##### Table of Contents



As filed with the Securities and Exchange Commission on
    April 23, 2007
 
 Registration
    No. 333-137897
    UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
    
  Amendment No. 3 to
 
 Form S-1
 REGISTRATION STATEMENT UNDER
    THE SECURITIES ACT OF 1933
      SKILLED HEALTHCARE GROUP,
    INC.
 (Exact name of registrant as
    specified in its charter)
  Delaware

8051

20-3934755(State or other jurisdiction
    of
    incorporation or organization)

(Primary Standard Industrial
    Classification Code Number)

(I.R.S. Employer
    Identification Number)   27442 Portola Parkway, Suite 200
    Foothill Ranch, California 92610(949) 282-5800 (Address, including zip
    code, and telephone number,
    including area code, of the registrants principal
    executive offices)
      Boyd Hendrickson
    Chairman and Chief Executive Officer
    Skilled Healthcare Group, Inc.
    27442 Portola Parkway, Suite 200
    Foothill Ranch, California 92610(949) 282-5800 (Name, address, including
    zip code, and telephone number,
    including area code, of agent for service)
      Copies to:
  Jonn R. Beeson, Esq.
    Latham & Watkins LLP
    650 Town Center Drive,
    20th Floor
    Costa Mesa, California 92626-1925
    (714) 540-1235

Kris F.
    Heinzelman, Esq.
    Cravath, Swaine & Moore LLP
    Worldwide Plaza,
    825 Eighth Avenue
    New York, New York 10019
    (212) 474-1000   Approximate date of commencement of proposed sale to the
    public:
  o
  o
  o
  o
      The Registrant hereby amends this Registration Statement on
    such date or dates as may be necessary to delay its effective
    date until the Registrant shall file a further amendment which
    specifically states that this Registration Statement shall
    thereafter become effective in accordance with Section 8(a)
    of the Securities Act of 1933 or until the Registration
    Statement shall become effective on such date as the Commission,
    acting pursuant to said Section 8(a), may determine.




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##### Table of Contents



The
information in this prospectus is not complete and may be
changed. Neither we nor the selling stockholders may sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and we are not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.  SUBJECT
    TO COMPLETION, DATED APRIL 23, 2007
  Shares
 
  Class A
    Common Stock
   
  Prior to this
    offering, there has been no public market for our class A
    common stock. The initial public offering price of our
    class A common stock is expected to be between
    $      and
    $      per share. We have applied
    to list our class A common stock on The New York Stock
    Exchange under the symbol SKH.
 
 
  Our class A
    common stock and class B common stock vote as a single
    class on all matters, except as otherwise provided in our
    restated certificate of incorporation or as required by law,
    with each share of class A common stock entitling its
    holder to one vote and each share of class B common stock
    entitling its holder to ten votes.
 
  Upon completion of
    this offering, our largest stockholder, Onex, will beneficially
    own approximately     % of the
    outstanding voting power of our class A common stock and
    class B common stock, or
    approximately     % if the underwriters
    exercise their over-allotment option in full. Accordingly, we
    will be a controlled company within the meaning
    given that term under the rules of The New York Stock Exchange.
  We are
    selling           shares
    of class A common stock. The underwriters also have an
    option to purchase a maximum
    of          
    additional shares of class A common stock from the selling
    stockholders set forth herein to cover over-allotments of
    shares.
 
  Investing in our
    class A common stock involves risks. See Risk
    Factors on page 15.
 
  Underwriting


Proceeds toPrice to


Discounts and


Skilled
    HealthcarePublic


Commissions


Group
    Inc.Per Share


$



$



$Total


$



$



$   If the underwriters
    exercise their over-allotment option in full, the selling
    stockholders will receive net proceeds, after deducting
    underwriting discounts and commissions, of
    $      per share and
    $           in
    the aggregate. We will not receive any of the proceeds from any
    sale of shares by the selling stockholders.
  Delivery of the
    shares of class A common stock will be made on or
    about          ,
    2007.
  Neither the
    Securities and Exchange Commission nor any state securities
    commission has approved or disapproved of these securities or
    determined if this prospectus is truthful or complete. Any
    representation to the contrary is a criminal offense.
  Credit
    Suisse UBS
    Investment Bank Banc
    of America Securities LLC Bear,
    Stearns & Co. Inc. Goldman,
    Sachs & Co. J.P. Morgan
    Securities Lehman
    Brothers  RBC
    Capital
    Markets          
    Scotia Capital
  The date of this
    prospectus
    is          ,
    2007.




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##### 



Table
    of Contents
  
  
 PageProspectus
    Summary


1Risk
    Factors


15Special
    Note Regarding Forward-Looking Statements


34Use
    of Proceeds


36Dividend
    Policy


37Capitalization


38Dilution


40Unaudited
    Pro Forma Consolidated Financial Statements


42Selected
    Historical Consolidated Financial Data


47Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


54Business


88Management


109Executive
    Compensation


114Description
    of Indebtedness


128Certain
    Relationships and Related Transactions


132Principal
    and Selling Stockholders


135Description
    of Capital Stock


137Shares
    Eligible for Future Sale


141Certain
    United States Federal Income Tax Consequences for Non-United
    States Holders


142Underwriting


146Notice
    to Canadian Residents


152Legal
    Matters


153Experts


153Where
    You Can Find More Information


153Index
    to Consolidated Financial Statements


F-1EXHIBIT 2.5EXHIBIT 10.12EXHIBIT 23.2EXHIBIT 23.3  
      Dealer
    Prospectus Delivery Obligation
  Until          ,
    2007 (25 days after the date of this offering), all dealers
    that effect transactions in these securities, whether or not
    participating in this offering, may be required to deliver a
    prospectus. This is in addition to the dealers obligation
    to deliver a prospectus when acting as an underwriter and with
    respect to unsold allotments or subscriptions.




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##### Table of Contents



PROSPECTUS
    SUMMARY  This summary highlights certain information about us and this
    offering. This summary is not comprehensive and does not contain
    all of the information that may be important to you. You should
    read the entire prospectus, including Risk Factors
    and the financial statements and related notes, before making an
    investment decision. Unless otherwise stated or the context
    indicates otherwise, references to we,
    us and our refer to Skilled Healthcare
    Group, Inc. and its consolidated subsidiaries, including its
    predecessor company, also named Skilled Healthcare Group,
    Inc.
  Our
    Company
      Our
    Competitive Strengths
    
    High-quality patient care and integrated service
    offerings.Through our dedicated and well-trained
    employees, attractive facilities and broad, integrated skilled
    nursing care and rehabilitation therapy service offerings, we
    believe that we provide high-quality, cost-effective care to our
    patients. We enhanced our position as a select provider to
    high-acuity patients by introducing our Express
    Recoverytm
    program, which uses a dedicated unit within a skilled nursing
    facility to deliver a comprehensive rehabilitation regime.
    Strong reputation in local markets.We believe
    we have a strong reputation for high-quality care and successful
    clinical outcomes in our local markets, which has enabled us to
    build strong relationships with managed care payors and key
    referral sources for high acuity patients.
    Concentrated network in attractive
    markets.Approximately 67% of our skilled nursing
    facilities are located in urban or suburban markets, and many
    are located in close proximity to medical centers and specialty
    physician groups, allowing us to develop relationships with
    these key referral sources. Our clustered facility locations
    also enable us to achieve lower operating costs.
 1




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##### Table of Contents




    Successful integration of
    acquisitions.Between August 1, 2003 and
    December 31, 2006, we acquired or entered into long-term
    leases for 27 skilled nursing and assisted living facilities
    across four states. We have experienced average facility level
    margin improvement of 2.6% and an increase in skilled mix of
    2.4% for the 22 of these facilities acquired before 2006, as
    measured by the first three full months immediately following
    each acquisition relative to the comparative period one year
    later.
    Significant facility ownership.As of
    December 31, 2006, we owned 73% of our facilities.
    Strong and experienced management team.Our
    senior management team has an average of more than 23 years
    of healthcare industry experience and has made significant
    financial and operating improvements to our business since
    joining us in 2002.  Our
    Strategy
    
    Focus on high-acuity patients.We focus on
    attracting high-acuity patients, for whom we are reimbursed at
    higher rates. We believe that we can continue to leverage our
    integrated service offering and our reputation for providing
    high-quality care to expand our referral network and increase
    the number of high-acuity patients referred to us. In addition,
    we intend to introduce our Express
    Recoverytm
    program in more of our facilities and to develop other
    innovative programs to better serve high-acuity patients.
    Expand our rehabilitation and other related healthcare
    businesses. We intend to continue to grow our
    rehabilitation therapy and hospice care businesses by expanding
    their use in both our own and in third-party facilities and by
    adding new third-party contracts.
    Drive revenue growth organically and through acquisitions and
    development.We pursue organic revenue growth by
    expanding our referral network, increasing our service offerings
    to high-acuity patients and expanding our other related
    healthcare services offerings. We also regularly evaluate
    strategic acquisitions and new development opportunities in
    attractive markets, particularly in the western region of the
    United States.
    Monitor performance measures to increase operating
    efficiency.We have implemented systems to
    monitor key performance metrics and support our focus on
    reducing operating costs by maximizing the efficient use of our
    labor resources and managing our insurance and professional and
    general liability and workers compensation expenses.
    Attract and retain talented and qualified
    employees.We seek to hire and retain talented
    and qualified employees, including our administrative and
    management personnel.  Our
    Industry
    
    Demand driven by aging population and increased life
    expectancies.According to the U.S. Census
    Bureau, the number of Americans aged 65 or older is expected to
    increase from approximately 37 million in 2005 to
    approximately 40 million in 2010 and approximately
    47 million in 2015, representing average annual growth from
    2005 of 1.9% and 2.5%, respectively. We believe this growth in
    the over 65 population will result in continued growth in the
    demand for long-term healthcare services.
 2




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##### Table of Contents




    Shift of patient care to lower cost
    alternatives.In response to rising health care
    costs, the federal government has adopted cost containment
    measures that encourage the treatment of patients in more cost
    effective settings such as skilled nursing facilities, for which
    the staffing requirements and associated costs are often
    significantly lower than at short or long-term acute-care
    hospitals, in-patient rehabilitation facilities or other
    post-acute care settings.
    Supply/Demand imbalance.Despite potential
    growth in demand for long-term healthcare services, the American
    Health Care Association reports that there has been a decline in
    the total number of nursing facility beds in the United States
    from approximately 1.8 million in December 2001 to
    approximately 1.7 million in June 2006, we believe in part
    due to the migration of
    lower-acuity
    patients to alternative sources of
    long-term
    care.   
  Recent
    Acquisitions
 
 
   
 
   
    Our
    Sponsor
      The
    Transactions
 3




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4




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##### Table of Contents



Stockholders
    Agreement
    Extraordinary
    Dividend Payment and Redemption of Preferred Stock
 
   
  Exchange
    Offer for Senior Subordinated Notes
    Corporate
    Information
  (949) 282-5800. www.skilledhealthcaregroup.com. The content of our website does not constitute a part of this
    prospectus.
  1 4
  Trademarks
    And Trade Names
  Express
    Recovery tm Hospice Care of the West Skilled Healthcare.
  Information
    in this Prospectus
    Industry
    and Market Data
 5




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The
    Offering  Common stock offered by us
    
    class
    A sharesUnderwriters over-allotment option
    
    class
    A shares from the selling stockholdersClass A common stock to be outstanding after this offering
    
    sharesClass B common stock to be outstanding after this offering
    
    sharesUse of proceeds
    
    We estimate that we will receive proceeds of approximately
    $      million from our offering
    of our class A common stock, after deducting underwriting
    discounts and other estimated expenses, assuming the shares are
    offered at $      per share, which
    is the mid-point of the estimated offering price range shown on
    the front cover page of this prospectus. We will use all of the
    net proceeds from this offering to: redeem $70.0 million aggregate principal amount
    of our 11% senior subordinated notes for an aggregate
    redemption price of approximately $77.7 million, and reduce the outstanding balance of our first lien
    term loan using any remaining proceeds.We will not receive any of the proceeds from any sale of shares
    by the selling stockholders.For sensitivity analysis as to the offering price and other
    information, see Use of Proceeds.Dividend Policy
    
    We currently do not expect to pay dividends or make any other
    distributions on our class A common stock in the
    foreseeable future. See Dividend Policy. 
 
 
  Listing
    
    We have applied to list our class A common stock on The New
    York Stock Exchange under the symbol SKH. 
 
  Special Voting Rights
    
    Our class A common stock and class B common stock vote as a
    single class on all matters, except as otherwise provided in our
    restated certificate of incorporation or as required by law,
    with each share of class A common stock entitling its holder to
    one vote and each share of class B common stock entitling its
    holder to ten votes. After giving effect to this offering,
    holders of our class B common stock will
    control     % of the combined voting
    power of our outstanding common stock. See Description of
    Capital Stock. 
  Risk Factors
    
    Investment in our class A common stock involves substantial
    risks. You should read and consider the information set forth
    under the heading Risk Factors and all other
    information included in this prospectus before investing in our
    class A common stock.
 6




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
    that our class A common stock will be sold at
    $      per share, which is the
    mid-point of the estimated offering price range shown on the
    front cover page of this prospectus;
    that the underwriters will not exercise their over-allotment
    option; 
  
    the conversion of all outstanding shares of our class A
    preferred stock
    into           shares
    of our class B common stock, concurrently with the
    completion of this Offering; 
 
  
    a   for   split of shares of our common
    stock, which was effective on April   ,
    2007; and 
  
    the effectiveness of our amended and restated certificate of
    incorporation upon the completion of this offering.
 7




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Summary
    Historical and Unaudited Pro Forma Consolidated Financial
    Data
 8




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##### Table of Contents



Consolidated
    Statement of Operations Data
  
 Year Ended December 31,Successor


Pro Forma


Predecessor


Predecessor2006


2006


2005


2004(Dollars in thousands, except per share data)Revenue

$
531,657






$
462,847


$
371,284Expenses:Cost of services (exclusive of
    rent cost of sales and depreciation and amortization shown below)


394,936







347,228



281,395Rent cost of sales


10,027







9,815



7,883General and administrative


39,872







43,784



25,148Depreciation and amortization


13,897







9,991



8,597458,732







410,818



323,023Total other income (expenses), net


(43,384
)






(44,251
)


(30,108
)Income before provision for
    (benefit from) income taxes, discontinued operations and the
    cumulative effect of a change in accounting principle


29,541







7,778



18,153Provision for (benefit from)
    income taxes


12,204







(13,048
)


4,421Income before discontinued
    operations and cumulative effect of a change in accounting
    principle


17,337







20,826



13,732Discontinued operations, net of tax










14,740



2,789Cumulative effect of a change in
    accounting principle, net of tax










(1,628
)


Net income


17,337







33,938



16,521Accretion on preferred stock


(18,406
)






(744
)


(469
)Net (loss) income attributable to
    common stockholders

$
(1,069
)





$
33,194


$
16,052Net (loss) income per share
    data:Net (loss) income per common
    share, basic

$
(46.56
)





$
27.01


$
13.45Net (loss) income per common
    share, diluted

$
(45.56
)





$
25.73


$
12.47Weighted average common shares
    outstanding, basic


22,955







1,228,965



1,193,501Weighted average common shares
    outstanding, diluted


22,955







1,290,120



1,286,963Pro forma net (loss) income per
    common share, basic (unaudited)(1)Pro forma net (loss) income per
    common share, diluted (unaudited)(1)Weighted average common shares
    outstanding used in pro forma per common share, basic (unaudited)Adjusted weighted average common
    shares outstanding used in pro forma per common share, diluted
    (unaudited)
 9




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Other
    Financial Data
  
 Year Ended December 31,Successor


Predecessor


Predecessor2006


2005


2004(Dollars in thousands)Capital expenditures (excluding
    acquisitions)

$
22,267


$
11,183


$
8,212Net cash provided by operating
    activities


34,415



15,004



48,358Net cash used in investing
    activities


(74,376
)


(223,785
)


(45,230
)Net cash provided by (used in)
    financing activities


5,644



241,253



(1,132
)EBITDA(2)


88,528



57,561



51,120EBITDA margin(2)


16.7
%


12.4
%


13.8
%Adjusted EBITDA(2)

$
88,725


$
77,778


$
58,559Adjusted EBITDA margin(2)


16.7
%


16.8
%


15.8
%Other Data 2006


2005


2004Number of facilities at end of
    period:Owned


53



49



35Leased


20



19



20Total


73



68



55Payor sources as a percentage of
    total revenue:Medicare


36.0
%


36.3
%


35.8
%Managed care and private pay


32.0



30.2



25.6Quality mix(3)


68.0



66.5



61.4Medicaid


32.0
%


33.5
%


38.6
%Payor sources as a percentage of
    total skilled nursing facility patient days:Medicare


18.0
%


17.8
%


16.8
%Managed care


5.5



4.6



3.8Skilled mix(3)


23.5
%


22.4
%


20.6
%Medicaid


59.9



61.4



65.4Private and other


16.6



16.2



14.0Number of skilled nursing
    facilities at end of period


61



56



50Number of assisted living
    facilities at end of period


12



12



5  
  Consolidated
    Balance Sheet Data
  SuccessorAs of December 31, 2006Actual


Pro Forma(4)(In thousands)Cash and cash equivalents

$
2,821


$Working capital


19,628Property and equipment, net


230,904Total assets


838,695Total long-term debt, including
    capital leases and current portion


469,055Total stockholders equity


240,648
 10




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##### Table of Contents



(1)
    
    Pro forma net (loss) income per common share gives effect to the
    conversion of our class A preferred stock into class B
    common stock, which will occur concurrently with the completion
    of this offering. Assuming the completion of this offering on
    December 31, 2006, and a conversion price of
    $      (which is the mid-point of the
    estimated offering price range shown on the front cover page of
    this prospectus), our class A preferred stock would convert
    into           shares
    of our class B common stock. See  The
    Offering for a description of the conversion of our
    class A preferred stock. 
  (2)
    
    We define EBITDA as net income (loss) before depreciation,
    amortization and interest expenses (net of interest income and
    other) and the provision for (benefit from) income taxes. EBITDA
    margin is EBITDA as a percentage of revenue. We prepare Adjusted
    EBITDA by adjusting EBITDA (to the extent applicable in the
    appropriate period) for:  
    discontinued operations, net of tax;
    the effect of a change in accounting principle, net of tax;
    the change in fair value of an interest rate hedge;
    reversal of a charge related to the decertification of a
    facility;
    gains or losses on sale of assets;
    the write-off of deferred financing costs of extinguished debt;
    reorganization expenses; and
    fees and expenses related to the Transactions.
 11




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##### Table of Contents



day-to-day
   
   
    
    they do not reflect our cash expenditures, or future
    requirements, for capital expenditures or contractual
    commitments;
    they do not reflect changes in, or cash requirements for, our
    working capital needs;
    they do not reflect the interest expense, or the cash
    requirements necessary to service interest or principal
    payments, on our debt;
    they do not reflect any income tax payments we may be required
    to make;
    although depreciation and amortization are non-cash charges, the
    assets being depreciated and amortized will often have to be
    replaced in the future, and EBITDA and Adjusted EBITDA do not
    reflect any cash requirements for such replacements;
    they are not adjusted for all non-cash income or expense items
    that are reflected in our consolidated statements of cash flows;
    they do not reflect the impact on net income of charges
    resulting from certain matters we consider not to be indicative
    of our on-going operations; and
    other companies in our industry may calculate these measures
    differently than we do, which may limit their usefulness as
    comparative measures.
 12




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Year Ended December 31,Successor


Predecessor


Predecessor2006


2005


2004(In thousands)Net income

$
17,337


$
33,938


$
16,521PlusProvision for (benefit from) income
    taxes


12,204



(13,048
)


4,421Depreciation and amortization


13,897



9,991



8,597Interest expense, net of interest
    income


45,090



26,680



21,581EBITDA


88,528



57,561



51,120Discontinued operations, net of
    tax(a)






(14,740
)


(2,789
)Cumulative effect of a change in
    accounting principle, net of tax(b)






1,628



Change in fair value of interest
    rate hedge(c)


197



165



926Gain on sale of assets(d)






(980
)


Write-off of deferred financing
    costs of extinguished debt(e)






16,626



7,858Reorganization expenses(f)






1,007



1,444Expenses related to the
    Transactions(g)






16,511



Adjusted EBITDA

$
88,725


$
77,778


$
58,559  
  Notes
  (a)
    
    In March 2005, we sold our California-based institutional
    pharmacy business and, therefore, the results of operations of
    our California-based pharmacy business have been classified as
    discontinued operations. As our pharmacy business has been sold,
    these amounts are no longer part of our core operating business.(b)
    
    In 2005, we recorded the cumulative effect of a change in
    accounting principle as a result of our adoption of Financial
    Accounting Standards Board or FASB, Interpretation No. 47,
    Accounting for Conditional Asset Retirement Obligations,
    or FIN 47 In 2003, we recorded the cumulative effect of a change
    in accounting principle as a result of our adoption of Statement
    of Financial Accounting Standards, or SFAS, No. 150
    Accounting for Certain Instruments with Characteristics of
    Both Liabilities and Equity or SFAS No. 150 which requires
    that financial instruments issued in the form of shares that are
    mandatorily redeemable be classified as liabilities. While these
    items are required under GAAP, they are not reflective of the
    operating income and losses of our underlying business.(c)
    
    Changes in fair value of an interest rate hedge are unrelated to
    our core operating activities and we believe that adjusting for
    these amounts allows us to focus on actual operating costs at
    our facilities.(d)
    
    While gains or losses on sales of assets are required under
    GAAP, these amounts are also not reflective of income and losses
    of our underlying business.(e)
    
    Reflects deferred financing costs that have been expensed in
    connection with the prepayment of previously outstanding debt
    and deferred financing costs that were expensed upon prepayment
    of our second lien senior secured term loan in connection with
    the Transactions. Write-offs for deferred financing costs are
    the result of distinct capital structure decisions made by our
    management and are unrelated to our
    day-to-day
    operations.(f)
    
    Represents expenses incurred in connection with our
    Chapter 11 reorganization. We believe that reorganization
    expenses will be immaterial in 2007 and, upon acceptance of our
    final petition by the bankruptcy court, which we expect will
    occur in 2007, we will no longer incur reorganization expenses.
    As a result, we do not believe that these expenses are
    reflective of the performance of our core operating business.
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(g)
    
    Represents (1) $0.2 million in fees paid by us in
    connection with the Transactions for valuation services and an
    acquisition audit; (2) our forgiveness in connection with
    the completion of the Transactions of a $2.5 million note
    issued to us in March 1998 by our then-Chairman of the Board,
    William Scott; (3) a $4.8 million bonus award expense
    incurred in December 2005 upon the completion of the
    Transactions pursuant to trigger event cash bonus agreements
    between us and our Chief Financial Officer, John King, and our
    Executive Vice President and President Ancillary Subsidiaries,
    Mark Wortley, in order to compensate them similarly to the
    economic benefit received by other executive officers who had
    previously purchased restricted stock; and (4) non-cash
    stock compensation charges of $9.0 million incurred in
    connection with restricted stock granted to certain of our
    senior executives. As these expenses relate solely to the
    Transactions, we do not expect to incur these types of expenses
    in the future.  (3)
    
    For a definition of Quality Mix and Skilled Mix, see
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Key Performance
    Indicators. 
  (4)
    
    The pro forma consolidated balance sheet data reflect
    (a) the sale of shares of class A common stock in this
    offering at an assumed initial public offering price per share
    of $     , the mid-point of the range
    shown on the front cover of this prospectus, (b) our
    receipt of the net proceeds from this offering, after deducting
    underwriting discounts and commissions and estimated offering
    expenses of approximately $     payable
    by us, (c) the application of $77.7 million of the
    proceeds of this offering to redeem $70.0 million of our
    outstanding 11% senior subordinated notes and the reduction
    of the outstanding balance of our first lien term loan with any
    remaining proceeds and (d) the acquisition of three interrelated
    long-term
    care facilities in Missouri in April 2007. A $1.00 increase or
    decrease in the assumed initial public offering price of
    $      per share would decrease or
    increase, respectively, the outstanding principal amount of our
    first lien term loan on a pro forma basis and would increase or
    decrease, respectively, working capital by approximately
    $      million and total
    stockholders equity by approximately
    $      million, and decrease or
    increase, respectively, total debt by approximately
    $     million, assuming the number of
    shares offered by us, as shown on the front cover page of this
    prospectus, remains the same and after deducting the
    underwriting discounts and commissions payable by us.
 14




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##### Table of Contents



RISK
    FACTORS  An investment in our class A common stock involves a high
    degree of risk. You should consider carefully the following
    information about these risks, together with the other
    information contained in this prospectus, before investing. Any
    of the risk factors we describe below could adversely affect our
    business, financial condition or operating results. The market
    price of our class A common stock could decline if one or
    more of these risks and uncertainties develop into actual
    events. You could lose all or part of the money you pay to buy
    our class A common stock. Some of the statements in
    Risk Factors are forward-looking statements. For
    more information about forward-looking statements, please see
    Special Note Regarding Forward-Looking
    Statements.
  Risks
    Related to our Business and Industry
  Reductions
    in Medicare reimbursement rates or changes in the rules
    governing the Medicare program could have a material adverse
    effect on our revenue, financial condition and results of
    operations.
          
    administrative or legislative changes to base rates or the bases
    of payment;
    limits on the services or types of providers for which Medicare
    will provide reimbursement;
    the reduction or elimination of annual rate increases; or
    an increase in co-payments or deductibles payable by
    beneficiaries.   15




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##### Table of Contents



We
    expect the federal and state governments to continue their
    efforts to contain growth in Medicaid expenditures, which could
    adversely affect our revenue and profitability.
        Recent
    federal government proposals could limit the states use of
    provider tax programs to generate revenue for their Medicaid
    expenditures, which could result in a reduction in our
    reimbursement rates under Medicaid.
    Revenue
    we receive from Medicare and Medicaid is subject to potential
    retroactive reduction.
   16




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##### Table of Contents



Healthcare
    reform legislation could adversely affect our revenue and
    financial condition.
      We are
    subject to extensive and complex laws and government
    regulations. If we are not operating in compliance with these
    laws and regulations or if these laws and regulations change, we
    could be required to make significant expenditures or change our
    operations in order to bring our facilities and operations into
    compliance.
    
    licensure and certification;
    adequacy and quality of healthcare services;
    qualifications of healthcare and support personnel;
    quality of medical equipment;
    confidentiality, maintenance and security issues associated with
    medical records and claims processing;
    relationships with physicians and other referral sources and
    recipients;
    constraints on protective contractual provisions with patients
    and third-party payors;
    operating policies and procedures;
    addition of facilities and services; and
    billing for services.   17




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##### Table of Contents




    cost reporting and billing practices;
    quality of care;
    financial relationships with referral sources; and
    the medical necessity of services provided.    We
    face periodic reviews, audits and investigations under federal
    and state government programs and contracts. These audits could
    have adverse findings that may negatively affect our
    business.
    
    refunding amounts we have been paid pursuant to the Medicare or
    Medicaid programs or from private payors;
    state or federal agencies imposing fines, penalties and other
    sanctions on us;
    temporary suspension of payment for new patients to the facility;
    decertification or exclusion from participation in the Medicare
    or Medicaid programs or one or more private payor networks;
    damage to our reputation;
    the revocation of a facilitys license; and
    loss of certain rights under, or termination of, our contracts
    with managed care payors.  Significant
    legal actions, which are commonplace in our industry, could
    subject us to increased operating costs and substantial
    uninsured liabilities, which would materially and adversely
    affect our results of operations, liquidity and financial
    condition.
   18




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##### Table of Contents



We
    could face significant financial difficultly as a result of one
    or more of the risks discussed above, which could cause our
    stock price to decline, could cause us to seek protection under
    bankruptcy laws or could cause our creditors to have a receiver
    appointed on our behalf.
          A
    significant portion of our business is concentrated in a few
    markets, and an economic downturn or changes in the laws
    affecting our business in those markets could have a material
    adverse effect on our operating results.
   19




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##### Table of Contents



Possible
    changes in the acuity mix of residents and patients as well as
    payor mix and payment methodologies may significantly reduce our
    profitability or cause us to incur losses.
    It is
    difficult to attract and retain qualified nurses, therapists,
    healthcare professionals and other key personnel, which
    increases our costs relating to these employees and could cause
    us to fail to comply with state staffing requirements at one or
    more of our facilities.
      If we
    are unable to comply with state minimum staffing requirements at
    one or more of our facilities, we could be subject to fines or
    other sanctions.
    on-site
   20




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##### Table of Contents



If we
    fail to attract patients and residents or to compete effectively
    with other healthcare providers, our revenue and profitability
    may decline and we may incur losses.
        Insurance
    coverage may become increasingly expensive and difficult to
    obtain for long-term care companies, and our self-insurance may
    expose us to significant losses.
  and/or
  occurrence-based
 21




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##### Table of Contents



If our
    referral sources fail to view us as an attractive long-term care
    provider, our patient base may decrease.
    We may
    be unable to reduce costs to offset decreases in our occupancy
    rates or other expenses completely.
    If we
    do not achieve or maintain a reputation for providing high
    quality of care, our business may be negatively
    affected.
   22




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##### Table of Contents



Consolidation
    of managed care organizations and other third-party payors or
    reductions in reimbursement from these payors may adversely
    affect our revenue and income or cause us to incur
    losses.
      Annual
    caps that limit the amounts that can be paid for outpatient
    therapy services rendered to any Medicare beneficiary may reduce
    our future net operating revenue and profitability or cause us
    to incur losses.
     23




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##### Table of Contents



Delays
    in reimbursement may cause liquidity problems.
      Our
    success is dependent upon retaining key personnel.
    Future
    acquisitions may use significant resources, may be unsuccessful
    and could expose us to unforeseen liabilities.
    
    difficulties integrating acquired operations, personnel and
    accounting and information systems, or in realizing projected
    efficiencies and cost savings;
    diversion of managements attention from other business
    concerns;
    potential loss of key employees or customers of acquired
    companies;
    entry into markets in which we may have limited or no experience;
    increasing our indebtedness and limiting our ability to access
    additional capital when needed;
    assumption of unknown material liabilities or regulatory issues
    of acquired companies, including for failure to comply with
    healthcare regulations; and
    straining of our resources, including internal controls relating
    to information and accounting systems, regulatory compliance,
    logistics and others. 24




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##### Table of Contents



Our
    substantial indebtedness could adversely affect our financial
    health and prevent us from fulfilling our financial
    obligations.
      
    increase our vulnerability to adverse economic and industry
    conditions;
    require us to dedicate a substantial portion of our cash flow
    from operations to payments on our indebtedness, thereby
    reducing the availability of our cash flow to fund working
    capital, capital expenditures and other general corporate
    purposes;
    limit our flexibility in planning for, or reacting to, changes
    in our business and the industry in which we operate;
    place us at a competitive disadvantage compared to our
    competitors that have less debt;
    increase the cost or limit the availability of additional
    financing, if needed or desired, to fund future working capital,
    capital expenditures and other general corporate requirements,
    or to carry out other aspects of our business plan;
    require us to maintain debt coverage and financial ratios at
    specified levels, reducing our financial flexibility;  and
    limit our ability to make strategic acquisitions and develop new
    facilities.    Despite
    our substantial indebtedness, we may still be able to incur more
    debt. This could intensify the risks associated with this
    indebtedness.
    Our
    operations are subject to environmental and occupational health
    and safety regulations, which could subject us to fines,
    penalties and increased operational costs.
   25




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##### Table of Contents



A
    portion of our workforce has unionized and our operations may be
    adversely affected by work stoppages, strikes or other
    collective actions.
    Natural
    disasters, terrorist attacks or acts of war may seriously harm
    our business.
    The
    efficient operation of our business is dependent on our
    information systems.
   26




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##### Table of Contents



Risks
    Related to this Offering and Ownership of our Class A
    Common Stock
  We are
    controlled by our Sponsor, whose interests may conflict with
    yours.
 
   
    Our
    class A common stock has no prior public market, and it is
    not possible to predict how our stock will perform after this
    offering.
    If our
    stock price is volatile, purchasers of our class A common
    stock could incur substantial losses.
    
    the depth and liquidity of the market for our class A
    common stock;
    developments generally affecting the healthcare industry;
    investor perceptions of us and our business; 27




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##### Table of Contents




    actions by institutional or other large stockholders;
    strategic actions, such as acquisitions or restructurings, or
    the introduction of new services by us or our competitors;
    new laws or regulations or new interpretations of existing laws
    or regulations applicable to our business;
    litigation and governmental investigations;
    changes in accounting standards, policies, guidance,
    interpretations or principles;
    adverse conditions in the financial markets or general economic
    conditions, including those resulting from war, incidents of
    terrorism and responses to such events;
    sales of class B common stock by us or members of our
    management team;
    additions or departures of key personnel; and
    our results of operations, financial performance and future
    prospects.    If
    securities or industry analysts do not publish research or
    reports about our business, if they change their recommendations
    regarding our stock adversely or if our operating results do not
    meet their expectations, our stock price and trading volume
    could decline.
    We do
    not intend to pay dividends on our class A common
    stock.
    You
    will incur immediate and substantial dilution in the net
    tangible book value of the stock you purchase.
   28




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##### Table of Contents



Failure
    to achieve and maintain effective internal controls in
    accordance with Section 404 of the Sarbanes-Oxley Act could
    result in a restatement of our financial statements, cause
    investors to lose confidence in our financial statements and our
    company and have a material adverse effect on our business and
    stock price.
       29




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##### Table of Contents



The
    requirements of being a public company, including compliance
    with the reporting requirements of the Exchange Act and the
    requirements of the Sarbanes-Oxley Act, may strain our
    resources, increase our costs and distract management, and we
    may be unable to comply with these requirements in a timely or
    cost-effective manner.
    
    institute a more comprehensive compliance function;
    establish new internal policies, such as those relating to
    disclosure controls and procedures and insider trading;
    design, establish, evaluate and maintain a system of internal
    control over financial reporting in compliance with the
    requirements of Section 404 and the related rules and
    regulations of the Securities and Exchange Commission and the
    Public Company Accounting Oversight Board;
    prepare and distribute periodic reports in compliance with our
    obligations under the federal securities laws;
    involve and retain to a greater degree outside counsel and
    accountants in the above activities; and
    establish an investor relations function.   30




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##### Table of Contents



Substantial
    future sales of our class A or class B common stock in
    the public market may cause the price of our stock to
    decline.
  lock-up lock-up
  lock-up
  We
    will be a controlled company within the meaning of
    The New York Stock Exchange rules and, as a result, will qualify
    for and will rely on exemptions from certain corporate
    governance requirements.
   31




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##### Table of Contents




    a majority of the board of directors consist of independent
    directors;
    the nominating and corporate governance committee be entirely
    composed of independent directors with a written charter
    addressing the committees purpose and responsibilities;
    the compensation committee be entirely composed of independent
    directors with a written charter addressing the committees
    purpose and responsibilities; and
    there be an annual performance evaluation of the nominating and
    corporate governance and compensation committees.    Our
    amended and restated certificate of incorporation, bylaws and
    Delaware law will contain provisions that could discourage
    transactions resulting in a change in control, which may
    negatively affect the market price of our class A common
    stock.
    
    our board of directors will be authorized, without prior
    stockholder approval, to create and issue preferred stock,
    commonly referred to as blank check preferred stock,
    with rights senior to those of class A common stock and
    class B common stock;
    advance notice requirements for stockholders to nominate
    individuals to serve on our board of directors or to submit
    proposals that can be acted upon at stockholder meetings;
    our board will be classified so not all members of our board are
    elected at one time, which may make it more difficult for a
    person who acquires control of a majority of our outstanding
    voting stock to replace our directors;
    stockholder action by written consent will be prohibited;
    special meetings of the stockholders will be permitted to be
    called only by the chairman of our board of directors, our chief
    executive officer or by a majority of our board of directors; 32




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##### Table of Contents




    stockholders will not be permitted to cumulate their votes for
    the election of directors;
    newly created directorships resulting from an increase in the
    authorized number of directors or vacancies on our board of
    directors will be filled only by majority vote of the remaining
    directors;
    our board of directors will be expressly authorized to make,
    alter or repeal our bylaws; and
    stockholders will be permitted to amend our bylaws only upon
    receiving at least
    662/3%
    of the votes entitled to be cast by holders of all outstanding
    shares then entitled to vote generally in the election of
    directors, voting together as a single class.   33




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##### Table of Contents



SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS      
    changes in Medicare and Medicaid payment levels and
    methodologies, including annual therapy caps, and the
    application of such methodologies by the government and its
    fiscal intermediaries;
    the effect of government regulations and changes in regulations
    governing the healthcare industry, including our compliance with
    such regulations;
    periodic reviews, audits and investigations by federal and state
    agencies;
    our ability to obtain and maintain individual state facility
    licenses to operate;
    changes in, or the failure to comply with, regulations governing
    the transmission and privacy of health information;
    pending or threatened litigation and professional liability
    claims;
    national and local economic conditions, including their effect
    on the availability and cost of labor, utilities and materials;
    future cost containment initiatives by third-party payors;
    demographic changes and changes in payor mix and payment
    methodologies;
    our ability to attract and retain qualified personnel;
    our ability to maintain and increase census (volume of
    residents) levels;
    the competitive environment in which we operate;
    our ability to obtain adequate insurance coverage with
    financially viable insurance carriers, as well as the ability of
    our insurance carriers to fulfill their obligations;
    changes in the current trends in the costs and volume of
    patient-care related claims, workers compensation claims
    and insurance costs related to such claims;
    our ability to maintain good relationships with referral sources;
    further consolidation in the industry in which we operate;
    liquidity concerns, including as a result of delays in
    reimbursement;
    our ability to integrate acquisitions and realize synergies and
    accretion;
    our ability to manage growth effectively; 34




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##### Table of Contents




    the failure to comply with environmental and occupational health
    and safety regulations;
    unionization, work stoppages or slowdowns;
    acts of God or public authorities, war, civil unrest, terrorism,
    fire, floods, earthquakes and other matters beyond our control;
    our existing and future debt, which may affect our ability to
    obtain financing in the future or to comply with our existing
    debt covenants;
    our ability to improve our fundamental business processes and
    reduce costs throughout the organization; and
    the availability and terms of capital to fund acquisitions,
    capital expenditures and ongoing operations.   35




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##### Table of Contents



USE OF
    PROCEEDS      
    redeem $70.0 million aggregate principal amount of our 11%
    senior subordinated notes, due January 15, 2014 for an
    aggregate redemption price of approximately
    $77.7 million; and
    reduce the outstanding balance of our first lien term loan,
    including our revolving credit facility, using any remaining
    proceeds.    
    a base rate determined by reference to the higher of the prime
    rate announced by Credit Suisse and the federal funds rate
    plus one-half of 1.0%; or
    a reserve adjusted Eurodollar rate.     36




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##### Table of Contents



DIVIDEND
    POLICY   37




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##### Table of Contents



CAPITALIZATION    
    on an actual basis; and 
  
    pro forma to give effect to (a) the conversion of all
    outstanding shares of our class A preferred stock
    into           shares
    of class B common stock concurrently with the completion of
    this offering, (b) our sale
    of           shares
    of class A common stock in this offering at an assumed
    initial public offering price of
    $      per share, the mid-point of
    the range shown on the front cover page of this prospectus
    (c) the application of the proceeds therefrom as described
    under Use of Proceeds and (d) our acquisition
    of three interrelated long-term care facilities in Missouri in
    April 2007. 
 
   
   As of December 31, 2006Actual


Pro forma(Unaudited)(In thousands, except for share and per share values)Cash and cash equivalents

$
2,821


$Long-term debt obligations,
    including current portions:Revolving credit facility(1)

$
8,500


$
First lien term loan(2)


256,100Capital leases and other debt


5,62311% senior subordinated
    notes(3)


198,832Total debt


469,055Stockholders equity:Convertible Preferred stock,
    $0.001 par value;Authorized  50,000
    shares
    actual;           shares
    pro forma;Issued and outstanding 
    22,312 shares actual; no shares pro forma


18,652Common Stock, $0.001 par value;Authorized  50,000
    shares actual; no shares pro formaIssued and outstanding 
    22,312 shares actual; no shares pro formaClass A Common Stock,
    $0.001 par value;Authorized  no shares
    actual;           shares
    pro forma;Issued and outstanding 
    no
    shares actual;           shares
    pro forma


Class B Common Stock,
    $0.001 par value;Authorized  no shares
    actual;           shares
    pro forma;Issued and outstanding 
    no shares
    actual;           shares
    pro formaAdditional paid-in-capital


221,996Retained earnings


Total stockholders equity


240,648Total capitalization

$
709,703


$  38




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##### Table of Contents



(1)
    
    Our revolving credit facility provides for letters of credit and
    revolving credit loans. As of December 31, 2006, we had
    $62.3 million available for borrowing under our revolving
    credit facility, after taking into account $4.2 million of
    outstanding but undrawn letters of credit and revolving credit
    loans outstanding of $8.5 million.(2)
    
    A $1.00 increase or decrease in the assumed initial public
    offering price of $      per share
    (the mid-point of the price range shown on the front cover page
    of this prospectus) would decrease or increase, respectively,
    the outstanding principal amount of our first lien term loan on
    a pro forma basis and would increase or decrease, respectively,
    each of additional paid in capital and total stockholders
    equity on a pro forma basis by
    $      million, assuming the
    number of shares offered by us, as shown on the front cover page
    of this prospectus, remains the same and after deducting the
    underwriting discounts and commissions and estimated offering
    expenses payable by us.(3)
    
    Our 11% senior subordinated notes were issued at a 0.7%
    discount to face value of $200 million. As of
    December 31, 2006, the 11% senior subordinated notes
    were recorded on our balance sheet at $198.8 million, net
    of $1.2 million of unamortized original issue discount. 
   
 39




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##### Table of Contents



DILUTION   
   
    Assumed initial public offering
    price per share





$Net tangible book value per share
    as of December 31, 2006 after conversion of series A
    convertible preferred stock

$Increase in net tangible book
    value per share attributable to this offeringNet tangible book value per share
    after this offeringDilution per share to new investors





$    40




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##### Table of Contents



Shares Purchased


Total Consideration


Average PriceNumber


Percent


Amount


Percent


per ShareExisting stockholders







%

$





%

$New investorsTotal






100
%

$




100
%    
   
     41




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##### Table of Contents



UNAUDITED
    PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS   
   
  
    the acquisition of three interrelated
    long-term
    care facilities in Missouri in April 2007, or the April
    Acquisition; 
  
    the acquisition of two skilled nursing facilities and one
    skilled nursing and residential care facility in Missouri in
    March 2006 for an aggregate purchase price of
    $31.0 million, or the Missouri Acquisitions; 
  
    the acquisition of a leasehold interest in a skilled nursing
    facility in Nevada in June 2006 for $2.7 million and
    the acquisition of a skilled nursing facility in Missouri in
    December 2006 for $8.5 million or collectively with the
    April Acquisition, the Other Acquisitions, and
    together with the Missouri Acquisitions, the
    Acquisitions; and 
  
    the adjustments for this offering and the use of proceeds
    therefrom, or the Offering, including:  
    our issuance
    of           shares
    of our class A common stock at a price of
    $      per share, which is the
    mid-point of the range shown on the front cover page of this
    prospectus;
    our receipt of the net proceeds from this offering of
    approximately $      after deducting
    underwriting discounts and commissions and estimated offering
    expenses of approximately $     payable
    by us;
    our redemption of $70.0 million in aggregate principal
    amount of our 11% senior subordinated notes for an
    aggregate redemption price of approximately
    $77.7 million; and
    our use of all remaining net proceeds to reduce the outstanding
    principal amount of our first lien term loan.   
   
     42




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##### Table of Contents



Unaudited
    Pro Forma Consolidated Balance Sheet as of December 31,
    2006
 
  
 AdjustmentsAdjustments for


for the AprilHistorical


this Offering


Acquisition (D)


Pro Forma(In thousands, except share and per share values)ASSETS:Current assets:Cash and cash equivalents

$
2,821


$







$Accounts receivable, net


86,168Other current assets


25,645Total current assets


114,634Property and equipment, net


230,904







24,320Goodwill


411,349







5,829Intangible assets, net


33,843Other assets


47,965Total assets

$
838,695


$



$
30,149


$LIABILITIES AND
    STOCKHOLDERS EQUITY:Current liabilities:Accounts payable and accrued
    liabilities

$
69,136


$







$Other current liabilities


22,693Current portion of long-term debt
    and capital leases


3,177



(A
)Total current liabilities


95,006Long-term liabilities:Long-term debt and capital leases,
    less current portion


465,878



(A
)


30,149Other liabilities


37,163Total liabilities


598,047







30,149Stockholders equity:Convertible preferred stock,
    $0.001 par value;Authorized 
    50,000 shares
    actual;           shares
    pro forma;Issued and outstanding 
    22,312 shares actual; no shares pro forma


18,652Common stock, $0.001 par value;Authorized 
    50,000 shares actual; no shares pro forma;Issued and outstanding 
    24,923 shares actual, no shares pro formaClass A common stock,
    $0.001 par value;Authorized  no shares
    actual;           shares
    pro forma;Issued and outstanding 
    no shares
    actual;           shares
    pro forma


Class B common stock,
    $0.001 par value;Authorized  no shares
    actual;           shares
    pro forma;Issued and outstanding 
    no shares
    actual;           shares
    pro formaAdditional paid-in capital


221,996



(B
)Retained earnings






(C
)Total stockholders equity


240,648Total liabilities and
    stockholders equity

$
838,695


$



$
30,149


$  
 43




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##### Table of Contents



Notes to
    Unaudited Pro Forma Consolidated Balance Sheet
   (A)
    
    The following table sets forth the anticipated uses of the
    estimated $      million of gross
    proceeds to us from this offering (in thousands):  Redemption of 11% senior
    subordinated notes(1)

$
70,000Additional redemption price
    relating to 11% senior subordinated notes


7,700Repayment of amounts outstanding
    under first lien term loanUnderwriting discounts and
    estimated transaction fees and expensesTotal

$    (1)
    
    The 11% senior subordinated notes were issued at a 0.7%
    discount to face value of $200 million. As of
    December 31, 2006, the 11% senior subordinated notes
    were recorded on our balance sheet at $198.8 million, net
    of $1.2 million of unamortized original issue discount.  (B)
    
    Adjustments to additional paid in capital reflect the following
    (in thousands):  Gross proceeds to us from the
    offering of class A common stock

$Underwriting discounts and
    estimated transaction expensesPar value of class A common
    stock issued in this offeringTotal

$    (C)
    
    Adjustments to retained earnings reflect the following for the
    redemption of the 11% senior subordinated notes (in thousands): 
 
  Additional redemption price

$
7,700Unamortized original issue discountUnamortized debt issuance costsTotal

$  
  (D)
    
    Adjustments reflect the assets acquired and liabilities assumed
    in connection with the April Acquisition: 
 44




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##### Table of Contents



Unaudited
    Pro Forma Consolidated Statement of Operations
    for the Year Ended December 31, 2006
  
 Adjustments


Adjustmentsfor the


for the


AdjustmentsMissouri


Other


for thisHistorical


Acquisitions(A)


Acquisitions(B)


Offering


Pro Forma(In thousands, except share and per share values)Revenue

$
531,657


$
3,716


$
28,651


$



$Expenses:Cost of services (exclusive of
    rent cost of sales and depreciation and amortization shown below)


394,936



2,921



23,424Rent cost of sales


10,027







365General and administrative


39,872



257



Depreciation and amortization


13,897



139



859458,732



3,317



24,648Other income (expenses):Interest expense


(46,286
)


(98
)


(2,894
)



(C)Interest income and other


1,196



Change in fair value of interest
    rate hedge


(197
)






Equity in earnings of joint venture


1,903







Total other income (expenses), net


(43,384
)


(98
)


(2,894
)Income from continuing operations
    before income taxes


29,541



301



1,109Provision for income taxes


12,204



120



444Income from continuing operations

$
17,337


$
181


$
665


$



$Income from continuing operations
    per common share, basic

$
755.26Income from continuing operations
    per common share, diluted

$
741.82Weighted average common shares
    outstanding, basic


22,955











22,955



22,955Weighted average common shares
    outstanding, diluted


23,371











23,371



23,371  
 45




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##### Table of Contents



Notes to
    Pro Forma Consolidated Statement of Operations
 for the Year Ended December 31, 2006.
  (A)
    
    These adjustments reflect the operating income and expenses of
    the facilities acquired in the Missouri Acquisitions for the
    period presented. 
  (B)
    
    These adjustments reflect the operating income and expenses of
    the facilities acquired in the Other Acquisitions for the period
    presented. 
  (C)
    
    The pro forma adjustment to interest expense reflects the
    decrease of interest expense as a result of the use of net
    proceeds from this offering of approximately
    $      to repay certain existing
    indebtedness. The components to this adjustment to interest
    expense, net are as follows:  Year EndedDecember 31, 2006Reduction in estimated interest
    expense and fees in connection with borrowings under the first
    lien term loan

$Reduction in interest expense and
    amortization of original issue discount incurred in connection
    with the 11% senior subordinated notesTotal

$  46




---



##### Table of Contents



SELECTED
    HISTORICAL CONSOLIDATED FINANCIAL DATA   47




---



##### Table of Contents



Consolidated
    Statement of Operations Data
 Year Ended December 31,Successor


Predecessor


Predecessor


Predecessor


Predecessor2006


2005


2004


2003


2002(In thousands, except for share and per share data)Revenue

$
531,657


$
462,847


$
371,284


$
316,939


$
302,567Expenses:Cost of services (exclusive of rent
    cost of sales and depreciation and amortization shown below)


394,936



347,228



281,395



243,520



235,052Rent cost of sales


10,027



9,815



7,883



7,168



7,320General and administrative


39,872



43,784



25,148



19,219



18,474Depreciation and amortization


13,897



9,991



8,597



8,069



7,947458,732



410,818



323,023



277,976



268,793Other income (expenses):Interest expense


(46,286
)


(27,629
)


(22,370
)


(27,486
)


(25,175
)Interest income and other


1,196



949



789



147



588Change in fair value of interest
    rate hedge


(197
)


(165
)


(926
)


(1,006
)


Equity in earnings of joint venture


1,903



1,787



1,701



1,161



972Write-off of deferred financing
    costs






(16,626
)


(7,858
)


(4,111
)


Forgiveness of stockholder loan






(2,540
)










Reorganization expenses






(1,007
)


(1,444
)


(12,964
)


(12,304
)Gain on sale of assets






980











Total other (expenses) income, net


(43,384
)


(44,251
)


(30,108
)


(44,259
)


(35,919
)Income (loss) before provision for
    (benefit from) income taxes, discontinued operations and
    cumulative effect of a change in accounting principle


29,541



7,778



18,153



(5,296
)


(2,145
)Provision for (benefit from) income
    taxes


12,204



(13,048
)


4,421



(1,645
)


Income (loss) before discontinued
    operations and cumulative effect of a change in accounting
    principle


17,337



20,826



13,732



(3,651
)


(2,145
)Income from discontinued
    operations, net of tax






14,740



2,789



1,966



2,851Cumulative effect of a change in
    accounting principle, net of tax






(1,628
)






(12,261
)


Net income (loss)


17,337



33,938



16,521



(13,946
)


706Accretion on preferred stock


(18,406
)


(744
)


(469
)






(2,760
)Net (loss) income attributable to
    common stockholders

$
(1,069
)

$
33,194


$
16,052


$
(13,946
)

$
(2,054
)Net (Loss) Income Per Share
    Data:Net (loss) income per common share,
    basic

$
(46.56
)

$
27.01


$
13.45


$
(12.06
)

$
(1.81
)Net (loss) income per common share,
    diluted

$
(46.56
)

$
25.73


$
12.47


$
(12.06
)

$
(1.81
)Weighted average common shares
    outstanding, basic


22,955



1,228,965



1,193,501



1,156,634



1,134,944Weighted average common shares
    outstanding, diluted


22,955



1,290,120



1,286,963



1,156,634



1,134,944Pro forma per common share,
    basic (unaudited)(1):Numerator:Net (loss) income, as reported

$
17,337Accretion on preferred stock


(18,406
) 48




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##### Table of Contents



Year Ended December 31,Successor


Predecessor


Predecessor


Predecessor


Predecessor2006


2005


2004


2003


2002(In thousands, except for share and per share data)Net income (loss) attributable to
    common stockholders

$
(1,069
)Denominator:Weighted average common shares
    outstanding used in pro forma per common share, basic
    (unaudited)(1)Pro forma net (loss) income per
    common share, basic (unaudited)(1)Pro forma per common share,
    diluted (unaudited)(1):Numerator:Net (loss) income attributable to
    common stockholders

$
(1,069
)Effect of assumed conversions, if
    applicable


Net (loss) income attributable to
    common stockholders plus effect of assumed conversions

$
(1,069
)Denominator:Weighted average common shares
    outstanding used in pro forma per common share, basicPlus: incremental shares from
    assumed conversions, if applicableAdjusted weighted average common
    shares outstanding used in pro forma per common share, diluted
    (unaudited)Pro forma net (loss) income per
    common share, diluted (unaudited)(1)   Year Ended December 31,Successor


Predecessor


Predecessor


Predecessor


Predecessor2006


2005


2004


2003


2002(Dollars in thousands)Other Financial DataCapital expenditures (excluding
    acquisitions)

$
22,267


$
11,183


$
8,212


$
19,119


$
5,902Net cash provided by (used in)
    operating activities


34,415



15,004



48,358



(15,221
)


30,378Net cash used in investing
    activities


(74,376
)


(223,785
)


(45,230
)


(26,093
)


(5,031
)Net cash provided by (used in)
    financing activities


5,644



241,253



(1,132
)


23,486



(15,797
)EBITDA(2)


88,528



57,561



51,120



19,817



33,240EBITDA margin(2)


16.7
%


12.4
%


13.8
%


6.3
%


11.0
%Adjusted EBITDA(2)

$
88,725


$
77,778


$
58,559


$
45,459


$
42,693Adjusted EBITDA margin(2)


16.7
%


16.8
%


15.8
%


14.3
%


14.1
%   49




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##### Table of Contents



As of December 31,Successor


Predecessor


Predecessor


Predecessor


Predecessor2006


2005


2004


2003


2002(In thousands)Balance Sheet DataCash and cash equivalents

$
2,821


$
37,138


$
4,666


$
2,670


$
20,498Working capital


19,628



59,130



15,036



(9,109
)


(208,421
)Property and equipment, net


230,904



191,151



192,397



157,146



147,720Total assets


838,695



797,082



308,860



260,407



257,323Long-term debt (including current
    portion and the revolving credit facility)


469,055



463,309



280,885



254,040



224,406Total stockholders equity
    (deficit)


240,648



222,927



(50,475
)


(82,313
)


(69,440
)   Notes
 
  (1)
    
    Pro forma net (loss) income per class A common share gives
    effect to the conversion of our class A preferred stock
    into
    approximately           shares
    of class B common stock, which will occur concurrently with
    the completion of this offering, assuming the completion of this
    offering on December 31, 2006, and a conversion price of
    $     , which is the mid-point of the
    estimated offering price range shown on the front cover page of
    this prospectus. 
  (2)
    
    We define EBITDA as net income (loss) before depreciation,
    amortization and interest expenses (net of interest income and
    other) and the provision for (benefit from) income taxes. EBITDA
    margin is EBITDA as a percentage of revenue. We prepare Adjusted
    EBITDA by adjusting EBITDA (each to the extent applicable in the
    appropriate period) for:  
    discontinued operations, net of tax;
    the effect of a change in accounting principle, net of tax;
    the change in fair value of an interest rate hedge;
    reversal of a charge related to the decertification of a
    facility;
    gains or losses on sale of assets;
    provision for the impairment of long-lived assets;
    the write-off of deferred financing costs of extinguished debt;
    reorganization expenses; and
    fees and expenses related to the Transactions.  We believe that the presentation of EBITDA and Adjusted EBITDA
    provide useful information to investors regarding our
    operational performance because they enhance an investors
    overall understanding of the financial performance and prospects
    for the future of our core business activities. Specifically, we
    believe that a report of EBITDA and Adjusted EBITDA provide
    consistency in our financial reporting and provides a basis for
    the comparison of results of core business operations between
    our current, past and future periods. EBITDA and Adjusted EBITDA
    are two of the primary indicators management uses for planning
    and forecasting in future periods, including trending and
    analyzing the core operating performance of our business from
    period-to-period without the effect of GAAP expenses, revenues
    and gains that are unrelated to the day-to-day performance of
    our business. We also use EBITDA and Adjusted EBITDA to
    benchmark the performance of our business against expected
    results, analyzing year-over-year trends, as described below,
    and to compare our operating performance to that of our
    competitors.Management uses both EBITDA and Adjusted EBITDA to assess the
    performance of our core business operations, to prepare
    operating budgets and to measure our performance against those
    budgets on a corporate, segment and a facility by facility
    level. We typically use Adjusted EBITDA for these 50




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##### Table of Contents



purposes at the corporate level (because the adjustments to
    EBITDA are not generally allocable to any individual business
    unit) and we typically use EBITDA to compare the operating
    performance of each skilled nursing and assisted living
    facility, as well as to assess the performance of our operating
    segments: long term care services, which includes the operation
    of our skilled nursing and assisted living facilities; and
    ancillary services, which includes our rehabilitation therapy
    and hospice businesses. EBITDA and Adjusted EBITDA are useful in
    this regard because they do not include such costs as interest
    expense, income taxes, depreciation and amortization expense and
    special charges, which may vary from business unit to business
    unit and period-to-period depending upon various factors,
    including the method used to finance the business, the amount of
    debt that we have determined to incur, whether a facility is
    owned or leased, the date of acquisition of a facility or
    business, the original purchase price of a facility or business
    unit or the tax law of the state in which a business unit
    operates. These types of charges are dependent on factors
    unrelated to our underlying business. As a result, we believe
    that the use of EBITDA and Adjusted EBITDA provide a meaningful
    and consistent comparison of our underlying business between
    periods by eliminating certain items required by GAAP which have
    little or no significance in our
    day-to-day
    operations.We also make capital allocations to each of our facilities based
    on expected EBITDA returns and establish compensation programs
    and bonuses for our executive management and facility level
    employees that are based upon the achievement of pre-established
    EBITDA and Adjusted EBITDA targets. 
  We also use Adjusted EBITDA to determine compliance with our
    debt covenants and assess our ability to borrow additional funds
    and to finance or expand our operations. The credit agreement
    governing our first lien term loan uses a measure substantially
    similar to Adjusted EBITDA as the basis for determining
    compliance with our financial covenants, specifically our
    minimum interest coverage ratio and our maximum total leverage
    ratio, and for determining the interest rate of our first lien
    term loan. The indenture governing our 11% senior
    subordinated notes due 2014 also uses a substantially similar
    measurement for determining the amount of additional debt we may
    incur. For example, both our credit facility and the indenture
    for the 11% senior subordinated notes include adjustments
    for (i) gain or losses on the sale of assets, (ii) the
    write-off of deferred financing costs of extinguished debt;
    (iii) reorganization expenses; and (iv) fees and
    expenses related to the Transactions. Our non-compliance with
    these financial covenants could lead to acceleration of amounts
    under our credit facility. In addition, if we cannot satisfy
    certain financial covenants under the indenture for our
    11% senior subordinated notes, we cannot engage in
    specified activities, such as incurring additional indebtedness
    or making certain payments. We are currently in compliance with
    our debt covenants. 
  Despite the importance of these measures in analyzing our
    underlying business, maintaining our financial requirements,
    designing incentive compensation and for our goal setting both
    on an aggregate and facility level basis, EBITDA and Adjusted
    EBITDA are non-GAAP financial measures that have no standardized
    meaning defined by GAAP. Therefore, our EBITDA and Adjusted
    EBITDA measures have limitations as analytical tools, and they
    should not be considered in isolation, or as a substitute for
    analysis of our results as reported under GAAP. Some of these
    limitations are:  
    they do not reflect our cash expenditures, or future
    requirements, for capital expenditures or contractual
    commitments;
    they do not reflect changes in, or cash requirements for, our
    working capital needs;
    they do not reflect the interest expense, or the cash
    requirements necessary to service interest or principal
    payments, on our debt;
    they do not reflect any income tax payments we may be required
    to make;
    although depreciation and amortization are non-cash charges, the
    assets being depreciated and amortized will often have to be
    replaced in the future, and EBITDA and Adjusted EBITDA do not
    reflect any cash requirements for such replacements;
    they are not adjusted for all non-cash income or expense items
    that are reflected in our consolidated statements of cash flows; 51




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##### Table of Contents




    they do not reflect the impact on earnings of charges resulting
    from certain matters we consider not to be indicative of our
    on-going operations; and
    other companies in our industry may calculate these measures
    differently than we do, which may limit their usefulness as
    comparative measures.  We compensate for these limitations by using them only to
    supplement both net income (loss) and consolidated cash flow on
    a basis prepared in conformance with GAAP in order to provide a
    more complete understanding of the factors and trends affecting
    our business. We strongly encourage investors to consider both
    net income (loss) and cash flows determined under GAAP as
    compared to EBITDA and Adjusted EBITDA, and to perform their own
    analysis, as appropriate.The following table provides a reconciliation from our net
    income (loss) (including the pro forma presentations thereof),
    which is the most directly comparable financial measure
    presented in accordance with GAAP for the periods indicated:  Year Ended December 31,Successor


Predecessor


Predecessor


Predecessor


Predecessor2006


2005


2004


2003


2002(In thousands)Net income (loss)

$
17,337


$
33,938


$
16,521


$
(13,946
)

$
706PlusProvision for (benefit from) income
    taxes


12,204



(13,048
)


4,421



(1,645
)


Depreciation and amortization


13,897



9,991



8,597



8,069



7,947Interest expense, net of interest
    income


45,090



26,680



21,581



27,339



24,587EBITDA


88,528



57,561



51,120



19,817



33,240Discontinued operations, net of
    tax(a)






(14,740
)


(2,789
)


(1,966
)


(2,851
)Cumulative effect of a change in
    accounting principle, net of tax(b)






1,628







12,261



Change in fair value of interest
    rate hedge(c)


197



165



926



1,006



Reversal of charge related to
    decertification of a facility(d)














(2,734
)


Gain on sale of assets(e)






(980
)










Write-off of deferred financing
    costs of extinguished debt(f)






16,626



7,858



4,111



Reorganization expenses(g)






1,007



1,444



12,964



12,304Expenses related to the
    Transactions(h)






16,511











Adjusted EBITDA

$
88,725


$
77,778


$
58,559


$
45,459


$
42,693   Notes
  (a)
    
    In March 2005, we sold our California-based institutional
    pharmacy business and, therefore, the results of operations of
    our California-based pharmacy business have been classified as
    discontinued operations. As our pharmacy business has been sold,
    these amounts are no longer part of our core operating business.(b)
    
    In 2005, we recorded the cumulative effect of a change in
    accounting principle as a result of our adoption of FIN
    No. 47. In 2003, we recorded the cumulative effect of a
    change in accounting principle as a result of our adoption of
    SFAS No. 150 which requires that financial instruments
    issued in the form of shares that are mandatorily redeemable be
    classified as liabilities. While these items are required under
    GAAP, they are not reflective of the operating income and losses
    of our underlying business.(c)
    
    Changes in fair value of an interest rate hedge are unrelated to
    our core operating activities and we believe that adjusting for
    these amounts allows us to focus on actual operating costs at
    our facilities.(d)
    
    In 2003, we reversed a charge recorded in 2000 related to a
    facility decertification from the Medicare and Medicaid
    programs. We appealed the decertification decision and in
    November 2002 reached a settlement for a recertification,
    resulting in the recovery of previously uncompensated care
    expenses in the amount of approximately $2.7 million. We
    believe our reversal of this charge is appropriate as the amount
    relates to a charge previously recorded in 2000. Even though the 52




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##### Table of Contents



reversal is appropriate under GAAP, this amount is not
    reflective our of true operating income for 2003.(e)
    
    While gains or losses on sales of assets are required under
    GAAP, these amounts are also not reflective of income and losses
    of our underlying business.(f)
    
    Reflects deferred financing costs that have been expensed in
    connection with the prepayment of previously outstanding debt
    and deferred financing costs that were expensed upon prepayment
    of our second lien senior secured term loan in connection with
    the Transactions. Write-offs for deferred financing costs are
    the result of distinct capital structure decisions made by our
    management and are unrelated to our
    day-to-day
    operations.(g)
    
    Represents expenses incurred in connection with our
    Chapter 11 reorganization. We believe that reorganization
    expenses will be immaterial in 2007 and, upon acceptance of our
    final petition by the bankruptcy court, which we expect will
    occur in 2007, we will no longer incur reorganization expenses.
    As a result, we do not believe that these expenses are
    reflective of the performance of our core operating business.(h)
    
    Represents (1) $0.2 million in fees paid by us in
    connection with the Transactions for valuation services and an
    acquisition audit; (2) our forgiveness in connection with
    the completion of the Transactions of a $2.5 million note
    issued to us in March 1998 by our then-Chairman of the Board,
    William Scott; (3) a $4.8 million bonus award expense
    incurred in December 2005 upon the completion of the
    Transactions pursuant to Trigger Event cash bonus agreements
    between us and our Chief Financial Officer, John King, and our
    Executive Vice President and President Ancillary Subsidiaries,
    Mark Wortley, in order to compensate them similarly to the
    economic benefit received by other executive officers who had
    previously purchased restricted stock; and (4) non-cash
    stock compensation charges of $9.0 million incurred in
    connection with restricted stock granted to certain of our
    senior executives. As these expenses relate solely to the
    Transactions, we do not expect to incur these types of expenses
    in the future. 53




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##### Table of Contents



MANAGEMENTS
    DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS  This Managements Discussion and Analysis of Financial
    Condition and Results of Operations is intended to assist in
    understanding and assessing the trends and significant changes
    in our results of operations and financial condition. Historical
    results may not indicate future performance. Our forward-looking
    statements reflect our current views about future events, are
    based on assumptions and are subject to known and unknown risks
    and uncertainties that could cause actual results to differ
    materially from those contemplated by these statements. See
    Special Note Regarding Forward-Looking Statements
    for a discussion of risks associated with reliance on
    forward-looking statements. Factors that may cause differences
    between actual results and those contemplated by forward-looking
    statements include, but are not limited to, those discussed in
    Risk Factors. Managements Discussion and
    Analysis of Financial Condition and Results of Operations should
    be read in conjunction with Selected Historical
    Consolidated Financial Data and our consolidated financial
    statements and related notes included elsewhere in this
    prospectus.
  Business
    Overview
        Historical
    Overview
  The
    Transactions
   54




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##### Table of Contents



Acquisitions
    and Divestitures
           
   
  Discontinued
    Operations
   55




---



##### Table of Contents



Year Ended December 31,2006

2005

2004(In thousands)Revenue

$



$
13,109


$
50,068Income from discontinued
    operations, net of taxes






14,740



2,789   Reorganization
    under Chapter 11
    1 4
      debtors-in-possession,
  
    emphasized quality of care;
    recruited experienced facility level management and nursing
    staff;
    accelerated revenue growth by improving census and payor mix by
    focusing on higher acuity patients;
    managed corporate and facility level operating expenses by
    streamlining support processes and eliminating redundant costs;
    expanded our corporate infrastructure by establishing a risk
    management team, legal department and human resources
    department; and
    implemented a new information technology system to provide rapid
    data delivery for management decision making. 56




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##### Table of Contents



Key
    Performance Indicators
    
    Skilled mix  the number of Medicare and
    non-Medicaid
    managed care patient days at our skilled nursing facilities
    divided by the total number of patient days at our skilled
    nursing facilities for any given period.
    EBITDA  net income (loss) before depreciation,
    amortization and interest expenses and the provision for income
    taxes. Additionally, Adjusted EBITDA means EBITDA as adjusted
    for non-core operating items. See footnote 2 to
    Prospectus Summary  Summary Historical and
    Unaudited Pro Forma Consolidated Financial Data for an
    explanation of the adjustments and a description of our uses of,
    and the limitations associated with the use of, EBITDA and
    Adjusted EBITDA.
    Average daily rates  revenue per patient per
    day for Medicare or managed care, Medicaid and private pay and
    other, calculated as total revenues for Medicare or managed
    care, Medicaid and private pay and other at our skilled nursing
    facilities divided by actual patient days for that revenue
    source for any given period.
    Quality mix  the amount of non-Medicaid
    revenue from each of our business units as a percentage of total
    revenue. In most states, Medicaid is the least attractive payor
    source, as rates are generally the lowest of all payor types.
    Occupancy percentage  the average daily ratio
    during a measurement period of the total number of residents
    occupying a bed in a skilled nursing facility to the number of
    available beds in the skilled nursing facility. During any
    measurement period, the number of licensed beds in a skilled
    nursing facility that are actually available to us may be less
    than the actual licensed bed capacity due to, among other
    things, bed decertifications.
    Percentage of facilities owned  the number of
    skilled nursing facilities and assisted living facilities that
    we own as a percentage of the total number of facilities. We
    believe that our success is influenced by the level of ownership
    of the facilities we operate.
    Average daily number of patients  the total
    number of patients at our skilled nursing facilities in a period
    divided by the number of days in that period.
    Number of facilities and licensed beds  the
    total number of skilled nursing facilities and assisted living
    facilities that we own or operate and the total number of
    licensed beds associated with these facilities. 57




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##### Table of Contents



Year Ended December 31,2006


2005


2004Occupancy statistics (skilled
    nursing facilities):Available beds in service at end
    of period


7,467



6,848



6,293
(1)Available patient days


2,609,122



2,529,782



2,282,681Actual patient days


2,270,552



2,155,183



2,012,097Occupancy percentage


87.0
%


85.2
%(2)


88.1
%Skilled mix


23.5
%


22.4
%


20.6
%Average daily number of patients


6,221



5,905



5,498EBITDA(3) (in
    thousands)

$
88,528


$
57,561


$
51,120Adjusted EBITDA(3)
    (in thousands)

$
88,725


$
77,778


$
58,559Revenue per patient day
    (skilled nursing facilities)Medicare

$
459


$
434


$
394Managed care


348



343



326Medicaid


124



117



109Private and other


144



134



127Weighted average for all


200



187



167Revenue from:Medicare


36.0
%


36.3
%


35.8
%Managed care and private pay


32.0



30.2



25.6Quality mix


68.0



66.5



61.4Medicaid


32.0



33.5



38.6Total


100
%


100
%


100
%   As of December 31,2006


2005


2004Facilities:Skilled nursing facilities (at end
    of period):Owned


43



39



33Leased


18



17



17Total skilled nursing facilities


61



56



50Total licensed beds


7,648



6,937



6,736Assisted living facilities (at end
    of period):Owned


10



10



2Leased


2



2



3Total assisted living facilities


12



12



5Total licensed beds


794



822



700Total facilities (at end of period)


73



68



55Percentage owned facilities (at
    end of period)


72.6
%


72.1
%


63.6
%     (1)
    
    Excludes the Vintage Park group of facilities that we acquired
    on December 31, 2004 and began operations on
    January 1, 2005, and our Summerlin, Nevada facility for
    which we acquired an operating lease on September 30, 2004
    and that was under construction for the remainder of 2004.(2)
    
    Occupancy percentage was 86.6% excluding Summerlin, Nevada,
    which was in
    start-up
    phase in 2005. 58




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##### Table of Contents



(3)
    
    EBITDA and Adjusted EBITDA are supplemental measures of our
    performance that are not required by, or presented in accordance
    with, GAAP. We define EBITDA as net income (loss) before
    depreciation, amortization and interest expenses (net of
    interest income and other) and the provision for (benefit from)
    income taxes. See footnote 2 to Prospectus
    Summary  Summary Historical and Unaudited Pro Forma
    Consolidated Financial Data for a description of our use
    of, and the limitations associated with the use of, EBITDA and
    Adjusted EBITDA. See footnote 2 to Selected
    Historical Consolidated Financial Data for a
    reconciliation to net income, which is the most directly
    comparable financial measure presented in accordance with GAAP.  Revenue
  Revenue
    by Service Offering
    Percentage Total RevenueYear Ended December 31,2006


2005


2004(Unaudited)Long-term care services segment:Skilled nursing facilities


85.4
%


86.8
%


90.8
%Assisted living facilities


2.9



3.5



2.0Total long-term care services
    segment


88.3



90.3



92.8Ancillary services segment:Third-party rehabilitation therapy
    services


10.9



9.2



7.1Hospice


0.9



0.4



Total ancillary services segment


11.8



9.6



7.1Other:


(0.1
)


0.1



0.1Total


100
%


100
%


100
%     Sources
    of Revenue
  Long-term
    care services segment
  Skilled Nursing Facilities.
 59




---



##### Table of Contents



Percentage Skilled Nursing Patient DaysYear Ended December 31,2006


2005


2004(Unaudited)Medicare


18.0
%


17.8
%


16.8
%Managed care


5.5



4.6



3.8Skilled mix


23.5



22.4



20.6Private and other


16.6



16.2



14.0Medicaid


59.9



61.4



65.4Total


100
%


100
%


100
%   Assisted Living Facilities.
  Ancillary
    services segment
  Rehabilitation Therapy.
  Hospice.
  Regulatory
    and other Governmental Actions Affecting Revenue
    Medicare.
   60




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##### Table of Contents



Medicaid.
  
    California.  In 2005, under State Assembly Bill
    1629, California Medicaid, known as Medi-Cal, switched from a
    prospective payment system to a prospective cost-based system
    for free-standing nursing facilities that is facility specific
    based upon the cost of providing care at that facility. State
    Assembly Bill 1629 included both a rate increase, as well as a
    quality assurance fee that is a provider tax. The provider tax
    is a mechanism for states to obtain additional federal funding
    for the states Medicaid program. State Assembly Bill 1629
    also effected a retroactive cost of living adjustment to its
    existing average reimbursement rate for the 2004/2005 rate year.
    As a result, we received a $5.8 million retroactive cost of
    living adjustment in August 2005, which related to services we
    had provided in 2004 and 2005. State Assembly Bill 1629 is
    scheduled to expire, with its prospective 61




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##### Table of Contents



cost-based system and quality assurance fee becoming
    inoperative, on July 31, 2008, unless a later enacted
    statute extends this date.  
    Texas.  Texas has a prospective cost based
    system that is facility specific based upon patient acuity mix
    for that facility.
    Kansas/Missouri.  The Kansas and Missouri
    Medicaid reimbursement systems are prospective cost based and
    are case mix adjusted for resident activity levels.
    Nevada.  Nevadas reimbursement system is
    prospective cost based, adjusted for patient acuity mix and
    designed to cover all costs except those currently associated
    with property, return on equity, and certain ancillaries.
    Property cost is reimbursed at a prospective rate for each
    facility.      Primary
    Expense Components
  Cost
    of Services
      General
    and Administrative
      
    increased salaries, bonuses and benefits necessary to attract
    and retain qualified accounting professionals as we seek to
    expand the size and enhance the skills of our accounting and
    finance staff;
    increased professional fees as we complete the process of
    complying with Section 404 of the Sarbanes-Oxley Act,
    including incurring additional audit fees in connection with our
    independent registered public accounting firms audit of
    our assessment of our internal controls over financial reporting;
    increased costs associated with creating and developing an
    internal audit function, which we have not had historically;
    increased legal costs associated with reviews of our filings
    with the Securities and Exchange Commission; and 62




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##### Table of Contents




    the incurrence of miscellaneous costs, such as exchange fees,
    investor relations fees, filing expenses, training expenses and
    increased directors and officers liability insurance.  Sarbanes-Oxley
  Restricted Stock Issued Prior to the
    Transactions.
    
    Subject to the executives continuing service with us, the
    shares would vest in full upon the occurrence of a Trigger
    Event, which was defined as any asset sale, initial public
    offering or stock sale (each, a liquidity event),
    providing a terminal equity value of us in excess of
    $100.0 million. The consummation of the Transactions
    constituted a valid Trigger Event; and
    If a Trigger Event had not occurred by the end of the original
    term of the executives employment agreement and such
    executive was still employed by us, 50% of his shares would vest
    if he had complied with the confidentiality and non-solicitation
    obligations in his employment agreement and we had achieved
    EBITDA in any one fiscal year of over $60.0 million. 
  Accounting for Stock Issued to Employees
 
 
   
 
   
  Cash Bonus Payments.
 63




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##### Table of Contents



Restricted Stock Issued in Connection with or Following the
    Transactions.
 
 
  Share Based Payments non-cash stock-based
 
 
   
 
   
 64




---



##### Table of Contents




    the valuation in a public offering reflected a valuation of
    freely-tradable common stock to be issued in the offering,
    whereas our then outstanding securities reflected illiquid
    ownership in a private company; 
 
  
    there is a risk that we will be unable to achieve our projected
    financial forecasts of operating results and cash flows, which
    could significantly reduce our equity value; and 
 
  
    there is a risk that we might not achieve a liquidity event,
    such as the completion of this offering or a sale of our
    company, at all. 
 
  non-employee
 
 
   
 
   
 
   
 
 
 
  Performance Based Incentive Compensation
    Plan.
 
 65




---



##### Table of Contents



Depreciation
    and Amortization
    Buildings and improvements

15-40 yearsLeasehold improvements

Shorter of the lease term or
    estimated useful
    life, generally 5-10 yearsFurniture and equipment

3-10 years   Rent
    Cost of Sales
    Dividend
    Accretion on Convertible Preferred Stock
    Critical
    Accounting Policies and Estimates
      Revenue
    recognition
   66




---



##### Table of Contents



Allowance
    for doubtful accounts
    Patient
    liability risks
    Impairment
    of long-lived assets
   67




---



##### Table of Contents



Goodwill
    and Intangible Assets
    Goodwill and other Intangible
    Assets
  Determination of Reporting Units
    
    long-term care services, which includes our operation of
    skilled nursing and assisted living facilities and is the most
    significant portion of our business,
    rehabilitation therapy, which provides physical,
    occupational and speech therapy in our facilities and
    unaffiliated facilities, and
    hospice care, which was established in 2004 and provides
    hospice care in Texas and California.    Goodwill Impairment Testing
    Deferred
    Financing Costs
   68




---



##### Table of Contents



Income
    Taxes
  Accounting for Income
    Taxes
  Accounting for the
    Impairment of Long-Lived Assets and for Long-Lived Assets
    Disposed Of
        Discontinued
    Operations
  Accounting for the Impairment or
    Disposal of Long-Lived Assets
 69




---



##### Table of Contents



Accounting
    for Conditional Asset Retirement Obligations
    pre-1980
    Operating
    Leases
  Accounting for Leases Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent
    Increases
  Recent
    Accounting Standards
  Accounting for Uncertainty in Income Taxes  an
    interpretation of SFAS No. 109
  Fair
    Value Measurements
 70




---



##### Table of Contents



The
    Fair Value Option for Financial Assets and Financial
    Liabilities
  Results
    of Operations
    Year EndedDecember 31,2006


2005


2004Revenue


100
%


100
%


100
%Expenses:Cost of services (exclusive of
    rent cost of sales and depreciation and amortization shown below)


74.3



75.0



75.8Rent cost of sales


1.8



2.1



2.1General and administrative


7.5



9.5



6.8Depreciation and amortization


2.6



2.2



2.386.2



88.8



87.0Other income (expenses):Interest expense


(8.8
)


(6.0
)


(6.0
)Interest income and other


0.2



0.2



0.2Change in fair value of interest
    rate hedge










(0.2
)Equity in earnings of joint venture


0.4



0.4



0.5Write-off of deferred financing
    costs






(3.6
)


(2.1
)Forgiveness of stockholder loan






(0.5
)


Reorganization expenses






(0.2
)


(0.4
)Gain on sale of assets






0.2



Total other income (expenses), net


(8.2
)


(9.5
)


(8.0
)Income before provision for
    (benefit from) income taxes, discontinued operations and the
    cumulative effect of a change in accounting principle


5.6



1.7



5.0Provision for (benefit from)
    income taxes


2.3



(2.8
)


1.2Income before discontinued
    operations and the cumulative effect of a change in accounting
    principle


3.3



4.5



3.8Income from discontinued
    operations, net of tax






3.2



0.7Cumulative effect of a change in
    accounting principle, net of tax






(0.4
)


Net income


3.3
%


7.3
%


4.5
%EBITDA margin(1)


16.7
%


12.4
%


13.8
%Adjusted EBITDA margin(1)


16.7
%


16.8
%


15.8
%     (1)
    
    See footnote 2 to Selected Historical Consolidated
    Financial Data for a calculation of EBITDA and Adjusted
    EBITDA and a description of our uses of, and the limitations
    associated with the use of, EBITDA and Adjusted EBITDA.  Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Revenue.
 71




---



##### Table of Contents



Cost of Services Expenses.
         72




---



##### Table of Contents



Rent cost of sales.
  General and Administrative Services
    Expenses.
  Depreciation and Amortization.
 
  Interest Expense, net of interest income and
    other.
 
  Write-off of deferred financing
    costs.
  Forgiveness of stockholder loan.
  Provision for (Benefit from) Income Taxes.
 73




---



##### Table of Contents



Discontinued operations, net of
    tax.
  EBITDA.
      Net Income.
  Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenue.
   74




---



##### Table of Contents



start-up.
    Cost of Services.
             75




---



##### Table of Contents



Rent Cost of Sales
  General and Administrative Services
    Expenses.
  Depreciation and Amortization. Express
    Recoverytm
  Interest Expense, Net of Interest Income and
    Other.
  Write-off of Deferred Financing
    Costs.
  Forgiveness of Stockholder Loan.
  Gain on Sale of Assets.
  Provision for (Benefit from) Income Taxes.
 76




---



##### Table of Contents



Discontinued Operations, Net of
    Tax.
  Cumulative Effect of Change in Accounting
    Principle. Accounting for
    Conditional Asset Retirement Obligations.
  EBITDA.
      Net Income.
 77




---



##### Table of Contents



Quarterly
    Data
    Three Months EndedMarch 31,


June 30,


September 30,


December 31,


March 31,


June 30,


September 30,


December 31,2006


2006


2006


2006


2005


2005


2005


2005Successor


Successor


Successor


Successor


Predecessor


Predecessor


Predecessor


Predecessor(In thousands, except share and per share data)Consolidated Statement of
    Operations DataRevenue

$
125,186


$
131,171


$
135,396


$
139,904


$
108,936


$
111,493


$
122,206


$
120,212Expenses:Cost of services (exclusive of rent
    cost of sales and depreciation and amortization shown below)


92,311



98,430



101,695



102,500



83,039



83,491



91,307



89,391Rent cost of sales


2,451



2,302



2,704



2,570



2,403



2,403



2,491



2,518General and administrative


9,566



9,298



10,092



10,916



7,525



7,489



6,971



21,799Depreciation and amortization


3,674



3,573



3,192



3,458



2,159



2,807



2,461



2,564108,002



113,603



117,683



119,444



95,126



96,190



103,230



116,272Other income (expenses):Interest expense


(11,227
)


(11,612
)


(11,693
)


(11,754
)


(5,363
)


(5,760
)


(7,914
)


(8,592
)Interest income and other


386



242



254



314



151



211



176



411Change in fair value of interest
    rate hedge


(21
)


77



(227
)


(26
)


65



(217
)


16



(29
)Equity in earnings of joint venture


381



511



502



509



397



516



449



425Write-off of deferred financing
    costs






















(11,021
)






(5,605
)Forgiveness of stockholder loan






























(2,540
)Reorganization expenses


















(178
)


(279
)


(97
)


(453
)Gain on sale of assets






























980Total other income (expenses), net


(10,481
)


(10,782
)


(11,164
)


(10,957
)


(4,928
)


(16,550
)


(7,370
)


(15,403
)Income (loss) before provision for
    (benefit from) income taxes, discontinued operations and
    cumulative effect of a change in accounting principle


6,703



6,786



6,549



9,503



8,882



(1,247
)


11,606



(11,463
)Provision for (benefit from) income
    taxes


2,601



3,071



2,588



3,944



(7,375
)


(2,904
)


3,875



(6,644
)Income (loss) before discontinued
    operations and cumulative effect of a change in accounting
    principle


4,102



3,715



3,961



5,559



16,257



1,657



7,731



(4,819
)Discontinued operations, net of tax


















12,569



2,269



(50
)


(48
)Cumulative effect of a change in
    accounting principle, net of tax






























(1,628
)Net income (loss)


4,102



3,715



3,961



5,559



28,826



3,926



7,681



(6,495
)Accretion on preferred stock


(4,401
)


(4,540
)


(4,684
)


(4,781
)


(259
)


(243
)






(242
)Net (loss) income attributable to
    common stockholders

$
(299
)

$
(825
)

$
(723
)

$
778


$
28,567


$
3,683


$
7,681


$
(6,737
)Net (loss) income per share data:(Loss) income before discontinued
    operations and cumulative effect of a change in accounting
    principle per common share, basic

$
(13.05
)

$
(35.95
)


(31.49
)


33.84


$
13.05


$
1.15


$
6.12


$
(4.23
) 78




---



##### Table of Contents



Three Months EndedMarch 31,


June 30,


September 30,


December 31,


March 31,


June 30,


September 30,


December 31,2006


2006


2006


2006


2005


2005


2005


2005Successor


Successor


Successor


Successor


Predecessor


Predecessor


Predecessor


Predecessor(In thousands, except share and per share data)Discontinued operations per common
    share, basic


















10.25



1.84



(0.04
)


(0.04
)Cumulative effect of a change in
    accounting principle per common share, basic






























(1.36
)Net (loss) income per common share,
    basic

$
(13.05
)

$
(35.95
)

$
(31.49
)

$
33.84


$
23.30


$
2.99


$
6.08


$
(5.63
)Net (loss) income before
    discontinued operations and cumulative effect of a change in
    accounting principle per common share, diluted

$
(13.05
)

$
(35.95
)

$
(31.49
)

$
32.86


$
12.22


$
1.08


$
5.92


$
(4.23
)Discontinued operations per common
    share, diluted


















9.60



1.73



(0.04
)


(0.04
)Cumulative effect of a change in
    accounting principle per common share, diluted






























(1.36
)Net (loss) income per common share,
    diluted

$
(13.05
)

$
(35.95
)

$
(31.49
)

$
32.86


$
21.82


$
2.81


$
5.88


$
(5.63
)Weighted average common shares
    outstanding, basic


22,916



22,947



22,950



22,984



1,226,144



1,229,867



1,263,830



1,195,966Weighted average common shares
    outstanding, diluted


22,916



22,947



22,950



23,674



1,309,354



1,308,666



1,306,745



1,195,966   Liquidity
    and Capital Resources
    Year Ended December 31,2006


2005


2004(In thousands)Net cash provided by operating
    activities

$
34,415


$
15,004


$
48,358Net cash used in investing
    activities


(74,376
)


(223,785
)


(45,230
)Net cash provided by (used in)
    financing activities


5,644



241,253



(1,132
)Net (decrease) increase in cash
    and equivalents


(34,317
)


32,472



1,996Cash and equivalents at beginning
    of period


37,138



4,666



2,670Cash and equivalents at end of
    period

$
2,821


$
37,138


$
4,666   Years
    Ended December 31, 2006 and 2005
      
    $24.9 million was due to a decrease in cash used by the
    change in other current assets, primarily prepaids and income
    taxes receivable, to a $12.3 million provision of cash in
    2006 from a $12.6 million use of cash in 2005 primarily due
    to the offset of a $9.4 million income tax receivable 79




---



##### Table of Contents



from 2005 against tax payments in 2006 as well lower prepaids in
    2006 compared to 2005 primarily due to timing of payments.  
    $3.6 million decrease in cash provided by the change in
    insurance liability risks to a $1.6 million provision of
    cash in 2006 from a $5.2 million provision of cash in 2005.  Express
    Recovery tm Express
    Recovery tm
      
    $211.3 million of equity investments made in us associated
    with the Transactions;
    $123.1 million received from a refinancing of debt in July
    2005;
    $198.7 million received from the issuance of our
    11% senior subordinated notes in December, 2005;
    $0.1 million received from the exercise of stock options
    and warrants; and
    $0.1 million in proceeds received from the sale of an
    interest rate hedge.    
    $110.0 million to fully pay-off our second lien term loan;
    $108.6 million to pay a special dividend to our
    stockholders;
    $28.3 million incurred in deferred financing costs,
    purchase of an interest rate hedge and early termination fees
    associated with our new debt issuances; 
  
    $15.7 million to fully redeem our class A preferred
    stock in accordance with our new senior debt structure; 
  
    $15.0 million to reduce the outstanding balance under our
    revolver; and
    $14.4 million in repayments on long-term debt and capital
    leases.  Years
    Ended December 31, 2005 and 2004
   80




---



##### Table of Contents




    $21.1 million was due to an increase in accounts
    receivable, net, to a $28.2 million use of cash in 2005
    from a $7.1 million use of cash in 2004, primarily due to
    increases in accounts receivable in 2005 related to the
    $5.8 million of retroactive cost of living revenue
    adjustments under California State Assembly Bill 1629, increases
    in our Hallmark rehabilitation business and the acquisition of
    the Vintage Park group of facilities and the Summerlin, Nevada
    facility, and
    $10.7 million was due to an increase in cash used by the
    change in other current assets, primarily prepaids and income
    taxes receivable, to a $12.6 million use of cash in 2005
    from a $1.9 million use of cash in 2004, and
    $6.1 million was due to a decrease in cash provided by
    insurance liability risks to $5.2 million in 2005 from
    $11.3 million in 2004 , primarily related to the timing
    difference between when amounts are accrued and subsequent
    claims payments associated with those accruals, offset by an
    $8.2 million increase in cash provided by the increase in
    accounts payable and accrued liabilities to a $13.9 million
    provision of cash in 2005 from a $5.7 million provision of
    cash in 2004.  Express
    Recovery tm Express
    Recovery tm
      
    $211.3 million of equity investments made in us associated
    with the Transactions;
    $123.1 million received from a refinancing of debt in July
    2005;
    $198.7 million received from the issuance of our
    11% senior subordinated notes in December, 2005;
    $0.1 million received from the exercise of stock options
    and warrants; and
    $0.1 million in proceeds received from the sale of an
    interest rate hedge.    
    $110.0 million to fully pay-off our second lien term loan;
    $108.6 million to pay a special dividend to our
    stockholders;
    $28.3 million incurred in deferred financing costs,
    purchase of an interest rate hedge and early termination fees
    associated with our new debt issuances; 
  
    $15.7 million to fully redeem our class A preferred
    stock in accordance with our new senior debt structure; 
  
    $15.0 million to reduce the outstanding balance under our
    revolver; and
    $14.4 million in repayments on long-term debt and capital
    leases. 81




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##### Table of Contents




    $228.9 million for repayments of our long-term debt due to
    the refinancing of our debt capital structure;
    $23.3 million to reduce our term debt; 
  
    $15.0 million dividend payment made to our class A
    preferred stockholders; and 
  
    $14.3 million incurred in deferred financing costs, the
    purchase of an interest note hedge and fees paid for the early
    extinguishment of debt associated with our new debt issuance.  Cash
    flows from Discontinued Operations
    Principal
    Debt Obligations
       82




---



##### Table of Contents




    a base rate determined by reference to the higher of the prime
    rate announced by Credit Suisse and the federal funds rate plus
    one-half of 1.0%; or
    a reserve adjusted Eurodollar rate.      
    our $259.4 million first lien senior secured term loan and
    a $50.0 million unused first lien senior secured revolving
    credit facility that matured on June 15, 2010;
    a $110.0 million second lien senior secured term
    loan; and
    capital leases and other debt of approximately $5.9 million.      Capital
    Expenditures
 
   
   83




---



##### Table of Contents



Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm
   Liquidity
 
   
     84




---



##### Table of Contents



Other
    Factors Affecting Liquidity and Capital Resources
  Medical and Professional Malpractice and Workers
    Compensation Insurance.
    Inflation.
    Seasonality.
  Off
    Balance Sheet Arrangements
   85




---



##### Table of Contents



Contractual
    Obligations
    Less Than








More ThanTotal


1 Yr.


1-3 Yrs.


3-5 Yrs.


5 Yrs.Senior subordinated notes

$
365,000


$
22,000


$
44,000


$
44,000


$
255,000Amended senior secured credit
    facility


356,235



22,348



42,035



41,131



250,721Capital lease obligations


4,214



367



2,766



436



645Other long-term debt obligations


2,697



341



681



681



994Operating lease obligations(1)


84,344



9,842



19,250



16,300



38,952$
812,490


$
54,898


$
108,732


$
102,548


$
546,312     (1)
    
    We lease some of our facilities under non-cancelable operating
    leases. The leases generally provide for our payment of property
    taxes, insurance and repairs, and have rent escalation clauses,
    principally based upon the Consumer Price Index or other fixed
    annual adjustments. The amounts shown reflect the future minimum
    rental payments under these leases.  Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure
    Quantitative
    and Qualitative Disclosures About Market Risk
    Interest
    Rate Risk
     86




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Fair2007


2008


2009


2010


2011


Thereafter


Total


ValueFixed-rate debt(1)

$
210


$
224


$
239


$
255


$
272


$
200,904


$
202,104


$
222,104Average interest rate


11.0
%


11.0
%


11.0
%


11.0
%


11.0
%


11.0
%Variable-rate debt

$
2,600


$
2,600


$
2,600


$
11,100


$
2,600


$
243,100


$
264,600


$
264,600Average interest rate(2)


7.5
%


7.1
%


7.1
%


7.2
%


7.3
%


7.3
%     (1)
    
    Excludes unamortized original issue discount of
    $1.2 million on our $200 million senior subordinated
    notes.(2)
    
    Based on a forward LIBOR rate estimate.   87




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BUSINESS  Overview
      Industry
    and Market Opportunity
    
    Demand driven by aging population and increased life
    expectancies.  We believe that demand for
    long-term healthcare services will continue to grow due to an
    aging population and increased life expectancies. According to
    the U.S. Census Bureau, the number of Americans aged 65 or
    older is expected to increase from approximately 37 million
    in 2005 to approximately 40 million in 2010 and
    approximately 47 million in 2015, representing average
    annual growth from 2005 of 1.9% and 2.5%, respectively. The
    number of Americans aged 85 and over is forecasted to more than
    double from 4.2 million in 2000 to 9.6 million by 2030.
    Shift of patient care to lower cost
    alternatives.  We expect that the growth of the
    elderly population in the United States will continue to cause
    healthcare costs to increase at a faster rate than the available
    funding from government-sponsored healthcare programs. In
    response, the federal government has adopted cost containment
    measures that encourage the treatment of patients in more cost
    effective settings such as skilled nursing facilities, for which
    the staffing requirements and associated costs are often
    significantly lower than at short or long-term acute-care
    hospitals, in-patient 88




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rehabilitation facilities or other post-acute care settings.
    Recent regulatory changes have created incentives for these
    facilities to minimize patient lengths of stay and placed limits
    on the type of patient that can be admitted to these facilities,
    thereby increasing the demand for skilled nursing care. At the
    same time, the government has increased Medicare funding to
    skilled nursing facilities for the treatment of high-acuity
    patients to a level at which we believe these providers can
    deliver effective clinical outcomes. As a result, we believe
    that many high-acuity patients that would have been previously
    treated in these facilities are increasingly being cared for in
    skilled nursing facilities.  
    Supply/Demand imbalance.  According to the AARP
    Public Policy Institute, the 65 or older population in
    California and Texas is expected to grow from 2002 to 2020 by
    79.5% and 74.6%, respectively, compared to the national average
    growth of 58.4% over this same period. We expect that this
    growth in the elderly population will result in increased demand
    for services provided by long-term healthcare facilities in the
    United States, including skilled nursing facilities, assisted
    living facilities and in-patient rehabilitation facilities.
    Despite potential growth in demand for long-term healthcare
    services, there has been a decline in the number of nursing
    facility beds. According to the American Health Care
    Association, the total number of nursing facility beds in the
    United States has declined from approximately 1.8 million
    in December 2001 to approximately 1.7 million in June 2006,
    we believe in part due to the migration of lower-acuity patients
    to alternative sources of long-term care. This supply/demand
    imbalance is also highlighted in our key states, with the number
    of nursing facility beds in California declining from 2001 to
    2006 by 5.9% and remaining relatively flat in Texas over such
    period.
    Medicare reimbursement.  Medicare is a federal
    program and provides certain healthcare benefits to
    beneficiaries who are 65 years of age or older, blind,
    disabled or qualify for the End Stage Renal Disease Program.
    Since 1999, Medicare has reimbursed our skilled nursing
    facilities at a predetermined rate, based on the anticipated
    costs of treating patients. Under this system, reimbursement
    rates are determined by classifying each patient into a resource
    utilization group, or RUG, category that is based upon each
    patients acuity level. Between 1999 and 2003, Congress
    enacted a series of temporary supplemental payments and
    adjustments to respond to financial pressures placed on the
    nursing home industry. Effective January 1, 2006, the last
    of the previously established temporary payments applicable to
    our patient population expired. At that time, the Center for
    Medicare and Medicaid Services increased the number of RUG
    categories from 44 to 53 and refined the reimbursement rates for
    the existing RUG categories in order to better align the
    respective payments with patient acuity levels. These nine new
    RUG categories generally apply to higher acuity patients and the
    higher reimbursement rates for those RUGs have been adopted to
    better account for the higher costs of those patients. As part
    of a market basket adjustment implemented for increased cost of
    living, Medicare payments to skilled nursing facilities
    increased by an average of 3.1% for 2006 and will also increase
    by an average of 3.1% for 2007.     89




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
    Medicaid reimbursement.  Medicaid is a
    state-administered medical assistance program for the indigent,
    operated by individual states with the financial participation
    of the federal government. All states in which we operate cover
    long-term care services for individuals who are Medicaid
    eligible and qualify for institutional care. Medicaid
    reimbursement rates are generally lower than reimbursement
    provided by Medicare. Rapidly increasing Medicaid spending,
    combined with slower state revenue growth, has led many states
    to institute measures aimed at controlling spending growth.
    Given that Medicaid outlays are a significant component of state
    budgets, we expect continuing cost containment pressures on
    Medicaid outlays for skilled nursing facilities in the states in
    which we operate. The presidents budget for fiscal year
    2008 includes proposals to cut a total of $25.7 billion in
    federal financial participation in Medicaid over the next five
    years. If this proposal is adopted, states which previously
    received higher federal matching payments would have less
    funding available, in which case Medicaid rates in these states
    may be reduced to levels that are below our operating costs. In
    addition, the DRA limited the circumstances under which an
    individual may become financially eligible for nursing home
    services under Medicaid. While Medicaid spending varies by
    state, we believe the states in which we operate generally
    provide a favorable operating environment.
    The U.S. Department of Health and Human Services has
    established a Medicaid advisory commission charged with
    recommending ways in which Congress can restructure the program.
    The commission issued its report on December 29, 2006. The
    commissions report included several recommendations that
    involved giving states greater discretion in the determination
    of eligibility, formulation of benefit packages, financing, and
    tying payment for services to quality measures. The commission
    also recommended to expand home and community-based care for
    seniors and the disabled.
    Tort reform.  In response to the growing cost
    of medical malpractice claims, many states, including California
    and Texas, have implemented tort reform measures capping
    non-economic damages in many cases and limiting certain punitive
    damages. These caps both limit exposure to claims and serve to
    expedite resolution of claims.  Our
    Competitive Strengths
    
    High-quality patient care and integrated service
    offerings.  Through our dedicated and well-trained
    employees, attractive facility environment and broad service
    offering, we believe that we provide high-quality,
    cost-effective care to our patients. We believe that our
    integrated skilled nursing care and rehabilitation therapy
    service offerings are particularly attractive to high-acuity
    patients. These patients require more intensive and medically
    complex care, which typically results in higher reimbursement
    rates. We enhanced our position as a select provider to
    high-acuity patients by introducing our Express
    Recoverytm
    program, which uses a dedicated unit within a skilled nursing
    facility to deliver a comprehensive rehabilitation regime to
    high-acuity patients. We have increased our skilled mix from
    20.6% for 2004 to 23.5% for 2006.
    Strong reputation in local markets.  We believe
    we have a strong reputation for high-quality care and successful
    clinical outcomes in our local markets. We believe this
    reputation has enabled us to build strong relationships with
    managed care payors, as well as referral sources such as
    hospitals and specialty physicians that frequently refer
    high-acuity patients to us.
    Concentrated network in attractive
    markets.  Approximately 67% of our skilled nursing
    facilities are located in urban or suburban markets. These
    markets are typically more heavily penetrated by 90




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specialty physicians, large medical centers and managed care
    payors, which are all key sources of referrals for high-acuity
    patients. Many of our facilities are located in close proximity
    to large medical centers and specialty physician groups,
    allowing us to develop relationships with these key referral
    sources and increase the number of high-acuity patients referred
    to us. We believe that managed care payors typically prefer a
    regional network of facilities such as ours because they prefer
    to contract with a limited number of providers. In addition, our
    clustered facility locations have enabled us to achieve lower
    operating costs through the flexible sharing of therapists and
    nurses among facilities, reduced third-party contract labor and
    the placement of experienced managers in close proximity to our
    facilities.  
    Successful integration of
    acquisitions.  Between August 1, 2003 and
    December 31, 2006, we have acquired or entered into
    long-term leases for 27 skilled nursing and assisted living
    facilities across four states. Immediately following the closing
    of an acquisition, we transition the acquired facilities to the
    same management platform we use to support our existing
    facilities, which includes centralized business services as well
    as common information systems, processes and standard operating
    procedures, including risk management. We have successfully
    integrated these facilities and have experienced average
    facility level margin improvement of 2.6% and an increase in
    skilled mix of 2.4% for the 22 of these facilities acquired
    before 2006 as measured by the first three full months
    immediately following each acquisition relative to the
    comparative period one year later.
    Significant facility ownership.  As of
    December 31, 2006, we owned approximately 73% of our
    facilities. Ownership provides us with greater operating and
    financial flexibility than leasing because it provides longer
    term control over facility operations, mitigates our exposure to
    increasing rent expense and allows us to respond more quickly
    and efficiently to changes in market demand through facility
    renovations and modifications.
    Strong and experienced management team.  Our
    senior management team has an average of more than 23 years
    of healthcare industry experience and has made significant
    financial and operating improvements to our business since
    joining us in 2002. By establishing our focus on key performance
    metrics and creating a culture of accountability across all of
    our facilities, our senior management team has developed a
    framework for monitoring and improving quality of care and
    profitability. Our senior management team has been the
    motivating force in the development of innovative programs to
    attract high-acuity patients, such as our Express
    Recoverytm
    program. After the completion of this offering, our senior
    management team will beneficially own
    approximately     % of our outstanding
    common stock.  Our
    Strategy
    
    Focus on high-acuity patients.  We focus on
    attracting high-acuity patients, for whom we are reimbursed at
    higher rates. We believe that we can continue to leverage our
    integrated service offering and our reputation for providing
    high-quality care to expand our referral network and increase
    the number of high-acuity patients referred to us. In addition,
    we intend to introduce our Express
    Recoverytm
    program in more of our facilities and to develop other
    innovative programs to better serve high-acuity patients. As of
    December 31, 2006, we have added 23 Express
    Recoverytm
    units at our facilities.
    Expand our rehabilitation and other related healthcare
    businesses.  We intend to continue to grow our
    rehabilitation therapy and hospice care businesses by expanding
    their use in both our own and in third-party facilities and by
    adding new third-party contracts. We have increased our
    third-party rehabilitation revenue 35.7%, to $57.9 million
    in 2006 from $42.7 million in 2005. We believe that by
    continuing to grow these businesses and adding to our portfolio
    of related healthcare services, we will be able to capture a
    greater share of healthcare expenditures in our key markets. 91




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
    Drive revenue growth organically and through acquisitions and
    development.  We pursue organic revenue growth by
    expanding our referral network, increasing our service offerings
    to high-acuity patients and expanding our other related
    healthcare services offerings. We regularly evaluate strategic
    acquisitions and new development opportunities in attractive
    markets, particularly in the western region of the United
    States, that allow us to build relationships with additional
    referral sources, such as hospitals, specialty physicians and
    managed care organizations, or achieve operational efficiencies.
    For example, we currently are advancing plans to develop three
    skilled nursing facilities on or near the Baylor campus.
    Monitor performance measures to increase operating
    efficiency.  We focus on reducing operating costs
    by maximizing the efficient use of our labor resources and
    managing our insurance and professional and general liability
    and workers compensation expenses. We have had success
    with these initiatives in part by implementing systems to
    monitor closely key metrics that measure our performance in such
    areas as quality of care, occupancy, payor mix, labor
    utilization and turnover and insurance claims. We believe that
    by continuing to monitor our performance closely we will be able
    to reduce our use of outsourced services and our overtime
    compensation and proactively address potential sources of
    medical malpractice and workers compensation exposure, all
    of which would enable us to improve our operating results.
    Attract and retain talented and qualified
    employees. We seek to hire and retain talented and
    qualified employees, including our administrative and management
    personnel. We also seek to leverage our employees
    capabilities through our culture, quality of care training and
    incentive programs in order to enhance our ability to provide
    quality clinical and rehabilitation services.  Recent
    Transactions
 
   
         92




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wholly-owned
  Operations
      Long-Term
    Care Services Segment
  Skilled
    Nursing Facilities
      Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm
  Assisted
    Living Facilities
   93




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Ancillary
    Services Segment
  Rehabilitation
    Therapy Services
      Hospice
    Care
    Our Local
    Referral Network
      Payment
    Sources
   94




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Percentage Skilled Nursing Patient DaysYear Ended December 31,2006


2005


2004Medicare


18.0
%


17.8
%


16.8
%Managed care


5.5



4.6



3.8Skilled mix


23.5



22.4



20.6Private and other


16.6



16.2



14.0Medicaid


59.9



61.4



65.4Total


100
%


100
%


100
%     Year Ended December 31,2006


2005


2004(Unaudited)Medicare


36.0
%


36.3
%


35.8
%Managed care and private pay


32.0



30.2



25.6Quality mix


68.0



66.5



61.4Medicaid


32.0



33.5



38.6Total


100
%


100
%


100
%   Sources
    of Reimbursement
    Medicare.
  
    Part A.  Hospital insurance, which
    provides reimbursement for inpatient services for hospitals,
    skilled nursing facilities and certain other healthcare
    providers and patients requiring daily 95




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professional skilled nursing and other rehabilitative care.
    Coverage in a skilled nursing facility is limited for a period
    up to 100 days, if medically necessary, after the
    individual has qualified for Medicare coverage by a three-day
    hospital stay. Medicare pays for the first 20 days of stay
    in a skilled nursing facility in full and the next 80 days
    above a daily coinsurance amount. Covered services include
    supervised nursing care, room and board, social services,
    pharmaceuticals and supplies as well as physical, speech and
    occupational therapies and other necessary services provided by
    nursing facilities. Medicare Part A also covers hospice
    care.  
    Part B.  Supplemental Medicare insurance,
    which requires the beneficiary to pay monthly premiums, covers
    physician services, limited drug coverage and other outpatient
    services, such as physical, occupational and speech therapy
    services, enteral nutrition, certain medical items and X-ray
    services received outside of a Part A covered inpatient
    stay.           96




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Medicaid.
     97




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98




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##### Table of Contents



Managed Care.
  Private Pay and Other.
  Reimbursement
    for Specific Services
  Reimbursement for Skilled Nursing
    Services.
    Reimbursement for Assisted Living
    Services.
  Reimbursement for Rehabilitation Therapy
    Services.
 99




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Reimbursement for Hospice Services. 90-day 60-day
       100




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Government
    Regulation
  General
      Civil
    and Criminal Fraud and Abuse Laws and Enforcement
        Anti-Kickback
    Statute
   101




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Stark
    Law
       102




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False
    Claims
  and/or
    Health
    Insurance Portability and Accountability Act of
    1996
     103




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State
    Privacy Laws
  and/or
  Certificates
    of Need and Other Regulatory Matters
    State
    Facility Operating License Requirements
  ,
  Rehabilitation
    License Requirements
    Regulation
    of our Joint Venture Institutional Pharmacy
   104




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Competition
    Express
    Recovery tm
        Labor
   105




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Risk
    Management
  follow-up
  Insurance
    General
    and Professional Liability Insurance
      Workers
    Compensation
         106




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Tort
    Reform
            Environmental
    Matters
    and/or and/or and/or
  Customers
    Legal
    Proceedings
   107




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Employees
    Properties
      Owned Facilities


Leased Facilities


Total FacilitiesLicensed





Licensed





LicensedNumber


Beds


Number


Beds


Number


BedsCalifornia


13



1,417



18



2,151



31



3,568Texas


21



3,173











21



3,173Kansas


15



838











15



838Missouri


4



573











4



573Nevada










2



290



2



290Total


53



6,001



20



2,441



73



8,442Skilled nursing


43



5,473



18



2,175



61



7,648Assisted living


10



528



2



266



12



794     Company
    History
      wholly-owned
 108




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MANAGEMENT  Executive
    Officers and Directors
    Name

Age

PositionBoyd Hendrickson


62


Chairman of the Board, Chief
    Executive Officer and DirectorJose Lynch


36


President, Chief Operating Officer
    and DirectorJohn E. King


46


Treasurer and Chief Financial
    OfficerRoland Rapp


45


General Counsel, Secretary and
    Chief Administrative OfficerMark Wortley


51


Executive Vice President and
    President of Ancillary SubsidiariesPeter A. Reynolds


48


Senior Vice President of Finance
    and Chief Accounting OfficerSusan Whittle


59


Senior Vice President and Chief
    Compliance OfficerRobert M. Le Blanc(1)(2)


40


Lead DirectorMichael E. Boxer(1)


45


DirectorJohn M. Miller, V(1)


54


DirectorGlenn S. Schafer(2)


57


DirectorWilliam Scott(2)


69


Director     (1)
    
    Member of our Audit Committee.(2)
    
    Member of our Compensation Committee.  Boyd Hendrickson, 62, Chairman of the Board, Chief Executive
    Officer and Director.
  Jose Lynch, 36, President, Chief Operating Officer and
    Director.
  John E. King, 46, Treasurer and Chief Financial
    Officer.
 109




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Roland Rapp, 45, General Counsel, Secretary and Chief
    Administrative Officer.
  Mark Wortley, 51, Executive Vice President and President of
    Ancillary Subsidiaries.
  Peter A. Reynolds, 48, Senior Vice President, Finance and
    Chief Accounting Officer.
  Susan Whittle, 59, Senior Vice President and Chief Compliance
    Officer. attorney-at-law.
  Robert M. Le Blanc, 40, Lead
    Director.
 110




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Michael E. Boxer, 45, Director.
  John M. Miller, 54, Director.
  Glenn S. Schafer, 57,
    Director.
  William C. Scott, 69, Director.
  Composition
    of the Board of Directors
       111




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Committees
    of the Board of Directors
      Audit
    Committee
  Regulation S-K. Rule 10A-3(b)(1) Rule 10A-3(6)(i)
  Rule 10A-3(6)(1) Rule 10A-3(b)(1)
    Compensation
    Committee
   112




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Compensation
    of Directors
      FeesEarnedor Paid in


StockDirector

Cash(1)


Awards(2)


TotalMichael E. Boxer

$
30,500


$
72,048


$
102,548John M. Miller


25,333



72,048



97,381Glenn S. Schafer


25,250



72,048



97,298     (1)
    
    In 2006, each non-employee director, other than Robert M. Le
    Blanc, received an annual retainer of $20,000 for services as a
    director.  We also reimburse all of our directors for all
    out-of-pocket
    expenses incurred in their capacity as a director, including in
    connection with traveling to and attending board and committee
    meetings. Each non-employee director, other than Mr. Le
    Blanc, received a payment of $1,000 for each board or separately
    scheduled committee meeting attended in person, or $500 if
    attended via teleconference. The audit committee chair received
    an additional $10,000 annual retainer and the compensation
    committee chair received an additional $5,000 annual retainer.(2)
    
    In August 2006, each of our non-employee directors, other than
    Mr. Le Blanc, received fully vested grants of five shares
    of our preferred stock and five shares of our common stock,
    provided that the director is not permitted to sell or transfer
    these shares until his service on our board ends.  Compensation
    Committee Interlocks and Insider Participation
   113




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EXECUTIVE
    COMPENSATION  Compensation
    Discussion and Analysis
      non-cash
    Compensation
    Components
    Base
    Salary
   114




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Annual
    Management Bonus Plan
       BonusAmount forAchievingWorking


Bonus Amount forCapital


AchievingBonus Amount for Achieving


Target


ManagementEBITDA Target


Equal to or


Objectives-Each 1%


Less Than


Accomplishment of


Target BonusName

5%


10%(1)


over 10%(2)


Prior Year


Major Initiatives(3)


PotentialBoyd Hendrickson

$
168,000


$
168,000


$
11,200


$
28,000


$
84,000


$
448,000John E. King


67,000



67,000



6,700



16,750



50,250



201,000Jose Lynch


126,500



126,500



9,200



23,000



69,000



345,000Roland Rapp


67,000



67,000



6,700



16,750



50,250



201,000Mark Wortley


67,000
(4)


67,000
(4)


6,700
(4)


16,750



50,250



201,000     (1)
    
    The bonus amount awarded for achieving 10% EBITDA growth over
    the previous year is in addition to the bonus amount awarded for
    achieving 5% EBITDA growth over the previous year.(2)
    
    The compensation committee determined that for every 1% over 10%
    EBITDA growth over the previous year the executive would be
    awarded a stretch bonus that is above the Target
    Bonus Potential provided above, which could result in the
    executive being awarded a bonus above the Target Bonus Potential.(3)
    
    The compensation committee prepared individual initiatives,
    tailored to gauge the performance of each executive in their
    respective role. The executive must accomplish each of these
    objectives, as determined by the compensation committee, in its
    sole discretion, to be eligible to receive the full amount of
    this portion of the cash bonus. The compensation committee also
    has sole discretion to award a partial amount of the bonus
    related to the achievement of the Management Objectives if the
    executive achieves some, but not all, of the objectives. 115




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(4)
    
    With respect to Mr. Wortley, the amounts awarded in all three
    columns under Bonus Amounts for Achieving EBITDA Target are
    divided equally between achieving the target with respect to our
    EBITDA and achieving the target with respect to the EBITDA of
    our ancillary services.    Long-term
    Equity Incentives
  Restricted
    Stock Awards
        Stock
    Options
 
   
 
   
 116




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Perquisites
    and Other Benefits
    Severance
    Agreements
    Executive
    Time Off
    2006
    Summary Compensation Table
    Non-EquityStock


Incentive Plan


All OtherName and Principal Position

Year


Salary(1)


Awards(2)


Compensation(3)


Compensation(4)


TotalBoyd Hendrickson


2006


$
560,000


$
19,153


$
411,000


$
23,335


$
1,013,488Chief Executive OfficerJohn E. King


2006



335,000



6,965



140,700



21,940



504,605Chief Financial OfficerJose Lynch


2006



460,000



15,670



317,400



25,755



818,825President, Chief Operating OfficerRoland Rapp,


2006



335,000



6,965



184,250



21,185



547,400General Counsel, Chief
    Administrative OfficerMark Wortley,


2006



335,000



6,965



231,150



55,967



629,082Executive Vice President and
    President of Ancillary Services  117




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(1)
    
    Includes cash and non-cash compensation earned in 2006 by the
    named executive officer.(2)
    
    The amounts shown are the amounts of compensation cost
    recognized by us in fiscal year 2006 related to grants of
    restricted stock in fiscal year 2005, as described in Statement
    of Financial Accounting Standards No. 123R. For a
    discussion of valuation assumptions, see Note 2 to our
    audited historical consolidated financial statements included
    elsewhere in this prospectus. These grants of restricted stock
    were made to the named executive officers in connection with the
    Transactions in December 2005. The compensation cost recognized
    by us is the amount of each grant that vested during the fiscal
    year 2006, representing the vesting of 25% of the total
    restricted stock granted. See  Long Term Equity
    Incentives  Restricted Stock Awards for a more
    complete description of these restricted stock awards.(3)
    
    The amounts shown represent the bonus performance awards earned
    under our 2006 Management Bonus Plan. Our 2006 Management Bonus
    Plan establishes threshold, target and maximum bonus payment
    awards to our executive officers based upon a percentage of
    their base salary. The goals employed for 2006 under this plan
    were (1) a pre-established target year over year growth in
    EBITDA, (2) a pre-established target working capital
    amount, measured as a percentage of net revenue, and
    (3) pre-established management objectives, individually
    tailored to each executives role. See
     Grants of Plan Based Awards and
     Compensation Discussion and
    Analysis  Annual Management Bonus Plan for a
    more complete description of this plan.(4)
    
    The amounts shown consist of our cost for the provision to the
    named executive officers of certain specified perquisites, as
    follows:  LifeNamed Executive Officer

Commuting


Insurance


Other(a)Boyd Hendrickson

$



$
5,072


$
18,263John E. King






2,462



19,479Jose Lynch






4,067



21,688Roland Rapp






2,462



18,723Mark Wortley


29,962



2,462



23,543    (a)
    
    Includes $16,292 in health insurance premiums for Messrs.
    Hendrickson, King, Lynch and Rapp and $18,026 in health
    insurance premiums for Mr. Wortley that were paid by us.  Grants of
    Plan-Based Awards
    Estimated Future Payouts UnderNon-Equity
    Incentive Plan Awards(1)Name

Threshold


Target


Maximum(2)Boyd Hendrickson

$
5,600


$
448,000


$
448,000John E. King

$
3,350


$
201,000


$
201,000Jose Lynch

$
4,600


$
345,000


$
345,000Roland Rapp

$
3,350


$
201,000


$
201,000Mark Wortley

$
3,350


$
201,000


$
201,000     (1)
    
    The amounts shown represent potential value of performance bonus
    awards under our 2006 Management Bonus Plan. Awards under the
    plan to the named executive officers are based on three
    performance objectives: (1) attaining a pre-established
    target year over year growth in EBITDA, (2) reducing
    working capital amount as a percentage of net revenue as
    compared to the prior year, and (3) achieving
    pre-established management objectives, individually tailored to
    each executives role. Our chief executive officers
    target bonus for 2006 was 80% of his year-end annualized base
    salary; our 118




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##### Table of Contents



presidents target bonus for 2006 was 75% of his year-end
    annualized base salary; and all other named executive
    officers target bonus for 2006 was 60% of their year-end
    annualized base salaries. Actual bonuses are based on our
    performance against targets and subject to the discretion of the
    compensation committee to reduce the amount payable. The amounts
    actually paid under these bonus plans for 2006 performance are
    reported in the Summary Compensation Table, under the Non-Equity
    Incentive Plan column. Please also see
     Compensation Discussion and
    Analysis  Annual Management Bonus Plan for more
    details regarding this plan.(2)
    
    The amounts shown as maximum potential payouts represent the
    value of the award given to the named executive officers based
    upon the achievement of all stated performance objectives under
    the plan. Each named executive officer is also awarded
    additional bonus amounts if year over year growth in EBITDA
    rises above the pre-established targets listed in the plan. For
    each 1% year over year growth in EBITDA above 10%, the named
    executive officers are compensated as follows:
    Mr. Hendrickson  $11,200;
    Mr. Lynch  $9,200; Messrs. King and
    Rapp  $6,700. Mr Wortley receives $3,350 and
    $3,350, respectively, for each 1% year over year growth in
    EBITDA above 10% with respect to our EBITDA and with respect to
    the EBITDA of our ancillary services.  Outstanding
    Equity Awards at Fiscal Year End
    Stock AwardsNumber of Shares


Market Value ofor Units of Stock


Shares or Units ofThat Have Not


Stock That HaveName

Vested(1)


Not VestedBoyd Hendrickson


383


$
38,300John E. King


139



13,900Jose Lynch


313



31,300Roland Rapp


139



13,900Mark Wortley


139



13,900     (1)
    
    In December 2005, in connection with the Transactions, we
    granted restricted stock awards to our named executive officers
    in the following amounts: Boyd Hendrickson, 766 shares;
    Jose Lynch, 627 shares; John King, 279 shares; Roland
    Rapp, 279 shares; and Mark Wortley, 279 shares. As of
    January 2007, 50% of those shares had vested. Of the remaining
    50% that have not vested, one half will vest on
    December 27, 2007 and one half will vest on
    December 27, 2008.  Option
    Exercises and Stock Vested
    Stock AwardsNumber of Shares


Value Realized onName

Acquired on Vesting


Vesting(1)Boyd Hendrickson


192


$
19,200John E. King


70



7,000Jose Lynch


157



15,700Roland Rapp


70



7,000Mark Wortley


70



7,000     (1)
    
    Represents the value of a share of our common stock, as
    determined by the board of directors, on the date of vesting
    multiplied by the number of shares that have vested. 119




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Potential
    Payments Upon Termination
  Severance Agreements.
    
    In the case of termination without cause:      
    In the case of non-extension of the term of employment, a lump
    sum cash payment equal to (i) the salary such executive
    would have been entitled to receive had the executive continued
    his or her employment for a period of 12 months following
    the date of termination, plus (ii) a pro-rata bonus
    proportionate to the number of days worked by the executive
    during the calendar year of the date of termination, payable
    when the bonus otherwise would have been payable,         120




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Salary(1)


Continuation of


TotalName

Trigger

and Bonus


Welfare Benefits(2)


Value(3)Boyd Hendrickson

Termination of
    Employment

$
1,568,000


$
22,835


$
1,590,835Non-extension of Term


1,008,000







1,008,000John E. King

Termination of
    Employment


703,500



20,225



723,725Non-extension of Term


536,000







536,000Jose Lynch

Termination of
    Employment


1,265,000



21,801



1,286,801Non-extension of Term


805,000







805,000Roland Rapp

Termination of
    Employment


703,500



20,225



723,725Non-extension of Term


536,000







536,000Mark Wortley

Termination of
    Employment


703,500



21,635



725,135Non-extension of Term


536,000







536,000     (1)
    
    In the case of a qualifying termination, represents (i) the
    amount, paid in lump sum, that the executive would have been
    entitled to had such executive been continually employed by the
    company for the amount of time outlined in such executives
    employment agreement, plus (ii) a bonus increment equal the
    pro-rata portion of the calendar year worked by such executive
    prior the executives qualifying termination.(2)
    
    In the case of a qualifying termination, represents the
    estimated payments for continued medical, dental, vision,
    disability and life insurance coverage, each for a period of one
    year, after termination of employment.(3)
    
    Excludes the value to the executive of a continued right to
    indemnification by us and the executives right to
    continued coverage under our directors and officers
    liability insurance.  Existing
    Employment Arrangements
   
  Boyd Hendrickson.
 
 
  Jose Lynch.
 
 121




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John E. King.
 
 
  Roland Rapp.
 
 
  Mark Wortley.
 
 122




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Restricted
    Stock Plan
 
   
  Restricted
    Stock Issuances Prior to the Transactions
      2007
    Incentive Award Plan
      Administration.
 123




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##### Table of Contents



The Securities Authorized.
  
    to the extent that an award terminates, expires, lapses or is
    forfeited for any reason, any shares subject to the award at
    such time will be available for future grants under the 2007
    plan;
    to the extent any shares of restricted stock are surrendered by
    the holder or repurchased by us, such shares may again be
    granted or awarded under the 2007 plan;
    to the extent shares are tendered or withheld to satisfy the
    exercise price or tax withholding obligation with respect to any
    award under the 2007 plan, such tendered or withheld shares will
    not be available for future grants under the 2007 plan;
    the payment of dividend equivalents in conjunction with any
    outstanding awards will not be counted against the shares
    available for issuance under the 2007 plan; and
    to the extent permitted by applicable law or any exchange rule,
    shares issued in assumption of, or in substitution for, any
    outstanding awards of any entity acquired in any form of
    combination by us or any of our subsidiaries will not be counted
    against the shares available for issuance under the 2007 plan.    Eligibility.
  Awards.
  
    Nonqualified Stock Options, or NQSOs, will provide for
    the right to purchase shares of our class A common stock at
    a specified price which may not be less than fair market value
    on the date of grant, and usually will become exercisable (at
    the discretion of the administrator) in one or more installments
    after the grant date, subject to the participants
    continued employment or service with us and/or subject to the
    satisfaction of corporate performance targets and individual
    performance targets established by the administrator. NQSOs may
    be granted for any term specified by the administrator, but may
    not exceed ten years. The administrator may accelerate the
    period during which an NQSO vests.
    Incentive Stock Optionswill be designed in a manner
    intended to comply with the provisions of Section 422 of
    the Code and will be subject to specified restrictions contained
    in the Code. Among such restrictions, ISOs must have an exercise
    price of not less than the fair market value of a share of
    class A common stock on the date of grant, may only be
    granted to employees, and must not be exercisable after a period
    of ten years measured from the date of grant. In the case of an
    ISO granted to an individual who owns (or is deemed to own) at
    least 10% of the total combined voting power of all classes of
    our capital stock, the 2007 plan provides that the exercise
    price must be at least 110% of the fair market value of a share
    of our class A common stock on the date of grant and the
    ISO must not be exercisable after a period of five years
    measured from the date of grant. 124




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
    Restricted Stockmay be awarded with or without payment,
    and are made subject to such restrictions as may be determined
    by the administrator, including continued employment or
    satisfaction of performance criteria or other criteria
    established by the administrator. Restricted stock, typically,
    may be forfeited for no consideration or repurchased by us at
    the original purchase price if the conditions or restrictions on
    vesting are not met. In general, restricted stock may not be
    sold, or otherwise transferred, until restrictions are
    terminated or expire. Holders of restricted stock, unless
    otherwise provided by the administrator, will generally have
    voting rights and will have the right to receive dividends, if
    any, prior to the time when the restrictions lapse, however,
    extraordinary dividends will generally be placed in escrow, and
    will not be released until restrictions are removed or expire.
    Restricted Stock Unitsare typically awarded without
    payment of consideration, but subject to vesting conditions
    based on continued employment or service or on satisfaction or
    performance criteria or other criteria established by the
    administrator. Like restricted stock, restricted stock units may
    not be sold, or otherwise transferred or hypothecated, until
    vesting conditions are terminated or expire. Unlike restricted
    stock, stock underlying restricted stock units will not be
    issued until the restricted stock units have vested and the
    shares have been issued, which may be after a deferral period.
    Recipients of restricted stock units generally will have no
    voting or dividend rights prior to the time when the shares are
    issued.
    Deferred Stock Awardsrepresent the right to receive
    shares of our class A common stock on a future date.
    Deferred stock may not be sold or otherwise hypothecated or
    transferred until issued. Deferred stock will not be issued
    until the deferred stock award has vested, and recipients of
    deferred stock generally will have no voting or dividend rights
    prior to the time when the vesting conditions are satisfied and
    the shares are issued. Deferred stock awards generally will be
    forfeited, and the underlying shares of deferred stock will not
    be issued, if the applicable vesting conditions and other
    restrictions are not met.
    Stock Appreciation Rightsmay be granted in connection
    with stock options or other awards, or separately. SARs granted
    in connection with stock options or other awards typically will
    provide for payments to the holder based upon increases in the
    price of our class A common stock over a set exercise
    price. The exercise price of any SAR granted under the 2007 plan
    must be at least 100% of the fair market value of a share of our
    class A common stock on the date of grant, and have a maximum
    term of 10 years. SARs under the 2007 plan will be settled
    in cash or shares of our class A common stock, or in a
    combination of both, at the election of the administrator.
    Dividend Equivalentsrepresent the value of the
    dividends, if any, per share paid by us, calculated with
    reference to the number of shares covered by the stock options,
    SARs or other awards held by the participant. Dividend
    equivalents may be settled in cash or shares of our class A
    common stock, or a combination of both, and at such times as
    determined by the administrator.
    Performance Awardsmay be granted based upon, among other
    things, the contributions or responsibilities of the recipient,
    individual or corporate goals, performance criteria or other
    criteria, as determined appropriate by the administrator. These
    awards may be paid in cash or in shares of our class A
    common stock, or in a combination of both, at the election of
    the administrator. Performance awards may also include bonuses
    granted by the administrator, which may be payable in cash or in
    shares of our class A common stock, or in a combination of
    both upon the attainment of specified performance goals.
    Stock Paymentsmay be authorized in the form of
    class A common stock or an option or other right to
    purchase class A common stock, as part of a deferred
    compensation arrangement, in lieu of all or any part of
    compensation, including bonuses, that would otherwise be payable
    in cash to the employee, consultant or non-employee director, or
    otherwise.
    Section 162(m) Performance-Based Awards
    may be granted to employees who the administrator has designated
    as participants whose compensation for a given fiscal year may
    be subject to the limit on deductible compensation imposed by
    Section 162(m) of the Code. The administrator may grant 125




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to such persons and other eligible persons awards under the 2007
    plan that are paid, vest or become exercisable upon the
    achievement of specified performance goals which are related to
    one or more of the following performance criteria, as applicable
    to us, on an overall basis, or any division, business unit or
    individual:  
    net earnings (either before or after interest, taxes,
    depreciation and amortization);
    gross or net sales or revenue;
    net income (either before or after taxes);
    operating earnings;
    cash flow (including, but not limited to, operating cash flow
    and free cash flow);
    return on assets;
    return on capital;
    return on stockholders equity;
    return on sales;
    gross or net profit or operating margin;
    costs;
    funds from operations;
    expense;
    working capital;
    earnings per share;
    price per share of our class A common stock;
    FDA or other regulatory body approval for commercialization of a
    product;
    implementation or completion of critical projects; and
    market share.    Adjustments of Awards. split-up,
  
    the number and kind of shares of our class A common stock
    (or other securities or property) with respect to which awards
    may be granted or awarded under the 2007 plan;
    the maximum number and kind of shares of our class A common
    stock which may be issued under the 2007 plan;
    the number and kind of shares of our class A common stock
    subject to outstanding awards;
    the number and kind of shares of our class A common stock
    (or other securities or property) for which automatic grants are
    subsequently to be made to new and continuing non-employee
    directors; and
    the grant or exercise price with respect to any award. 126




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Change of Control.
  Amendment and Termination.
  
    to increase the maximum number of shares of our class A
    common stock that may be issued under the 2007 plan;
    to decrease the exercise price of any outstanding option or SAR
    granted under the 2007 plan; or
    if required by applicable law (including any applicable stock
    exchange or national market system requirement).  Effective and Expiration Date.
  Registration of Shares on
    Form S-8. Form S-8
 127




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DESCRIPTION
    OF INDEBTEDNESS  Senior
    Secured Credit Facility
        First
    Amendment to the Senior Secured Credit Facility
    
    for term loans, a reduction of the applicable margins over our
    interest rates of 0.5%, as described below under
     Interest Rates and Fees;
    the ability to receive for further reductions of the applicable
    margins based upon favorable ratings from certain debt rating
    agencies upon consummation of our sale of our class A
    common stock in this offering and the issuance of new ratings
    from those agencies;
    an allowance for the net proceeds from an initial public
    offering of our common stock to be applied to prepay the term
    loans, including our revolving credit facility, to the lesser of
    (i) 50% of such net proceeds or (ii) the excess of
    such net proceeds over the amount to prepay $70.0 million
    of the 11% senior subordinated notes, plus accrued interest and
    any prepayment premium, as described below under
     The 11% Senior Subordinated Notes;
    approval of the merger of our predecessor company with and into
    us, and the change of our name from SHG Holding Solutions, Inc.
    to Skilled Healthcare Group, Inc.; and
    revision of certain covenants and reporting requirements.  Interest
    Rates and Fees
    
    a base rate determined by reference to the higher of the prime
    rate announced by Credit Suisse and the federal funds rate
    plus one-half of 1.0%; or
    a reserve adjusted Eurodollar rate.   128




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Prepayments
    
    100% of net proceeds from any asset sale by us or our
    subsidiaries not reinvested in productive assets within
    270 days;
    100% of the net proceeds from any insurance or condemnation
    award received by us or our subsidiaries not reinvested in
    productive assets within 270 days;
    50% (reduced to 25% if our consolidated leverage ratio is less
    than 3.00 to 1.00) of the net proceeds resulting from issuance
    of any equity interests, or from any capital contribution to us
    by any holder of our equity interests, excluding proceeds from:  
    stock option or other management compensation plans for
    officers, directors and employees;
    issuances of equity in one of our subsidiaries to us or to any
    of our other subsidiaries; or
    certain other limited offerings;  
    of the net proceeds resulting from the consummation of an
    initial public offering of our common stock, the lesser of
    (i) 50% of the net proceeds or (ii) the excess of such
    net proceeds over the amount to prepay $70.0 million of the
    11% senior subordinated notes, plus accrued interest and any
    prepayment premium as described below under
     The 11% Senior Subordinated Notes;
    100% of the net proceeds from the issuance of certain
    indebtedness by us, excluding indebtedness permitted to be
    incurred under the first lien secured credit facility; and
    50% (reduced to 25% if the consolidated leverage ratio is less
    than 3.00 to 1.00) of excess cash flow for any year, commencing
    in 2006.  Security
    and Guarantees
    Covenants
    Events
    of Default
   129




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##### Table of Contents



The
    11% Senior Subordinated Notes
  General
  Form S-4
  Ranking
    
    junior to all of our and the guarantors existing and
    future senior indebtedness, including the senior secured credit
    facility;
    equally with any of our and the guarantors future senior
    subordinated indebtedness, if any;
    senior to any of our and the guarantors future
    subordinated indebtedness, if any; and
    effectively junior to the existing and future liabilities of our
    non-guarantor subsidiaries and our pharmacy joint venture.  Optional
    Redemption
  th
  RedemptionPeriod

Price2010


105.50%2011


102.75%2012 and thereafter


100.00%     
    at least 65% of the aggregate principal amount of senior
    subordinated notes remains outstanding after the occurrence of
    each such redemption (other than notes held by us or our
    affiliates); and
    provided further that such redemption occurs within 90 days
    after the consummation of any such sale of our equity securities.   130




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Covenants
    
    incur, assume or guarantee additional indebtedness or issue
    preferred stock;
    pay dividends or make other equity distributions to our
    stockholders;
    purchase or redeem our capital stock;
    make certain investments;
    enter into arrangements that restrict dividends or other
    payments to us from our restricted subsidiaries;
    sell or otherwise dispose of assets;
    engage in transactions with our affiliates; and
    merge or consolidate with another entity. 131




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CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS  Policy
    Regarding Related Party Transactions
        The
    Transactions
      
    Onex made an equity investment in us of approximately
    $211.3 million in cash;
    the rollover investors made an equity investment in us of
    approximately $1.5 million in cash through settlement of a
    bonus payable and $10.1 million in rollover equity;
    our predecessor company assumed $200.0 million aggregate
    principal amount of senior subordinated notes issued in
    connection with the merger;
    our predecessor company paid cash merger consideration of
    $240.8 million to our then-existing stockholders (other
    than, to the extent of their rollover investment, the rollover
    investors) and option holders;
    our predecessor company amended its existing first lien senior
    secured credit facility to provide for a rollover of its
    existing $259.4 million term loan and an increase in its
    revolving credit facility from $50.0 million to
    $75.0 million;
    our predecessor company repaid in full its $110.0 million
    second lien senior secured credit facility;
    our predecessor company paid accrued interest on its second lien
    senior secured credit facility;
    we increased the cash on our balance sheet by
    $35.2 million; and 132




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
    we paid approximately $19.2 million of fees and expenses,
    including placement and other financing fees, and other
    transaction costs and professional expenses.    Agreement
    with Onex Partners Manager LP
  out-of-pocket out-of-pocket
  Stockholders
    Agreement
  non-Onex
  Leased
    Facilities
    Notes Receivable
    Agreement
    with Executive Search Solutions
   133




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Employment
    Agreements
   134




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PRINCIPAL
    AND SELLING STOCKHOLDERS   
  
    each of our Named Executive Officers;
    each of our directors;
    all of our directors and executive officers as a group;
    each person, or group of affiliated persons, who is known by us
    to own beneficially more than 5% of our common stock; and
    each selling stockholder. 
   
   
   
  
 SharesBeneficially OwnedShares


After OfferingShares Beneficially


Subject to


if Over-AllotmentOwned Prior to Offering


Over-Allotment


Exercised in FullName of Beneficial Owner

Number


Percentage


Option


Number


Percent(1)5% StockholdersOnex(2)



(2)Directors and Named Executive
    OfficersMichael E. BoxerBoyd Hendrickson



(3)John E. King



(4)Robert M. Le Blanc



(5)Jose Lynch



(6)John M. Miller, VGlenn S. SchaferWilliam ScottRoland Rapp



(4)Mark Wortley



(4)Executive Officers and
    directors as a group (12 persons)



(7)  
    *
    
    Less than 1%. 
  (1)
    
    The percentage held after the offering is based upon the number
    of shares of class A common stock and shares of
    class B common stock expected to be outstanding after the
    offering. 
 135




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##### Table of Contents



(2)
    
    Onex Corporation, 161 Bay Street, Toronto, Ontario, M5J
    2S1, Canada. Onex Corporation is the direct parent company of
    Onex Partners GP, Inc. Onex Partners GP, Inc. is the general
    partner of Onex Partners GP LP, which is the general partner of
    Onex Partners LP. Onex Corporation is also the sole member of
    Onex Partners LLC, which is the general partner of Onex US
    Principals LP. Onex Corporation is also the sole member of Onex
    American Holdings II LLC, which is the sole member of
    Skilled Executive Investco LLC. Each of Onex Partners LP, Onex
    US Principals LP, Onex American Holdings II LLC and Skilled
    Executive Investco LLC own shares in us. Onex Corporations
    board of directors are Daniel C. Casey, Peter C. Goodsoe,
    Serge Gouin, Brian M. King, John B. McCoy, J. Robert S.
    Prichard, Heather M. Reisman, Gerald W. Schwartz and Arni C.
    Thorsteinson. Mr. Schwartz is also the Chairman, President and
    Chief Executive Officer of Onex Corporation and owns shares
    representing a majority of the voting rights of the shares of
    Onex Corporation and, as such, has voting and investment power
    with respect to, and accordingly may be deemed to own
    beneficially, all of the shares of our class B common stock
    owned beneficially by Onex Corporation. Each of Onex
    Corporations board members disclaim beneficial ownership
    of the shares beneficially owned by Onex, other than to the
    extent they have a direct pecuniary interest therein. 
 
 
 
  (3)
    
    Includes 766.1001 shares of restricted stock, 383.0501 of
    which are unvested as of March 31, 2007. 
 
  (4)
    
    Includes 278.5815 shares of restricted stock, 139.2908 of
    which are unvested as of March 31, 2007. 
 
 
  (5)
    
    Mr. Le Blanc has served as Managing Director of Onex
    Investment Corp., an affiliate of Onex Corporation, a
    diversified industrial corporation, since 1999. As a result,
    Mr. Le Blanc may be deemed to beneficially own the shares
    of class B common stock directly held by Onex. 
 
 
  (6)
    
    Includes 626.8091 shares of restricted stock, 313.4046 of
    which are unvested as of March 31, 2007. 
 
  (7)
    
    Includes in the aggregate 2,367.9447 shares of restricted
    stock, 1,149.1498 of which are unvested as of March 31,
    2007, and the conversion of 21,489.0 shares of preferred
    stock. 
 136




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DESCRIPTION
    OF CAPITAL STOCK   
  General
 
 
   
 
 
  Common
    Stock
 
   
    Voting Rights.
  Class A Common Stock.
  Class B Common Stock.
 137




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Dividend Rights.
  Conversion Rights.
  Preemptive or Similar Rights.
  Right to Receive Liquidation
    Distributions.
  Preferred
    Stock
 
   
  Registration
    Agreement
   138




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Form S-3 Form S-3, Form S-3,
    Stockholders
    Agreement
    Certificate
    of Incorporation and Bylaw Provisions
    
    our board of directors will be authorized, without prior
    stockholder approval, to create and issue preferred stock,
    commonly referred to as blank check preferred stock,
    with rights senior to those of class A common stock and
    class B common stock;
    advance notice requirements for nominations to serve on our
    board of directors or for proposals that can be acted upon at
    stockholder meetings;
    our board will be classified so not all members of our board are
    elected at one time, which may make it more difficult for a
    person who acquires control of a majority of our outstanding
    voting stock to replace our directors; 139




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##### Table of Contents




    stockholder action by written consent will be prohibited;
    special meetings of the stockholders will be permitted to be
    called only by the chairman of our board of directors, our chief
    executive officer or by a majority of our board of directors;
    stockholders will not be permitted to cumulate their votes for
    the election of directors;
    vacancies on our board of directors will be filled only by
    majority vote of incumbent directors;
    our board of directors will be expressly authorized to make,
    alter or repeal our bylaws; and
    stockholders will be permitted to amend our bylaws only upon
    receiving at least
    662/3%
    of the votes entitled to be cast by holders of all outstanding
    shares then entitled to vote generally in the election of
    directors, voting together as a single class.  New York
    Stock Exchange Listing
 
   
  Transfer
    Agent and Registrar
   140




---



##### Table of Contents



SHARES ELIGIBLE
    FOR FUTURE SALE      lock-up lock-up lock-up 16-day lock-up lock-up 18-day lock-up
  lock-up lock-up
  
    no shares will be eligible for sale upon effectiveness of this
    offering;
    shares
    will be eligible for sale under Rule 144 beginning
    90 days after the date of this prospectus; and
    shares
    will be eligible for sale upon expiration of the
    lock-up
    agreements and market stand-off provisions described above,
    beginning 180 days after the date of this prospectus.    Rule 144
   141




---



##### Table of Contents




    1% of the number of shares of common stock then outstanding,
    which will equal
    approximately           shares
    immediately after this offering assuming no exercise of the
    underwriters over-allotment option; or
    The average weekly trading volume of our class A common
    stock during the four calendar weeks preceding the filing of the
    Form 144 with respect to such sale.  lock-up
  Rule 144(k)
  lock-up
  Rule 701
    lock-up lock-up lock-up
  Registration
    Rights
  lock-up
 142




---



##### Table of Contents



CERTAIN
    UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
    FOR NON-UNITED STATES HOLDERS      
    banks, insurance companies, or other financial institutions;
    persons subject to the alternative minimum tax;
    tax-exempt organizations;
    dealers in securities or currencies;
    traders in securities that elect to use a
    mark-to-market
    method of accounting for their securities holdings;
    controlled foreign corporations, passive
    foreign investment companies, and corporations that
    accumulate earnings to avoid United States federal income tax;
    persons who own, or are deemed to own, more than 5% of our
    company (except to the extent specifically set forth below);
    persons that are S corporations, partnerships or other
    pass-through entities;
    certain former citizens or long-term residents of the United
    States;
    persons who hold our class A common stock as a position in
    a hedging transaction, straddle, conversion
    transaction or other risk reduction transaction; or
    persons deemed to sell our class A common stock under the
    constructive sale provisions of the Code.  YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE
    APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR
    PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES OF THE
    PURCHASE, OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON
    STOCK ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX
    RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR
    OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
  Non-United
    States Holder Defined
    
    an individual citizen or resident of the United States; 143




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##### Table of Contents




    a corporation or other entity taxable as a corporation created
    or organized in the United States or under the laws of the
    United States or any political subdivision thereof;
    an estate whose income is subject to United States federal
    income tax regardless of its source; or
    a trust (x) whose administration is subject to the primary
    supervision of a United States court and that has one or more
    United States persons who have the authority to control all
    substantial decisions of the trust or (y) that has made a
    valid election to be treated as a United States person.  Distributions
    Form W-8BEN Form W-8
  Form W-8ECI
    Gain on
    Disposition of Class A Common Stock
    
    the gain is effectively connected with your conduct of a United
    States trade or business (and, if a tax treaty applies, is
    attributable to a United States permanent establishment
    maintained by you);
    you are an individual who is present in the United States for a
    period or periods aggregating 183 days or more during the
    calendar year in which the sale or disposition occurs and
    certain other conditions are met; or
    our class A common stock constitutes a United States real
    property interest by reason of our status as a United
    States real property holding corporation for United States
    federal income tax purposes, or a USRPHC, at any time within the
    shorter of the five-year period preceding the disposition or
    your holding period for our class A common stock.   144




---



##### Table of Contents



Backup
    Withholding and Information Reporting
    Form W-8BEN Form W-8.
   145




---



##### Table of Contents



UNDERWRITING    NumberUnderwriter

of SharesCredit Suisse Securities (USA) LLCUBS Securities LLCBanc of America Securities LLCBear, Stearns & Co. Inc.Goldman, Sachs & Co.J.P. Morgan Securities, Inc.Lehman Brothers Inc.RBC Capital Markets CorporationScotia Capital (USA), Inc.Total     30-day
      Per Share


TotalWithout


With


Without


WithOver-


Over-


Over-


Over-Allotment


Allotment


Allotment


AllotmentUnderwriting Discounts and
    Commissions paid by us

$



$



$



$Expenses payable by us

$



$



$



$Underwriting Discounts and
    Commissions paid by selling stockholders

$



$



$



$Expenses payable by the selling
    stockholders

$



$



$



$  146




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##### Table of Contents



16-day 18-day
  16-day 18-day
   
   
   147




---



##### Table of Contents




    the information presented in this prospectus and otherwise
    available to the underwriters;
    the history of and the prospects for the industry in which we
    will compete;
    the ability of our management;
    the prospects for our future earnings;
    the present state of our development and our current financial
    condition;
    the recent market prices of, and the demand for, publicly-traded
    class A common stock of generally comparable
    companies; and
    the general condition of the securities markets at the time of
    this offering.      
    Stabilizing transactions permit bids to purchase the underlying
    security so long as the stabilizing bids do not exceed a
    specified maximum.
    Over-allotment involves sales by the underwriters of shares in
    excess of the number of shares the underwriters are obligated to
    purchase, which creates a syndicate short position. The short
    position may be either a covered short position or a naked short
    position. In a covered short position, the number of shares
    over-allotted by the underwriters is not greater than the number
    of shares that they may purchase in the over-allotment option.
    In a naked short position, the number of shares involved is
    greater than the number of shares in the over-allotment option.
    The underwriters may close out any covered short position by
    either exercising their over-allotment option
    and/or
    purchasing shares in the open market.
    Syndicate covering transactions involve purchases of the
    class A common stock in the open market after the
    distribution has been completed in order to cover syndicate
    short positions. In determining the source of shares to close
    out the short position, the underwriters will consider, among
    other things, the price of shares available for purchase in the
    open market as compared to the price at which they may purchase
    shares through the over-allotment option. If the underwriters
    sell more shares than could be covered by the over-allotment
    option, a naked short position, the position can only he closed
    out by buying shares in the open market. A naked short position
    is more likely to be created if the underwriters are concerned
    that there could be downward pressure on the price of the shares
    in the open market after pricing that could adversely affect
    investors who purchase in this offering.
    Penalty bids permit the representatives to reclaim a selling
    concession from a syndicate member when the class A common
    stock originally sold by the syndicate member is purchased in a
    stabilizing or syndicate covering transaction to cover syndicate
    short positions.   148




---



##### Table of Contents



(a)
    to legal entities which are authorized or regulated to operate
    in the financial markets or, if not so authorized or regulated,
    whose corporate purpose is solely to invest in securities;(b)
    to any legal entity which has two or more of (1) an average
    of at least 250 employees during the last financial year;
    (2) a total balance sheet of more than 43,000,000 and
    (3) an annual net turnover of more than 50,000,000,
    as shown in its last annual or consolidated accounts;(c)
    to fewer than 100 natural or legal persons (other than qualified
    investors as defined in the Prospectus Directive) subject to
    obtaining the prior consent of the manager for any such offer; or(d)
    in any other circumstances which do not require the publication
    by the Issuer of a prospectus pursuant to Article 3 of the
    Prospectus Directive.      (a)
    it has only communicated or caused to be communicated and will
    only communicate or cause to be communicated an invitation or
    inducement to engage in investment activity (within the meaning
    of section 21 of FSMA) to persons who have professional
    experience in matters relating to investments falling with
    Article 19(5) of the Financial Services and Markets Act
    2000 (Financial Promotion) Order 2005 or in circumstances in
    which section 21 of FSMA does not apply to the company; and(b)
    it has complied with, and will comply with all applicable
    provisions of FSMA with respect to anything done by it in
    relation to the common stock in, from or otherwise involving the
    United Kingdom. 149




---



##### Table of Contents



Article L.411-2 no. 98-880
   150




---



##### Table of Contents



151




---



##### Table of Contents



NOTICE TO
    CANADIAN RESIDENTS    Representations
    of Purchasers
    
    the purchaser is entitled under applicable provincial securities
    laws to purchase the shares without the benefit of a prospectus
    qualified under those securities laws,
    where required by law, that the purchaser is purchasing as
    principal and not as agent,
    the purchaser has reviewed the text above under Resale
    Restrictions, and
    the purchaser acknowledges and consents to the provision of
    specified information concerning its purchase of the shares to
    the regulatory authority that by law is entitled to collect the
    information.    Rights of
    Action  Ontario Purchasers Only
    Enforcement
    of Legal Rights
    Taxation
    and Eligibility for Investment
   152




---



##### Table of Contents



LEGAL
    MATTERS   EXPERTS     WHERE YOU
    CAN FIND MORE INFORMATION  Form S-1
  1-800-SEC-0330 www.sec.gov.
   153




---



##### Table of Contents



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS  SKILLED HEALTHCARE GROUP, INC.Report
    of Independent Registered Public Accounting Firm


F-2Consolidated
    Financial StatementsConsolidated
    Balance Sheets


F-3Consolidated
    Statements of Operations


F-4Consolidated
    Statements of Stockholders Equity (Deficit)


F-5Consolidated
    Statements of Cash Flows


F-6Notes
    to Consolidated Financial Statements


F-8SUNSET HEALTHCAREReport
    of Independent Registered Public Accounting Firm


F-44Combined
    Financial StatementsCombined
    Balance Sheet


F-45Combined
    Statement of Income


F-46Combined
    Statement of Stockholders Deficit


F-47Combined
    Statement of Cash Flows


F-48Notes
    to Combined Financial Statements


F-49  F-1




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm  
        
     F-2




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Balance Sheets
 (In
    thousands, except share and per share data)
  
 Pro FormaStockholdersEquity atDecember 31,2006December 31,


(Unaudited)


December 31,2006


(Note 12)


2005ASSETSCurrent assets:Cash and cash equivalents

$
2,821






$
37,138Accounts receivable, less allowance
    for doubtful accounts of $7,889 and $5,678 at December 31,
    2006 and 2005, respectively


86,168







62,561Deferred income taxes


13,248







11,390Prepaid expenses


2,101







5,996Other current assets


10,296







18,865Total current assets


114,634







135,950Property and equipment, net


230,904







191,151Other assets:Notes receivable, less allowance
    for doubtful accounts of $0 and $301 at December 31, 2006
    and 2005, respectively


4,968







3,916Deferred financing costs, net


15,764







18,551Goodwill


411,349







396,097Intangible assets, net


33,843







35,823Non-current income tax receivable


1,882







Deferred income taxes


1,504







21Other assets


23,847







15,573Total other assets


493,157







469,981Total assets

$
838,695






$
797,082LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued
    liabilities

$
69,136






$
55,233Employee compensation and benefits


22,693







18,669Current portion of long-term debt
    and capital leases


3,177







2,918Total current liabilities


95,006







76,820Long-term liabilities:Insurance liability risks


28,306







28,414Other long-term liabilities


8,857







8,530Long-term debt and capital leases,
    less current portion


465,878







460,391Total liabilities


598,047







574,155Stockholders equity:Convertible preferred stock,
    50,000 shares authorized with 25,000 shares designated
    as Series A; $0.001 par value per share; 22,312 and
    22,287 shares issued and outstanding at December 31,
    2006 and 2005, respectively and zero shares pro forma
    (unaudited), liquidation preference of $18,652 and $246 at
    December 31, 2006 and 2005, respectively and zero pro forma
    (unaudited)


18,652







246Common stock 50,000 shares
    authorized, $0.001 par value per share; 24,923 shares and
    24,759 shares issued and outstanding at December 31,
    2006 and 2005, respectively
    and          shares
    pro forma (unaudited)










Class A common stock, $0.0001
    par value;
    Authorized  no shares
    actual;           shares
    pro forma; Issued and outstanding  no shares
    actual;           shares
    pro forma (unaudited)Class B common stock, $0.0001
    par value;
    Authorized  no shares
    actual;           shares
    pro forma; Issued and outstanding  no shares
    actual;           shares
    pro forma (unaudited)Deferred compensation










(185
)Additional
    paid-in-capital


221,996







222,866Retained earnings










Total stockholders equity


240,648







222,927Total liabilities and
    stockholders equity

$
838,695






$
797,082  
   F-3




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##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Statements of Operations
 (In
    thousands except share and per share data)
  
 Year Ended December 31,2006


2005


2004Successor


Predecessor


PredecessorRevenue

$
531,657


$
462,847


$
371,284Expenses:Cost of services (exclusive of rent
    cost of sales and depreciation and amortization shown below)


394,936



347,228



281,395Rent cost of sales


10,027



9,815



7,883General and administrative


39,872



43,784



25,148Depreciation and amortization


13,897



9,991



8,597458,732



410,818



323,023Other income (expenses):Interest expense


(46,286
)


(27,629
)


(22,370
)Interest income and other


1,196



949



789Equity in earnings of joint venture


1,903



1,787



1,701Change in fair value of interest
    rate hedge


(197
)


(165
)


(926
)Reorganization expenses






(1,007
)


(1,444
)Write-off of deferred financing
    costs






(16,626
)


(7,858
)Forgiveness of stockholder loan






(2,540
)


Gain on sale of assets






980



Total other income (expenses), net


(43,384
)


(44,251
)


(30,108
)Income before provision for
    (benefit from) income taxes, discontinued operations and
    cumulative effect of a change in accounting principle


29,541



7,778



18,153Provision for (benefit from) income
    taxes


12,204



(13,048
)


4,421Income before discontinued
    operations and cumulative effect of a change in accounting
    principle


17,337



20,826



13,732Discontinued operations, net of tax






14,740



2,789Cumulative effect of a change in
    accounting principle, net of tax






(1,628
)


Net income


17,337



33,938



16,521Accretion on preferred stock


(18,406
)


(744
)


(469
)Net (loss) income attributable to
    common stockholders

$
(1,069
)

$
33,194


$
16,052Net (loss) income per share data:(Loss) income before discontinued
    operations and cumulative effect of a change in accounting
    principle per common share, basic

$
(46.56
)

$
16.34


$
11.11Discontinued operations per common
    share, basic






11.99



2.34Cumulative effect of a change in
    accounting principle per common share, basic






(1.32
)


Net (loss) income per common share,
    basic

$
(46.56
)

$
27.01


$
13.45(Loss) income before discontinued
    operations and cumulative effect of a change in accounting
    principle per common share, diluted

$
(46.56
)

$
15.56


$
10.30Discontinued operations per common
    share, diluted






11.43



2.17Cumulative effect of a change in
    accounting principle per common share, diluted






(1.26
)


Net (loss) income per common share,
    diluted

$
(46.56
)

$
25.73


$
12.47Weighted average common shares
    outstanding, basic


22,955



1,228,965



1,193,501Weighted average common shares
    outstanding, diluted


22,955



1,290,120



1,286,963Pro forma net loss per common
    share, basic (unaudited)

$Pro forma net loss per common
    share, diluted (unaudited)

$Weighted-average number of shares
    used in pro forma per common share calculations, basic
    (unaudited)Weighted-average number of shares
    used in pro forma per common share calculations, diluted
    (unaudited)  
   F-4




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Statements of Stockholders Equity (Deficit)
 (In
    thousands, except share data)
 
  
 Additional


RetainedPreferred Stock


Common Stock


Class B Non-Voting Common Stock


Deferred


Paid-In


(Deficit)


Due FromShares


Amount


Shares


Amount


Shares


Amount


Comp


Capital


Earnings


Stockholder


TotalPredecessorBalance at December 31, 2003





$




1,193,587


$







$



$



$
107,572


$
(187,345
)

$
(2,540
)

$
(82,313
)Change in terms of preferred stock


15,000



15,000



































15,000Accretion on preferred stock






469























(469
)










Issuance of restricted stock


















70,661



1







3











4Cancellation of restricted stock


















(4,930
)






















Deferred compensation related to
    restricted stock awards


























(1,161
)


1,161











Amortization of deferred
    compensation


























313















313Other changes














12















(12
)










Net income


































16,521







16,521Balance at December 31, 2004


15,000



15,469



1,193,587



12



65,731



1



(848
)


108,255



(170,824
)


(2,540
)


(50,475
)Accretion on preferred stock






498























(498
)










Dividends paid






(967
)






















(107,637
)










(108,604
)Redemption of preferred stock


(15,000
)


(15,000
)


































(15,000
)Forgiveness of stockholder loan






































2,540



2,540Exercise of warrants and cash
    settlement of stock options










42,999



82



























82Repurchase of common stock










(614
)


















(7
)










(7
)Cancellation of common stock by
    Bankruptcy Court










(979
)






























Deferred compensation related to
    restricted stock awards


























(8,940
)


8,940











Stock-based compensation and
    amortization of deferred compensation


























9,788















9,788Net income


































33,938







33,938







1,234,993



94



65,731



1







9,053



(136,886
)






(127,738
)SuccessorEffect of the Onex Transaction










(1,234,993
)


(94
)


(65,731
)


(1
)






(9,053
)


136,886







127,738Onex and other equity contributions


22,287







22,287



















222,865











222,865Deferred compensation related to
    restricted stock awards










2,472















(247
)


247











Amortization of deferred
    compensation


























62















62Accretion on preferred stock






246























(246
)










Balance at December 31, 2005


22,287



246



24,759















(185
)


222,866











222,927Proceeds from issuance of stock


10







10



















100











100Net income


































17,337







17,337Reclassification of deferred
    compensation upon adopting SFAS No. 123R


























185



(185
)










Issuance of restricted stock


15







154































Stock-based compensation






























284











284Accretion on preferred stock






18,406























(1,069
)


(17,337
)






Balance at December 31, 2006


22,312


$
18,652



24,923


$







$



$



$
221,996


$



$



$
240,648
 F-5




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Statements of Cash Flows
 (In thousands)
 
  
 Year Ended December 31,2006


2005


2004Successor


Predecessor


PredecessorOperating ActivitiesNet income

$
17,337


$
33,938


$
16,521Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization


13,897



9,991



8,597Reorganization expenses






1,007



1,444Provision for doubtful accounts


5,439



3,968



2,259Non-cash stock-based compensation


284



9,850



313Cumulative effect of a change in
    accounting principle






1,628



(Gain) on sale of assets






(23,892
)


Amortization of deferred financing
    costs


2,640



1,657



1,155Write-off of deferred financing
    costs and prepayment costs related to extinguished debt






16,626



7,858Forgiveness of stockholder loan






2,540



Deferred income taxes


(6,363
)


(23,129
)


Change in fair value of interest
    rate hedge


197



165



926Amortization of discount on senior
    subordinated notes


164







Changes in operating assets and
    liabilities:Accounts receivable


(29,046
)


(28,242
)


(7,119
)Other current assets


12,267



(12,630
)


(1,923
)Accounts payable and accrued
    liabilities


14,019



13,983



5,745Employee compensation and benefits


3,588



2,393



2,817Non-current income tax receivable


(1,882
)






Insurance liability risks


1,547



5,173



11,272Other long-term liabilities


327



1,015



306Net cash paid for reorganization
    costs






(1,037
)


(1,813
)Net cash provided by operating
    activities


34,415



15,004



48,358Investing activitiesPrincipal (additions) payments on
    notes receivable, net


(1,052
)


171



1,134Acquisition of healthcare facilities


(43,030
)






(42,748
)Proceeds from disposal of property
    and equipment






41,059



74Additions to property and equipment


(22,267
)


(11,183
)


(8,212
)Changes in other assets


(7,680
)


(482
)


4,522Cash distributed related to the
    Onex Transaction


(347
)


(253,350
)


Net cash used in investing
    activities


(74,376
)


(223,785
)


(45,230
)Financing activitiesBorrowings (repayments) under line
    of credit


8,500



(15,000
)


Repayments on long-term debt and
    capital leases


(2,918
)


(14,362
)


(23,299
)Repayments on long-term debt
    through refinancing






(110,000
)


(228,854
)Fees paid for early extinguishment
    of debt






(6,300
)


(4,361
)Proceeds from issuance of long-term
    debt






321,786



278,998Additions to deferred financing
    costs of new debt


(38
)


(21,765
)


(9,358
)Redemption of preferred stock






(15,732
)


 F-6




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Statements of Cash Flows  (Continued)
 (In thousands)
  Year Ended December 31,2006


2005


2004Successor


Predecessor


PredecessorPurchase of treasury stock






(7
)


Proceeds from exercise of warrants
    and cash settlement of stock options






82



Dividends paid






(108,604
)


(15,000
)Proceeds from restricted stock grant










4Proceeds from capital contributions
    related to the Onex Transaction






211,300



Proceeds from the issuance of new
    common stock


100







Proceeds from sale of interest rate
    hedge






130



1,355Purchase of interest rate hedge






(275
)


(617
)Net cash provided by (used in)
    financing activities


5,644



241,253



(1,132
)(Decrease) increase in cash and
    cash equivalents


(34,317
)


32,472



1,996Cash and cash equivalents at
    beginning of year


37,138



4,666



2,670Cash and cash equivalents at end of
    year

$
2,821


$
37,138


$
4,666Supplemental cash flow
    informationCash paid for:Interest expense

$
31,620


$
26,068


$
26,836Income taxes

$
2,655


$
25,222


$
1,414Supplemental disclosure of non-cash
    investing and financing activities:Reclassification of accounts
    receivable to notes receivable

$
2,265


$



$
313Capitalized lease transactions

$



$



$
1,514  
   F-7




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes
    to Consolidated Financial Statements
 (Dollars
    In Thousands, Except Per Share Data)
  1.
    Description
    of Business  Current
    Business
 
  sub-acute sub-acute
 
  Reorganization
    Under Chapter 11
 
   
  debtor-in-possession
    Year Ended December 31,2005


2004Professional fees

$
600


$
620Court-related services


40



157Refinancing costs


5



49Other fees


362



618Total

$
1,007


$
1,444  F-8




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    Year Ended December 31,2005


2004Operating cash receipts

$



$
Cash payments to suppliers for
    reorganization services:Professional fees


600



620Court-related services


40



157Refinancing costs


5



49Other fees


392



987Total

$
1,037


$
1,813   Matters
    Related to Emergence
    
    The incurrence by SHG of (i) approximately $32,000 in
    indebtedness available under new Revolving Credit Facilities;
    (ii) approximately $23,000 under a new Secured Mezzanine
    Term Loan; and (iii) approximately $95,000 under a new
    Senior Mortgage Term Loan;
    The satisfaction of SHGs
    111/4% Senior
    Subordinated Notes due 2008 (2008 Notes) upon the
    issuance or payment by SHG to the holders of the 2008 Notes on a
    pro rata basis of (i) approximately $106,800 of new Senior
    Subordinated Secured Increasing Rate Notes due 2008 that accrued
    interest at an initial rate of 9.25% and provided for annual
    rate increases, (ii) 58,642 shares of common stock and
    (iii) cash in the amount of $50,000, consisting of
    approximately $36,000 in outstanding interest and approximately
    $14,000 of principal;
    The payment in full of amounts outstanding under SHGs
    $90,000 Term Loan Facility and $30,000 Revolving Credit
    Facility; 
  
    The issuance of one share of new series A preferred stock,
    par value $0.01 per share for each share of SHGs
    existing series A preferred stock; 
  
    The cancellation of SHGs series A common stock and
    the issuance of 1.1142 shares of new common stock for each
    share of cancelled series A common stock;
    The cancellation of SHGs series B common stock and
    options to purchase series C common stock, with no
    distribution made in respect thereof;
    The cancellation of SHGs series C common stock and
    the issuance of one share of new common stock for each share of
    cancelled series C common stock;
    The cancellation of outstanding warrants to purchase
    series C common stock and the issuance of new warrants, on
    substantially the same terms, to purchase a number of shares of
    new common stock equal to the number of shares of series C
    common stock that were subject to the existing warrants so
    cancelled;
    An amendment and restatement of SHGs stockholders
    agreement;
    The impairment of certain secured claims and the impairment of
    certain general unsecured claims; and F-9




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   
    The restructuring of SHGs businesses and legal structure
    to conform to SHGs exit financing requirements whereby
    business enterprises were assumed by new subsidiary limited
    liability companies and existing corporations such that:
    (i) day-to-day
    operations are performed by each operating subsidiary;
    (ii) administrative services, such as accounting and cash
    management, are provided through a subsidiary administrative
    services company under contracts at market rates with each of
    the operating subsidiaries, and (iii) payroll processing
    services are provided through a subsidiary employment services
    company under contracts at market rates with each of the
    operating subsidiary employers.  The
    Onex Transaction
 
  Business Combinations
 
 
   
     F-10




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
       Issuance of common and preferred
    stock for cash

$
211,300Issuance of common and preferred
    stock for rollover consideration


10,065Issuance of common and preferred
    stock in consideration for settlement of accrued liabilities


1,500Total issuance of common and
    preferred stock


222,865Issuance of 11% Senior
    Subordinated Notes due 2014


198,668Amended First Lien Credit
    Agreement, assumed under Agreement


259,350Total sources of financing

$
680,883     Cash paid to stockholders,
    including amounts held in escrow

$
240,814Rollover consideration


10,065Accrued liability settled in
    consideration for common and preferred stock


1,500Amended First Lien Credit
    Agreement, assumed under Agreement


259,350Amounts paid to settle Second Lien
    Credit Agreement


110,000Accrued interest and prepayment
    penalty on Second Lien Credit Agreement


4,798Transaction costs


7,739Deferred financing costs


11,439Total purchase price

$
645,705Net cash retained in successor
    company from the Onex Transaction

$
35,178       Purchase price:





$
645,705Cash held in predecessor company


2,744Other current assets


90,628Property and equipment


191,151Identifiable intangible assets


35,823Other long-term assets


63,011Current liabilities


(67,464
)Other long-term liabilities


(66,223
)Net assets acquired






249,670Goodwill





$
396,035  F-11




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    Tangible
    assets and other long-term liabilities
  
    Land and buildings:  The valuation of land and
    buildings was calculated using an income approach by employing a
    direct capitalization analysis where an estimated market rental
    rate was used to determine the potential income for each
    property. Actual and estimated operating expenses by property
    were then deducted and the resulting net operating income was
    capitalized by a market-derived capitalization rate to determine
    the value of the property. The total fair value assigned to land
    and buildings was $174,383.
    Other property and equipment:  Other property
    and equipment consisted of furniture and equipment and
    construction in progress, for which the fair value was estimated
    to equal net book value as of the date of the Onex Transaction.
    The total fair value assigned to other property and equipment
    was $16,768. 
  
    Other long-term assets and
    liabilities:  Other long-term assets, consisting
    primarily of deferred income taxes, restricted cash, deferred
    financing and deposits, were valued at book value as of the date
    of the Onex Transaction. The total fair value assigned to other
    long-term assets was $63,011. Other long-term liabilities,
    consisting primarily of insurance liability risks and deferred
    income taxes, were valued at book value as of the date of the
    Onex Transaction. The total fair value assigned to other
    long-term liabilities was $66,223. 
  Intangible
    assets
    
    Patient lists and managed care contracts:  The
    valuation of patient lists and managed care contracts was
    calculated using an income approach by employing an excess
    earnings method that examined the economic returns contributed
    by the identified tangible and intangible assets of the Company,
    and then isolating the excess return, which was attributed to
    the pool of intangible assets being valued. The excess return
    was then discounted to present value to determine the fair value
    of the patient lists and managed care contracts. The
    amortization periods of the managed care contracts was
    determined to be five years. The amortization period of the
    patient lists was determined to be four months. The fair value
    assigned to managed care contracts and patient lists was $7,700
    and $800, respectively.
    Leasehold interests:  The valuation of the
    leasehold interests was calculated using a market approach by
    determining the present value of the difference (the
    disadvantage or advantage) between the current and future
    contract lease obligation and the estimated market lease rate
    over the term of the lease for each lease acquired. The
    resulting advantages and disadvantages were aggregated, netted
    and discounted to present value to determine the amount of the
    purchase price to be allocated to leasehold interests. The
    weighted-average amortization period for the leasehold interests
    was determined to be approximately 10 years. The total fair
    value assigned to leasehold interests was $7,012. F-12




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   
    Lease acquisition costs and
    covenants-not-to-compete:  The
    fair value was determined to be book value as of the date of the
    Onex Transaction. The lease acquisition costs were fully
    amortized in 2006. The remaining amortization period of the
    covenants-not-to-compete
    was approximately four years. The total fair value assigned to
    these items was $3,311.
    Trade names:  The valuation of the trade names
    was calculated using an income approach, specifically the
    royalty savings method, by projecting revenue attributable to
    the services using the trade names, the royalty rate that would
    hypothetically be charged by a licensor of the trade name to a
    licensee, and a discount rate to reflect the inherent risk of
    the projected cash flows. The resulting cash flows were then
    discounted to present value to determine the fair value of the
    trade names. The trade names were determined to have an
    indefinite life and therefore not subject to amortization. The
    total fair value assigned to trade names was $17,000.    Prior Basis ofAccounting,Balance Sheet Accounts

December 27, 2005


Merger Adjustments


As AdjustedCash and cash
    equivalents(1)

$
1,960


$
35,178


$
37,138Other current
    assets(2)


12,865



6,000



18,865Property and equipment,
    net(3)


190,903



248



191,151Deferred financing costs,
    net(4)


7,112



11,439



18,551Deferred income tax asset,
    net(5)


11,739



(11,718
)


21Goodwill(6)


20,491



375,544



396,035Other
    intangibles(7)


3,311



32,512



35,823Accounts payable and accrued
    liabilities(8)


50,251



4,982



55,233Other long-term
    liabilities(9)


3,580



4,950



8,53011% Senior Subordinated
    Notes(10)






198,668



198,668Second Lien credit
    agreement(11)


110,000



(110,000
)


     (1)
    
    Cash and cash equivalents increased by $35,178 as a result of
    financing sources exceeding the purchase price.(2)
    
    Other current assets increased by $6,000 as a result of the
    amount held in escrow for potential tax liabilities.(3)
    
    Property and equipment, net increased by $248 as a result of
    reflecting fixed assets at fair value at the date of the Onex
    Transaction.(4)
    
    Deferred financing costs, net increased by $11,439 as a result
    of the costs related to the financing of the 11% Senior
    Subordinated Notes due 2014.(5)
    
    Net deferred income tax assets decreased as a result of the Onex
    Transaction.(6)
    
    Goodwill of $396,035 represents the excess of the purchase price
    over the fair values of the net assets acquired.(7)
    
    Other intangibles increased by $32,512. Other intangibles are
    listed in Note 4.(8)
    
    Accounts payable and accrued liabilities increased by $4,982
    primarily from an accrual for amounts due to Heritage related to
    SHGs December 27, 2005 tax return, partially offset
    by accrued interest and a prepayment penalty related to the
    settlement of SHGs Second Lien Credit Agreement.(9)
    
    Other long-term liabilities increased by $4,950 to record the
    fair value of certain asset retirement obligations. F-13




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   (10)
    
    Concurrent with the Onex Transaction, 11% Senior
    Subordinated Notes due 2014 with a face value of $200,000 were
    issued at a discount of $1,332.(11)
    
    Concurrent with the Onex Transaction, SHGs Second Lien
    Credit Agreement was settled.    2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
    Reclassifications
    Estimates
    and Assumptions
    Revenue
    and Receivables
   F-14




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     2006


2005


2004Percentage





Percentage





PercentageRevenue


of


Revenue


of


Revenue


ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueMedicare

$
191,263



36.0
%

$
168,144



36.3
%

$
133,092



35.8
%Medicaid


170,171



32.0



155,128



33.5



143,176



38.6Subtotal Medicare and Medicaid


361,434



68.0



323,272



69.8



276,268



74.4Managed Care


43,267



8.1



33,844



7.3



24,945



6.7Private and Other


126,956



23.9



105,731



22.9



70,071



18.9Total

$
531,657



100.0
%

$
462,847



100.0
%

$
371,284



100.0
%     Risks
    and Uncertainties
    Concentration
    of Credit Risk
    Cash
    and Cash Equivalents
    Property
    and Equipment
   F-15




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    Buildings and improvements

15-40 yearsLeasehold improvements

Shorter of the lease term or
    estimated useful life, generally 5-10 yearsFurniture and equipment

3-10 years     Goodwill
    and Intangible Assets
  Goodwill and Other Intangible
    Assets
  Determination
    of Reporting Units
    -
    long-term care services, which includes the operation of
    skilled nursing and assisted living facilities and is the most
    significant portion of the Companys business,-
    rehabilitation therapy, which provides physical,
    occupational and speech therapy in Company-operated facilities
    and unaffiliated facilities, and-
    hospice care, which was established in 2004 and provides
    hospice care in Texas and California. 
  start-up
 
  Goodwill
    Impairment Testing
   F-16




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     Deferred
    Financing Costs
    Income
    Taxes
  Accounting for
    Income Taxes.
  Impairment
    of Long-Lived Assets
    Interest
    Rate Caps
    Stock
    Options and Equity Related Charges
 
  Share-Based Payments,
 
   F-17




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   Accounting for Stock Issued to
    Employees Accounting for Stock-Based
    Compensation
        Asset
    Retirement Obligations
  Accounting for Conditional Asset Retirement Obligations Accounting for Asset Retirement
    Obligations and/or
  pre-1980
 F-18




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   
   
    Operating
    Leases
  Accounting for Leases, Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent
    Increases.
  Net
    (Loss) Income per Share
   F-19




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     Year Ended December 31,2006


2005


2004Numerator:Net income, as reported

$
17,337


$
33,938


$
16,521Accretion on preferred stock


(18,406
)


(744
)


(469
)Net (loss) income attributable to
    common stockholders

$
(1,069
)

$
33,194


$
16,052Denominator:Weighted average common shares
    outstanding


22,955



1,228,965



1,193,501Net (loss) income per common
    share, basic

$
(46.56
)

$
27.01


$
13.45       Year Ended December 31,2006


2005


2004Numerator:Net (loss) income attributable to
    common stockholders

$
(1,069
)

$
33,194


$
16,052Net (loss) income attributable to
    common stockholders plus effect of assumed conversions

$
(1,069
)

$
33,194


$
16,052Denominator:Weighted average common shares
    outstanding


22,955



1,228,965



1,193,501Plus: incremental shares from
    assumed conversions, if applicable






61,155



93,462Adjusted weighted average common
    shares outstanding


22,955



1,290,120



1,286,963Net (loss) income per common
    share, diluted

$
(46.56
)

$
25.73


$
12.47  F-20




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
  Unaudited
    Pro Forma Net Loss per Common Share
    Year EndedDecember 31,2006Pro forma net loss per common
    share, basic:Numerator:Net loss, as reported

$
[
]Accretion on preferred stock


Net loss attributable to common
    stockholders

$
[
]Denominator:Weighted average common shares
    outstanding used in pro forma net loss per common share, basic

$
[
]Pro forma net loss per common
    share, basic

$
[
]Pro forma net loss per common
    share, diluted:Numerator:Net loss attributable to common
    stockholders

$
[
]Net loss attributable to common
    stockholders plus effect of assumed conversion

$
[
]Denominator:Weighted average common shares
    outstanding used in pro forma net loss per common share, basic


[
]Plus: incremental shares from
    assumed conversions, if applicable


Adjusted weighted average common
    shares outstanding used in pro forma net loss per common share,
    diluted


[
]Pro forma net loss per common
    share, diluted

$
[
]   Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes  An
    Interpretation of SFAS No. 109
  Fair
    Value Measurements
 F-21




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   
  The Fair
    Value Option for Financial Assets and Financial Liabilities
 
  3.
    Fair
    Value of Financial Instruments    Cash
    and Cash Equivalents
    Interest
    Rate Caps
    Long-Term
    Debt
    4.
    Intangible
    Assets   F-22




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    AccumulatedCost


Amortization


Net BalanceIntangible assets subject to
    amortization:Covenants
    not-to-compete

$
2,987


$
(713
)

$
2,274Managed care contracts


7,700



(1,541
)


6,159Leasehold interests


9,227



(817
)


8,410Total

$
19,914


$
(3,071
)


16,843Intangible assets not subject to
    amortization:Trade names










17,000Balance at December 31, 2006









$
33,843   AccumulatedCost


Amortization


Net BalanceIntangible assets subject to
    amortization:Lease acquisition costs

$
594


$



$
594Covenants
    not-to-compete


2,717







2,717Patient lists


800







800Managed care contracts


7,700







7,700Leasehold interests


7,012







7,012Total

$
18,823


$




18,823Intangible assets not subject to
    amortization:Trade names










17,000Balance at December 31,
    2005(1)









$
35,823     (1)
    
    In accordance with SFAS No. 141, intangible assets
    were recorded at fair value at December 27, 2005 due to the
    Onex Transaction.  5.
    Discontinued
    Operations    dollar-for-dollar
 F-23




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     2006


2005


2004Revenue

$



$
13,109


$
50,068Expenses






(12,074
)


(45,395
)Gain on sale of assets






22,912



Pre-tax income






23,947



4,673Provision for income taxes






(9,207
)


(1,884
)Discontinued operations, net of
    taxes

$



$
14,740


$
2,789   6.
    Acquisitions        Purchase price and other costs
    related to the purchase





$
31,376Land and land improvements


1,530Buildings and leasehold
    improvements


18,071Furniture and equipment


855Total assets acquired






20,456Goodwill





$
10,920    F-24




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     Year Ended December 31,2006


2005Revenue

$
535,373


$
485,981Income from continuing operations

$
17,518


$
22,336Net (loss) income available to
    common stockholders

$
(888
)

$
34,704Net (loss) income available to
    common stockholders per common share, basic

$
(38.67
)

$
28.24Net (loss) income available to
    common stockholders per common share, diluted

$
(38.67
)

$
26.90    
   
  7.
    Business
    Segments    sub-acute,
   F-25




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
  mark-up;
    
 Long-Term CareServices


Ancillary Services


Other(3)


TotalYear ended December 31,
    2006Revenue from external customers

$
469,758


$
62,623


$
(724
)

$
531,657Intersegment revenue






50,199



1,229



51,428Total revenue

$
469,758


$
112,822


$
505


$
583,085Segment total assets

$
704,797


$
66,358


$
67,540


$
838,695Goodwill and intangibles included
    in total assets

$
408,642


$
36,550


$



$
445,192Segment capital expenditures

$
20,086


$
606


$
1,575


$
22,267EBITDA(2)

$
75,207


$
18,828


$
(5,507
)

$
88,528Year ended December 31,
    2005Revenue from external customers

$
418,028


$
44,519


$
300


$
462,847Intersegment revenue






43,216



5,176



48,392Total revenue

$
418,028


$
87,735


$
5,476


$
511,239Segment total assets

$
627,364


$
58,339


$
111,379


$
797,082Goodwill and intangibles included
    in total assets(1)

$
395,207


$
36,713


$



$
431,920Segment capital expenditures

$
9,724


$
189


$
1,270


$
11,183EBITDA(2)

$
64,348


$
14,801


$
(21,588
)

$
57,561Year ended December 31,
    2004Revenue from external customers

$
344,443


$
26,462


$
379


$
371,284Intersegment revenue






30,304



5,940



36,244Total revenue

$
344,443


$
56,766


$
6,319


$
407,528Segment total assets

$
241,412


$
17,504


$
49,944


$
308,860Goodwill and intangibles included
    in total assets

$
25,037


$
1,827


$



$
26,864Segment capital expenditures

$
7,246


$
609


$
357


$
8,212EBITDA(2)

$
47,943


$
7,979


$
(4,802
)

$
51,120  
    (1)
    
    Goodwill from the Onex Transaction was allocated based on the
    relative fair value of the assets on the date of the Onex
    Transaction. 
  (2)
    
    EBITDA is defined as net income before depreciation,
    amortization and interest expense (net) and the provision for
    (benefit from) income taxes. 
  (3)
    
    Other includes discontinued operations in 2005 and
    2004. F-26




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   8.
    Debt    2006


2005$200,000 2014 Notes, interest rate
    11.0%, with an original issue discount of $1,168 and $1,332 at
    December 31, 2006 and 2005, respectively, interest payable
    semiannually, principal due 2014, unsecured

$
198,832


$
198,668Revolving Credit Facility, swing
    line subfacility, interest rate based on bank base rate plus
    1.75% (10.0% at December 31, 2006), due 2010


4,500



Revolving Credit Facility,
    interest rate based on LIBOR plus 2.75% (8.1% at
    December 31, 2006) collateralized by real property,
    due 2010


4,000



First Lien Credit Agreement,
    interest rate based on LIBOR plus 2.75% (8.1% at
    December 31, 2006) collateralized by real property,
    due 2012


256,100



258,700Notes payable, fixed interest rate
    6.5%, payable in monthly installments, collateralized by a first
    priority deed of trust, due November 2014


2,104



2,301Present value of capital lease
    obligations at effective interest rates, collateralized by
    property and equipment


3,519



3,640Total long-term debt and capital
    leases


469,055



463,309Less amounts due within one year


(3,177
)


(2,918
)Long-term debt and capital leases,
    net of current portion

$
465,878


$
460,391     Senior
    Subordinated Notes
       F-27




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     12-month
  First
    Lien Credit and Revolving Loan Agreement
 
  and/or
 
  Debt
    Covenants
     F-28




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   Scheduled
    Maturities of Long-Term Debt
    OtherLong-TermCapital Leases


Debt


Total2007

$
367


$
2,810


$
3,1772008


371



2,824



3,1952009


2,395



2,839



5,2342010


216



11,355



11,5712011


220



2,872



3,092Thereafter


645



444,004



444,6494,214



466,704



470,918Less original issue discount at
    December 31, 2006






1,168



1,168Less amount representing interest


695







695$
3,519


$
465,536


$
469,055   Interest
    Rate Hedging Activities
         F-29




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   9.
    Other
    Current Assets and Other Assets    2006


2005Receivable from escrow

$
6,000


$
6,000Income tax receivable






9,370Supply inventories


2,152



2,146Other notes receivable, net of
    allowance of $0 and $330 at December 31, 2006 and 2005,
    respectively


2,144



1,349$
10,296


$
18,865     2006


2005Equity investment in Pharmacy
    joint venture

$
4,170


$
3,992Restricted cash


8,448



1,390Investments


4,856



7,465Deposits and other assets


4,695



2,726Expenses related to initial public
    offering


1,678



$
23,847


$
15,573   Equity
    Investment in Pharmacy Joint Venture
 
   
  Restricted
    Cash
    Investments
  held-to-maturity. available-for-sale
 F-30




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    Deposits
    10.
    Property
    and Equipment    2006


2005Land and land improvements

$
43,333


$
40,523Buildings and leasehold
    improvements


164,105



133,860Furniture and equipment


24,372



14,769Construction in progress


8,913



1,999240,723



191,151Less amortization and accumulated
    depreciation


(9,819
)


$
230,904


$
191,151   11.
    Income
    Taxes    2006


2005


2004Federal:Current

$
14,118


$
8,187


$
3,497Deferred


(3,648
)


(18,822
)


State:Current


2,377



695



924Deferred


(643
)


(3,108
)


$
12,204


$
(13,048
)

$
4,421     Year Ended December 31,2006


2005


2004Income tax expense (benefit) on
    continuing operations

$
12,204


$
(13,048
)

$
4,421Income tax on discontinued
    operations






9,207



1,884Income tax benefit on cumulative
    effect of change in accounting principle






(1,017
)


$
12,204


$
(4,858
)

$
6,305  F-31




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    2006


2005


2004Federal rate (35%)

$
10,339


$
2,722


$
6,353State taxes, net of federal tax
    benefit


1,127



1,748



601Change in valuation allowance






(25,177
)


(6,158
)Preferred stock, Series A
    dividends










659Reorganization costs






3,865



2,737Restricted stock compensation






3,551



110Other, net


738



243



119$
12,204


$
(13,048
)

$
4,421          F-32




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    
 2006


2005Current


Non-Current


Current


Non-CurrentDeferred income tax assets:Vacation and other accrued expenses

$
3,915


$
1,704


$
3,199


$
900Allowance for doubtful accounts


3,033







2,317



Professional liability accrual


6,540



8,392



6,211



9,317Rent accrual


142



1,543



137



1,183Asset retirement obligation






2,065







1,995Other






924







1,506Total deferred income tax assets


13,630



14,628



11,864



14,901Deferred income tax liabilities:Intangible assets






(11,860
)






(13,028
)Fixed Assets














(516
)Other


(382
)






(474
)


Total deferred income tax
    liabilities


(382
)


(11,860
)


(474
)


(13,544
)Net deferred income tax assets


13,248



2,768



11,390



1,357Valuation allowance






(1,264
)






(1,336
)Net deferred income tax assets

$
13,248


$
1,504


$
11,390


$
21  
  12.
    Stockholders
    Equity 
  Successor
    Stockholders Equity
 
         F-33




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     
   
    
 WeightedWeighted


Weighted


AverageNumber of


Average


Average


IntrinsicGrants Made

Title of


Shares


Purchase


Fair Value


Value perDuring the Quarter Ended

Securities


Granted


Price


per Share


Share(1)March 31, 2006


Restricted Common Stock



69.6455



none


$
100


$June 30, 2006


Restricted Common Stock



69.6455



none


$
100


$September 30, 2006


Common Stock



15



none


$
3,960


$September 30, 2006


Class A Preferred Stock



15



none


$
9,900


$  
    (1)
    
    Using the mid-point of the range of the expected price between
    $      and
    $      per share in this offering. 
   
 
   
 F-34




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
 
   
  Predecessor
    Stockholders Equity
 
   
 
   
 
  Accounting for Certain Financial Instruments with
    Characteristics of both Liabilities and Equity,
 
     F-35




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
      
    Subject to the executives continuing service with SHG, the
    shares would vest in full upon the occurrence of a Trigger
    Event, defined as any asset sale, initial public offering or
    stock sale of SHG (each, a liquidity event),
    providing a terminal equity value of SHG in excess of $100,000
    (the consummation of the Onex Transaction constituted a valid
    Trigger Event); and
    If a Trigger Event had not occurred by the end of the original
    term of the executives employment agreement and such
    executive was still employed by SHG, 50% of his shares would
    vest if the executive had complied with the confidentiality and
    non-solicitation obligations in his employment agreement and SHG
    had achieved EBITDA in any one fiscal year of over $60,000.       F-36




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
 
    
  Number of


Stock-BasedShares


CompensationEarned and


Recognized


RecognizedVested


in 2005


in 2004Exceeding the minimum EBITDA
    trigger


32,865


$
848


$
313Completion of the Onex
    Transaction, deemed as a Trigger Event


32,866



8,940



65,731


$
9,788


$
313   Dividend
    Payment
 
  then-existing
 
    Warrants
        Stock
    Options
 
   
 F-37




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
     
 WeightedNumber of





AverageShares


Price per Share


Exercise PriceOutstanding at December 31,
    2004


6,475


$
18.30


$
18.30Granted










Settled in cash


(4,475
)


18.30



18.30Canceled


(2,000
)


18.30



18.30Outstanding at December 31,
    2005





$



$
  
  13.
    Commitments
    and Contingencies  Leases
      2007

$
9,8422008


9,6212009


9,6292010


8,4492011


7,851Thereafter


38,952$
84,344   Litigation
       F-38




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    Insurance
    Workers
    Compensation
          General
    and Professional Liability
  sub-acute
   
   
   F-39




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
 
   
      December 31,2006


2005General and








General andProfessional


Workers





Professional


WorkersLiability


Compensation


Total


Liability


Compensation


TotalReserve for insurance risks:Current

$
16,056
(1)

$
3,064
(2)

$
19,120


$
14,837
(1)

$
2,628
(2)

$
17,465Non-current


20,591



7,715



28,306



21,689



6,725



28,414$
36,647


$
10,779


$
47,426


$
36,526


$
9,353


$
45,879     (1)
    
    Included in accounts payable and accrued liabilities.(2)
    
    Included in employee compensation and benefits.  Hallmark
    Indemnification
    Financial
    Guarantees
    14.
    Material
    Transactions with Related Parties  Leased
    Facilities
   F-40




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
   Notes Receivable
    Agreement
    with Onex Partners Manager LP
    15.
    Defined
    Contribution Plan    16.
    Quarterly
    Financial Information (Unaudited)    Quarter EndedMarch 31


June 30


September 30


December 31(Unaudited)2006:Revenue

$
125,186


$
131,171


$
135,396


$
139,904Total expense


108,002



113,603



117,683



119,444Other income (expenses), net


(10,481
)


(10,782
)


(11,164
)


(10,957
)Income before provision for income
    taxes


6,703



6,786



6,549



9,503Provision for income taxes


2,601



3,071



2,588



3,944Net income


4,102



3,715



3,961



5,559Accretion on preferred stock


(4,401
)


(4,540
)


(4,684
)


(4,781
)Net (loss) income attributable to
    common stockholders

$
(299
)

$
(825
)

$
(723
)

$
778Net (loss) income per share data:Net (loss) income per common
    share, basic

$
(13.05
)

$
(35.95
)

$
(31.49
)

$
33.84Net (loss) income per common
    share, diluted

$
(13.05
)

$
(35.95
)

$
(31.49
)

$
32.86Weighted average common shares
    outstanding, basic


22,916



22,947



22,950



22,984Weighted average common shares
    outstanding, diluted


22,916



22,947



22,950



23,674   F-41




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
  Quarter EndedMarch 31


June 30


September 30


December 31(Unaudited)2005Revenue

$
108,936


$
111,493


$
122,206


$
120,212Total expenses


95,126



96,190



103,230



116,272Other income (expenses), net


(4,928
)


(16,550
)


(7,370
)


(15,403
)Income (loss) before (benefit
    from) provision for income taxes, discontinued operations and
    cumulative effect of a change in accounting principle


8,882



(1,247
)


11,606



(11,463
)(Benefit from) provision for
    income taxes


(7,375
)


(2,904
)


3,875



(6,644
)Discontinued operations, net of tax


12,569



2,269



(50
)


(48
)Cumulative effect of a change in
    accounting principle, net of tax














(1,628
)Net income (loss)


28,826



3,926



7,681



(6,495
)Accretion on preferred stock


(259
)


(243
)






(242
)Net income (loss) attributable to
    common stockholders

$
28,567


$
3,683


$
7,681


$
(6,737
)Net income (loss) per share data:Income (loss) before discontinued
    operations and cumulative effect of a change in accounting
    principle per common share, basic

$
13.05


$
1.15


$
6.12


$
(4.23
)Discontinued operations per common
    share, basic


10.25



1.84



(0.04
)


(0.04
)Cumulative effect of a change in
    accounting principle per common share, basic














(1.36
)Net income (loss) per share, basic

$
23.30


$
2.99


$
6.08


$
(5.63
)Income (loss) before discontinued
    operations and cumulative effect of a change in accounting
    principle per common share, diluted

$
12.22


$
1.08


$
5.92


$
(4.23
)Discontinued operations per common
    share, diluted


9.60



1.73



(0.04
)


(0.04
)Cumulative effect of a change in
    accounting principle per common share, diluted














(1.36
)Net income (loss) per common
    share, diluted

$
21.82


$
2.81


$
5.88


$
(5.63
)Weighted average common shares
    outstanding, basic


1,226,144



1,229,867



1,263,830



1,195,966Weighted average common shares
    outstanding, diluted


1,309,354



1,308,666



1,306,745



1,195,966  F-42




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Notes to
    Consolidated Financial
    Statements  (Continued)
 (Dollars In Thousands, Except Per Share Data)
    17.
    Subsequent
    Events    
    for Term Loans and Revolving Loans, a reduction of the
    applicable margins over the Companys interest rates of
    0.5%;
    the ability for further reductions of the applicable margins
    based upon favorable ratings from certain debt rating agencies
    and the issuance of new ratings from those agencies;
    allowance for the net proceeds resulting from the consummation
    of an initial public offering of the Companys common stock
    to be applied to prepay the Term Loans, including the Revolving
    Loans, to be the lesser of (i) 50% of such net proceeds or
    (ii) the excess of such net proceeds over the amount to
    prepay $70,000 of the 2014 Notes;
    approval of the merger of SHG with and into Skilled with Skilled
    being the surviving company and changing its name from SHG
    Holding Solutions, Inc. to Skilled Healthcare Group,
    Inc.; and
    revision of certain covenants and reporting requirements.     
   
    
    The Company paid $6,300 to Heritage, which represents the
    amounts paid by SHG to the IRS in excess of the 2005 tax amounts
    on SHGs tax return for the period ended December 27,
    2005;
    The Company paid an additional $1,000 into the escrow account
    for the satisfaction of certain tax liabilities that arose prior
    to the date of the Onex Transaction;
    The Company and Heritage instructed the escrow agent to release
    to Heritage the remaining $15,000 in escrow that was established
    to provide for any contingencies or liabilities not recorded or
    specifically provided for as of December 27, 2005; and
    The Company and Heritage generally released each other from any
    further claims beyond the tax amounts remaining in the escrow
    account. 
 F-43




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm                F-44




---



##### Table of Contents



SUNSET
    HEALTHCARE
  COMBINED
    BALANCE SHEET
 DECEMBER 31,
    2005
 (In thousands, except for share and per share data)
  ASSETSCurrent assets:Cash and cash equivalents

$
2,070Accounts receivable, less
    allowance for doubtful accounts of $40


2,155Other current assets


140Total current assets


4,365Property and equipment, net


10,347Other assets


363Total assets

$
15,075LIABILITIES AND
    STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued
    liabilities

$
1,257Employee compensation and benefits


560Professional liability risk


835Due to stockholder


318Revolving credit facility


150Current portion of long-term debt


7,284Total current liabilities


10,404Long-term liabilities:Long-term debt, less current
    portion


5,933Total liabilities


16,337Stockholders deficit:Common stock  Liberty
    Terrace Nursing 30,000 shares authorized, $1.00 par
    value, 600 shares issued and outstanding


1Common stock  Carmel
    Hills Living Center 30,000 shares authorized,
    $1.00 par value, 400 shares issued and outstanding


Common stock 
    Holmesdale Care Center 100,000 shares authorized,
    $0.01 par value, 20,000 shares issued and outstanding


Accumulated deficit


(1,263
)Total stockholders deficit


(1,262
)Total liabilities and
    stockholders deficit

$
15,075    F-45




---



##### Table of Contents



SUNSET
    HEALTHCARE
  COMBINED
    STATEMENT OF INCOME
 FOR THE
    YEAR ENDED DECEMBER 31, 2005
 (In thousands)
  Revenue

$
23,134Expenses:Cost of services (exclusive of
    depreciation and amortization shown below)


17,549General and administrative


1,648Depreciation and amortization


83120,028Other expenses:Interest expense


(589
)Net income

$
2,517    F-46




---



##### Table of Contents



SUNSET
    HEALTHCARE
  COMBINED
    STATEMENT OF STOCKHOLDERS DEFICIT
 (In thousands except for share data)
  AdditionalCommon Stock


Paid-In


AccumulatedShares


Amount


Capital


Deficit


TotalBalances at December 31, 2004


21,000


$
1


$
211


$
(2,919
)

$
(2,707
)Net income














2,517



2,517Stockholder contribution










342







342Distributions to stockholders










(553
)


(861
)


(1,414
)Balances at December 31, 2005


21,000


$
1


$



$
(1,263
)

$
(1,262
)    F-47




---



##### Table of Contents



SUNSET
    HEALTHCARE
  COMBINED
    STATEMENT OF CASH FLOWS
 DECEMBER 31,
    2005
 (In thousands)
  Operating ActivitiesNet income

$
2,517Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


831Change in fair value of interest
    rate hedge


(335
)Changes in operating assets and
    liabilities:Accounts receivable


(254
)Other current assets


(29
)Accounts payable and accrued
    liabilities


576Employee compensation and benefits


95Professional liability risk


150Net cash provided by operating
    activities


3,551Investing ActivitiesAdditions to property and equipment


(130
)Changes in other assets


(210
)Net cash used in investing
    activities


(340
)Financing ActivitiesRepayments on line of credit
    facilities


(442
)Repayments on long-term debt


(559
)Repayments of Stockholder note


(30
)Contribution to paid in capital


342Distributions paid to stockholders


(1,414
)Net cash used in financing
    activities


(2,103
)Increase in cash and cash
    equivalents


1,108Cash and cash equivalents at
    beginning of year


962Cash and cash equivalents at end
    of year

$
2,070    F-48




---



##### Table of Contents



SUNSET
    HEALTHCARE
  NOTES TO
    COMBINED FINANCIAL STATEMENTS
 December 31, 2005
   1.
    Description
    of Business    2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
    Use of
    Estimates
 
   
  Revenue
    and Accounts Receivables
      Revenue


PercentageDollars


of RevenueMedicare

$
7,217



31.2
%Medicaid


8,366



36.2Subtotal Medicare and Medicaid


15,583



67.4Managed Care


379



1.6Private and Other


7,172



31.0Total

$
23,134



100.0
%  F-49




---



##### Table of Contents



SUNSET
    HEALTHCARE
  NOTES TO
    COMBINED FINANCIAL
    STATEMENTS  (Continued)
  Risks
    and Uncertainties
    Concentration
    of Credit Risk
    Cash
    and Cash Equivalents
      Property
    and Equipment
    Buildings and improvements


15-30 yearsFurniture and equipment


3-10 years   Income
    Taxes
    3.
    Fair
    Value of Financial Instruments    Cash
    and Cash Equivalents
   F-50




---



##### Table of Contents



SUNSET
    HEALTHCARE
  NOTES TO
    COMBINED FINANCIAL
    STATEMENTS  (Continued)
   Long-Term
    Debt
    4.
    Debt    Note payable  Bank of
    America, interest rate of 5.13%, payable in monthly
    installments, due June 1, 2006

$
6,856Note payable  Bank of
    America, interest rate of 6.25%, payable in monthly
    installments, due September 1, 2007


4,028Note payable  Security
    Bank of Kansas City, interest rate of 8.0%, payable in monthly
    installments, due July, 2007


2,304Promissory note payable to
    unrelated party for the financing of the Residential Care
    Facility Certificate of Need License, due March 2007, monthly
    payments of $5; non-interest bearing


70Less fair market value of interest
    rate option agreements

$
(41
)13,217Less current portion


(7,284
)$
5,933     2006

$
7,2842007


5,933$
13,217       Interest
    Rate Option
       F-51




---



##### Table of Contents



SUNSET
    HEALTHCARE
  NOTES TO
    COMBINED FINANCIAL
    STATEMENTS  (Continued)
    5.
    Other
    Current Assets and Other Assets    December 31,2005Other current receivables

$
56Inventory


21Prepaid property insurance


9Prepaid workers compensation
    insurance


54$
140     December 31,2005Restricted investments

$
363       6.
    Property
    and Equipment    December 31,2005Land and land improvements

$
350Buildings and improvements


12,354Furniture and equipment


2,804Vehicles


12215,630Less amortization and accumulated
    depreciation


(5,283
)$
10,347   7.
    Stockholders
    Equity  Additional
    Paid in Capital
   F-52




---



##### Table of Contents



SUNSET
    HEALTHCARE
  NOTES TO
    COMBINED FINANCIAL
    STATEMENTS  (Continued)
    8.
    Related
    Parties  Management
    Agreement
    Loan
    from Stockholder
    9.
    Line of
    Credit  1 2
  10.
    Contingent
    Liabilities  Government
    Regulations  Medicaid
    Government
    Regulations  Medicare
    Professional
    Liability Insurance
     F-53




---



##### Table of Contents



SUNSET
    HEALTHCARE
  NOTES TO
    COMBINED FINANCIAL
    STATEMENTS  (Continued)
   Workers
    Compensation Insurance
    11.
    Subsequent
    Events (unaudited)   F-54




---



##### Table of Contents








---



##### Table of Contents



PART II
  INFORMATION
    NOT REQUIRED IN PROSPECTUS
  Item 13.
    Other
    Expenses of Issuance and Distribution    Amount to bePaidSEC registration fee

$
18,725NASD filing fee


18,000New York Stock Exchange listing fee


*Legal fees and expenses


*Accounting fees and expenses


*Printing and engraving expenses


*Blue sky fees and expenses
    (including legal fees)


*Transfer agent and registrar fees


*Miscellaneous


*Total

$
*     *
    
    To be provided by amendment.  Item 14.
    Indemnification
    of Directors and Officers       II-1




---



##### Table of Contents



Item 15.
    Recent
    Sales of Unregistered Securities    Name or Class of

Aggregate


ExemptionDate

Title of Securities

Number Sold

Purchasers

Consideration


Claimed12/27/05

Common Stock

22,286.5475

Certain officers, employees and
    other investors

$
2,228,654.75


Regulation D12/27/05

Class A Preferred Stock

22,286.5475

Certain officers, employees and
    other investors

$
220,636,820


Regulation D12/27/05

Restricted Common Stock

2,472.4137

Certain employees


None


Rule 70112/27/05

11% Senior Subordinated Notes due
    2014

$200 million
    aggregate
    principal
    amount

Initial Purchasers (Credit Suisse
    Securities (USA) LLC and J.P. Morgan Securities, Inc.)



(1)

Regulation D1/30/06

Common Stock

10

Stephen R. Darling

$
1,000


Regulation D1/30/06

Class A Preferred Stock

10

Stephen R. Darling

$
99,900


Regulation D II-2




---



##### Table of Contents



Name or Class of

Aggregate


ExemptionDate

Title of Securities

Number Sold

Purchasers

Consideration


Claimed3/6/06

Restricted Common Stock

69.6455

Susan Whittle


None


Rule 7014/17/06

Restricted Common Stock

69.6455

Peter Reynolds


None


Rule 7018/30/06

Class A Preferred Stock

5

Michael Boxer


None


Rule 7018/30/06

Common Stock

5

Michael Boxer


None


Rule 7018/30/06

Class A Preferred Stock

5

John Miller


None


Rule 7018/30/06

Common Stock

5

John Miller


None


Rule 7018/30/06

Class A Preferred Stock

5

Glenn Schaefer


None


Rule 7018/30/06

Common Stock

5

Glenn Schaefer


None


Rule 701  
    (1)
    
    The aggregate offering price for the 11% Senior Subordinated
    Notes due 2014 was $198,666,000. The aggregate underwriting
    discounts were $1,334,000. 
 
  Item 16.
    Exhibits
    and Financial Statement Schedules  Exhibits.
  
 Number

Description1
.1*

Form of Underwriting Agreement.2
.1**

Agreement and Plan of Merger,
    dated as of October 22, 2005, among SHG Acquisition Corp.,
    SHG Holding Solutions, Inc. and Skilled Healthcare Group,
    Inc.2
.2**

Amendment No. 1 to Agreement
    and Plan of Merger, dated October 22, 2005, by and between
    SHG Holding Solutions, Inc. and Skilled Healthcare Group, Inc.2
.3**

Asset Purchase Agreement, dated as
    of January 31, 2006, by and among Skilled Healthcare Group,
    Inc., each of the entities listed on Schedule 2.1 thereto,
    M. Terence Reardon and M. Sue Reardon, individually and as
    Trustee of the M. Terence Reardon Trust U.T.A. dated
    6/26/03, and M. Sue Reardon and M. Terence Reardon, as Trustees
    of the M. Sue Reardon Trust U.T.A. dated 6/26/03.2
.4**

Agreement and Plan of Merger,
    dated as of February 7, 2007, by and between SHG Holding
    Solutions, Inc., and Skilled Healthcare Group, Inc.2
.5

Asset Purchase Agreement, dated
    February 8, 2007, by and among Skilled Healthcare Group,
    Inc., Raymore Care Center LLC, Blue River Care Center LLC, MLD
    Healthcare LLC, Blue River Real Estate LLC, MLD Real Estate LLC,
    Melvin Dunsworth and Raymore Health Care, Inc.3
.1**

Restated Certificate of
    Incorporation of Skilled Healthcare Group, Inc. (formerly known
    as SHG Holding Solutions, Inc.) (in effect prior to the offering)3
.1.1*

Certificate of Ownership and
    Merger of Skilled Healthcare Group, Inc., dated February 7,
    20073
.1.2*

Certificate of Amendment to
    Restated Certificate of Incorporation of Skilled Healthcare
    Group, Inc., dated April   , 20073
.2**

By-Laws of Skilled Healthcare
    Group, Inc. (formerly known as SHG Holding Solutions, Inc.) (in
    effect prior to the offering)3
.3*

Amended and Restated Certificate
    of Incorporation of Skilled Healthcare Group, Inc. dated
    April   , 2007 (to be effective immediately after
    the closing of this offering).3
.4*

Amended and Restated Bylaws of
    Skilled Healthcare Group, Inc. (to be effective immediately
    after the closing of this offering).4
.1*

Form of specimen certificate for
    SHG Holding Solutions, Inc.s Common Stock.4
.2**

Indenture, dated as of
    December 27, 2005, by and among SHG Acquisition Corp.,
    Wells Fargo Bank, N.A. and certain subsidiaries of Skilled
    Healthcare Group, Inc. 
 II-3




---



##### Table of Contents



Number

Description4
.3**

Registration Rights Agreement,
    dated as of December 27, 2005, by and among SHG Acquisition
    Corp., all the subsidiaries of Skilled Healthcare Group, Inc.
    listed therein, Credit Suisse First Boston, LLC and
    J.P. Morgan Securities, Inc.4
.4**

Investor Stockholders
    Agreement, dated as of December 27, 2005, among
    SHG Holding Solutions, Inc., Onex Partners LP and the
    stockholders listed on the signature pages thereto.4
.5**

Registration Agreement dated as of
    December 27, 2005, among SHG Holding Solutions, Inc. and
    the persons listed thereon.5
.1*

Opinion of Latham &
    Watkins LLP.10
.1**

Skilled Healthcare Group, Inc.
    Restricted Stock Plan.10
.2**

Form of Restricted Stock Agreement.10
.3*

Skilled Healthcare Group 2007
    Incentive Award Plan.10
.4**

Second Amended and Restated First
    Lien Credit Agreement, dated as of December 27, 2005, by
    and among SHG Holding Solutions, Inc., Skilled Healthcare Group,
    Inc., the financial institutions party thereto, and Credit
    Suisse, Cayman Islands, as administrative agent and collateral
    agent.10
.5**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Boyd Hendrickson.10
.6**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Jose Lynch.10
.7**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and John E. King.10
.8**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Roland G. Rapp.10
.9**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Mark Wortley.10
.10*

Form of Indemnification Agreement
    with SHG Holding Solutions, Inc.s directors and executive
    officers.10
.11**

Lease, dated as of August 26,
    2002, by and between CT Foothill 10/241, LLC, and Fountain View,
    Inc., and amendments thereto.10
.12

First Amendment to Second Amended
    and Restated First Lien Credit Agreement, dated as of
    January 31, 2007, by and among Skilled Healthcare Group,
    Inc., SHG Holding Solutions, Inc., the financial institutions
    parties thereto, and Credit Suisse, Cayman Islands, as
    administrative agent and collateral agent.23
.1*

Consent of Latham & Watkins
    LLP (included in Exhibit 5.1)23
.2

Consent of Independent Registered
    Public Accounting Firm, Skilled Healthcare Group, Inc.23
.3

Consent of Independent Registered
    Public Accounting Firm, Sunset Healthcare24
.1**

Powers of Attorney.24
.2**

Power of Attorney for Glenn S.
    Schafer.  
   
  *
    
    To be filed by amendment 
  **
    
    Previously filed. II-4




---



##### Table of Contents



Financial Statement Schedules.
  SCHEDULE II 
    VALUATION AND QUALIFYING ACCOUNTS(Deducted from the assets to which they apply)(Dollars in Thousands)
  SCHEDULE II 
    VALUATION ACCOUNTS
  SKILLED
    HEALTHCARE GROUP, INC.
 December 31,
    2006
  Balance at


Charged toBeginning of


Costs and





Balance at EndPeriod


Expenses


Deductions(1)


of Period(Dollars in thousands)Accounts receivableYear Ended December 31, 2006

$
5,678


$
5,791


$
(3,580
)

$
7,889Year Ended December 31, 2005

$
4,750


$
4,468


$
(3,540
)

$
5,678Year Ended December 31, 2004

$
10,033


$
2,259


$
(7,542
)

$
4,750Notes receivableYear Ended December 31, 2006

$
631


$
(352
)

$
(279
)

$
Year Ended December 31, 2005

$
1,288


$
(500
)

$
(157
)

$
631Year Ended December 31, 2004

$
1,847


$



$
(559
)

$
1,288     (1)
    
    Uncollectible accounts written off, net of recoveries  Item 17.
    Undertakings         II-5




---



##### Table of Contents



bona fide
 II-6




---



##### Table of Contents



SIGNATURES
 
  th
 
    By:
    /s/  Boyd
    Hendrickson   Title:
    Chief Executive Officer and Chairman of the Board
 
   
  
 Signature

Title

Date/s/  Boyd
    HendricksonBoyd
    Hendrickson

Chief Executive Officer
    (Principal Executive Officer) and 
    Chairman of the Board

April 20, 2007*Jose
    Lynch

President and Chief Operating
    Officer
    and Director

April 20, 2007/s/  John
    E. KingJohn
    E. King

Treasurer and Chief Financial
    Officer
    (Principal Financial Officer)

April 20, 2007*Peter
    A. Reynolds

Senior Vice President, Finance
    and
    Chief Accounting Officer
    (Principal Accounting Officer)

April 20, 2007*Robert
    M. Le Blanc

Lead Director

April 20, 2007*Michael
    E. Boxer

Director

April 20, 2007*John
    M. Miller, V

Director

April 20, 2007/s/  Glenn
    S. SchaferGlenn
    S. Schafer

Director

April 20, 2007*William
    Scott

Director

April 20, 2007*By

/s/  John
    E. KingAttorney-in-fact  
 II-7




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##### Table of Contents



EXHIBIT INDEX
  
 Number

Description1
.1*

Form of Underwriting Agreement.2
.1**

Agreement and Plan of Merger,
    dated as of October 22, 2005, among SHG Acquisition Corp.,
    SHG Holding Solutions, Inc. and Skilled Healthcare Group, Inc.2
.2**

Amendment No. 1 to Agreement
    and Plan of Merger, dated October 22, 2005, by and between
    SHG Holding Solutions, Inc. and Skilled Healthcare Group, Inc.2
.3**

Asset Purchase Agreement, dated as
    of January 31, 2006, by and among Skilled Healthcare Group,
    Inc., each of the entities listed on Schedule 2.1 thereto,
    M. Terence Reardon and M. Sue Reardon, individually and as
    Trustee of the M. Terence Reardon Trust U.T.A. dated
    6/26/03, and M. Sue Reardon and M. Terence Reardon, as Trustees
    of the M. Sue Reardon Trust U.T.A. dated 6/26/03.2
.4**

Agreement and Plan of Merger,
    dated as of February 7, 2007, by and between SHG Holding
    Solutions, Inc., and Skilled Healthcare Group, Inc.2
.5

Asset Purchase Agreement, dated
    February 8, 2007, by and among Skilled Healthcare Group,
    Inc., Raymore Care Center LLC, Blue River Care Center LLC, MLD
    Healthcare LLC, Blue River Real Estate LLC, MLD Real Estate LLC,
    Melvin Dunsworth and Raymore Health Care, Inc.3
.1**

Restated Certificate of
    Incorporation of Skilled Healthcare Group, Inc. (formerly known
    as SHG Holding Solutions, Inc.) (in effect prior to the
    offering).3
.1.1*

Certificate of Ownership and
    Merger of Skilled Healthcare Group, Inc., dated February 2, 20073
.1.2*

Certificate of Amendment to
    Restated Certificate of Incorporation of Skilled Healthcare
    Group, Inc., dated April   , 20073
.2**

By-Laws of Skilled Healthcare
    Group, Inc. (formerly known as SHG Holding Solutions, Inc.) (in
    effect prior to the offering)3
.3*

Amended and Restated Certificate
    of Incorporation of Skilled Healthcare Group, Inc. dated
    April   , 2003 (to be effective immediately after
    the closing of this offering).3
.4*

Amended and Restated Bylaws of
    Skilled Healthcare Group, Inc. (to be effective immediately
    after the closing of this offering).4
.1*

Form of specimen certificate for
    SHG Holding Solutions, Inc.s Common Stock.4
.2**

Indenture, dated as of
    December 27, 2005, by and among SHG Acquisition Corp.,
    Wells Fargo Bank, N.A. and certain subsidiaries of Skilled
    Healthcare Group, Inc.4
.3**

Registration Rights Agreement,
    dated as of December 27, 2005, by and among SHG Acquisition
    Corp., all the subsidiaries of Skilled Healthcare Group, Inc.
    listed therein, Credit Suisse First Boston, LLC and
    J.P. Morgan Securities, Inc.4
.4**

Investor Stockholders
    Agreement, dated as of December 27, 2005, among SHG Holding
    Solutions Inc., Onex Partners LP and the stockholders listed on
    the signature pages thereto.4
.5**

Registration Agreement dated as of
    December 27, 2005, among SHG Holding Solutions, Inc. and
    the persons listed thereon.5
.1*

Opinion of Latham &
    Watkins LLP.10
.1**

Skilled Healthcare Group, Inc.
    Restricted Stock Plan.10
.2**

Form of Restricted Stock Agreement.10
.3*

Skilled Healthcare Group 2007
    Incentive Award Plan.10
.4**

Second Amended and Restated First
    Lien Credit Agreement, dated as of December 27, 2005, by
    and among SHG Holding Solutions, Inc., Skilled Healthcare Group,
    Inc., the financial institutions party thereto, and Credit
    Suisse, Cayman Islands, as administrative agent and collateral
    agent.10
.5**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Boyd Hendrickson.10
.6**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Jose Lynch.10
.7**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and John E. King.10
.8**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Roland G. Rapp.




---



##### Table of Contents



Number

Description10
.9**

Employment Agreement, dated
    December 27, 2005, by and between Skilled Healthcare Group,
    Inc. and Mark Wortley.10
.10*

Form of Indemnification Agreement
    with SHG Holding Solutions, Inc.s directors and executive
    officers.10
.11**

Lease, dated as of August 26,
    2002, by and between CT Foothill 10/241, LLC, and Fountain View,
    Inc., and amendments thereto.10
.12

First Amendment to Second Amended
    and Restated First Lien Credit Agreement, dated as of
    January 31, 2007, by and among Skilled Healthcare Group,
    Inc., SHG Holding Solutions, Inc., the financial institutions
    parties thereto, and Credit Suisse, Cayman Islands, as
    administrative agent and collateral agent.23
.1*

Consent of Latham & Watkins
    LLP (included in Exhibit 5.1)23
.2

Consent of Independent Registered
    Public Accounting Firm, Skilled Healthcare Group, Inc.23
.3

Consent of Independent Registered
    Public Accounting Firm, Sunset Healthcare24
.1**

Powers of Attorney.24
.2**

Power of Attorney for Glenn S.
    Schafer  
   
  *
    
    To be filed by amendment 
  **
    
    Previously filed.