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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  (Mark One)þ


ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF
    1934For the Fiscal Year Ended December 31, 2008ORo


TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF
    1934   Commission File Number
    001-33459
  Skilled Healthcare Group,
    Inc.
 (Exact Name of Registrant as
    Specified in its Charter)
  Delaware(State of
    Incorporation)

20-3934755(I.R.S. Employer
    Identification Number)27442 Portola Parkway, Suite 200
    Foothill Ranch, CA(Address of Principal
    Executive Offices)

92610(Zip Code)   Registrants telephone number:
    (949) 282-5800
    Securities registered pursuant to Section 12(b) of the
    Act:
  Common Stock, $0.001 par value per share

New York Stock Exchange(Title of each class)

(Name of each exchange on which
    registered)   Securities registered pursuant to Section 12(g) of the
    Act: None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   Rule 12b-2 o þ
    Documents
    Incorporated by Reference:




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##### 





SKILLED
    HEALTHCARE GROUP, INC.
  ANNUAL
    REPORT
  INDEX
  
   PageItem 1.

Business


1Item 1A.

Risk Factors


18Item 1B.

Unresolved Staff Comments


34Item 2.

Properties


35Item 3.

Legal Proceedings


35Item 4.

Submission of Matters to a Vote of Security
    Holders


36Item 5.

Market For Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


36Item 6.

Selected Financial Data


37Item 7.

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


41Item 7A.

Quantitative and Qualitative Disclosures About
    Market Risk


65Item 8.

Financial Statements and Supplementary Data


66Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


66Item 9A.

Controls and Procedures


67Item 9B.

Other Information


69Item 10.

Directors, Executive Officers and Corporate
    Governance


69Item 11.

Executive Compensation


69Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


69Item 13.

Certain Relationships and Related Transactions,
    and Director Independence


69Item 14.

Principal Accountant Fees and Services


69Item 15.

Exhibits and Financial Statement Schedules


70SIGNATURES


74EX-21EX-23.1EX-31.1EX-31.2EX-32   ii




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PART I
  Item 1.
    Business  Overview
  References in this report to the Company,
    we, us and our refer to
    Skilled Healthcare Group, Inc. and its wholly owned companies,
    unless the context requires otherwise.
    2008
    Acquisitions
  34-unit
    Operations
      Long-Term
    Care Services Segment
  Skilled
    Nursing Facilities
   1




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Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm
  Assisted
    Living Facilities
    Equity
    Investment in Pharmacy Joint Venture
    Ancillary
    Services Segment
  Rehabilitation
    Therapy Services
   2




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Hospice
    Care
    Our Local
    Referral Network
      Payment
    Sources
    Sources
    of Reimbursement
   3




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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 professional skilled
    nursing and other rehabilitative care. Coverage in a skilled
    nursing facility is limited for a period of up to 100 days,
    if medically necessary, after the individual has qualified for
    Medicare coverage as a result of a
    three-day or
    longer hospital stay. Medicare pays for the first 20 days
    of stay in a skilled nursing facility in full and the next
    80 days, to the extent 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.         4




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speech-language speech-language
           5




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Medicaid.
             6




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
    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 freestanding nursing facilities, which 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. State Assembly
    Bill 1629 is scheduled to expire, with its prospective
    cost-based system and quality assurance fee becoming
    inoperative, on July 31, 2009, unless a later enacted
    statute extends this date. The governor and legislature have
    recommended a two-year extension, without any changes.
    Texas.  In 2008, Texas switched from a
    prospective cost-based system that is facility-specific, based
    upon patient acuity mix for that facility to a patient-specific
    rate setting method using a RUG classification system similar to
    the Medicare program but with Texas standardized case mix
    indexing.
    Kansas.  The Kansas Medicaid reimbursement
    system is prospective cost-based and is case mix adjusted for
    resident activity levels.
    Missouri.  The Missouri Medicaid reimbursement
    system is prospective cost-based. The facility-specific rate is
    composed of five cost components: (i) patient care;
    (ii) ancillary care; (iii) administration;
    (iv) capital; and (v) working capital. Missouri has a
    provider tax similar to the previously mentioned California
    provider tax.
    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. Nevada has a provider tax similar to the previously
    mentioned California provider tax.
    New Mexico.  New Mexicos reimbursement
    system is a prospective cost-based system that is rebased every
    three years. New Mexicos Medicaid program reimburses
    nursing facilities at the lower of the facilitys billed
    charges or a prospective per diem rate. This per diem rate is
    specific for the facility and determined on the basis of the
    facilitys base-year allowable costs, constrained by rate
    ceilings. In addition, the per diem rate is subject to final
    adjustment for specified additional costs and inflationary
    trends. Effective August 1, 2008, the state of New Mexico
    began implementing a coordinated program of physical health and
    community-based supports and services, to be known as
    Coordinated Long-Term Services, or CLTS. Under CLTS, the
    providers contract directly with various Managed Care
    Organizations, or MCOs, and negotiate financial reimbursement
    directly with the MCOs. Plans to implement this program
    throughout more of the state are in place for 2009.    Managed Care.
 7




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Private Pay and Other.
  Reimbursement
    for Specific Services
  Reimbursement for Skilled Nursing
    Services.
    Reimbursement for Assisted Living
    Services.
  Reimbursement for Rehabilitation Therap Services.
    Reimbursement for Hospice Services. 90-day 60-day
    12-month
   8




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Government
    Regulation
  General
      Civil
    and Criminal Fraud and Abuse Laws and Enforcement
        Anti-Kickback
    Statute
   9




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Stark
    Law
       10




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False
    Claims
  and/or
      Health
    Insurance Portability and Accountability Act of
    1996
     11




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State
    Privacy Laws
  and/or
  Certificates
    of Need and Other Regulatory Matters
    State
    Operating License Requirements
    Rehabilitation
    License Requirements
   12




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Regulation
    of our Joint Venture Institutional Pharmacy
      Competition
    Express
    Recovery tm
       13




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Labor
    Risk
    Management
  follow-up
  Insurance
    General
    and Professional Liability Insurance
          Workers
    Compensation
   14




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Employee
    Benefit Insurance
    Tort
    Law Environment
             15




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Environmental
    Matters
    and/or and/or and/or
  Customers
    Executive
    Officers of the Registrant
    Name

Age

PositionBoyd Hendrickson


64


Chairman of the Board, Chief Executive Officer and DirectorJose Lynch


39


President, Chief Operating Officer and DirectorDevasis Ghose


55


Executive Vice President, Treasurer and Chief Financial OfficerRoland Rapp


47


Executive Vice President, General Counsel and SecretaryMark Wortley


53


Executive Vice President and Chief Executive Officer of
    Ancillary CompaniesChristopher N. Felfe


44


Senior Vice President of Finance and Chief Accounting OfficerSusan Whittle


61


Senior Vice President and Chief Compliance Officer   Boyd Hendrickson, Chairman of the Board, Chief Executive
    Officer and Director.
  Jose Lynch, President, Chief Operating Officer and
    Director.
 16




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Devasis Ghose, Executive Vice President, Treasurer and Chief
    Financial Officer.
  Roland Rapp, Executive Vice President, General Counsel and
    Secretary.
  Mark Wortley, Executive Vice President and Chief Executive
    Officer of Ancillary Companies.
  Christopher N. Felfe, Senior Vice President, Finance and
    Chief Accounting Officer.
  Susan Whittle, Senior Vice President and Chief Compliance
    Officer. attorney-at-law.
 17




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Employees
    Available
    Information
  Form 10-K, Form 10-Q, Form 8-K, http://www.skilledhealthcaregroup.com 1-800-SEC-0330. Form 10-K.
  Company
    History
      Item 1A.
    Risk
    Factors  and/or
 18




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Reductions
    in Medicare reimbursement rates, including annual caps that
    limit the amounts that can be paid for outpatient therapy
    services rendered to any Medicare beneficiary, 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.   19




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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.
    (2006-2010).
      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.
   20




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Revenue
    we receive from Medicare and Medicaid is subject to potential
    retroactive reduction.
        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
 21




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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.      
    fraud and abuse;
    quality of care;
    financial relationships with referral sources; and
    the medical necessity of services provided.   22




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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 managed care 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 managed care 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.
      We
    could face significant financial difficulties as a result of one
    or more of the risks discussed above, which could cause us to
    seek protection under bankruptcy laws or could cause our
    creditors to have a receiver appointed on our
    behalf.
   23




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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.
    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
 24




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If we
    fail to attract patients and residents and 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
 25




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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.
   26




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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.
      Delays
    in reimbursement may cause liquidity problems.
       27




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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 or to establish internal financial
    controls; and
    straining of our resources, including internal controls relating
    to information and accounting systems, regulatory compliance,
    logistics and others.    Global
    economic conditions may impact our ability obtain additional
    financing on commercially reasonable terms or at all and our
    ability to expand our business may be harmed.
   28




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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.   29




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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.
  clean-up,
  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.
   30




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The
    efficient operation of our business is dependent on our
    information systems.
    Risks
    Related to Ownership of Our Class A Common Stock
  We are
    controlled by Onex Corporation, whose interests may conflict
    with yours.
      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;
    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; 31




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
    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 Onex, 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.
    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.
   32




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We are
    a controlled company within the meaning of NYSE
    rules and, as a result, qualify for and rely on exemptions from
    certain corporate governance requirements.
    
    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 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 is authorized, without prior stockholder
    approval, to create and issue preferred stock, commonly referred
    to as blank check preferred stock, with rights
    senior to those of our class A common stock and
    class B common stock; 33




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
    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;
    provided, that prior to the date that the total number of
    outstanding shares of our class B common stock is less than
    10% of the total number of shares of common stock outstanding,
    which we refer to as the Transition Date, no such requirement is
    required for holders of at least 10% of our outstanding
    class B common stock;
    our board of directors is classified so not all of the members
    of our board of directors 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;
    following the Transition Date, stockholder action by written
    consent will be prohibited;
    special meetings of the stockholders are permitted to be called
    only by the chairman of our board of directors, our chief
    executive officer or by a majority of our board of directors;
    stockholders are not permitted to cumulate their votes for the
    election of directors;
    newly created directorships resulting from an increase in the
    authorized number of directors or vacancies on our board of
    directors will be filled only by majority vote of the remaining
    directors;
    our board of directors is expressly authorized to make, alter or
    repeal our bylaws; and
    stockholders are permitted to amend our bylaws only upon
    receiving 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.    Item 1B.
    Unresolved
    Staff Comments   34




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Item 2.
    Properties      Owned Facilities


Leased Facilities


Total FacilitiesLicensed





Licensed





LicensedNumber


Beds


Number


Beds


Number


BedsCalifornia


15



1,572



16



1,996



31



3,568Texas


21



3,173











21



3,173Kansas


25



1,359











25



1,359Nevada










2



290



2



290Missouri


7



1,017











7



1,017New Mexico


2



208



8



972



10



1,180Total


70



7,329



26



3,258



96



10,587Skilled nursing


51



6,381



24



2,992



75



9,373Assisted living


19



948



2



266



21



1,214     Item 3.
    Legal
    Proceedings     35




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Item 4.
    Submission
    of Matters to a Vote of Security Holders    PART II
  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    Year Ended December 31, 2008

High ($)


Low ($)First quarter


15.49



9.83Second quarter


14.39



10.47Third quarter


17.17



13.02Fourth quarter


15.75



7.83   Year Ended December 31, 2007

High ($)


Low ($)Second quarter (May 15 to June 30)


16.57



14.75Third quarter


16.30



13.02Fourth quarter


16.81



14.14     Dividend
    Payment
    Purchases
    of Equity Securities by the Issuer and Affiliated
    Purchasers
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
       36




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Item 6.
    Selected
    Financial Data    SELECTED
    CONSOLIDATED FINANCIAL DATA
  Years Ended December 31,2008


2007


2006


2005


2004Successor


Successor


Successor


Predecessor


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

$
733,330


$
634,607


$
531,657


$
462,847


$
371,284Expenses


642,221



551,922



458,732



410,818



323,023Total other income (expenses), net


(33,848
)


(52,584
)


(43,384
)


(44,251
)


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


57,261



30,101



29,541



7,778



18,153Provision for (benefit from) income taxes


20,052



12,952



12,204



(13,048
)


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


37,209



17,149



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


37,209



17,149



17,337



33,938



16,521Accretion on preferred stock






(7,354
)


(18,406
)


(744
)


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

$
37,209


$
9,795


$
(1,069
)

$
33,194


$
16,052Earnings Per Share Data:Earnings per common share, basic

$
1.02


$
0.36


$
(0.09
)

$
27.01


$
13.45Earnings per common share, diluted

$
1.01


$
0.35


$
(0.09
)

$
25.73


$
12.47Weighted average common shares outstanding, basic


36,573



27,062



11,638



1,229



1,194Weighted average common shares outstanding, diluted


36,894



27,715



11,638



1,290



1,287Other Financial DataCapital expenditures (excluding acquisitions)

$
49,626


$
29,398


$
22,267


$
11,183


$
8,212Net cash provided by operating activities


63,013



31,723



32,150



15,004



48,358Net cash used in investing activities


(68,377
)


(121,548
)


(72,111
)


(223,785
)


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


2,399



92,016



5,644



241,253



(1,132
)EBITDA(1)


114,820



90,311



88,536



57,561



51,120EBITDA margin(1)


15.7
%


14.2
%


16.7
%


12.4
%


13.8
%Adjusted EBITDA(1)


114,882



101,999



88,733


$
77,778


$
58,559Adjusted EBITDA margin(1)


15.7
%


16.1
%


16.7
%


16.8
%


15.8
%   37




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##### Table of Contents



As of December 31,2008


2007


2006


2005


2004Successor


Successor


Successor


Predecessor


Predecessor(In thousands)Balance Sheet DataCash and cash equivalents

$
2,047


$
5,012


$
2,821


$
37,138


$
4,666Working capital


54,560



55,122



19,628



59,130



15,036Property and equipment, net


346,466



294,281



230,904



191,151



192,397Total assets


1,013,842



970,107



838,695



797,082



308,860Long-term debt (including current portion and the revolving
    credit facility)


470,261



458,436



469,055



463,309



280,885Total stockholders equity (deficit)


412,103



374,469



240,648



222,927



(50,475
)   Notes
  (1)
    
    We define EBITDA as net income before depreciation, amortization
    and interest expense (net of interest income) 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;
    debt retirement costs;
    reorganization expenses; and
    fees and expenses related to the Transactions.      facility-by-facility
 38




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##### Table of Contents




    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 earnings of charges resulting
    from certain matters we consider not to be indicative of our
    ongoing operations; and
    other companies in our industry may calculate these measures
    differently than we do, which may limit their usefulness as
    comparative measures. 39




---



##### Table of Contents



Year Ended December 31,2008


2007


2006


2005


2004Successor


Successor


Successor


Predecessor


Predecessor(In thousands)Net income

$
37,209


$
17,149


$
17,337


$
33,938


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


20,052



12,952



12,204



(13,048
)


4,421Depreciation and amortization


20,978



17,687



13,897



9,991



8,597Interest expense, net of interest income


36,581



42,523



45,098



26,680



21,581EBITDA


114,820



90,311



88,536



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)






40



197



165



926(Gain) loss on sale of assets(d)


62











(980
)


Premium on redemption of debt and write-off of deferred
    financing costs of extinguished debt(e)






11,648







16,626



7,858Reorganization expenses(f)














1,007



1,444Expenses related to the Transactions(g)














16,511



Adjusted EBITDA

$
114,882


$
101,999


$
88,733


$
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 No. 150
    Accounting for Certain Instruments with Characteristics of
    Liabilities and Equity,or SFAS 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)
    
    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. These write-offs
    reflect (1) deferred financing costs that have been
    expensed in connection with the prepayment of previously
    outstanding debt and deferred 40




---



##### Table of Contents



financing costs that were expensed upon prepayment of our second
    lien senior secured term loan in connection with the
    Transactions; and (2) a $7.7 million redemption
    premium on $70.0 million of our 11.0% senior
    subordinated noted that we redeemed in June 2007, before their
    scheduled maturities in 2014.(f)
    
    Represents expenses incurred in connection with our
    Chapter 11 reorganization.(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 cash bonus agreements between us and
    our former Chief Financial Officer, John King, and our Executive
    Vice President and Chief Executive Officer of Ancillary
    Companies, 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.  Item 7.
    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, which 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.
    Factors that may cause differences between actual results and
    those contemplated by forward-looking statements include, but
    are not limited to, those discussed in Item 1A, Risk
    Factors, herein. This Managements Discussion and
    Analysis of Financial Condition and Results of Operations should
    be read in conjunction with Selected Financial Data
    in Item 6 of this report and our consolidated financial
    statements and related notes included in this report.
  Certain prior year amounts have been reclassified to conform
    to current year presentation.
  Business
    Overview
     41




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##### Table of Contents



Acquisitions
            34-unit
      Key
    Financial Performance Indicators
    
    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.
    Average daily rates  revenue per patient per day for
    Medicare or managed care, Medicaid and private pay and other,
    calculated as total revenue 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.
    EBITDA  net income 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 1 under Item 6 of
    this report, Selected Financial Data, for an
    explanation of the adjustments 42




---



##### Table of Contents



and a description of our uses of, and the limitations associated
    with the use of, EBITDA and Adjusted EBITDA.  
    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.
    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 significant level of ownership
    of the facilities we operate.
    Quality mix  the amount of non-Medicaid revenue from
    each of our business units as a percentage of total revenue. In
    most states, Medicaid rates are generally the lowest of all
    payor types.
    Skilled mix  the number of Medicare and 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.    Year Ended December 31,2008


2007


2006Revenue from:Medicare


36.5
%


36.8
%


36.0
%Managed care, private pay, and other


32.1



32.2



32.0Quality mix


68.6



69.0



68.0Medicaid


31.4



31.0



32.0Total


100.0
%


100.0
%


100.0
%Occupancy statistics (skilled nursing facilities):Available patient days


3,302,889



2,973,011



2,637,154Actual patient days


2,791,937



2,523,954



2,270,552Occupancy percentage


84.5
%


84.9
%


86.1
%Skilled mix


24.2
%


24.1
%


23.5
%Average daily number of patients


7,628



6,915



6,221EBITDA(1) (in thousands)

$
114,820


$
90,311


$
88,536Adjusted EBITDA(1) (in thousands)

$
114,882


$
101,999


$
88,733Revenue per patient day (skilled nursing facilities prior to
    intercompany eliminations)Medicare

$
525


$
495


$
459Managed care


359



354



348Medicaid


139



131



124Private pay and other


157



151



144Weighted average

$
224


$
214


$
200   43




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##### Table of Contents



As of December 31,2008


2007


2006Facilities:Skilled nursing facilities:Owned


51



49



43Leased


24



25



18Total skilled nursing facilities


75



74



61Total licensed beds


9,373



9,183



7,648Assisted living facilities:Owned


19



11



10Leased


2



2



2Total assisted living facilities


21



13



12Total licensed beds


1,214



955



794Total facilities


96



87



73Available beds in service


10,195



9,007



7,467Percentage of owned facilities


72.9
%


69.0
%


72.6
%     (1)
    
    EBITDA and Adjusted EBITDA are supplemental measures of our
    performance that are not required by, or presented in accordance
    with U.S. generally accepted accounting principles, or GAAP. We
    define EBITDA as net income before depreciation, amortization
    and interest expenses (net of interest income) and the provision
    for income taxes. See reconciliation of net income to EBITDA and
    Adjusted EBITDA and a discussion of its uses and limitations in
    footnote 1 in Item 6 of this report, Selected
    Financial Data.  Revenue
  Revenue
    by Service Offering
    2008


2007


2006Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueLong-term care services segment:Skilled nursing facilities

$
622.9



85.0
%

$
538.3



84.8
%

$
454.8



85.6
%Assisted living facilities


20.6



2.8



17.3



2.7



15.5



2.9Total long-term care segment


643.5



87.8



555.6



87.5



470.3



88.5Ancillary services segment:Third-party rehabilitation therapy services


69.9



9.5



69.0



10.9



56.7



10.6Hospice


19.9



2.7



10.0



1.6



4.7



0.9Total ancillary services segment


89.8



12.2



79.0



12.5



61.4



11.5Total

$
733.3



100.0
%

$
634.6



100.0
%

$
531.7



100.0
%  44




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##### Table of Contents



Sources
    of Revenue
    Year Ended December 31,2008


2007


2006Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueCalifornia

$
327,088



44.6
%

$
309,064



48.7
%

$
279,612



52.6
%Kansas


51,331



7.0



39,195



6.2



34,556



6.5Missouri


55,878



7.6



51,357



8.1



20,236



3.8Nevada


30,605



4.2



25,474



4.0



17,151



3.2New Mexico


82,254



11.2



24,505



3.9







Texas


185,914



25.4



184,435



29.1



179,814



33.8Other


260



0.0



577



0.0



288



0.1Total

$
733,330



100.0
%

$
634,607



100.0
%

$
531,657



100.0
%   Long-
    Term Care Services Segment
  Skilled Nursing Facilities.
    Percentage Skilled Nursing Patient Days Year EndedDecember 31,2008


2007


2006Medicare


17.2
%


18.1
%


18.0
%Managed care


7.0



6.0



5.5Skilled mix


24.2



24.1



23.5Private pay and other


17.9



17.0



16.6Medicaid


57.9



58.9



59.9Total


100.0
%


100.0
%


100.0
%  45




---



##### Table of Contents



Year Ended December 31,2008


2007


2006Medicare


36.5
%


36.8
%


36.0
%Managed care


9.5



8.5



8.1Private pay and other


22.6



23.7



23.9Quality mix


68.6



69.0



68.0Medicaid


31.4



31.0



32.0Total


100.0
%


100.0
%


100.0
%   Assisted Living Facilities.
  Ancillary
    Services Segment
  Rehabilitation Therapy.
  Hospice.
  Regulatory
    and other Governmental Actions Affecting Revenue
    2008


2007


2006Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueMedicare

$
267.2



36.5
%

$
233.6



36.8
%

$
191.2



36.0
%Medicaid


230.5



31.4



197.0



31.0



170.2



32.0Subtotal Medicare and Medicaid


497.7



67.9



430.6



67.8



361.4



68.0Managed Care


69.7



9.5



53.6



8.5



43.3



8.1Private pay and Other


165.9



22.6



150.4



23.7



127.0



23.9Total

$
733.3



100.0
%

$
634.6



100.0
%

$
531.7



100.0
%      46




---



##### Table of Contents



Primary
    Expense Components
  Cost
    of Services
      General
    and Administrative
    Performance Based Incentive Compensation
    Plan.
  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 Revenue
    Dividend
    Accretion on Convertible Preferred Stock
    Critical
    Accounting Policies and Estimates
   47




---



##### Table of Contents



Revenue
    recognition
    Allowance
    for doubtful accounts
    Patient
    liability risks
   48




---



##### Table of Contents



Impairment
    of long-lived assets
      Goodwill
    and Intangible Assets
    Goodwill
    as of December 31, 2008
    start-up
  Goodwill
    Impairment Testing
   49




---



##### Table of Contents



Determination
    of Reporting Units
  Goodwill and Other
    Intangible Assets
  
    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 California and New Mexico.  Income
    Taxes
  Accounting for
    Uncertainty in Income Taxes  an Interpretation of
    FASB Statement No. 109 Accounting for Income Taxes Business Combinations
      Accounting for Income
    Taxes
   50




---



##### Table of Contents



Share-Based
    Payments
  Accounting for Stock-Based
    Compensation
     51




---



##### Table of Contents



Accounting
    for Conditional Asset Retirement Obligations
  Accounting for Conditional Asset
    Retirement Obligations
      Operating
    Leases
  Accounting for Leases Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent Increase.
  Recent
    Accounting Standards
  In December 2007, the FASB issued
    SFAS 141R.
  Noncontrolling Interests in Consolidated Financial Statement
    an amendment of ARB No. 51
 52




---



##### Table of Contents



Fair Value Measurements No. 157-2, FSP 157-2, Effective Date of FASB Statement No. 157
  
    Level 1  Quoted prices in active markets for
    identical assets or liabilities.
    Level 2  Inputs other than Level 1 that are
    observable, either directly or indirectly, such as quoted prices
    for similar assets or liabilities; quoted prices in markets that
    are not active; or other inputs that are observable or can be
    corroborated by observable market data for substantially the
    full term of the assets or liabilities.
    Level 3  Unobservable inputs that are supported
    by little or no market activity and that are significant to the
    fair value of the assets or liabilities.    The Fair Value Option for Financial
    Assets and Financial Liabilities contract-by-contract
  Disclosures about Derivative Instruments and Hedging
    Activities an Amendment of FASB Statement
    No. 133
 53




---



##### Table of Contents



No. 142-3, FSP 142-3 ,
    Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible
    Assets FSP 142-3 FSP 142-3 FSP 142-3 FSP 142-3
  Results
    of Operations
    Year Ended December 31,2008


2007


2006Revenue


100
%


100
%


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


78.9



79.0



78.2Rent cost of revenue


2.5



2.0



1.8General and administrative


3.3



3.2



3.6Depreciation and amortization


2.9



2.8



2.687.6



87.0



86.2Other income (expenses):Interest expense


(5.1
)


(7.0
)


(8.8
)Interest income


0.1



0.2



0.2Equity in earnings of joint venture


0.3



0.3



0.4Change in fair value of interest rate hedge










Premium on redemption of bond and write-off of deferred
    financing costs






(1.8
)


Other income (expense)










Total other income (expenses), net


(4.7
)


(8.3
)


(8.2
)Income before provision for income taxes


7.7



4.7



5.6Provision for income tax


2.7



2.0



2.3Net income


5.0
%


2.7
%


3.3
%EBITDA margin(1)


15.7
%


14.2
%


16.7
%Adjusted EBITDA margin(1)


15.7
%


16.1
%


16.7
%     (1)
    
    See footnote 1 to Item 6 of this report, Selected
    Financial Data for a calculation of EBITDA and Adjusted
    EBITDA and for a description of our uses of, and the limitations
    associated with the use of, EBITDA and Adjusted EBITDA. 54




---



##### Table of Contents



Year
    Ended December 31, 2008 Compared to Year Ended
    December 31, 2007
  Revenue.
      Cost of Services Expenses.
         55




---



##### Table of Contents



Rent cost of revenue.
  General and Administrative Services
    Expenses.
  Depreciation and Amortization. tm
  Interest Expense.
  Interest Income.
  Premium on Redemption of Debt and Write-off of Related
    Deferred Financing Costs.
  Provision for Income Taxes.
  EBITDA.
 56




---



##### Table of Contents



Net Income.
  Year
    Ended December 31, 2007 Compared to Year Ended
    December 31, 2006
  Revenue.
  tm
    Cost of Services Expenses.
       57




---



##### Table of Contents



Rent cost of revenue.
  General and Administrative Services
    Expenses.
  Depreciation and Amortization. tm
  Interest Expense.
  Interest Income.
  Premium on Redemption of Debt and Write-off of Related
    Deferred Financing Costs.
  Provision for Income Taxes.
 58




---



##### Table of Contents



EBITDA.
  Net Income.
  Quarterly
    Data
    Three Months EndedDecember 31,


September 30,


June 30,


March 31,


December 31,


September 30,


June 30,


March 31,2008


2008


2008


2008


2007


2007


2007


2007(In thousands, except per share data)Consolidated Statement of Operations DataRevenue

$
189,781


$
182,474


$
180,348


$
180,727


$
177,393


$
161,468


$
151,091


$
144,655Expenses:Cost of sales (exclusive of rent cost of revenue and
    depreciation and amortization shown below)


148,336



145,749



142,252



142,144



139,767



127,761



119,522



113,949Rent cost of revenue


4,534



4,771



4,478



4,465



4,398



3,235



2,527



2,694General and administrative


6,743



5,992



5,557



6,222



6,173



5,073



4,375



4,761Depreciation and amortization


5,444



5,301



5,073



5,160



5,067



4,420



4,239



3,961165,057



161,813



157,360



157,991



155,405



140,489



130,663



125,365Other income (expenses):Interest expense


(9,239
)


(9,207
)


(9,162
)


(9,653
)


(10,178
)


(9,914
)


(11,926
)


(12,092
)Premium on redemption of debt and write-off of related deferred
    financing costs


























(11,648
)


Interest income


174



169



123



214



289



384



587



327Other income (expense)


47



(110
)


87



222



86



(159
)


97



Change in fair value of interest rate hedge


















(1
)


(6
)






(33
)Equity in earnings of joint venture


754



624



718



391



329



381



353



540Total other income (expenses), net


(8,264
)


(8,524
)


(8,234
)


(8,826
)


(9,475
)


(9,314
)


(22,537
)


(11,258
)Income (loss) before provision for (benefit from) income taxes


16,460



12,137



14,754



13,910



12,513



11,665



(2,109
)


8,032Provision for (benefit from) income taxes


6,195



2,561



5,830



5,466



5,329



4,801



(556
)


3,378Net income (loss)


10,265



9,576



8,924



8,444



7,184



6,864



(1,553
)


4,654Accretion on preferred stock


























(2,582
)


(4,772
)Net (loss) income attributable to common stockholders

$
10,265


$
9,576


$
8,924


$
8,444


$
7,184


$
6,864


$
(4,135
)

$
(118
)Earnings per share data:Earnings per common share, basic

$
0.28


$
0.26


$
0.24


$
0.23


$
0.20


$
0.19


$
(0.18
)

$
(0.01
)Earnings per common share, diluted

$
0.28


$
0.26


$
0.24


$
0.23


$
0.19


$
0.19


$
(0.18
)

$
(0.01
)Weighted-average common shares outstanding, basic


36,606



36,578



36,558



36,551



36,249



36,236



23,437



11,959Weighted-average common shares outstanding, diluted


36,893



36,909



36,871



36,881



36,886



36,917



23,437



11,959  59




---



##### Table of Contents



Liquidity
    and Capital Resources
    Years Ended December 31,2008


2007


2006(In thousands)Net cash provided by operating activities

$
63,013


$
31,723


$
32,150Net cash used in investing activities


(68,377
)


(121,548
)


(72,111
)Net cash provided by financing activities


2,399



92,016



5,644Net (decrease) increase in cash and equivalents


(2,965
)


2,191



(34,317
)Cash and equivalents at beginning of period


5,012



2,821



37,138Cash and equivalents at end of period

$
2,047


$
5,012


$
2,821   Years
    Ended December 31, 2008 and 2007
    34-unit Express
    Recovery tm
    Years
    Ended December 31, 2007 and 2006
     60




---



##### Table of Contents




    $12.2 million was due to a decrease in cash provided by the
    change in other current and non-current assets, primarily
    prepaids, to a $0.1 million provision of cash in 2007 from
    a $12.3 million provision of cash in 2006, primarily in
    prepaids and income taxes receivable, due to the offset of a
    $9.4 million income tax receivable from 2005 against tax
    payments in 2006.
    a $5.2 million decrease in cash provided by the change in
    insurance liability risks to a $3.7 million use of cash in
    2007 from a $1.5 million provision of cash in 2006.
    a $8.2 million decrease in cash provided by the change in
    accounts payable and accrued liabilities to a $5.8 provision of
    cash in 2007 from a $14.0 provision of cash in 2006, primarily
    due to the release of tax amounts accrued related to the
    transactions.  Express
    Recovery tm
    Principal
    Debt Obligations
       61




---



##### Table of Contents



Term Loan
    and Revolving Loan
  and/or
  Senior
    Subordinated Notes
         62




---



##### Table of Contents



12-month
  Capital
    Expenditures
  tm tm tm
        Liquidity
       63




---



##### Table of Contents



Other
    Factors Affecting Liquidity and Capital Resources
  Medical and Professional Malpractice and Workers
    Compensation Insurance.
    Inflation.
    Seasonality.
  Global Market and Economic Conditions.
 64




---



##### Table of Contents



Off
    Balance Sheet Arrangements
    Contractual
    Obligations
    Less Than








More ThanTotal


1 Yr.


1-3 Yrs.


3-5 Yrs.


5 Yrs.Long-term debt obligations Senior subordinated notes

$
202,096


$
14,300


$
28,600


$
28,600



130,596First lien credit agreement(1)


367,168



12,379



106,708



248,081



Capital lease obligations


2,321



170



2,151







Other long-term debt obligations


7,437



5,435



445



445



1,112Purchase commitments


823



823











Operating lease obligations(2)


135,697



17,425



32,029



26,998



59,245$
715,542


$
50,532


$
169,933


$
304,124


$
190,953       (1)
    
    Based on implied forward three-month LIBOR rates in the yield
    curve as of December 31, 2008.(2)
    
    We lease some of our facilities under noncancelable 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.  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk   65




---



##### Table of Contents



Interest
    Rate Exposure  Interest Rate Risk
    Management
      Fair2009


2010


2011


2012


2013


Thereafter


Total


ValueFixed-rate debt(1)

$
5,185


$
133


$
142


$
150


$
160


$
130,958


$
136,728


$
114,628Average interest rate


4.6
%


6.0
%


6.0
%


6.0
%


6.0
%


11.0
%Variable-rate debt

$
2,600


$
83,600


$
2,600


$
243,100


$



$



$
331,900


$
256,630Average interest rate(2)


2.8
%


4.3
%


4.2
%


4.5
%






     (1)
    
    Excludes unamortized original issue discount of
    $0.5 million on our 11% senior subordinated notes.(2)
    
    Based on implied forward three-month LIBOR rates in the yield
    curve as of December 31, 2008.    Year EndedNotional


Trade


Effective





December 31,


Fair ValueLoan

Amount


Date


Date


Maturity


2008


(Pre-tax)First Lien

$
100,000



10/24/07



10/31/07



12/31/09


($
1,089
)

$
(3,007
)   Accounting for Derivative
    Instruments and Hedging Activities,
  Item 8.
    Financial
    Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure   66




---



##### Table of Contents



Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Changes
    in Internal Control Over Financial Reporting
    Managements
    Report on Internal Control over Financial Reporting
  Rule 13a-15(f)
    Internal
    Control  Integrated Framework.
   67




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                 
    68




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance        Code of
    Ethics
    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   69




---



##### 



PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Consolidated Financial Statements and
    Supplementary Data:
     
 PageNumberReport of Independent Registered Public
    Accounting Firm


F-1Consolidated Balance Sheets at December 31,
    2008 and 2007


F-2Consolidated Statements of Operations for Each of
    the Years in the Three Year Period Ended December 31,
    2008


F-3Consolidated Statements of Stockholders
    Equity for Each of the Years in the Three Year Period Ended
    December 31, 2008


F-4Consolidated Statements of Cash Flows for Each of
    the Years in the Three Year Period Ended December 31,
    2008


F-5Notes to Consolidated Financial Statements


F-6   Financial Statement Schedule:
  PageNumberSchedule II  Valuation
    Accounts


S-1     70




---



##### Table of Contents



Exhibits:
  INDEX OF
    EXHIBITS
  Number

Description2
.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. (filed as Exhibit 2.1 to our
    Registration Statement on Form S-1, No. 333-137897, filed on
    October 10, 2006, and incorporated herein by reference).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. (filed as Exhibit 2.2 to our Registration
    Statement on Form S-1, No. 333-137897, filed on October 10,
    2006, and incorporated herein by reference).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 June 26, 2003, and M. Sue Reardon and
    M. Terence Reardon, as Trustees of the M. Sue Reardon Trust
    U.T.A. dated June 26, 2003 (filed as Exhibit 2.3 to our
    Registration Statement on Form S-1, No. 333-137897, filed on
    October 10, 2006, and incorporated herein by reference).2
.4

Agreement and Plan of Merger, dated as of February 7, 2007, by
    and among SHG Holding Solutions, Inc., and Skilled Healthcare
    Group, Inc. (filed as Exhibit 2.4 to our Registration Statement
    on Form S-1/A, No. 333-137897, filed on February 9, 2007,
    and incorporated herein by reference).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. (filed as Exhibit 2.5 to our Registration
    Statement on Form S-1/A, No. 333-137897, filed on April 23,
    2007, and incorporated herein by reference).2
.6

Asset Purchase Agreement, dated as of July 31, 2007, by and
    among Skilled Healthcare Group, Inc. and certain affiliates of
    Laurel Healthcare Providers, LLC (filed as Exhibit 2.6 to our
    Form 10-Q for the quarter ended June 30, 2007, and incorporated
    herein by reference ).3
.1

Amended and Restated Certificate of Incorporation of Skilled
    Healthcare Group, Inc. (filed as Exhibit 3.2 to our Form 10-Q
    for the quarter ended June 30, 2007, and incorporated herein by
    reference).3
.2

Amended and Restated By-Laws of Skilled Healthcare Group, Inc.
    (filed as Exhibit 3.4 to our Registration Statement on Form
    S-1/A, No. 333-137897, filed on April 27, 2007, and incorporated
    herein by reference).3
.3

Certificate of Ownership and Merger of Skilled Healthcare Group,
    Inc., dated February 7, 2007 (filed as Exhibit 3.1.1 to our
    Registration Statement on Form S-1/A, No. 333-137897, filed on
    April 27, 2007, and incorporated herein by reference).4
.1

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. (filed as Exhibit
    4.2 to our Registration Statement on Form S-1, No. 333-137897,
    filed on October 10, 2006, and incorporated herein by reference).4
.2

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. (filed as
    Exhibit 4.3 to our Registration Statement on Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by reference).4
.3

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 (filed as
    Exhibit 4.4 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006, and incorporated herein
    by reference).4
.4

Employment Agreement dated December 27, 2005, among SHG Holding
    Solutions, Inc. and the persons listed thereon (filed as Exhibit
    4.5 to our Registration Statement on Form S-1, No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference). 71




---



##### Table of Contents



Number

Description4
.5

Form of specimen certificate for Skilled Healthcare Group,
    Inc.s class A common stock (filed as Exhibit 4.1 to
    our Registration Statement on Form S-1/A, No. 333-137897, filed
    on April 27, 2007, and incorporated herein by reference).4
.6

Form of 11% Senior Subordinated Notes due 2014 (included in
    Exhibit 4.1).10
.1*

Skilled Healthcare Group, Inc. Restricted Stock Plan (filed as
    Exhibit 10.1 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.2*

Form of Restricted Stock Agreement (filed as Exhibit 10.2 to our
    Registration Statement on Form S-1, No. 333-137897, filed
    on October 10, 2006 and incorporated herein by reference).10
.3

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 (filed as
    Exhibit 10.4 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.4*

Employment Agreement, dated April 30, 2005, by and between
    Skilled Healthcare Group, Inc. and Boyd Hendrickson (filed as
    Exhibit 10.5 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.5*

Employment Agreement, dated December 27, 2005, by and between
    Skilled Healthcare Group, Inc. and Jose Lynch (filed as Exhibit
    10.6 to our Registration Statement on Form S-1, No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).10
.7*

Employment Agreement, dated December 27, 2005, by and between
    Skilled Healthcare Group, Inc. and Roland G. Rapp (filed as
    Exhibit 10.8 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.8*

Employment Agreement, dated December 27, 2005, by and between
    Skilled Healthcare Group, Inc. and Mark Wortley (filed as
    Exhibit 10.9 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.10*

Trigger Event Cash Bonus Agreement, dated April 30, 2005, by and
    between Skilled Healthcare Group, Inc. and Mark Wortley (filed
    as Exhibit 10.11 to our Registration Statement on Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).10
.11

Lease, dated as of August 26, 2002, by and between CT Foothill
    10/241, LLC, and Fountain View, Inc., and amendments thereto
    (filed as Exhibit 10.13 to our Registration Statement on Form
    S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).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
    (filed as Exhibit 10.12 to our Registration Statement on Form
    S-1/A, No. 333-137897, filed on April 23, 2007 and
    incorporated herein by reference).10
.13*

Employment Agreement, dated as of August 14, 2007, by and
    between Skilled Healthcare LLC and Christopher N. Felfe (filed
    as Exhibit 10.1 to our Form 10-Q for the quarter ended September
    30, 2007, and incorporated herein by reference).10
.14*

Side Letter, dated as of August 14, 2007, by and between Skilled
    Healthcare, LLC and Christopher N. Felfe (filed as Exhibit
    10.2 to our Form 10-Q for the quarter ended September 30, 2007,
    and incorporated herein by reference).10
.16*

Form of Indemnification Agreement with Skilled Healthcare
    Groups directors, executive officers, and certain
    employees (filed as Exhibit 10.10 to our Registration Statement
    on Form S-1/A, No. 333-137897, filed on April 27, 2007, and
    incorporated herein by reference).(1)10
.17

Instrument of Joinder, dated as of May 11, 2007, by and among
    Skilled Healthcare Group, Inc., Bank of America, N.A., UBS Loan
    Finance LLC and Credit Suisse, Cayman Islands Branch (filed as
    Exhibit 10.3 to our Form 10-Q for the quarter ended June 30,
    2007, and incorporated herein by reference).10
.18*

Employment Agreement, dated as of November 30, 2007, by and
    between Skilled Healthcare LLC and Devasis Ghose (filed as
    Exhibit 10.1 to our Form 8-K dated November 30, 2007, and
    incorporated herein by reference). 72




---



##### Table of Contents



Number

Description10
.19*

Amended and Restated Skilled Healthcare Group, Inc. 2007
    Incentive Award Plan (filed as Appendix A to the Companys
    Definitive Proxy Statement filed on April 7, 2008, and
    incorporated herein by reference).21


Subsidiaries of the Registrant23
.1

Consent of Independent Registered Public Accounting Firm.31
.1

Certification of Principal Executive Officer pursuant to Section
    302 of the Sarbanes-Oxley Act of 2002.31
.2

Certification of Principal Financial Officer pursuant to Section
    302 of the Sarbanes-Oxley Act of 2002.32


Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.     *
    
    Management contract or compensatory plan or arrangement.(1)
    
    Skilled Healthcare Group, Inc. has entered into an
    indemnification agreement with the following individuals: Boyd
    Hendrickson, Chairman of the Board, Chief Executive Officer and
    Director; Jose Lynch, President, Chief Operating Officer and
    Director; Devasis Ghose, Executive Vice President, Treasurer and
    Chief Financial Officer; Roland Rapp, General Counsel, Secretary
    and Chief Administrative Officer; Mark Wortley, Executive Vice
    President and Chief Executive Officer of Ancillary Companies;
    Christopher N. Felfe, Senior Vice President, Finance and Chief
    Accounting Officer; Susan Whittle, Senior Vice President and
    Chief Compliance Officer; Robert M. Le Blanc, Lead Director;
    Michael E. Boxer, Director; John M. Miller, Director; M. Bernard
    Puckett, Director; Glenn S. Schafer, Director; William C. Scott,
    Director; Michael D. Stephens, Director; Kelly Atkins, Senior
    Vice President of Operations, Pacific Division; Brad Gibson,
    Senior Vice President of Operations, Finance; Matt Moore, Senior
    Vice President of Operations, Midwest Division; Aisha Salaam,
    Senior Vice President of Professional Services.  Exhibits
   73




---



##### Table of Contents



SIGNATURES      By
    /s/  
    Boyd Hendrickson          Date: February 25, 2009

By

/s/  Boyd
    HendricksonBoyd HendricksonChairman of the Board, 
    Chief Executive Officer and DirectorDate: February 25, 2009

By

/s/  Jose
    LynchJose LynchPresident, Chief Operating Officer and DirectorDate: February 25, 2009

By

/s/  Devasis
    GhoseDevasis GhoseExecutive Vice President, Treasurer andChief Financial
    Officer(Principal Financial Officer)Date: February 25, 2009

By

/s/  Christopher
    N.
    FelfeChristopher N. FelfeSenior Vice President of Finance
    and Chief Accounting Officer
    (Principal Accounting Officer)Date: February 25, 2009

By

/s/  Robert
    M. Le
    BlancRobert M. Le BlancLead Director 74




---



##### Table of Contents



Date: February 25, 2009

By

/s/  Michael
    BoxerMichael BoxerDirectorDate: February 25, 2009

By

/s/  John
    M. Miller,
    VJohn M. Miller, VDirectorDate: February 25, 2009

By

/s/  M.
    Bernard
    PuckettM. Bernard PuckettDirectorDate: February 25, 2009

By

/s/  Glenn
    SchaferGlenn SchaferDirectorDate: February 25, 2009

By

/s/  William
    ScottWilliam ScottDirectorDate: February 25, 2009

By

/s/  Michael
    D.
    StephensMichael D. StephensDirector  75




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm             
    F-1




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Balance Sheets
  December 31,2008


2007(In thousands, exceptper share data)ASSETSCurrent assets:Cash and cash equivalents

$
2,047


$
5,012Accounts receivable, less allowance for doubtful accounts of
    $14,336 and $9,717 at December 31, 2008 and 2007,
    respectively


115,211



112,919Deferred income taxes


14,708



14,968Prepaid expenses


9,226



5,708Other current assets


7,483



11,697Total current assets


148,675



150,304Property and equipment, less accumulated depreciation of $40,118
    and $23,519 at December 31, 2008 and 2007, respectively


346,466



294,281Other assets:Notes receivable


4,448



5,102Deferred financing costs, net


10,184



11,869Goodwill


449,962



449,710Intangible assets, less accumulated amortization of $10,490 and
    $6,840 at December 31, 2008 and 2007, respectively


30,310



34,092Non-current income tax receivable






2,288Other assets


23,797



22,461Total other assets


518,701



525,522Total assets

$
1,013,842


$
970,107LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities

$
55,478


$
59,218Employee compensation and benefits


30,825



29,629Current portion of long-term debt and capital leases


7,812



6,335Total current liabilities


94,115



95,182Long-term liabilities:Insurance liability risks


30,654



24,248Deferred income tax


457



2,297Other long-term liabilities


14,064



21,810Long-term debt and capital leases, less current portion


462,449



452,101Total liabilities


601,739



595,638Stockholders equity:Class A common stock, 175,000 shares authorized,
    $0.001 par value per share; 20,189 and 19,261 shares
    issued and outstanding at December 31, 2008 and 2007,
    respectively


20



19Class B common stock, 30,000 shares authorized,
    $0.001 par value per share; 17,027 and 17,696 shares
    issued and outstanding at December 31, 2008 and 2007,
    respectively


17



18Additional
    paid-in-capital


366,565



365,051Retained earnings


47,343



10,134Accumulated other comprehensive loss


(1,842
)


(753
)Total stockholders equity


412,103



374,469Total liabilities and stockholders equity

$
1,013,842


$
970,107    F-2




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Statements of Operations
  Year Ended December 31,2008


2007


2006(In thousands, except per share data)Revenue

$
733,330


$
634,607


$
531,657Expenses:Cost of services (exclusive of rent cost of revenue and
    depreciation and amortization shown below)


578,481



500,999



415,407Rent cost of revenue


18,248



12,854



10,027General and administrative


24,514



20,382



19,401Depreciation and amortization


20,978



17,687



13,897642,221



551,922



458,732Other income (expenses):Interest expense


(37,261
)


(44,110
)


(46,286
)Premium on redemption of debt and write-off of related deferred
    financing costs






(11,648
)


Interest income


680



1,587



1,188Equity in earnings of joint venture


2,487



1,603



1,903Change in fair value of interest rate hedge






(40
)


(197
)Other income


246



24



8Total other income (expenses), net


(33,848
)


(52,584
)


(43,384
)Income before provision for income taxes


57,261



30,101



29,541Provision for income taxes


20,052



12,952



12,204Net income


37,209



17,149



17,337Accretion on preferred stock






(7,354
)


(18,406
)Net income (loss) attributable to common stockholders

$
37,209


$
9,795


$
(1,069
)Earnings per share data:Earnings per common share, basic

$
1.02


$
0.36


$
(0.09
)Earnings per common share, diluted

$
1.01


$
0.35


$
(0.09
)Weighted-average common shares outstanding, basic


36,573



27,062



11,638Weighted-average common shares outstanding, diluted


36,894



27,715



11,638    F-3




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Statements of Stockholders Equity
  Class A


Class B





Additional


Retained


OtherPreferred Stock


Common Stock


Common Stock


Common Stock


Deferred


Paid-In


(Deficit)


ComprehensiveShares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Comp


Capital


Earnings


Loss


Total(In thousands)Balance at December 31, 2005


22


$
246



12,553


$
13






$







$



$
(185
)

$
222,853


$



$



$
222,927Proceeds from issuance of stock










5



























100











100Net income










































17,337







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


































185



(185
)










Issuance of restricted stock










78







































Stock-based compensation






































284











284Accretion on preferred stock






18,406































(1,069
)


(17,337
)






Balance at December 31, 2006


22



18,652



12,636



13























221,983











240,648Net income










































17,149







17,149Conversion of preferred stock into class B common stock


(22
)


(26,006
)


















15,928



16







25,990











Conversion of common stock into class B common stock










(12,636
)


(13
)










12,636



13



















Issuance of class A common stock in IPO, net of related
    costs


















8,333



8















116,785











116,793Conversion of class B common stock into class A common
    stock


















10,850



11



(10,850
)


(11
)


















Issuance of restricted stock


















78































Forfeiture of restricted stock


























(18
)






















Stock-based compensation






































632











632Accretion on preferred stock






7,354































(339
)


(7,015
)






Unrealized loss on interest rate swap














































(753
)


(753
)Balance at December 31, 2007


















19,261



19



17,696



18







365,051



10,134



(753
)


374,469Net income










































37,209







37,209Conversion of class B common stock into class A common
    stock


















625



1



(625
)


(1
)


















Issuance of restricted stock


















309































Forfeiture of restricted stock


















(2
)






(44
)






















Stock-based compensation






































1,558











1,558Restricted stock traded to pay tax


















(4
)


















(67
)










(67
)Excess tax benefits from stock-based payment arrangements






































23











23Unrealized loss on interest rate swap














































(1,089
)


(1,089
)Balance at December 31, 2008





$







$




20,189


$
20



17,027


$
17


$



$
366,565


$
47,343


$
(1,842
)

$
412,103    F-4




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Statements of Cash Flows
  Year Ended December 31,2008


2007


2006(In thousands)Operating ActivitiesNet income

$
37,209


$
17,149


$
17,337Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation and amortization


20,978



17,687



13,897Provision for doubtful accounts


10,087



6,116



5,439Non-cash stock-based compensation


1,558



632



284Excess tax benefits from stock-based payment arrangements


(23
)






(Gain) loss on sale of assets


62







Amortization of deferred financing costs


3,068



2,640



2,640Premium on redemption of debt and write-off of deferred
    financing costs






11,648



Deferred income taxes


(659
)


349



(6,363
)Change in fair value of interest rate hedge






40



197Amortization of discount on senior subordinated notes


107



140



164Changes in operating assets and liabilities:Accounts receivable


(15,668
)


(35,304
)


(31,311
)Other current and non-current assets


2,109



52



12,267Accounts payable and accrued liabilities


923



5,843



14,019Employee compensation and benefits


355



6,453



3,588Non-current income tax receivable






(406
)


(1,882
)Insurance liability risks


(490
)


(3,722
)


1,547Other long-term liabilities


3,397



2,406



327Net cash provided by operating activities


63,013



31,723



32,150Investing activitiesChange in notes receivable


4,476



2,303



1,213Acquisition of healthcare facilities


(23,360
)


(88,447
)


(43,030
)Proceeds from disposal of property and equipment


133







Additions to property and equipment


(49,626
)


(29,398
)


(22,267
)Changes in other assets






1,324



(7,680
)Cash distributed related to the Onex Transaction






(7,330
)


(347
)Net cash used in investing activities


(68,377
)


(121,548
)


(72,111
)Financing activitiesBorrowings under line of credit


13,000



59,500



8,500Repayments on long-term debt and capital leases


(9,241
)


(74,265
)


(2,918
)Fees paid for early extinguishment of debt






(7,700
)


Additions to deferred financing costs of new debt


(1,383
)


(2,312
)


(38
)Excess tax benefits from stock-based payment arrangements


23







Proceeds from IPO, net of expenses






116,793



Proceeds from the issuance of new common stock










100Net cash provided by financing activities


2,399



92,016



5,644(Decrease) increase in cash and cash equivalents


(2,965
)


2,191



(34,317
)Cash and cash equivalents at beginning of year


5,012



2,821



37,138Cash and cash equivalents at end of year

$
2,047


$
5,012


$
2,821Supplemental cash flow informationCash paid for:Interest, net of capitalized interest

$
34,938


$
42,042


$
31,620Income taxes

$
20,909


$
13,229


$
2,655Non-cash activities:Conversion of accounts receivable into notes receivable

$
3,289


$
2,437


$
2,265Insurance premium financed

$
7,959


$
3,630



    F-5




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts In Thousands, Except Per Share Data)
  1.
    Description
    of Business  Current
    Business
    The
    Onex Transaction
  Business
    Combinations
    2.
    Summary
    of Significant Accounting Policies  Basis of
    Presentation
   F-6




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Estimates
    and Assumptions
    Reclassifications
    Revenue
    and Accounts Receivables
      2008


2007


2006Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueMedicare

$
267,180



36.5
%

$
233,660



36.8
%

$
191,263



36.0
%Medicaid


230,498



31.4



196,978



31.0



170,171



32.0Subtotal Medicare and Medicaid


497,678



67.9



430,638



67.8



361,434



68.0Managed care


69,723



9.5



53,589



8.5



43,267



8.1Private pay and other


165,929



22.6



150,380



23.7



126,956



23.9Total

$
733,330



100.0
%

$
634,607



100.0
%

$
531,657



100.0
%  F-7




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Year Ended December 31,2008


2007


2006Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueCalifornia

$
327,088



44.6
%

$
309,064



48.7
%

$
279,612



52.6
%Kansas


51,331



7.0



39,195



6.2



34,556



6.5Missouri


55,878



7.6



51,357



8.1



20,236



3.8Nevada


30,605



4.2



25,474



4.0



17,151



3.2New Mexico


82,254



11.2



24,505



3.9







Texas


185,914



25.4



184,435



29.1



179,814



33.8Other


260



0.0



577



0.0



288



0.1Total

$
733,330



100.0
%

$
634,607



100.0
%

$
531,657



100.0
%     2008


2007Accounts


AccountsReceivable


ReceivableMedicare

$
26,540


$
27,503Medicaid


31,213



32,072Subtotal Medicare and Medicaid


57,753



59,575Managed care


25,253



23,758Private pay and other


46,541



39,303Total accounts receivable


129,547



122,636Allowance for doubtful accounts


(14,336
)


(9,717
)Accounts receivable, net

$
115,211


$
112,919   Risks and
    Uncertainties
     F-8




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
      Concentration
    of Credit Risk
    Cash and
    Cash Equivalents
      Capitalized
    Interest
    Property
    and Equipment
   F-9




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts 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-owned facilities and
    unaffiliated facilities; and
    Hospice care, which was established in 2004 and provides
    hospice care in California and New Mexico.  start-up
  Goodwill
    Impairment Testing
   F-10




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Deferred
    Financing Costs
    Income
    Taxes
  Accounting for
    Income Taxes
  Accounting for Uncertainty in Income Taxes  an
    Interpretation of FASB Statement No. 109 Income Taxes
  Impairment
    of Long-Lived Assets
    Interest
    Rate Caps and Swaps
    Stock
    Options and Equity Related Charges
  Share-Based Payments,
 F-11




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts 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
     F-12




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Operating
    Leases
  Accounting for Leases, Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent
    Increases
  Earnings
    per Share
  Earnings per Share
   F-13




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    December 31, 2008


December 31, 2007Class A


Class B


Total


Class A


Class B


TotalEarnings per share, basicNumerator:Allocation of income attributable to common stockholders

$
19,744


$
17,465


$
37,209


$
4,315


$
5,480


$
9,795Denominator:Weighted-average common shares outstanding


19,407



17,166



36,573



11,922



15,140



27,062Earnings per common share, basic

$
1.02


$
1.02


$
1.02


$
0.36


$
0.36


$
0.36Earnings per share, dilutedNumerator:Allocation of income attributable to common stockholders

$
19,612


$
17,597


$
37,209


$
4,215


$
5,580


$
9,795Denominator:Weighted-average common shares outstanding


19,407



17,166



36,573



11,922



15,140



27,062Plus: incremental shares related to dilutive effect of stock
    options and restricted stock, if applicable


39



282



321



4



649



653Adjusted weighted-average common shares outstanding


19,446



17,448



36,894



11,926



15,789



27,715Earnings per common share, diluted

$
1.01


$
1.01


$
1.01


$
0.35


$
0.35


$
0.35     2006Earnings per share, basicNumerator:Net income, as reported

$
17,337Accretion on preferred stock


(18,406
)Net (loss) income attributable to common stockholders

$
(1,069
)Denominator:Weighted-average common shares outstanding


11,638Earnings per common share, basic

$
(0.09
)  F-14




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    2006Earnings per share, dilutedNumerator:Net (loss) income attributable to common stockholders

$
(1,069
)Denominator:Weighted average common shares outstanding


11,638Plus: incremental shares from assumed conversions, if applicable


Adjusted weighted-average common shares outstanding


11,638Earnings per common share, diluted

$
(0.09
)   Comprehensive
    Loss
      2008


2007


2006Net unrealized loss, net of tax effect of $1,165 in 2008, $477
    in 2007 and $0 in 2006

$
(1,089
)

$
(753
)

$
   Recent
    Accounting Pronouncements
    Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51
 F-15




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Fair Value Measurements No. 157-2, Effective Date of FASB Statement No. 157
  
    Level 1  Quoted prices in active markets for
    identical assets or liabilities.
    Level 2  Inputs other than Level 1 that are
    observable, either directly or indirectly, such as quoted prices
    for similar assets or liabilities; quoted prices in markets that
    are not active; or other inputs that are observable or can be
    corroborated by observable market data for substantially the
    full term of the assets or liabilities.
    Level 3  Unobservable inputs that are supported
    by little or no market activity and that are significant to the
    fair value of the assets or liabilities.    The Fair Value Option for Financial
    Assets and Financial Liabilities contract-by-contract
  Disclosures
    about Derivative Instruments and Hedging Activities 
    An Amendment of FASB Statement No. 133
 F-16




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    No. 142-3 (FSP 142-3) ,
    Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible
    Assets FSP 142-3 FSP 142-3 FSP 142-3 FSP 142-3
  3.
    Fair
    Value of Financial Instruments    Cash
    and Cash Equivalents
    Interest
    Rate Caps and Swap
        Level 1


Level 2


Level 3


TotalInterest rate swap

$



$
(3,007
)

$



$
(3,007
)   Long-Term
    Debt
   F-17




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    4.
    Intangible
    Assets    Life


AccumulatedCost


(in years)


Amortization


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

$
2,987



5.0


$
(2,221
)

$
766Managed care contracts


10,920



5.0



(5,614
)


5,306Leasehold interests


9,120



9.6



(2,655
)


6,465Total

$
23,027



6.8


$
(10,490
)


12,537Intangible assets not subject to amortization:Trade names














17,130Other long-lived intangibles














643Balance at December 31, 2008













$
30,310   Life


AccumulatedCost


(in years)


Amortization


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

$
2,987



5.0


$
(1,467
)

$
1,520Managed care contracts


10,920



5.0



(3,331
)


7,589Leasehold interests


9,062



9.6



(1,689
)


7,373Patient lists


530



0.5



(353
)


177Total

$
23,499



6.7


$
(6,840
)


16,659Intangible assets not subject to amortization:Trade names














17,130Other long-lived intangibles














303Balance at December 31, 2007













$
34,092   5.
    Acquisitions   F-18




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Purchase price and other costs related to the purchase





$
30,647Land and land improvements

$
1,360Buildings and leasehold improvements


22,415Furniture and equipment


545Other


90Total assets acquired






24,410Goodwill





$
6,237       Purchase price and other costs related to the purchase





$
53,234Land and land improvements

$
4,570Buildings and leasehold improvements


12,240Furniture and equipment


2,214Amortizable intangibles


3,880Other


236Total assets acquired






23,140Goodwill





$
30,094     34-unit
 F-19




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Purchase price and other costs related to the purchase





$
13,660Land and land improvements

$
1,060Buildings and leasehold improvements


9,960Furniture and equipment


480Other


62Total assets acquired






11,562Goodwill





$
2,098       Purchase price and other costs related to the purchase





$
9,026Land and land improvements

$
613Buildings and leasehold improvements


6,425Furniture and equipment


1,015Other


63Total assets acquired






8,116Goodwill





$
910       Year Ended December 31,2008


2007Revenue

$
739,317


$
701,206Income from continuing operations

$
37,347


$
16,365Net income available to common stockholders

$
37,347


$
9,011Earnings per common share, basic

$
1.02


$
0.33Earnings per common share, diluted

$
1.01


$
0.33   6.
    Business
    Segments   F-20




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
      mark-up;
    Long-term


AncillaryCare Services


Services


Other


Eliminations


TotalYear ended December 31, 2008Revenue from external customers

$
643,476


$
89,854


$



$



$
733,330Intersegment revenue


4,031



65,174







(69,205
)


Total revenue

$
647,507


$
155,028


$



$
(69,205
)

$
733,330Segment capital expenditures

$
46,062


$
1,416


$
2,148


$



$
49,626EBITDA(1)

$
118,206


$
18,602


$
(21,988
)

$



$
114,820Year ended December 31, 2007Revenue from external customers

$
555,620


$
78,987


$



$



$
634,607Intersegment revenue


1,448



60,446






$
(61,894
)


Total revenue

$
557,068


$
139,433


$



$
(61,894
)

$
634,607Segment capital expenditures

$
27,931


$
479


$
988


$



$
29,398EBITDA(1)

$
101,555


$
19,607


$
(30,851
)

$



$
90,311 F-21




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Long-term


AncillaryCare Services


Services


Other


Eliminations


TotalYear ended December 31, 2006Revenue from external customers

$
470,263


$
61,394


$



$



$
531,657Intersegment revenue






51,428






$
(51,428
)


Total revenue

$
470,263


$
112,822


$



$
(51,428
)

$
531,657Segment capital expenditures

$
20,086


$
606


$
1,575


$



$
22,267EBITDA(1)

$
87,550


$
18,704


$
(17,718
)

$



$
88,536     Long-term


AncillaryCare Services


Services


Other


TotalDecember 31, 2008:Segment total assets

$
887,986


$
75,246


$
50,610


$
1,013,842Goodwill and intangibles included in total assets

$
444,129


$
36,143


$



$
480,272December 31, 2007:Segment total assets

$
837,548


$
71,695


$
60,864


$
970,107Goodwill and intangibles included in total assets

$
447,304


$
36,498


$



$
483,802     (1)
    
    EBITDA is defined as net income before depreciation,
    amortization and interest expense (net of interest income) and
    the provision for (benefit from) income taxes. EBITDA margin is
    EBITDA as a percentage of revenue. The Company prepares Adjusted
    EBITDA by adjusting EBITDA (each to the extent applicable in the
    appropriate period) for:  
    the change in fair value of an interest rate hedge;
    gains or losses on sale of assets; and
    the write-off of deferred financing costs of extinguished debt    period-to-period day-to-day year-over-year
  facility-by-facility
 F-22




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  period-to-period day-to-day
        
    they do not reflect the Companys cash expenditures, or
    future requirements, for capital expenditures or contractual
    commitments;
    they do not reflect changes in, or cash requirements for,
    working capital needs;
    they do not reflect the interest expense, or the cash
    requirements necessary to service interest or principal
    payments, on debt;
    they do not reflect any income tax payments the Company may be
    required to make; F-23




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
   
    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 consolidated statements of cash flows;
    they do not reflect the impact on earnings of charges resulting
    from certain matters the Company does consider not to be
    indicative of on-going operations; and
    other companies in the Companys industry may calculate
    these measures differently than the Company does, which may
    limit their usefulness as comparative measures.      2008


2007


2006Net income

$
37,209


$
17,149


$
17,337PlusProvision for (benefit from) income taxes


20,052



12,952



12,204Depreciation and amortization


20,978



17,687



13,897Interest expense, net of interest income


36,581



42,523



45,098EBITDA


114,820



90,311



88,536Change in fair value of interest rate hedge(a)






40



197(Gain) Loss on sale of assets(b)


62







Premium on redemption of debt and write-off of deferred
    financing costs of extinguished debt(c)






11,648



Adjusted EBITDA

$
114,882


$
101,999


$
88,733     Notes
  (a)
    
    Changes in fair value of an interest rate hedge are unrelated to
    the core operating activities and the Company believes that
    adjusting for these amounts allows them to focus on actual
    operating costs at its facilities.(b)
    
    While gains or losses on sales of assets are required under
    GAAP, these amounts are also not reflective of income and losses
    of the Companys underlying business.(c)
    
    Write-offs for deferred financing costs are the result of
    distinct capital structure decisions made by management and are
    unrelated to
    day-to-day
    operations. These write-offs reflect a $7,700 redemption premium
    on $70,000 of the 11.0% senior subordinated noted that the
    Company redeemed in June 2007, before their scheduled maturities
    in 2014. F-24




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
   7.
    Debt    2008


2007Revolving Loan, base interest rate, comprised of prime plus
    1.75% (5.00% at December 31, 2008) collateralized by
    substantially all assets of the Company, due 2010

$
3,000


$
8,000Revolving Loan, interest rate based on LIBOR plus 2.75% (5.00%
    at December 31, 2008) collateralized by substantially
    all assets of the Company, due 2010


78,000



60,000Term Loan, interest rate based on LIBOR plus 2.00% (4.74% at
    December 31, 2008) collateralized by substantially all
    assets of the Company, due 2012


250,900



253,5002014 Notes, interest rate 11.0%, with an original issue discount
    of $545 and $652 at December 31, 2008 and 2007,
    respectively, interest payable semiannually, principal due 2014,
    unsecured


129,455



129,348Notes payable, fixed interest rate 6.5%, payable in monthly
    installments, collateralized by a first priority deed of trust,
    due November 2014


1,669



1,893Insurance premium financing


5,059



2,310Present value of capital lease obligations at effective interest
    rates, collateralized by property and equipment


2,178



3,385Total long-term debt and capital leases


470,261



458,436Less amounts due within one year


(7,812
)


(6,335
)Long-term debt and capital leases, net of current portion

$
462,449


$
452,101   Term
    Loan and Revolving Loan
  and/or
 F-25




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Senior
    Subordinated Notes
        12-month
  Debt
    Covenants
     F-26




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Scheduled
    Maturities of Long-Term Debt
    Capital


Long-TermLeases


Debt


Total2009

$
170


$
7,785


$
7,9552010


2,151



83,733



85,8842011






2,742



2,7422012






243,250



243,2502013






160



160Thereafter






130,958



130,9582,321



468,628



470,949Less original issue discount at December 31, 2008






545



545Less amount representing interest


143







143$
2,178


$
468,083


$
470,261   Interest
    Rate Swap
      Year EndedNotional





Effective





December 31,


Fair ValueLoan

Amount


Trade Date


Date


Maturity


2008


(Pre-tax)First Lien

$
100,000



10/24/07



10/31/07



12/31/09


($
1,089
)

($
3,007
)   Accounting for
    Derivative Instruments and Hedging Activities
 F-27




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  8.
    Other
    Current Assets and Other Assets    2008


2007Receivable from escrow

$



$
7,031Income tax refund receivable


2,739



Supply inventories


2,684



2,533Current portion of notes receivable


1,523



2,056Other current assets


537



77$
7,483


$
11,697     2008


2007Equity investment in pharmacy joint venture

$
5,082


$
4,183Restricted cash


12,454



10,697Investments


1,515



2,666Deposits and other assets


4,746



4,915$
23,797


$
22,461   Equity
    Investment in Pharmacy Joint Venture
    Restricted
    Cash
    Investments
  available-for-sale. other-than-temporary
 F-28




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Deposits
    9.
    Property
    and Equipment    2008


2007Land and land improvements

$
57,604


$
55,508Buildings and leasehold improvements


251,690



207,447Furniture and equipment


50,479



31,630Construction in progress


26,811



23,215386,584



317,800Less accumulated depreciation


(40,118
)


(23,519
)$
346,466


$
294,281   10.
    Income
    Taxes    2008


2007


2006Federal:Current

$
17,879


$
7,886


$
14,118Deferred


486



2,710



(3,648
)State:Current


2,820



2,163



2,377Deferred


(1,133
)


193



(643
)$
20,052


$
12,952


$
12,204     2008


2007


2006Federal rate (35)%

$
20,041


$
10,535


$
10,339State taxes, net of federal tax benefit


1,096



1,531



1,127Uncertain tax positions and related interest


(1,350
)


916



451Other, net


265



(30
)


287$
20,052


$
12,952


$
12,204      F-29




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
        2008


2007Non-





Non-Current


Current


Current


CurrentDeferred income tax assets:Vacation and other accrued expenses

$
4,392


$
3,497


$
3,849


$
2,437Allowance for doubtful accounts


4,750







3,778



Professional liability accrual


3,330



8,504



6,482



6,206Rent accrual


263



2,355



528



1,454Asset retirement obligation, net






1,489







1,232Fair value of hedge


1,225











500Other


748



455



331



895Total deferred income tax assets


14,708



16,300



14,968



12,724Deferred income tax liabilities:Intangible assets






(11,216
)






(11,007
)Fixed assets






(5,484
)






(2,714
)Other














Total deferred income tax liabilities






(16,700
)






(13,721
)Net deferred income tax assets


14,708



(400
)


14,968



(997
)Valuation allowance






(57
)






(1,300
)Net deferred income tax assets (liabilities)

$
14,708


$
(457
)

$
14,968


$
(2,297
)      F-30




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    2008


2007Balance at January 1

$
11,027



11,107Additions based on tax positions related to the current year






Additions for tax positions of prior years






1,482Reductions for tax positions of prior years






(1,482
)Settlements






(80
)Reductions for lapses of statutes


(8,200
)


Balance at December 31,

$
2,827


$
11,027         11.
    Stockholders
    Equity        
    authorized 25,000 shares of preferred stock,
    $0.001 par value per share;
    authorized 175,000 shares of class A common stock,
    voting power of one vote per share, $0.001 par value per
    share;
    authorized 30,000 shares of class B common stock,
    voting power of ten votes per share, $0.001 par value per
    share; and F-31




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
   
    provided for mandatory and optional conversion of the
    class B common stock into class A common stock on a
    one-for-one
    basis under certain circumstances.  507-for-one
    12.
    Stock-Based
    Compensation  2005
    Restricted Stock Plan
    2007
    Incentive Award Plan
     F-32




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
        Weighted-AverageNumber of


Grant DateShares


Fair ValueNon-vested balance at January 1, 2008


408


$
2.85Granted


309



12.49Vested


(319
)


1.98Forfeited


(46
)


0.74Non-vested balance at December 31, 2008


352


$
12.36       Year Ended December 31,2008


2007Risk-free interest rate


3.23
%


4.51
%Expected life


6.25 years



5.85 yearsDividend yield


0
%


0
%Volatility


40.6
%


32.7
%Weighted-average fair value

$
5.89


$
6.16      F-33




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
      Weighted-AverageWeighted-


RemainingAverage


Contractual


AggregateNumber of


Exercise


Term


IntrinsicShares


Price


(in years)


ValueOutstanding at January 1, 2008


169


$
15.42Granted


144


$
13.13Exercised





$
Forfeited or cancelled


(4
)

$
15.50Outstanding at December 31, 2008


309


$
14.35



8.58


$
Exercisable at December 31, 2008


74


$
15.45



8.21


$
     13.
    Commitments
    and Contingencies  Leases
      2009


17,4252010


16,0312011


15,9982012


15,2582013


11,740Thereafter


59,245$
135,697     Litigation
   F-34




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
            Insurance
   F-35




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Workers Compensation.
        General and Professional Liability. sub-acute
           F-36




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    2008


2007General and











General andProfessional


Employee


Workers





Professional


Employee


WorkersLiability


Medical


Compensation


Total


Liability


Medical


Compensation


TotalCurrent

$
8,172
(1)

$
1,551
(2)

$
3,906
(2)

$
13,629


$
15,909
(1)

$
1,070
(2)

$
3,546
(2)

$
20,525Non-current


20,871







9,783



30,654



15,230







9,018



24,248$
29,043


$
1,551


$
13,689


$
44,283


$
31,139


$
1,070


$
12,564


$
44,773     (1)
    
    Included in accounts payable and accrued liabilities.(2)
    
    Included in employee compensation and benefits.  Hallmark
    Indemnification
    Financial
    Guarantees
    Purchase
    Commitment
    14.
    Material
    Transactions with Related Parties  Agreement
    with Onex Partners Manager LP
    15.
    Defined
    Contribution Plan   F-37




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  16.
    Quarterly
    Financial Information (Unaudited)    Quarter EndedDecember 31


September 30


June 30


March 312008:Revenue

$
189,781


$
182,474


$
180,348


$
180,727Total expense


165,057



161,813



157,360



157,991Other income (expenses), net


(8,264
)


(8,524
)


(8,234
)


(8,826
)Income before provision for income taxes


16,460



12,137



14,754



13,910Provision (benefit) for income taxes


6,195



2,561



5,830



5,466Net income (loss)


10,265



9,576



8,924



8,444Earnings per share data:Earnings per common share, basic

$
0.28


$
0.26


$
0.24


$
0.23Earnings per common share, diluted

$
0.28


$
0.26


$
0.24


$
0.23Weighted-average common shares outstanding, basic


36,606



36,578



36,558



36,551Weighted-average common shares outstanding, diluted


36,893



36,909



36,871



36,881   Quarter EndedDecember 31


September 30


June 30


March 31(Unaudited)2007:Revenue

$
177,393


$
161,468


$
151,091


$
144,655Total expense


155,405



140,489



130,663



125,365Other income (expenses), net


(9,475
)


(9,314
)


(22,537
)


(11,258
)Income before provision for income taxes


12,513



11,665



(2,109
)


8,032Provision (benefit) for income taxes


5,329



4,801



(556
)


3,378Net income (loss)


7,184



6,864



(1,553
)


4,654Accretion on preferred stock










(2,582
)


(4,772
)Net (loss) income attributable to common stockholders

$
7,184


$
6,864


$
(4,135
)

$
(118
)Earnings per share data:Earnings per common share, basic

$
0.20


$
0.19


$
(0.18
)

$
(0.01
)Earnings per common share, diluted

$
0.19


$
0.19


$
(0.18
)

$
(0.01
)Weighted-average common shares outstanding, basic


36,249



36,236



23,437



11,959Weighted-average common shares outstanding, diluted


36,886



36,917



23,437



11,959    F-38




---



##### Table of Contents



(a)  2. Financial
    Statement Schedule:
 SKILLED
    HEALTHCARE GROUP, INC.



SCHEDULE II 
    VALUATION ACCOUNTS  Balance at


Charged toBeginning of


Costs and





Balance at EndPeriod


Expenses


Deductions(1)


of Period(In thousands)Accounts receivable allowancesYear Ended December 31, 2008

$
9,717


$
10,087


$
(5,468
)

$
14,336Year Ended December 31, 2007

$
7,889


$
6,116


$
(4,288
)

$
9,717Year Ended December 31, 2006

$
5,678


$
5,791


$
(3,580
)

$
7,889Notes receivable allowancesYear Ended December 31, 2008

$



$



$



$
Year Ended December 31, 2007

$



$



$



$
Year Ended December 31, 2006

$
631


$
(352
)

$
(279
)

$
     (1)
    
    Uncollectible accounts written off, net of recoveries S-1




---



##### Table of Contents



INDEX OF
    EXHIBITS
  Number

Description2
.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. (filed as Exhibit 2.1 to our
    Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference)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. (filed as
    Exhibit 2.2 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference)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 June 26, 2003, and M. Sue
    Reardon and M. Terence Reardon, as Trustees of the M. Sue
    Reardon Trust U.T.A. dated June 26, 2003 (filed as
    Exhibit 2.3 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference)2
.4

Agreement and Plan of Merger, dated as of February 7, 2007,
    by and among SHG Holding Solutions, Inc., and Skilled Healthcare
    Group, Inc. (filed as Exhibit 2.4 to our Registration
    Statement on
    Form S-1/A,
    No. 333-137897,
    filed on February 9, 2007, and incorporated herein by
    reference).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. (filed as Exhibit 2.5 to our Registration
    Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 23, 2007, and incorporated herein by
    reference).2
.6

Asset Purchase Agreement, dated as of July 31, 2007, by and
    among Skilled Healthcare Group, Inc. and certain affiliates of
    Laurel Healthcare Providers, LLC (filed as Exhibit 2.6 to
    our
    Form 10-Q
    for the quarter ended June 30, 2007, and incorporated
    herein by reference ).3
.1

Amended and Restated Certificate of Incorporation of Skilled
    Healthcare Group, Inc. (filed as Exhibit 3.2 to our
    Form 10-Q
    for the quarter ended June 30, 2007, and incorporated
    herein by reference).3
.2

Amended and Restated By-Laws of Skilled Healthcare Group, Inc.
    (filed as Exhibit 3.4 to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).3
.3

Certificate of Ownership and Merger of Skilled Healthcare Group,
    Inc., dated February 7, 2007 (filed as Exhibit 3.1.1
    to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).4
.1

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. (filed as
    Exhibit 4.2 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.2

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. (filed
    as Exhibit 4.3 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.3

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 (filed as Exhibit 4.4 to our Registration Statement
    on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.4

Registration Agreement dated as of December 27, 2005, among
    SHG Holding Solutions, Inc. and the persons listed thereon
    (filed as Exhibit 4.5 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.5

Form of specimen certificate for Skilled Healthcare Group,
    Inc.s class A common stock (filed as Exhibit 4.1
    to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).4
.6

Form of 11% Senior Subordinated Notes due 2014 (included in
    exhibit 4.1).




---



##### Table of Contents



Number

Description10
.1*

Skilled Healthcare Group, Inc. Restricted Stock Plan (filed as
    Exhibit 10.1 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.2*

Form of Restricted Stock Agreement (filed as Exhibit 10.2
    to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.3

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 (filed as
    Exhibit 10.4 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.4*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Boyd Hendrickson
    (filed as Exhibit 10.5 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.5*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Jose Lynch (filed as
    Exhibit 10.6 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.7*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Roland G. Rapp (filed
    as Exhibit 10.8 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.8*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Mark Wortley (filed
    as Exhibit 10.9 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.10*

Trigger Event Cash Bonus Agreement, dated April 30, 2005,
    by and between Skilled Healthcare Group, Inc. and Mark Wortley
    (filed as Exhibit 10.11 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.11

Lease, dated as of August 26, 2002, by and between CT
    Foothill 10/241, LLC, and Fountain View, Inc., and amendments
    thereto (filed as Exhibit 10.13 to our Registration
    Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).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
    (filed as Exhibit 10.12 to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 23, 2007 and incorporated herein by
    reference).10
.13*

Employment Agreement, dated as of August 14, 2007, by and
    between Skilled Healthcare LLC and Christopher N. Felfe (filed
    as Exhibit 10.1 to our
    Form 10-Q
    for the quarter ended September 30, 2007, and incorporated
    herein by reference).10
.14*

Side Letter, dated as of August 14, 2007, by and between
    Skilled Healthcare, LLC and Christopher N. Felfe (filed as
    Exhibit 10.2 to our
    Form 10-Q
    for the quarter ended September 30, 2007, and incorporated
    herein by reference).10
.16*

Form of Indemnification Agreement with Skilled Healthcare
    Groups directors, executive officers and certain employees
    (filed as Exhibit 10.10 to the Companys Registration
    Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).(1)10
.17

Instrument of Joinder, dated as of May 11, 2007, by and
    among Skilled Healthcare Group, Inc., Bank of America, N.A., UBS
    Loan Finance LLC and Credit Suisse, Cayman Islands Branch (filed
    as Exhibit 10.3 to our
    Form 10-Q
    for the quarter ended June 30, 2007, and incorporated
    herein by reference).10
.18*

Employment Agreement, dated as of November 30, 2007, by and
    between Skilled Healthcare LLC and Devasis Ghose (filed as
    Exhibit 10.1 to our
    Form 8-K
    dated November 30, 2007, and incorporated herein by
    reference).10
.19*

Amended and Restated Skilled Healthcare Group, Inc. 2007
    Incentive Award Plan (filed as Appendix A to the
    Companys Definitive Proxy Statement filed on April 7,
    2008, and incorporated herein by reference).21


Subsidiaries of the Registrant23
.1

Consent of Independent Registered Public Accounting Firm.31
.1

Certification of Principal Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.




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##### Table of Contents



Number

Description31
.2

Certification of Principal Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.32


Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.     *
    
    Management contract or compensatory plan or arrangement.(1)
    
    Skilled Healthcare Group, Inc. has entered into an
    indemnification agreement with the following individuals: Boyd
    Hendrickson, Chairman of the Board, Chief Executive Officer and
    Director; Jose Lynch, President, Chief Operating Officer and
    Director; Devasis Ghose, Executive Vice President, Treasurer and
    Chief Financial Officer; Roland Rapp, General Counsel, Secretary
    and Chief Administrative Officer; Mark Wortley, Executive Vice
    President and Chief Executive Officer of Ancillary Companies;
    Christopher N. Felfe, Senior Vice President, Finance and Chief
    Accounting Officer; Susan Whittle, Senior Vice President and
    Chief Compliance Officer; Robert M. Le Blanc, Lead Director;
    Michael E. Boxer, Director; John M. Miller, Director; M. Bernard
    Puckett, Director; Glenn S. Schafer, Director; William C. Scott,
    Director; Michael D. Stephens, Director; Kelly Atkins, Senior
    Vice President of Operations, Pacific Division; Brad Gibson,
    Senior Vice President of Operations, Finance; Matt Moore, Senior
    Vice President of Operations, Midwest Division; Aisha Salaam,
    Senior Vice President of Professional Services.