##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended September 30, 2007.
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the transition period from  to.
 Commission file number: 001-33459
 Skilled Healthcare Group, Inc.
   Delaware
    
    20-3934755(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)27442 Portola Parkway, Suite 200Foothill Ranch, California
    
    92610(Address of principal executive offices)
    
    (Zip Code)
 (949) 282-5800
 þ o
  o o þ
 þ o




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##### Table of Contents



TABLE OF ADDITIONAL REGISTRANTS
 (State or Other
    
    (Primary StandardJurisdiction of
    
    IndustrialIncorporation or
    
    Classification Code
    
    (I.R.S. Employer(Exact Names of Registrants as Specified in Their Charters)
    
    Organization)
    
    Number)
    
    Identification No.)Albuquerque Heights Healthcare and Rehabilitation Center,
LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675040Alexandria Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-4395382Alta Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081141Anaheim Terrace Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081125Baldwin Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1854609Bay Crest Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081158Belen Meadows Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675094Blue River Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-8386525Briarcliff Nursing and Rehabilitation Center GP,
LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080490Briarcliff Nursing and Rehabilitation Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081646Brier Oak on Sunset, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-4212165Cameron Nursing and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-8571379Canyon Transitional Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675157Carehouse Healthcare Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0080962Carmel Hills Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-4214320Chestnut Property, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-8386994Clairmont Beaumont GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080531Clairmont Beaumont, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081662Clairmont Longview GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080552Clairmont Longview, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081682Clovis Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675210Colonial New Braunfels Care Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081694Colonial New Braunfels GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080585Colonial Tyler Care Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081705Colonial Tyler GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080596Comanche Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081764Coronado Nursing Center GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080630Coronado Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081776Devonshire Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0080978East Sunrise Property, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-8387041East Walnut Property, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-4214556Elmcrest Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-4274740Euclid Property, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-8387105Eureka Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0146285Flatonia Oak Manor GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080645Flatonia Oak Manor, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081788Fountain Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081005Fountain Senior Assisted Living, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-0081024Fountain View Subacute and Nursing Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-2506832Glen Hendren Property, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-4214585Granada Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0146353Guadalupe Valley Nursing Center GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080693Guadalupe Valley Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081801Hallettsville Rehabilitation and Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081807Hallettsville Rehabilitation GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080721Hallmark Investment Group, Inc.
    
    Delaware
    
    
    6700
    
    
    
    95-4644786Hallmark Rehabilitation GP, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0083989Hallmark Rehabilitation, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0084046Hancock Park Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-3918421Hancock Park Senior Assisted Living, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-3918420




---



##### Table of Contents



(State or Other
    
    (Primary StandardJurisdiction of
    
    IndustrialIncorporation or
    
    Classification Code
    
    (I.R.S. Employer(Exact Names of Registrants as Specified in Their Charters)
    
    Organization)
    
    Number)
    
    Identification No.)Hemet Senior Assisted Living, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081183Highland Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1854718Holmesdale Healthcare and Rehabilitation Center,
LLC
    
    Delaware
    
    
    8051
    
    
    
    20-4214404Holmesdale Property, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-4214625Hospice Care Investments, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0674503Hospice Care of the West, LLC
    
    Delaware
    
    
    8080
    
    
    
    20-0662232Hospice of the West, LP
    
    Delaware
    
    
    8080
    
    
    
    20-1138347Hospitality Nursing and Rehabilitation Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081818Hospitality Nursing GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080750Leasehold Resource Group, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-0083961Liberty Terrace Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-4214454Live Oak Nursing Center GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080766Live Oak Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081828Louisburg Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1854747Montebello Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081194Monument Rehabilitation and Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081831Monument Rehabilitation GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080781Oak Crest Nursing Center GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080801Oak Crest Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081841Oakland Manor GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080814Oakland Manor Nursing Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081854Pacific Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0146398Preferred Design, LLC
    
    Delaware
    
    
    7300
    
    
    
    20-4645757Richmond Healthcare and Rehabilitation Center,
LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1854787Rio Hondo Subacute and Nursing Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-4274737Rossville Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1854816Royalwood Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081209Seaview Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0146473Sharon Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081226Shawnee Gardens Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1854845SHG Resources, LP
    
    Delaware
    
    
    6500
    
    
    
    20-0084078Skies Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675263Skilled Healthcare, LLC
    
    Delaware
    
    
    7300
    
    
    
    20-0084014South Swope Property, LLC
    
    Delaware
    
    
    6500
    
    
    
    20-5855449Southwest Payroll Services, LLC
    
    Delaware
    
    
    7300
    
    
    
    41-2115227Southwood Care Center GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080824Southwood Care Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081861Spring Senior Assisted Living, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-0081045St. Anthony Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675327St. Catherine Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-8386337St. Elizabeth Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1609072St. John Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-8386810St. Luke Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0366729St. Joseph Transitional Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-4974918St. Theresa Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675370Summit Care Corporation
    
    Delaware
    
    
    6700
    
    
    
    95-3656297Summit Care Pharmacy, Inc.
    
    Delaware
    
    
    6700
    
    
    
    95-3747839Sycamore Park Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    95-2260970Texas Cityview Care Center GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080841Texas Cityview Care Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081871




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##### Table of Contents



(State or Other
    
    (Primary StandardJurisdiction of
    
    IndustrialIncorporation or
    
    Classification Code
    
    (I.R.S. Employer(Exact Names of Registrants as Specified in Their Charters)
    
    Organization)
    
    Number)
    
    Identification No.)Texas Heritage Oaks Nursing and Rehabilitation Center GP,
LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080949Texas Heritage Oaks Nursing and Rehabilitation Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081888The Clairmont Tyler GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080856The Clairmont Tyler, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081909The Earlwood, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081060The Heights of Summerlin, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1380043The Rehabilitation Center of Albuquerque, LLC
    
    Delaware
    
    
    8051
    
    
    
    26-0675426The Rehabilitation Center of Raymore, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-8386866The Woodlands Healthcare Center GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080888The Woodlands Healthcare Center, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081923Town and Country Manor GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080866Town and Country Manor, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081914Valley Healthcare Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081076Villa Maria Healthcare Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081090Vintage Park at Atchison, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1854925Vintage Park at Baldwin City, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1854971Vintage Park at Gardner, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1855022Vintage Park at Lenexa, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1855099Vintage Park at Louisburg, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1855153Vintage Park at Osawatomie, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1855502Vintage Park at Ottawa, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1855554Vintage Park at Paola, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1855675Vintage Park at Stanley, LLC
    
    Delaware
    
    
    8360
    
    
    
    20-1855749Wathena Healthcare and Rehabilitation Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-1854880West Side Campus of Care GP, LLC
    
    Delaware
    
    
    6700
    
    
    
    20-0080879West Side Campus of Care, LP
    
    Delaware
    
    
    8051
    
    
    
    20-0081918Willow Creek Healthcare Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081112Woodland Care Center, LLC
    
    Delaware
    
    
    8051
    
    
    
    20-0081237




---



##### 



Skilled Healthcare Group, Inc.
 Form 10-Q
For the Quarterly Period Ended September 30, 2007
 Index
 PageNumberPart I.
    
    Financial Information
    
    
    2Item 1.
    
    Financial Statements
    
    
    2Condensed Consolidated Balance Sheets  September 30, 2007 (unaudited) and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations  Three and nine months ended September 30, 2007 (unaudited) and September 30, 2006 (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2007 (unaudited) and September 30, 2006 (unaudited)
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    32Item 4T.
    
    Controls and Procedures
    
    
    32Part II.
    
    Other Information
    
    
    33Item 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    33Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3.
    
    Defaults Upon Senior Securities
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    34Signatures.
    
    
    
    
    36EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 Skilled Healthcare Group, Inc.
 
 Condensed Consolidated Balance Sheets
 (In thousands, except per share data)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    325
    
    
    $
    2,821Accounts receivable, less allowance for doubtful
accounts of $9,033 and $7,889 at September 30, 2007
and December 31, 2006, respectively
    
    
    101,438
    
    
    
    86,168Deferred income taxes, net
    
    
    13,979
    
    
    
    13,248Prepaid expenses
    
    
    5,722
    
    
    
    2,101Other current assets
    
    
    14,365
    
    
    
    10,296Total current assets
    
    
    135,829
    
    
    
    114,634Property and equipment, net
    
    
    289,063
    
    
    
    230,904Other assets:Notes receivable
    
    
    5,533
    
    
    
    4,968Deferred financing costs, net
    
    
    12,504
    
    
    
    15,764Goodwill
    
    
    448,047
    
    
    
    411,349Intangible assets, net
    
    
    35,408
    
    
    
    33,843Non-current income tax receivable
    
    
    1,882
    
    
    
    1,882Deferred income taxes, net
    
    
    2,127
    
    
    
    1,504Other assets
    
    
    21,663
    
    
    
    23,847Total other assets
    
    
    527,164
    
    
    
    493,157Total assets
    
    $
    952,056
    
    
    $
    838,695LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    50,721
    
    
    $
    69,136Employee compensation and benefits
    
    
    25,618
    
    
    
    22,693Current portion of long-term debt and capital leases
    
    
    6,594
    
    
    
    3,177Total current liabilities
    
    
    82,933
    
    
    
    95,006Long-term liabilities:Insurance liability risks
    
    
    27,149
    
    
    
    28,306Other long-term liabilities
    
    
    21,277
    
    
    
    8,857Long-term debt and capital leases, less current portion
    
    
    452,875
    
    
    
    465,878Total liabilities
    
    
    584,234
    
    
    
    598,047Stockholders equity:Preferred stock, no shares authorized at September 30,
2007 (unaudited) and 50 shares authorized, 25 shares
Class A convertible shares and 25 Class B shares at
December 31, 2006Class A, $0.001 par value per share; no shares and
22 shares issued and outstanding at September 30,
2007 (unaudited) and December 31, 2006,
respectively, liquidation preference of $0 and
$18,652 at September 30, 2007 (unaudited) and
December 31, 2006, respectively
    
    
    
    
    
    
    18,652Class B, $0.001 par value per share; no shares
issued and outstanding at September 30, 2007 and
December 31, 2006, respectively
    
    
    
    
    
    
    Preferred stock, 25,000 shares authorized, $0.001 par
value per share, at September 30, 2007 (unaudited) and no
shares authorized at December 31, 2006; no shares issued
and outstanding at September 30, 2007 and December 31,
2006, respectively
    
    
    Common stock, no shares authorized at September 30, 2007
(unaudited) and 25,350 shares authorized, $0.001 par
value per share, at December 21, 2006; no shares and
12,636 shares issued and outstanding at September 30,
2007 (unaudited) and December 31, 2006, respectively
    
    
    
    
    
    
    13Class A common stock, 175,000 shares authorized, $0.001
par value per share, at September 30, 2007 (unaudited)
and no shares authorized at December 31, 2006; 19,244 and
no shares issued and outstanding at September 30, 2007
(unaudited) and December 31, 2006, respectively
    
    
    19Class B common stock, 30,000 shares authorized, $0.001
par value per share, at September 30, 2007 (unaudited)
and no shares authorized at December 30, 2006; 17,714 and
no shares issued and outstanding at September 30, 2007
(unaudited) and December 31, 2006, respectively
    
    
    18Additional paid-in-capital
    
    
    364,841
    
    
    
    221,983Retained earnings
    
    
    2,944
    
    
    
    Total stockholders equity
    
    
    367,822
    
    
    
    240,648Total liabilities and stockholders equity
    
    $
    952,056
    
    
    $
    838,695
  2




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##### Table of Contents



Skilled Healthcare Group, Inc.
 
 Condensed Consolidated Statements of Operations
 (In thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Revenue
    
    $
    161,468
    
    
    $
    135,396
    
    
    $
    457,215
    
    
    $
    391,753Expenses:Cost of services (exclusive of rent cost of sales
and depreciation and amortization shown below)
    
    
    120,826
    
    
    
    101,497
    
    
    
    341,534
    
    
    
    293,015Rent cost of sales
    
    
    3,235
    
    
    
    2,750
    
    
    
    8,456
    
    
    
    7,910General and administrative
    
    
    12,008
    
    
    
    10,244
    
    
    
    33,908
    
    
    
    27,944Depreciation and amortization
    
    
    4,420
    
    
    
    3,192
    
    
    
    12,619
    
    
    
    10,419140,489
    
    
    
    117,683
    
    
    
    396,517
    
    
    
    339,288Other income (expenses):Interest expense
    
    
    (9,914
    )
    
    
    (11,693
    )
    
    
    (33,933
    )
    
    
    (34,532
    )Premium on redemption of debt and write-off of
related deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (11,648
    )
    
    
    Interest income
    
    
    384
    
    
    
    254
    
    
    
    1,298
    
    
    
    882Other
    
    
    (159
    )
    
    
    
    
    
    
    (62
    )
    
    
    Equity in earnings of joint venture
    
    
    381
    
    
    
    502
    
    
    
    1,274
    
    
    
    1,394Change in fair value of interest rate hedge
    
    
    (6
    )
    
    
    (227
    )
    
    
    (40
    )
    
    
    (171
    )Total other income (expenses), net
    
    
    (9,314
    )
    
    
    (11,164
    )
    
    
    (43,111
    )
    
    
    (32,427
    )Income before provision for income taxes
    
    
    11,665
    
    
    
    6,549
    
    
    
    17,587
    
    
    
    20,038Provision for income taxes
    
    
    4,801
    
    
    
    2,588
    
    
    
    7,622
    
    
    
    8,260Net income
    
    
    6,864
    
    
    
    3,961
    
    
    
    9,965
    
    
    
    11,778Accretion on preferred stock
    
    
    
    
    
    
    (4,684
    )
    
    
    (7,354
    )
    
    
    (13,625
    )Net income (loss) attributable to common stockholders
    
    $
    6,864
    
    
    $
    (723
    )
    
    $
    2,611
    
    
    $
    (1,847
    )Net income (loss) per share data:Net income (loss) per common share, basic
    
    $
    0.19
    
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    (0.16
    )Net income (loss) per common share, diluted
    
    $
    0.19
    
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    (0.16
    )Weighted-average common shares outstanding, basic
    
    
    36,236
    
    
    
    11,636
    
    
    
    23,966
    
    
    
    11,629Weighted-average common shares outstanding, diluted
    
    
    36,917
    
    
    
    11,636
    
    
    
    24,651
    
    
    
    11,629
  3




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##### Table of Contents



Skilled Healthcare Group, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (In thousands, except share and per share data)
 Nine Months EndedSeptember 30,2007
    
    
    2006(Unaudited)Cash Flows from Operating ActivitiesNet income
    
    $
    9,965
    
    
    $
    11,778Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    12,619
    
    
    
    10,419Loss on disposal of property and equipment
    
    
    
    
    
    
    251Provision for doubtful accounts
    
    
    3,474
    
    
    
    3,524Non-cash stock-based compensation
    
    
    392
    
    
    
    352Amortization of deferred financing costs
    
    
    2,004
    
    
    
    2,155Write-off of deferred financing costs and premium on early redemption of debt
    
    
    11,648
    
    
    
    Deferred income taxes
    
    
    (3,028
    )
    
    
    (3,138
    )Change in fair value of interest rate hedge
    
    
    40
    
    
    
    171Amortization of discount on senior subordinated notes
    
    
    113
    
    
    
    123Changes in operating assets and liabilities:Accounts receivable
    
    
    (18,744
    )
    
    
    (23,086
    )Other current assets
    
    
    (6,262
    )
    
    
    6,103Accounts payable and accrued liabilities
    
    
    (12,240
    )
    
    
    9,570Employee compensation and benefits
    
    
    3,033
    
    
    
    4,630Insurance liability risks
    
    
    (1,144
    )
    
    
    1,402Other long-term liabilities
    
    
    12,420
    
    
    
    152Net cash provided by operating activities
    
    
    14,290
    
    
    
    24,406Cash Flows from Investing Activities(Additions to) principal payments on notes receivable, net
    
    
    (565
    )
    
    
    623Acquisition of healthcare facilities
    
    
    (87,237
    )
    
    
    (34,016
    )Additions to property and equipment
    
    
    (20,398
    )
    
    
    (13,384
    )Changes in other assets
    
    
    2,013
    
    
    
    (6,188
    )Cash distributed related to the Onex Transaction
    
    
    (7,330
    )
    
    
    Net cash used in investing activities
    
    
    (113,517
    )
    
    
    (52,965
    )Cash Flows from Financing ActivitiesBorrowings under line of credit, net
    
    
    58,500
    
    
    
    Repayments on long-term debt and capital leases
    
    
    (68,575
    )
    
    
    (2,193
    )Premium paid for redemption of debt
    
    
    (7,700
    )
    
    
    Additions to deferred financing costs
    
    
    (2,312
    )
    
    
    (38
    )Proceeds from initial public offering of common stock, net of expenses
    
    
    116,818
    
    
    
    Proceeds from the issuance of new common stock
    
    
    
    
    
    
    100Net cash provided by (used in) financing activities
    
    
    96,731
    
    
    
    (2,131
    )Decrease in cash and cash equivalents
    
    
    (2,496
    )
    
    
    (30,690
    )Cash and cash equivalents at beginning of period
    
    
    2,821
    
    
    
    37,272Cash and cash equivalents at end of period
    
    $
    325
    
    
    $
    6,582
  4




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##### Table of Contents



Skilled Healthcare Group, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands, except share and per share data)
 Nine Months EndedSeptember 30,2007
    
    2006(Unaudited)Supplemental cash flow informationCash paid for:Interest expense
    
    $
    39,267
    
    
    $
    27,736Income taxes
    
    $
    10,620
    
    
    $
    1,100Details of accumulated other comprehensive loss:Change in market value of marketable securities, net of tax
    
    $
    
    
    
    $
    190
  5




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Description of Business
 Current Business
  Other Information
  Recent Developments
  
    
    authorizes 25,000,000 shares of preferred stock, $0.001 par value;
    
    authorizes 175,000,000 shares of class A common stock, voting power of one vote per
share, $0.001 par value;
    
    authorizes 30,000,000 shares of class B common stock, voting power of ten votes per
share, $0.001 par value; and
    
    provides 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.
 6




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##### Table of Contents



2. Summary of Significant Accounting Policies
  Basis of Presentation
  Estimates and Assumptions
  Revenue and Accounts Receivable
  7




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##### Table of Contents



Three Months Ended September 30,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Revenue
    
    
    Percentage
    
    
    Revenue
    
    
    PercentageDollars
    
    
    of Revenue
    
    
    Dollars
    
    
    of RevenueMedicare
    
    $
    58,371
    
    
    
    36.2
    %
    
    $
    47,559
    
    
    
    35.1
    %Medicaid
    
    
    50,846
    
    
    
    31.5
    
    
    
    44,406
    
    
    
    32.8Subtotal Medicare and Medicaid
    
    
    109,217
    
    
    
    67.7
    
    
    
    91,965
    
    
    
    67.9Managed Care
    
    
    13,610
    
    
    
    8.4
    
    
    
    11,148
    
    
    
    8.2Private and Other
    
    
    38,641
    
    
    
    23.9
    
    
    
    32,283
    
    
    
    23.9Total
    
    $
    161,468
    
    
    
    100.0
    %
    
    $
    135,396
    
    
    
    100.0
    %
 Nine Months Ended September 30,2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Revenue
    
    
    Percentage
    
    
    Revenue
    
    
    PercentageDollars
    
    
    of Revenue
    
    
    Dollars
    
    
    of RevenueMedicare
    
    $
    169,792
    
    
    
    37.1
    %
    
    $
    141,639
    
    
    
    36.2
    %Medicaid
    
    
    139,205
    
    
    
    30.5
    
    
    
    125,515
    
    
    
    32.0Subtotal Medicare and Medicaid
    
    
    308,997
    
    
    
    67.6
    
    
    
    267,154
    
    
    
    68.2Managed Care
    
    
    38,028
    
    
    
    8.3
    
    
    
    31,723
    
    
    
    8.1Private and Other
    
    
    110,190
    
    
    
    24.1
    
    
    
    92,876
    
    
    
    23.7Total
    
    $
    457,215
    
    
    
    100.0
    %
    
    $
    391,753
    
    
    
    100.0
    %
 Stock Options and Equity Related Charges
 Share-Based Payments
   Net Income (Loss) Per Share of Class A and Class B Common Stock
 Earnings Per Share
 8




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##### Table of Contents



Three Months Ended September 30, 2007
    
    
    Nine Months Ended September 30, 2007(Unaudited)
    
    
    (Unaudited)Class A
    
    
    Class B
    
    
    Total
    
    
    Class A
    
    
    Class B
    
    
    TotalNet income per share, basicNumerator:Allocation of income
attributable to common
stockholders
    
    $
    3,631
    
    
    $
    3,233
    
    
    $
    6,864
    
    
    $
    1,033
    
    
    $
    1,578
    
    
    $
    2,611Denominator:Weighted-average common
shares outstanding
    
    
    19,167
    
    
    
    17,069
    
    
    
    36,236
    
    
    
    9,478
    
    
    
    14,488
    
    
    
    23,966Net income per common share,basic
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.11Net income per share, dilutedNumerator:Allocation of income
attributable to common
stockholders
    
    $
    3,572
    
    
    $
    3,292
    
    
    $
    6,864
    
    
    $
    1,009
    
    
    $
    1,602
    
    
    $
    2,611Denominator:Weighted-average common
shares outstanding
    
    
    19,167
    
    
    
    17,069
    
    
    
    36,236
    
    
    
    9,478
    
    
    
    14,488
    
    
    
    23,966Plus: incremental shares
related to dilutive
effect of stock options
and restricted stock, if
applicable
    
    
    43
    
    
    
    638
    
    
    
    681
    
    
    
    45
    
    
    
    640
    
    
    
    685Adjusted weighted-average
common shares outstanding
    
    
    19,210
    
    
    
    17,707
    
    
    
    36,917
    
    
    
    9,523
    
    
    
    15,128
    
    
    
    24,651Net income per common share,Diluted
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.11
 Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Reclassifications
  9




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##### Table of Contents



3. Business Segments
     Long-term
    
    
    AncillaryCare Services
    
    
    Services
    
    
    Other
    
    
    TotalThree months ended September 30, 2007 (unaudited)Revenue from external customers
    
    $
    141,553
    
    
    $
    19,792
    
    
    $
    123
    
    
    $
    161,468Intersegment revenue
    
    
    
    
    
    
    16,093
    
    
    
    
    
    
    
    16,093Total revenue
    
    $
    141,553
    
    
    $
    35,885
    
    
    $
    123
    
    
    $
    177,561Segment capital expenditures
    
    $
    7,629
    
    
    $
    70
    
    
    $
    72
    
    
    $
    7,771EBITDA(1)
    
    $
    22,600
    
    
    $
    5,179
    
    
    $
    (2,164
    )
    
    $
    25,615Three months ended September 30, 2006 (unaudited)Revenue from external customers
    
    $
    119,489
    
    
    $
    15,684
    
    
    $
    223
    
    
    $
    135,396Intersegment revenue
    
    
    
    
    
    
    13,393
    
    
    
    
    
    
    
    13,393Total revenue
    
    $
    119,489
    
    
    $
    29,077
    
    
    $
    223
    
    
    $
    148,789Segment capital expenditures
    
    $
    5,281
    
    
    $
    236
    
    
    $
    (95
    )
    
    $
    5,422EBITDA(1)
    
    $
    17,815
    
    
    $
    5,141
    
    
    $
    (1,776
    )
    
    $
    21,180
 Long-term
    
    
    AncillaryCare Services
    
    
    Services
    
    
    Other
    
    
    TotalNine months ended September 30, 2007 (unaudited)Revenue from external customers
    
    $
    399,479
    
    
    $
    57,362
    
    
    $
    374
    
    
    $
    457,215Intersegment revenue
    
    
    
    
    
    
    45,454
    
    
    
    
    
    
    
    45,454Total revenue
    
    $
    399,479
    
    
    $
    102,816
    
    
    $
    374
    
    
    $
    502,669Segment capital expenditures
    
    $
    22,037
    
    
    $
    431
    
    
    $
    (2,070
    )
    
    $
    20,398EBITDA(1)
    
    $
    64,006
    
    
    $
    15,139
    
    
    $
    (16,304
    )
    
    $
    62,841Nine months ended September 30, 2006 (unaudited)Revenue from external customers
    
    $
    347,478
    
    
    $
    43,916
    
    
    $
    359
    
    
    $
    391,753
 10




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##### Table of Contents



Long-term
    
    
    AncillaryCare Services
    
    
    Services
    
    
    Other
    
    
    TotalIntersegment revenue
    
    
    
    
    
    
    37,926
    
    
    
    
    
    
    
    37,926Total revenue
    
    $
    347,478
    
    
    $
    81,842
    
    
    $
    359
    
    
    $
    429,679Segment capital expenditures
    
    $
    12,383
    
    
    $
    449
    
    
    $
    552
    
    
    $
    13,384EBITDA(1)
    
    $
    53,144
    
    
    $
    14,155
    
    
    $
    (3,192
    )
    
    $
    64,107
 
 (1)
    
    EBITDA is defined as net income before depreciation, amortization and interest expense (net)
and the provision for income taxes. See reconciliation of net income to EBITDA and a
discussion of its uses and limitations on pages 21-23 of this quarterly report.  Long-term
    
    
    AncillaryCare Services
    
    
    Services
    
    
    Other
    
    
    TotalSeptember 30, 2007:Segment total assets
    
    $
    577,232
    
    
    $
    73,975
    
    
    $
    300,849
    
    
    $
    952,056Goodwill and intangibles included in total assets
    
    $
    446,850
    
    
    $
    36,605
    
    
    $
    
    
    
    $
    483,455December 31, 2006:Segment total assets
    
    $
    704,797
    
    
    $
    66,358
    
    
    $
    67,540
    
    
    $
    838,695Goodwill and intangibles included in total assets
    
    $
    408,642
    
    
    $
    36,550
    
    
    $
    
    
    
    $
    445,192
 4. Income Taxes
   Accounting for Uncertainty
in Income Taxes  An Interpretation of FASB Statement No. 109, Accounting for Income Taxes,
   11




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##### Table of Contents



5. Other Current Assets and Other Assets
  September 30, 2007
    
    
    December 31, 2006(Unaudited)Receivable from escrow
    
    $
    7,031
    
    
    $
    6,000Income tax refund receivable
    
    
    2,512
    
    
    
    Supply inventories
    
    
    2,533
    
    
    
    2,152Other notes receivable
    
    
    2,289
    
    
    
    2,144$
    14,365
    
    
    $
    10,296
  September 30, 2007
    
    
    December 31, 2006(Unaudited)Equity investment in pharmacy joint venture
    
    $
    4,174
    
    
    $
    4,170Restricted cash
    
    
    9,517
    
    
    
    8,448Investments
    
    
    2,905
    
    
    
    4,856Deposits and other assets
    
    
    5,067
    
    
    
    4,695Expenses related to initial public offering
    
    
    
    
    
    
    1,678$
    21,663
    
    
    $
    23,847
 6. Commitments and Contingencies
 Litigation
    Insurance
  Workers Compensation.
 12




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##### Table of Contents



General and Professional Liability.
     September 30, 2007
    
    

December
31, 2006(Unaudited)General and
    
    
    
    
    
    
    
    
    
    
    General andProfessional
    
    
    Workers
    
    
    
    
    
    
    Professional
    
    
    WorkersLiability
    
    
    Compensation
    
    
    Total
    
    
    Liability
    
    
    Compensation
    
    
    TotalCurrent
    
    $
    16,177
    (1)
    
    $
    2,956
    (2)
    
    $
    19,133
    
    
    $
    16,056
    (1)
    
    $
    3,064
    (2)
    
    $
    19,120Non current
    
    
    17,982
    
    
    
    9,167
    
    
    
    27,149
    
    
    
    20,591
    
    
    
    7,715
    
    
    
    28,306$
    34,159
    
    
    $
    12,123
    
    
    $
    46,282
    
    
    $
    36,647
    
    
    $
    10,779
    
    
    $
    47,426
 
 (1)
    
    Included in accounts payable and accrued liabilities.(2)
    
    Included in employee compensation and benefits. 13




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##### Table of Contents



Financial Guarantees
  7. Stockholders Equity
  Risk-free interest rate
    
    
    4.62%Expected life
    5.75 yearsDividend yield
    
    
    0%Volatility
    
    
    32.00%Estimated forfeitures
    
    
    9.00%Weighted-average fair value
    
    $
    6.09
    Weighted-AverageWeighted -
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (in years)
    
    
    ValueOutstanding at January 1, 2007
    
    
    
    
    
    $
    Granted
    
    
    134,000
    
    
    $
    15.50Exercised
    
    
    
    
    
    $
    Forfeited or cancelled
    
    
    
    
    
    $
    Outstanding at September 30, 2007
    
    
    134,000
    
    
    $
    15.50
    
    
    
    9.83
    
    
    $
    816Exercisable at September 30, 2007
    
    
    33,500
    
    
    $
    15.50
    
    
    
    9.83
    
    
    $
    204
 8. Subsequent Events
  14




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This Managements Discussion and Analysis of Financial Condition and Results of Operations is
intended to assist in understanding and assessing the trends and significant changes in our results
of operations and financial condition. Historical results may not indicate future performance. Our
forward-looking statements reflect our current views about future events, are based on assumptions
and are subject to known and unknown risks and uncertainties that could cause actual results to
differ materially from those contemplated by these statements. Factors that may cause differences
between actual results and those contemplated by forward-looking statements include, but are not
limited to, those discussed in Part II, Item 1A, Risk Factors, of our Form 10-Q for the quarterly
period ended June 30, 2007 and this quarterly report. As used in this Managements Discussion and
Analysis of Financial Condition and Results of Operations, the words, we, our and us refer to
Skilled Healthcare Group, Inc. and its consolidated subsidiaries. This Managements Discussion and
Analysis of Financial Condition and Results of Operations should be read in conjunction with our
condensed consolidated financial statements and related notes included in this report.
 Business Overview
    Revenue
 Revenue by Service Offering
  15




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##### Table of Contents



Percentage Total Revenue
    
    Percentage Total RevenueThree Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Unaudited)
    
    (Unaudited)Long-term care services:Skilled nursing facilities
    
    
    85.1
    %
    
    
    85.3
    %
    
    
    84.7
    %
    
    
    85.8
    %Assisted living facilities
    
    
    2.5
    
    
    
    2.9
    
    
    
    2.7
    
    
    
    2.9Total long-term care services
    
    
    87.6
    
    
    
    88.2
    
    
    
    87.4
    
    
    
    88.7Ancillary services :Third-party rehabilitation
therapy services
    
    
    10.7
    
    
    
    10.6
    
    
    
    11.2
    
    
    
    10.4Hospice
    
    
    1.6
    
    
    
    1.0
    
    
    
    1.3
    
    
    
    0.8Total ancillary services
    
    
    12.3
    
    
    
    11.6
    
    
    
    12.5
    
    
    
    11.2Other:
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Sources of Revenue
 Long-Term Care Services Segment
 Skilled Nursing Facilities.
  Percentage Skilled Nursing Patient DaysThree Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Medicare
    
    
    17.5
    %
    
    
    17.3
    %
    
    
    18.5
    %
    
    
    18.2
    %Managed care
    
    
    5.9
    
    
    
    5.5
    
    
    
    5.9
    
    
    
    5.4Skilled mix
    
    
    23.4
    
    
    
    22.8
    
    
    
    24.4
    
    
    
    23.6Private and other
    
    
    17.6
    
    
    
    16.8
    
    
    
    16.8
    
    
    
    16.6Medicaid
    
    
    59.0
    
    
    
    60.4
    
    
    
    58.8
    
    
    
    59.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Assisted Living Facilities.
 Ancillary Services Segment
 Rehabilitation Therapy.
 16




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##### Table of Contents



Hospice.
 Regulatory and Other Governmental Actions Affecting Revenue
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    
    Percent of
    
    
    Revenue
    
    
    Percent of
    
    
    Revenue
    
    
    Percent of
    
    
    Revenue
    
    
    Percent ofDollars
    
    
    Total
    
    
    Dollars
    
    
    Total
    
    
    Dollars
    
    
    Total
    
    
    Dollars
    
    
    TotalMedicare
    
    $
    58,371
    
    
    
    36.2
    %
    
    $
    47,559
    
    
    
    35.1
    %
    
    $
    169,792
    
    
    
    37.1
    %
    
    $
    141,639
    
    
    
    36.2
    %Medicaid
    
    
    50,846
    
    
    
    31.5
    
    
    
    44,406
    
    
    
    32.8
    
    
    
    139,205
    
    
    
    30.5
    
    
    
    125,515
    
    
    
    32.0Managed Care
    
    
    13,610
    
    
    
    8.4
    
    
    
    11,148
    
    
    
    8.2
    
    
    
    38,028
    
    
    
    8.3
    
    
    
    31,723
    
    
    
    8.1Private and Other
    
    
    38,641
    
    
    
    23.9
    
    
    
    32,283
    
    
    
    23.9
    
    
    
    110,190
    
    
    
    24.1
    
    
    
    92,876
    
    
    
    23.7Total
    
    $
    161,468
    
    
    
    100.0
    %
    
    $
    135,396
    
    
    
    100.0
    %
    
    $
    457,215
    
    
    
    100.0
    %
    
    $
    391,753
    
    
    
    100.0
    %
  Medicare.
   17




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Medicaid.
 18




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##### Table of Contents




    
    California. In 2005, under State Assembly Bill 1629, California Medicaid, known as
Medi-Cal, switched from a prospective payment system to a prospective cost-based system for
free standing nursing facilities that is facility-specific-based upon the cost of providing
care at that facility. State Assembly Bill 1629 included both a rate increase, as well as a
quality assurance fee that is a provider tax. The provider tax is a mechanism for states to
obtain additional federal funding for the states Medicaid program. State Assembly Bill
1629 is scheduled to expire, with its prospective cost-based system and quality assurance
fee becoming inoperative, on July 31, 2008, unless a later enacted statute extends this
date.
    
    Texas. Texas has a prospective cost-based system that is facilityspecific-based upon
patient acuity mix for that facility. Effective September 1, 2008, Texas will transition
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; (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.
  Managed Care.
 Private Pay and Other.
 Critical Accounting Policies Update
  19




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006(Unaudited)
    
    
    

    (Unaudited)Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses:Cost of services (exclusive of rent cost
of sales and depreciation and amortization
shown below)
    
    
    74.8
    
    
    
    75.0
    
    
    
    74.7
    
    
    
    74.8Rent cost of sales
    
    
    2.0
    
    
    
    2.0
    
    
    
    1.9
    
    
    
    2.0General and administrative
    
    
    7.4
    
    
    
    7.6
    
    
    
    7.4
    
    
    
    7.1Depreciation and amortization
    
    
    2.7
    
    
    
    2.4
    
    
    
    2.8
    
    
    
    2.786.9
    
    
    
    87.0
    
    
    
    86.8
    
    
    
    86.6Other income (expenses):Interest expense
    
    
    (6.1
    )
    
    
    (8.6
    )
    
    
    (7.4
    )
    
    
    (8.8
    )Premium on redemption of debt and
write-off of related deferred financing
costs
    
    
    
    
    
    
    
    
    
    
    (2.5
    )
    
    
    Interest income
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2Other
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    Equity in earnings of joint venture
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.3Change in fair value of interest rate hedge
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    Total other income (expenses), net
    
    
    (5.8
    )
    
    
    (8.2
    )
    
    
    (9.3
    )
    
    
    (8.3
    )Income before provision for income taxes
    
    
    7.3
    
    
    
    4.8
    
    
    
    3.9
    
    
    
    5.1Provision for income taxes
    
    
    3.0
    
    
    
    1.9
    
    
    
    1.7
    
    
    
    2.1Net income
    
    
    4.3
    %
    
    
    2.9
    %
    
    
    2.2
    %
    
    
    3.0
    %
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)Reconciliation of net income to EBITDA and
Adjusted EBITDA (in thousands):Net income
    
    $
    6,864
    
    
    $
    3,961
    
    
    $
    9,965
    
    
    $
    11,778Interest expense, net of interest income
    
    
    9,530
    
    
    
    11,439
    
    
    
    32,635
    
    
    
    33,650Provision for income taxes
    
    
    4,801
    
    
    
    2,588
    
    
    
    7,622
    
    
    
    8,260Depreciation and amortization expense
    
    
    4,420
    
    
    
    3,192
    
    
    
    12,619
    
    
    
    10,419EBITDA
    
    
    25,615
    
    
    
    21,180
    
    
    
    62,841
    
    
    
    64,107Change in fair value of interest rate hedge
    
    
    6
    
    
    
    227
    
    
    
    40
    
    
    
    171Other
    
    
    159
    
    
    
    
    
    
    
    62
    
    
    
    Write-off of deferred financing costs
related to redemption of debt
    
    
    
    
    
    
    
    
    
    
    3,948
    
    
    
    Premium on redemption of debt
    
    
    
    
    
    
    
    
    
    
    7,700
    
    
    
    Adjusted EBITDA
    
    $
    25,780
    
    
    $
    21,407
    
    
    $
    74,591
    
    
    $
    64,278
  21




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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;
 22




---



##### Table of Contents




    
    although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not
reflect any cash requirements for such replacements;
 
    
    they are not adjusted for all non-cash income or expense items that are reflected in our
consolidated statements of cash flows;
 
    
    they do not reflect the impact on net income of charges resulting from certain matters we
consider not to be indicative of our on-going operations; and
 
    
    other companies in our industry may calculate these measures differently than we do, which
may limit their usefulness as comparative measures.
  Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Revenue.
   23




---



##### Table of Contents



Cost of Services Expenses.
     Rent Cost of Sales.
 General and Administrative Services Expenses.
 24




---



##### Table of Contents



Depreciation and Amortization.
 Interest Expense.
 Interest Income and Other.
 Provision for Income Taxes
 EBITDA.
   Net Income
 25




---



##### Table of Contents



Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Revenue.
   Cost of Services Expenses.
    26




---



##### Table of Contents



Rent Cost of Sales.
 General and Administrative Services Expenses.
 Depreciation and Amortization.
 Interest Expense.
 27




---



##### Table of Contents



Premium on Redemption of Debt and Write-off of Related Deferred Financing Costs.
 Interest Income and Other.
 Provision for Income Taxes.
 EBITDA.
   Net Income
 Liquidity and Capital Resources
 Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
  28




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##### Table of Contents



Principal Debt Obligations and Capital Expenditures
   29




---



##### Table of Contents



Express Recovery tm Express Recovery tm Express Recovery tm
   Other Factors Affecting Liquidity and Capital Resources
 Medical and Professional Malpractice and Workers Compensation Insurance.
 30




---



##### Table of Contents



Inflation.
  Seasonality.
 Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  31




---



##### Table of Contents



Item 4. Controls and Procedures
  
 Item 4T. Controls and Procedures
 Disclosure Controls and Procedures
   Internal Control Over Financial Reporting
  32




---



##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   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.
   33




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 Number
    
    Description2.1*
    
    Agreement of and Plan of Merger, dated as of October 22, 2005, among SHG
Acquisition Corp., SHG Holding Solutions, Inc. and Skilled Healthcare Group,
Inc (incorporated by reference to Exhibit 2.1 to the Companys Registration
Statement on Form S-1, No. 333-137897, filed on October 10, 2006).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.
(incorporated by reference to Exhibit 2.2 to the Companys Registration
Statement on Form S-1, No. 333-137897, filed on October 10, 2006).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 Trustees 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 (incorporated by reference to Exhibit 2.3 to the Companys
Registration Statement on Form S-1, No. 333-137897, filed on October 10,
2006).2.4*
    
    Agreement and Plan of Merger, dated as of February 7, 2007, by and between
SHG Holding Solutions, Inc., and Skilled Healthcare Group, Inc.
(incorporated by reference to Exhibit 2.4 to the Companys Registration
Statement on Form S-1/A, No. 333-137897, filed on February 9, 2007).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. (incorporated by reference to
Exhibit 2.5 to the Companys Registration Statement on Form S-1/A, No.
333-137897, filed on April 23, 2007).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 (incorporated by reference to Exhibit 3.2 to the Companys
Form 10-Q, filed on August 9, 2007).3.1*
    
    Certificate of Ownership and Merger of Skilled Healthcare Group, Inc., dated
February 7, 2007 (incorporated by reference to Exhibit 3.1.1 to the
Companys Registration Statement on Form S-1/A, No. 333-137897, filed on
April 27, 2007).
 34




---



##### Table of Contents



Number
    
    Description3.2*
    
    Amended and Restated Certificate of Incorporation of Skilled Healthcare
Group, Inc. (incorporated by reference to Exhibit 3.2 to the Companys Form
10-Q, filed on August 9, 2007).3.3*
    
    Amended and Restated Bylaws of Skilled Healthcare Group, Inc., dated April
19, 2007 (incorporated by reference to Exhibit 3.4 to the Companys
Registration Statement on Form S-1/A, No. 333-137897, filed on April 27,
2007).4.1*
    
    Form of specimen certificate for Skilled Healthcare Group, Inc.s class A
common stock (incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form S-1/A, No. 333-137897, filed on April 27,
2007).4.2*
    
    Indenture, dated as of December 27, 2005, by and among SHG Acquisition
Corp., Wells Fargo Bank, N.A. and certain subsidiaries of Skilled Healthcare
Group, Inc. (incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form S-1, No. 333-137897, filed on October 10,
2006).4.3*
    
    Form of 11% Senior Subordinated Notes due 2014 (included in exhibit 4.1).4.4*
    
    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. (incorporated by reference to Exhibit 4.3 to the Companys
Registration Statement on Form S-1, No. 333-137897, filed on October 10,
2006).4.5*
    
    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 (incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on Form S-1, No. 333-137897, filed on
October 10, 2006).4.6*
    
    Registration Agreement dated as of December 27, 2005, among SHG Holding
Solutions, Inc. and the persons listed thereon (incorporated by reference to
Exhibit 4.5 to the Companys Registration Statement on Form S-1, No.
333-137897, filed on October 10, 2006).10.1
    
    Employment Agreement, dated as of August 14, 2007, by and between Skilled
Healthcare LLC and Christopher N. Felfe.10.2
    
    Side Letter, dated as of August 14, 2007, by and between Skilled Healthcare,
LLC and Christopher N. Felfe.31.1
    
    Certification of Principal Executive Officer Required Under Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.32
    
    Certification of Principal Executive Officer and Principal Financial Officer
Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.
 
 *
    
    Incorporated by reference.+
    
    The Company has omitted certain schedules and exhibits pursuant to Item 601(b)(2) of
Regulation S-K and shall furnish supplementally to the SEC copies of any of the omitted
schedules and exhibits upon the SECs request. 35




---



##### Table of Contents



SIGNATURES
  SKILLED HEALTHCARE GROUP, INC.Date: November 9, 2007
    /s/ John E. KingJohn E. KingTreasurer and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory) /s/ Christopher N. FelfeChristopher N. FelfeSenior Vice President, Finance
and Chief Accounting Officer
(Principal Accounting Officer and Authorized Signatory) 36




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##### Table of Contents



EXHIBIT INDEX
 Number
    
    Description2.1*
    
    Agreement of and Plan of Merger, dated as of October 22, 2005, among SHG
Acquisition Corp., SHG Holding Solutions, Inc. and Skilled Healthcare Group,
Inc (incorporated by reference to Exhibit 2.1 to the Companys Registration
Statement on Form S-1, No. 333-137897, filed on October 10, 2006).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.
(incorporated by reference to Exhibit 2.2 to the Companys Registration
Statement on Form S-1, No. 333-137897, filed on October 10, 2006).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 Trustees 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 (incorporated by reference to Exhibit 2.3 to the Companys Registration
Statement on Form S-1, No. 333-137897, filed on October 10, 2006).2.4*
    
    Agreement and Plan of Merger, dated as of February 7, 2007, by and between SHG
Holding Solutions, Inc., and Skilled Healthcare Group, Inc. (incorporated by
reference to Exhibit 2.4 to the Companys Registration Statement on Form
S-1/A, No. 333-137897, filed on February 9, 2007).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. (incorporated by reference to Exhibit
2.5 to the Companys Registration Statement on Form S-1/A, No. 333-137897,
filed on April 23, 2007).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 (incorporated by reference to Exhibit 2.6 to the Companys Form 10-Q,
filed on August 9, 2007).3.1*
    
    Certificate of Ownership and Merger of Skilled Healthcare Group, Inc., dated
February 7, 2007 (incorporated by reference to Exhibit 3.1.1 to the Companys
Registration Statement on Form S-1/A, No. 333-137897, filed on April 27,
2007).3.2*
    
    Amended and Restated Certificate of Incorporation of Skilled Healthcare Group,
Inc. (incorporated by reference to Exhibit 3.2 to the Companys Form 10-Q,
filed on August 9, 2007).3.3*
    
    Amended and Restated Bylaws of Skilled Healthcare Group, Inc., dated April 19,
2007 (incorporated by reference to Exhibit 3.4 to the Companys Registration
Statement on Form S-1/A, No. 333-137897, filed on April 27, 2007).4.1*
    
    Form of specimen certificate for Skilled Healthcare Group, Inc.s class A
common stock (incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form S-1/A, No. 333-137897, filed on April 27,
2007).4.2*
    
    Indenture, dated as of December 27, 2005, by and among SHG Acquisition Corp.,
Wells Fargo Bank, N.A. and certain subsidiaries of Skilled Healthcare Group,
Inc. (incorporated by reference to Exhibit 4.2 to the Companys Registration
Statement on Form S-1, No. 333-137897, filed on October 10, 2006).4.3*
    
    Form of 11.0% Senior Subordinated Notes due 2014 (included in exhibit 4.1).4.4*
    
    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. (incorporated by reference to Exhibit 4.3 to the Companys Registration
Statement on Form S-1, No. 333-137897, filed on October 10, 2006).
 37




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##### Table of Contents



Number
    
    Description4.5*
    
    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 (incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on Form S-1, No. 333-137897, filed on October
10, 2006).4.6*
    
    Registration Agreement dated as of December 27, 2005, among SHG Holding
Solutions, Inc. and the persons listed thereon (incorporated by reference to
Exhibit 4.5 to the Companys Registration Statement on Form S-1, No.
333-137897, filed on October 10, 2006).10.1
    
    Employment Agreement, dated as of August 14, 2007, by and between Skilled
Healthcare LLC and Christopher N. Felfe.10.2
    
    Side Letter, dated as of August 14, 2007, by and between Skilled Healthcare,
LLC and Christopher N. Felfe.31.1
    
    Certification of Principal Executive Officer Required Under Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Principal Financial Officer Required Under Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.32
    
    Certification of Principal Executive Officer and Principal Financial Officer
Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, and 18 U.S.C. Section 1350.
 
 *
    
    Incorporated by reference.+
    
    The Company has omitted certain schedules and exhibits pursuant to Item 601(b)(2) of
Regulation S-K and shall furnish supplementally to the SEC copies of any of the omitted
schedules and exhibits upon the SECs request. 38