##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K/A
 Amendment No. 1
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2008
 OR
 o
    
    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.
  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)
 
 Common Stock, $0.001 par value per share
(Title of each class)
    
    New York Stock Exchange
(Name of each exchange on which registered)
   o þ
  o þ
  þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer þNon-accelerated filer o
    
    Non-accelerated filer o
  o  þ
  Documents Incorporated by Reference:
    i




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##### Table of Contents



Explanatory Note
     As of December 31,2008
    
    
    2007Previously
    
    
    Restatement
    
    
    As
    
    
    Previously
    
    
    Restatement
    
    
    AsBalance Sheet Line items
    
    Reported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedAccounts
receivable, net
    
    $
    115.2
    
    
    $
    (12.2
    )
    
    $
    103.0
    
    
    $
    112.9
    
    
    $
    (7.2
    )
    
    $
    105.7Allowance for doubtful accounts
    
    
    14.3
    
    
    
    12.3
    
    
    
    26.6
    
    
    
    9.7
    
    
    
    7.2
    
    
    
    16.9Deferred income taxes  current
    
    
    14.7
    
    
    
    5.0
    
    
    
    19.7
    
    
    
    15.0
    
    
    
    2.9
    
    
    
    17.9Total current assets
    
    
    148.7
    
    
    
    (7.3
    )
    
    
    141.4
    
    
    
    150.3
    
    
    
    (4.2
    )
    
    
    146.1Total assets
    
    
    1,013.8
    
    
    
    (7.2
    )
    
    
    1,006.6
    
    
    
    970.1
    
    
    
    (4.2
    )
    
    
    965.9Deferred income taxes
    
    
    0.5
    
    
    
    0.2
    
    
    
    0.7
    
    
    
    2.3
    
    
    
    0.2
    
    
    
    2.5Total Liabilities
    
    
    601.7
    
    
    
    0.3
    
    
    
    602.0
    
    
    
    595.6
    
    
    
    0.2
    
    
    
    595.8Additional paid-in-capital
    
    
    366.6
    
    
    
    (3.6
    )
    
    
    363.0
    
    
    
    365.1
    
    
    
    (3.6
    )
    
    
    361.5Retained earnings
    
    
    47.3
    
    
    
    (3.9
    )
    
    
    43.4
    
    
    
    10.1
    
    
    
    (0.8
    )
    
    
    9.3Stockholders equity
    
    
    412.1
    
    
    
    (7.5
    )
    
    
    404.6
    
    
    
    374.5
    
    
    
    (4.4
    )
    
    
    370.1Total liabilities and
stockholders equity
    
    
    1,013.8
    
    
    
    (7.2
    )
    
    
    1,006.6
    
    
    
    970.1
    
    
    
    (4.2
    )
    
    
    965.9
 ii




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##### Table of Contents



Year Ended December 31,2008
    
    
    2007
    
    
    2006Consolidated Statement of
    
    Previously
    
    
    Restatement
    
    
    
    
    
    
    Previously
    
    
    Restatement
    
    
    
    
    
    
    Previously
    
    
    RestatementOperations Data
    
    Reported
    
    
    Adjustments
    
    

Restated
    
    
    Reported
    
    
    Adjustments
    
    

Restated
    
    

Reported
    
    
    Adjustments
    
    

RestatedCost of Services
    
    $
    578.5
    
    
    $
    5.1
    
    
    $
    583.6
    
    
    $
    501.0
    
    
    $
    3.0
    
    
    $
    504.0
    
    
    $
    417.7
    
    
    $
    4.2
    
    
    $
    421.9Income before provision for income taxes
    
    
    57.3
    
    
    
    (5.1
    )
    
    
    52.2
    
    
    
    30.1
    
    
    
    (3.0
    )
    
    
    27.1
    
    
    
    29.5
    
    
    
    (4.1
    )
    
    
    25.4Provision for income taxes
    
    
    20.1
    
    
    
    (2.0
    )
    
    
    18.1
    
    
    
    13.0
    
    
    
    (1.2
    )
    
    
    11.8
    
    
    
    12.2
    
    
    
    (1.6
    )
    
    
    10.6Net income
    
    
    37.2
    
    
    
    (3.1
    )
    
    
    34.1
    
    
    
    17.1
    
    
    
    (1.8
    )
    
    
    15.3
    
    
    
    17.3
    
    
    
    (2.5
    )
    
    
    14.8Net income (loss) attributable to common stockholders
    
    
    37.2
    
    
    
    (3.1
    )
    
    
    34.1
    
    
    
    9.8
    
    
    
    (1.9
    )
    
    
    7.9
    
    
    
    (1.1
    )
    
    
    (2.5
    )
    
    
    (3.6
    )Earnings per common share, basic
    
    $
    1.02
    
    
    $
    (0.09
    )
    
    $
    0.93
    
    
    $
    0.36
    
    
    $
    (0.07
    )
    
    $
    0.29
    
    
    $
    (0.09
    )
    
    $
    (0.22
    )
    
    $
    (0.31
    )Earnings per common share, diluted
    
    $
    1.01
    
    
    $
    (0.09
    )
    
    $
    0.92
    
    
    $
    0.35
    
    
    $
    (0.06
    )
    
    $
    0.29
    
    
    $
    (0.09
    )
    
    $
    (0.22
    )
    
    $
    (0.31
    )
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Consolidated Statement of
    
    Previously
    
    
    Restatement
    
    
    
    
    
    
    Previously
    
    
    Restatement
    
    
    
    
    
    
    Previously
    
    
    RestatementCash Flows
    
    Reported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedOperating ActivitiesNet income
    
    $
    37.2
    
    
    $
    (3.1
    )
    
    $
    34.1
    
    
    $
    17.1
    
    
    $
    (1.8
    )
    
    $
    15.3
    
    
    $
    17.3
    
    
    $
    (2.5
    )
    
    $
    14.8Provision for doubtful accounts
    
    
    10.1
    
    
    
    5.1
    
    
    
    15.2
    
    
    
    6.1
    
    
    
    3.0
    
    
    
    9.1
    
    
    
    5.4
    
    
    
    4.2
    
    
    
    9.6Deferred income taxes
    
    
    (0.7
    )
    
    
    (1.9
    )
    
    
    (2.6
    )
    
    
    0.3
    
    
    
    (1.1
    )
    
    
    (0.8
    )
    
    
    (6.4
    )
    
    
    (1.6
    )
    
    
    (8.0
    )
 Quarterly Data -
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,Previously reported
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Accounts receivable, net
    
    $
    115.2
    
    
    $
    113.5
    
    
    $
    111.2
    
    
    $
    126.2
    
    
    $
    112.9
    
    
    $
    101.4
    
    
    $
    89.7
    
    
    $
    88.5Cost of Services
    
    
    148.4
    
    
    
    145.7
    
    
    
    142.3
    
    
    
    142.1
    
    
    
    139.8
    
    
    
    127.8
    
    
    
    119.5
    
    
    
    113.9Income before provision for income taxes
    
    
    16.5
    
    
    
    12.1
    
    
    
    14.8
    
    
    
    13.9
    
    
    
    12.5
    
    
    
    11.7
    
    
    
    (2.1
    )
    
    
    8.0Provision for income taxes
    
    
    6.2
    
    
    
    2.6
    
    
    
    5.8
    
    
    
    5.5
    
    
    
    5.4
    
    
    
    4.8
    
    
    
    (0.6
    )
    
    
    3.4Net income
    
    
    10.3
    
    
    
    9.6
    
    
    
    8.9
    
    
    
    8.4
    
    
    
    7.1
    
    
    
    6.9
    
    
    
    (1.6
    )
    
    
    4.7Net income (loss) attributable to common
stockholders
    
    
    10.3
    
    
    
    9.6
    
    
    
    8.9
    
    
    
    8.4
    
    
    
    7.1
    
    
    
    6.9
    
    
    
    (4.1
    )
    
    
    (0.1
    )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
    )
 Quarterly Data -
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,Restatement Adjustments
     
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Accounts receivable, net
    
    $
    (12.2
    )
    
    $
    (10.8
    )
    
    $
    (9.1
    )
    
    $
    (7.9
    )
    
    $
    (7.2
    )
    
    $
    (6.3
    )
    
    $
    (6.3
    )
    
    $
    (5.5
    )Cost of Services
    
    
    1.5
    
    
    
    1.7
    
    
    
    1.1
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.9
    
    
    
    1.3Income before provision for income taxes
    
    
    (1.4
    )
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (0.1
    )
    
    
    (0.8
    )
    
    
    (1.3
    )Provision for income taxes
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.3
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.5
    )Net income
    
    
    (0.9
    )
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    (0.8
    )Net income (loss) attributable to common
stockholders
    
    
    (0.9
    )
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    (0.8
    )Earnings per common share, basic
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )Earnings per common share, diluted
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )
 December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,Quarterly Data - Restated
     
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Accounts receivable, net
    
    $
    103.0
    
    
    $
    102.7
    
    
    $
    102.1
    
    
    $
    118.3
    
    
    $
    105.7
    
    
    $
    95.1
    
    
    $
    83.4
    
    
    $
    83.0Cost of Services
    
    
    149.9
    
    
    
    147.4
    
    
    
    143.4
    
    
    
    142.9
    
    
    
    140.5
    
    
    
    127.9
    
    
    
    120.4
    
    
    
    115.2Income before provision for income taxes
    
    
    15.1
    
    
    
    10.4
    
    
    
    13.6
    
    
    
    13.1
    
    
    
    11.7
    
    
    
    11.6
    
    
    
    (2.9
    )
    
    
    6.7Provision for income taxes
    
    
    5.7
    
    
    
    1.9
    
    
    
    5.3
    
    
    
    5.2
    
    
    
    5.0
    
    
    
    4.8
    
    
    
    (0.9
    )
    
    
    2.9Net income
    
    
    9.4
    
    
    
    8.6
    
    
    
    8.2
    
    
    
    7.9
    
    
    
    6.7
    
    
    
    6.8
    
    
    
    (2.1
    )
    
    
    3.9Net income (loss) attributable to common
stockholders
    
    
    9.4
    
    
    
    8.6
    
    
    
    8.2
    
    
    
    7.9
    
    
    
    6.6
    
    
    
    6.8
    
    
    
    (4.6
    )
    
    
    (0.9
    )Earnings per common share, basic
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )Earnings per common share, diluted
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )
  iii




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iv




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##### 



SKILLED HEALTHCARE GROUP, INC.
ANNUAL REPORT
INDEX
 PageItem 1.
    
    Business
    
    1Item 1A.
    
    Risk Factors
    
    22Item 1B.
    
    Unresolved Staff Comments
    
    42Item 2.
    
    Properties
    
    42Item 3.
    
    Legal Proceedings
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    43Item 5.
    
    Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    44Item 6.
    
    Selected Financial Data
    
    46Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    53Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    89Item 8.
    
    Financial Statements and Supplementary Data
    
    90Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    90Item 9A.
    
    Controls and Procedures
    
    90Item 9B.
    
    Other Information
    
    94Item 10.
    
    Directors, Executive Officers and Corporate Governance
    
    95Item 11.
    
    Executive Compensation
    
    95Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    95Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    95Item 14.
    
    Principal Accountant Fees and Services
    
    95Item 15.
    
    Exhibits and Financial Statement Schedules
    
    96SIGNATURES
    
    100EX-21.1EX-23.1EX-31.1EX-31.2EX-32
  v




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##### Table of Contents



PART I
 
 Item 1.
    
    Business
 Overview
  Restatement
  2008 Acquisitions
   Operations
  1




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Long-Term Care Services Segment
 Skilled Nursing Facilities
   Express Recovery Express Recovery Express Recovery Express Recovery Express Recovery Express
Recovery
 Assisted Living Facilities
  2




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Equity Investment in Pharmacy Joint Venture
  Ancillary Services Segment
 Rehabilitation Therapy Services
   Hospice Care
  Our Local Referral Network
  3




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Payment Sources
  Sources of Reimbursement
  4




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##### Table of Contents



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.
     5




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6




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Medicaid
    7




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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. California has extended State
Assembly Bill 1629 through the 2009-2010 and 2010-2011 rate years with a growth rate
of up to five percent for both years.
 
    
    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.
 8




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
    
    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
 Private Pay and Other
 Reimbursement for Specific Services
 Reimbursement for Skilled Nursing Services
  9




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##### Table of Contents



Reimbursement for Assisted Living Services
 Reimbursement for Rehabilitation Therapy Services
  Reimbursement for Hospice Services
    10




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Government Regulation
 General
   Civil and Criminal Fraud and Abuse Laws and Enforcement
    11




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Anti-Kickback Statute
     Stark Law
  12




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False Claims
   13




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Health Insurance Portability and Accountability Act of 1996
    State Privacy Laws
  14




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Certificates of Need and Other Regulatory Matters
  State Operating License Requirements
  Rehabilitation License Requirements
  Regulation of our Joint Venture Institutional Pharmacy
   15




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Competition
  Express Recovery
    Labor
  16




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##### Table of Contents



Risk Management
  Insurance
  General and Professional Liability Insurance
     17




---



##### Table of Contents



Workers Compensation
   Employee Benefit Insurance
  Tort Law Environment
    18




---



##### Table of Contents



Environmental Matters
   Customers
  19




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##### Table of Contents



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 FinancialOfficerRoland Rapp
    
    47
    
    Executive Vice President, General Counsel and SecretaryMark Wortley
    
    53
    
    Executive Vice President and Chief Executive Officer ofAncillary CompaniesChristopher N. Felfe
    
    44
    
    Senior Vice President of Finance and Chief AccountingOfficerSusan 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
 Devasis Ghose, Executive Vice President, Treasurer and Chief Financial Officer.
 Roland Rapp, Executive Vice President, General Counsel and Secretary
 20




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##### Table of Contents



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
 Employees
  Available Information
 http://www.skilledhealthcaregroup.com
 21




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##### Table of Contents



Company History
   
 Item 1A. Risk Factors
  22




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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;
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##### Table of Contents




    
    the reduction or elimination of annual rate increases; or
    
    an increase in co-payments or deductibles payable by beneficiaries.
  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.
    24




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Recent federal government proposals could limit the states use of provider tax programs to
generate revenue for their Medicaid expenditures, which could result in a reduction in our
reimbursement rates under Medicaid.
  Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction.
    25




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##### Table of Contents



Healthcare reform legislation could adversely affect our revenue and financial condition.
   We are subject to extensive and complex laws and government regulations. If we are not operating
in compliance with these laws and regulations or if these laws and regulations change, we could be
required to make significant expenditures or change our operations in order to bring our facilities
and operations into compliance.
  
    
    licensure and certification;
    
    adequacy and quality of healthcare services;
    
    qualifications of healthcare and support personnel;
    
    quality of medical equipment;
    
    confidentiality, maintenance and security issues associated with medical records and
claims processing;
    
    relationships with physicians and other referral sources and recipients;
    
    constraints on protective contractual provisions with patients and third-party
payors;
    
    operating policies and procedures;
    
    addition of facilities and services; and
    
    billing for services.
  26




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##### Table of Contents




    
    fraud and abuse;
    
    quality of care;
    
    financial relationships with referral sources; and
    
    the medical necessity of services provided.
  We face periodic reviews, audits and investigations under federal and state government programs and
contracts. These audits could have adverse findings that may negatively affect our business.
  
    
    refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or
from 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;
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##### Table of Contents




    
    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.
  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.
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The restatement of our consolidated financial statements has subjected us to a number of additional
risks and uncertainties, including increased costs for accounting and legal fees and the increased
possibility of legal proceedings.
  Management recently identified a material weakness in our internal control over financial reporting
with respect to errors in the reporting of accounts receivable allowance for doubtful accounts in our LTC operating
segment. Additionally, management may identify material weaknesses in the future that could
adversely affect investor confidence, impair the value of our common stock and increase our cost of
raising capital .
    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.
  29




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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.
    30




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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.
  31




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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.
  32




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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.
   33




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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;
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##### Table of Contents




    
    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 .
     35




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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.
  Despite our substantial indebtedness, we may still be able to incur more debt. This could
intensify the risks associated with this indebtedness.
  36




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Our operations are subject to environmental and occupational health and safety regulations, which
could subject us to fines, penalties and increased operational costs.
  A portion of our workforce has unionized and our operations may be adversely affected by work
stoppages, strikes or other collective actions.
  Natural disasters, terrorist attacks or acts of war may seriously harm our business.
  The efficient operation of our business is dependent on our information systems.
  37




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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;
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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.
  39




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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.
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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;
    
    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 66 2/3%
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.
  41




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Item 1B.
    
    Unresolved Staff Comments
  
 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
  42




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Item 4.
    
    Submission of Matters to a Vote of Security Holders
  43




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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
   44




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45




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Item 6.
    
    Selected Financial Data
     46




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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL DATA
 Years Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(1)
    
    
    2004(1)Successor
    
    
    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 (as restated)
    
    
    647,305
    
    
    
    554,940
    
    
    
    462,887
    
    
    
    410,818
    
    
    
    323,023Total other income (expenses), net (as restated)
    
    
    (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 (as restated)
    
    
    52,177
    
    
    
    27,083
    
    
    
    25,386
    
    
    
    7,778
    
    
    
    18,153Provision for (benefit from) income taxes (as restated)
    
    
    18,081
    
    
    
    11,801
    
    
    
    10,595
    
    
    
    (13,048
    )
    
    
    4,421Income before discontinued operations and
cumulative effect of a change in accounting principle
(as restated)
    
    
    34,096
    
    
    
    15,282
    
    
    
    14,791
    
    
    
    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 (as restated)
    
    
    34,096
    
    
    
    15,282
    
    
    
    14,791
    
    
    
    33,938
    
    
    
    16,521Accretion on preferred stock
    
    
    
    
    
    
    (7,354
    )
    
    
    (18,406
    )
    
    
    (744
    )
    
    
    (469
    )Net income(loss) attributable to common stockholders
(as restated)
    
    $
    34,096
    
    
    $
    7,928
    
    
    $
    (3,615
    )
    
    $
    33,194
    
    
    $
    16,052Earnings Per Share Data:Earnings per common share, basic (as restated)
    
    $
    0.93
    
    
    $
    0.29
    
    
    $
    (0.31
    )
    
    $
    27.01
    
    
    $
    13.45Earnings per common share, diluted (as restated)
    
    $
    0.92
    
    
    $
    0.29
    
    
    $
    (0.31
    )
    
    $
    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(2) (as restated)
    
    
    109,736
    
    
    
    87,293
    
    
    
    84,381
    
    
    
    57,561
    
    
    
    51,120EBITDA margin(2) (as restated)
    
    
    15.0
    %
    
    
    13.8
    %
    
    
    15.9
    %
    
    
    12.4
    %
    
    
    13.8
    %Adjusted EBITDA(2) (as restated)
    
    
    109,798
    
    
    
    98,981
    
    
    
    84,578
    
    
    $
    77,778
    
    
    $
    58,559Adjusted EBITDA margin(2) (as restated)
    
    
    15.0
    %
    
    
    15.6
    %
    
    
    15.9
    %
    
    
    16.8
    %
    
    
    15.8
    %
 47




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##### Table of Contents



As of December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(1)
    
    
    2004(1)Successor
    
    
    Successor
    
    
    Successor
    
    
    Predecessor
    
    
    Predecessor(in thousands)Balance Sheet DataCash and cash equivalents
    
    $
    2,047
    
    
    $
    5,012
    
    
    $
    2,821
    
    
    $
    37,138
    
    
    $
    4,666Working capital (3) (as restated)
    
    
    47,298
    
    
    
    50,872
    
    
    
    17,166
    
    
    
    59,130
    
    
    
    15,036Property and equipment, net
    
    
    346,466
    
    
    
    294,281
    
    
    
    230,904
    
    
    
    191,151
    
    
    
    192,397Total assets (as restated)
    
    
    1,006,580
    
    
    
    965,857
    
    
    
    836,233
    
    
    
    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) (as restated)
    
    
    404,577
    
    
    
    370,056
    
    
    
    238,102
    
    
    
    222,927
    
    
    
    (50,475
    )
 
 Notes (1)
    
    The restatement adjustments did not affect the fiscal years ended December 31, 2005 and
December 31, 2004.(2)
    
    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.
   48




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
    
    they do not reflect our cash expenditures, or future requirements, for capital
expenditures or contractual commitments;
 49




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##### Table of Contents




    
    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.
  50




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Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005(a)
    
    
    2004(a)Successor
    
    
    Successor
    
    
    Successor
    
    
    Predecessor
    
    
    Predecessor(in thousands)Net income (as restated)
    
    $
    34,096
    
    
    $
    15,282
    
    
    $
    14,791
    
    
    $
    33,938
    
    
    $
    16,521PlusProvision for (benefit from) income
taxes (as restated)
    
    
    18,081
    
    
    
    11,801
    
    
    
    10,595
    
    
    
    (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 (as restated)
    
    
    109,736
    
    
    
    87,293
    
    
    
    84,381
    
    
    
    57,561
    
    
    
    51,120Discontinued operations, net of tax(b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,740
    )
    
    
    (2,789
    )Cumulative effect of a change in
accounting principle, net of tax(c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,628
    
    
    
    Change in fair value of interest rate
hedge(d)
    
    
    
    
    
    
    40
    
    
    
    197
    
    
    
    165
    
    
    
    926(Gain) loss on sale of assets(e)
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    (980
    )
    
    
    Premium on redemption of debt and
write-off of deferred financing costs
of extinguished debt(f)
    
    
    
    
    
    
    11,648
    
    
    
    
    
    
    
    16,626
    
    
    
    7,858Reorganization expenses(g)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,007
    
    
    
    1,444Expenses related to the Transactions(h).
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,511
    
    
    
    Adjusted EBITDA (as restated)
    
    $
    109,798
    
    
    $
    98,981
    
    
    $
    84,578
    
    
    $
    77,778
    
    
    $
    58,559
 
 Notes (a)
    
    The restatement adjustments did not affect the fiscal years ended December 31, 2005 and
December 31, 2004(b)
    
    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.(c)
    
    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.(d)
    
    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.(e)
    
    While gains or losses on sales of assets are required under GAAP, these amounts are also not
reflective of income and losses of our underlying business.
 51




---



##### Table of Contents



(f)
    
    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 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.(g)
    
    Represents expenses incurred in connection with our Chapter 11 reorganization.(h)
    
    Represents (1) $0.2 million in fees paid by us in connection with the Transactions for
valuation services and an acquisition audit; (2) our forgiveness in connection with the
completion of the Transactions of a $2.5 million note issued to us in March 1998 by our
then-Chairman of the Board, William Scott; (3) a $4.8 million bonus award expense incurred in
December 2005 upon the completion of the Transactions pursuant to 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.(3)
    
    As a result of the restatement adjustments, working capital as of December 31, 2008
decreased $7.3 million, from $54.6 million as previously-reported to $47.3 million as
restated, working capital as of December 31, 2007 decreased $4.2 million, from $55.1
million as previously-reported to $50.9 million as restated, and working capital as of
December 31, 2006 decreased $2.4 million, from $19.6 million as previously-reported to
$17.2 million as restated. The decreases in working capital were primarily due to the
increase in our restated accounts receivable allowance for doubtful accounts in our LTC operating segment in
periods from 2006 through 2008, as a result of the restatement.
 52




---



##### Table of Contents



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
gives effect to the restatement of the accompanying consolidated financial statements and related
matters discussed in Note 2, Restatement, of the Notes to the Consolidated Financial Statements,
and should be read together with the accompanying consolidated financial statements and related
notes included elsewhere in this amended report on Form 10-K/A . The restatement corrects the
allowance for LTC accounts receivable, cost of services, pre-tax income, net income and retained
earnings for the periods affected. This information 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, of this amended report on Form 10-K/A . 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 amended report on Form 10-K/A and our consolidated
financial statements and related notes included in this amended report.
 Certain prior year amounts have been reclassified to conform to current year presentation.
 Business Overview
    53




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##### Table of Contents



Restatement
     Year Ended December 31,2008
    
    
    2007
    
    
    2006Previously
    
    
    Restatement
    
    
    As
    
    
    Previously
    
    
    Restatement
    
    
    As
    
    
    Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    Restated
    
    
    Reported
    
    
    Adjustments
    
    
    RestatedBalance Sheet DataAccounts receivable
    
    $
    115.2
    
    
    $
    (12.2
    )
    
    $
    103.0
    
    
    $
    112.9
    
    
    $
    (7.2
    )
    
    $
    105.7
    
    
    $
    86.2
    
    
    $
    (4.2
    )
    
    $
    82.0Consolidated Statement ofOperations DataCost of Services
    
    $
    578.5
    
    
    $
    5.1
    
    
    $
    583.6
    
    
    $
    501.0
    
    
    $
    3.0
    
    
    $
    504.0
    
    
    $
    417.7
    
    
    $
    4.2
    
    
    $
    421.9Income before provision
for income taxes
    
    
    57.3
    
    
    
    (5.1
    )
    
    
    52.2
    
    
    
    30.1
    
    
    
    (3.0
    )
    
    
    27.1
    
    
    
    29.5
    
    
    
    (4.2
    )
    
    
    25.4Provision for income taxes
    
    
    20.1
    
    
    
    (2.0
    )
    
    
    18.1
    
    
    
    13.0
    
    
    
    (1.2
    )
    
    
    11.8
    
    
    
    12.2
    
    
    
    (1.6
    )
    
    
    10.6Net income
    
    
    37.2
    
    
    
    (3.1
    )
    
    
    34.1
    
    
    
    17.1
    
    
    
    (1.8
    )
    
    
    15.3
    
    
    
    17.3
    
    
    
    (2.5
    )
    
    
    14.8Net income (loss)
attributable to common stockholders
    
    
    37.2
    
    
    
    (3.1
    )
    
    
    34.1
    
    
    
    9.8
    
    
    
    (1.9
    )
    
    
    7.9
    
    
    
    (1.1
    )
    
    
    (2.5
    )
    
    
    (3.6
    )
 Quarterly Effects of the Restatement
  54




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##### Table of Contents




    
    Cost of services increased for each of the first, second, third and fourth quarters
by $0.8 million, $1.1 million, $1.7 million and $1.5 million, respectively.
    
    Income before provision for income taxes decreased for each of the first, second,
third and fourth quarters by $0.8 million, $1.2 million,
$1.7 million and $1.4 million,
respectively.
    
    Net income decreased for each of the first, second, third and fourth quarters by
$0.5 million, $0.7 million, $1.0 million and $0.9 million, respectively.
    
    Accounts receivable (less allowance for doubtful accounts) decreased as of the
first, second, third and fourth quarters by $7.9 million, $9.1 million, $10.8 million
and $12.2 million, respectively.
   
    
    Cost of services increased for each of the first, second, third and fourth quarters
by $1.3 million, $0.9 million, $0.1 million and $0.7 million, respectively.
    
    Income before provision for income taxes decreased for each of the first, second,
third and fourth quarters by $1.3 million, $0.8 million, $0.1 million and $0.8 million,
respectively.
    
    Net income decreased for each of the first, second, third and fourth quarters by
$0.8 million, $0.5 million, $0.1 million and $0.4 million, respectively.
    
    Accounts receivable (less allowance for doubtful accounts) decreased as of the
first, second, third and fourth quarters by $5.5 million, $6.3 million, $6.3 million
and $7.2 million, respectively.
   55




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##### Table of Contents



Quarterly Data -
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,Previously reported
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Accounts receivable, net
    
    $
    115.2
    
    
    $
    113.5
    
    
    $
    111.2
    
    
    $
    126.2
    
    
    $
    112.9
    
    
    $
    101.4
    
    
    $
    89.7
    
    
    $
    88.5Cost of Services
    
    
    148.4
    
    
    
    145.7
    
    
    
    142.3
    
    
    
    142.1
    
    
    
    139.8
    
    
    
    127.8
    
    
    
    119.5
    
    
    
    113.9Income before provision for income taxes
    
    
    16.5
    
    
    
    12.1
    
    
    
    14.8
    
    
    
    13.9
    
    
    
    12.5
    
    
    
    11.7
    
    
    
    (2.1
    )
    
    
    8.0Provision for income taxes
    
    
    6.2
    
    
    
    2.6
    
    
    
    5.8
    
    
    
    5.5
    
    
    
    5.4
    
    
    
    4.8
    
    
    
    (0.6
    )
    
    
    3.4Net income
    
    
    10.3
    
    
    
    9.6
    
    
    
    8.9
    
    
    
    8.4
    
    
    
    7.1
    
    
    
    6.9
    
    
    
    (1.6
    )
    
    
    4.7Net income (loss) attributable to
common stockholders
    
    
    10.3
    
    
    
    9.6
    
    
    
    8.9
    
    
    
    8.4
    
    
    
    7.1
    
    
    
    6.9
    
    
    
    (4.1
    )
    
    
    (0.1
    )
 Quarterly Data -
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,Restatement Adjustments
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Accounts receivable, net
    
    $
    (12.2
    )
    
    $
    (10.8
    )
    
    $
    (9.1
    )
    
    $
    (7.9
    )
    
    $
    (7.2
    )
    
    $
    (6.3
    )
    
    $
    (6.3
    )
    
    $
    (5.5
    )Cost of Services
    
    
    1.5
    
    
    
    1.7
    
    
    
    1.1
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.1
    
    
    
    0.9
    
    
    
    1.3Income before provision for income taxes
    
    
    (1.4
    )
    
    
    (1.7
    )
    
    
    (1.2
    )
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    (0.1
    )
    
    
    (0.8
    )
    
    
    (1.3
    )Provision for income taxes
    
    
    (0.5
    )
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.3
    )
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.5
    )Net income
    
    
    (0.9
    )
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    (0.8
    )Net income (loss) attributable to
common stockholders
    
    
    (0.9
    )
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    (0.8
    )
 Quarterly Data -
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,As Restated
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Accounts receivable, net
    
    $
    103.0
    
    
    $
    102.7
    
    
    $
    102.1
    
    
    $
    118.3
    
    
    $
    105.7
    
    
    $
    95.1
    
    
    $
    83.4
    
    
    $
    83.0Cost of Services
    
    
    149.9
    
    
    
    147.4
    
    
    
    143.4
    
    
    
    142.9
    
    
    
    140.5
    
    
    
    127.9
    
    
    
    120.4
    
    
    
    115.2Income before provision for income taxes
    
    
    15.1
    
    
    
    10.4
    
    
    
    13.6
    
    
    
    13.1
    
    
    
    11.7
    
    
    
    11.6
    
    
    
    (2.9
    )
    
    
    6.7Provision for income taxes
    
    
    5.7
    
    
    
    1.9
    
    
    
    5.3
    
    
    
    5.2
    
    
    
    5.0
    
    
    
    4.8
    
    
    
    (0.9
    )
    
    
    2.9Net income
    
    
    9.4
    
    
    
    8.6
    
    
    
    8.2
    
    
    
    7.9
    
    
    
    6.7
    
    
    
    6.8
    
    
    
    (2.1
    )
    
    
    3.9Net income (loss) attributable to
common stockholders
    
    
    9.4
    
    
    
    8.6
    
    
    
    8.2
    
    
    
    7.9
    
    
    
    6.6
    
    
    
    6.8
    
    
    
    (4.6
    )
    
    
    (0.9
    )
 2008
 Quarter ended March 31, 2008
 Quarter ended June 30, 2008
 Quarter ended September 30, 2008
 56




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##### Table of Contents



Quarter ended December 31, 2008
 2007
 Quarter ended March 31, 2007
 Quarter ended June 30, 2007
 Quarter ended September 30, 2007
 Quarter ended December 31, 2007
 57




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##### Table of Contents



Acquisitions
         58




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##### Table of Contents



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 amended report, Selected
Financial Data, for an explanation of the adjustments and a description of our uses
of, and the limitations associated with the use of, EBITDA and Adjusted EBITDA.
    
    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.
  59




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##### Table of Contents



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) (as
restated)
    
    $
    109,736
    
    
    $
    87,293
    
    
    $
    84,381Adjusted EBITDA (1) (in
thousands) (as restated)
    
    $
    109,798
    
    
    $
    98,981
    
    
    $
    84,578Revenue 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
 60




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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
    
    
    8,983
    
    
    
    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 amended report, Selected Financial Data. 61




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##### Table of Contents



Revenue
 Revenue by Service Offering
  2008
    
    
    2007
    
    
    2006Revenue
    
    
    Percentage
    
    
    Revenue
    
    
    Percentage
    
    
    Revenue
    
    
    PercentageDollars
    
    
    of Revenue
    
    
    Dollars
    
    
    of Revenue
    
    
    Dollars
    
    
    of 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
    %
 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
  62




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Percentage Skilled Nursing Patient DaysYear Ended December 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
    %
  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
  63




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##### Table of Contents



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
    %
   Primary Expense Components
 Cost of Services
   General and Administrative
  Performance Based Incentive Compensation Plan.
 Depreciation and Amortization
  64




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Buildings and improvements
    
    15-40 yearsLeasehold improvements
    
    Shorter of the lease term or estimated usefullife, generally 5-10 yearsFurniture and equipment
    
    3-10 years
 Rent Cost of Revenue
  Dividend Accretion on Convertible Preferred Stock
  Critical Accounting Policies and Estimates
   Revenue recognition
  65




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Allowance for doubtful accounts
  Patient liability risks
  Impairment of long-lived assets
  66




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Goodwill and Intangible Assets
  Goodwill as of December 31, 2008
   Goodwill Impairment Testing
   67




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##### 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
    68




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##### Table of Contents



.
    Share-Based Payments
 Accounting for Stock-Based
Compensation
  69




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##### Table of Contents



Accounting for Conditional Asset Retirement Obligations
 Accounting for Conditional Asset Retirement Obligations
   Operating Leases
 Accounting for Leases Accounting for Operating Leases with Scheduled Rent Increase.
 70




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##### Table of Contents



Recent Accounting Standards
  Noncontrolling Interests in Consolidated
Financial Statement an amendment of ARB No. 51
 Fair Value Measurements Effective Date
of FASB Statement No. 157
 71




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##### Table of Contents



The Fair Value Option for Financial Assets
and Financial Liabilities
 Disclosures about Derivative Instruments and
Hedging Activities an Amendment of FASB Statement No. 133
 , Determination of the Useful Life
of Intangible Assets Goodwill and Other Intangible Assets
 72




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Results of Operations
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Expenses (as restated):Cost of services (exclusive of rent cost of revenue and depreciation and
amortization shown below) (as restated)
    
    
    79.6
    
    
    
    79.4
    
    
    
    79.3Rent cost of revenue
    
    
    2.5
    
    
    
    2.0
    
    
    
    1.8General and administrative
    
    
    3.3
    
    
    
    3.2
    
    
    
    3.2Depreciation and amortization
    
    
    2.9
    
    
    
    2.8
    
    
    
    2.688.3
    
    
    
    87.4
    
    
    
    86.9Other 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 (as restated)
    
    
    7.0
    
    
    
    4.3
    
    
    
    4.9Provision for income tax (as restated)
    
    
    2.5
    
    
    
    1.9
    
    
    
    2.0Net income (as restated)
    
    
    4.5
    %
    
    
    2.4
    %
    
    
    2.9
    %EBITDA margin(1) (as restated)
    
    
    15.0
    %
    
    
    13.8
    %
    
    
    15.9
    %Adjusted EBITDA margin(1) (as restated)
    
    
    15.0
    %
    
    
    15.6
    %
    
    
    15.9
    %
 
 (1)
    
    See footnote 1 to Item 6 of this amended 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. 73




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Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 Revenue.
   Cost of Services Expenses
    74




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##### Table of Contents



Year Ended December 31,2008
    
    
    2007(in millions)Cost of services expenses, as previously reported
    
    $
    578.5
    
    
    $
    501.0Restatement adjustments
    
    
    5.1
    
    
    
    3.0Cost of services expenses, as restated
    
    $
    583.6
    
    
    $
    504.0
 Rent cost of revenue.
 General and Administrative Services Expenses.
 Depreciation and Amortization.
 75




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##### Table of Contents



Interest Expense.
 Interest Income
 Premium on Redemption of Debt and Write-off of Related Deferred Financing Costs.
 Provision for Income Taxes.
  Year Ended December 31,2008
    
    
    2007(in millions)Provision for (benefit from) income taxes, as previously reported
    
    $
    20.1
    
    
    $
    13.0Restatement adjustments
    
    
    (2.0
    )
    
    
    (1.2
    )Provision for (benefit from) income taxes, as restated
    
    $
    18.1
    
    
    $
    11.8
  EBITDA.
 76




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##### Table of Contents



Year Ended December 31,2008
    
    
    2007(in millions)EBITDA, as previously reported
    
    $
    114.8
    
    
    $
    90.3Restatement adjustments
    
    
    (5.1
    )
    
    
    (3.0
    )EBITDA, as restated
    
    $
    109.7
    
    
    $
    87.3
 Net Income
  Year Ended December 31,2008
    
    
    2007(in millions)Net income, as previously reported
    
    $
    37.2
    
    
    $
    17.1Restatement adjustments
    
    
    (3.1
    )
    
    
    (1.8
    )Net income, as restated
    
    $
    34.1
    
    
    $
    15.3
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
 Revenue.
  77




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Cost of Services Expenses
     78




---



##### Table of Contents



Year Ended December 31,2007
    
    
    2006(in millions)Cost of services expenses, as previously reported
    
    $
    501.0
    
    
    $
    417.7Restatement adjustments
    
    
    3.0
    
    
    
    4.2Cost of services expenses, as restated
    
    $
    504.0
    
    
    $
    421.9
 Rent cost of revenue.
 General and Administrative Services Expenses.
 Depreciation and Amortization.
 Interest Expense.
 Interest Income.
 Premium on Redemption of Debt and Write-off of Related Deferred Financing Costs.
 79




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##### Table of Contents



Provision for Income Taxes.
  Year Ended December 31,2007
    
    
    2006(in millions)Provision for (benefit from) income taxes, as previously reported
    
    $
    13.0
    
    
    $
    12.2Restatement adjustments
    
    
    (1.2
    )
    
    
    (1.6
    )Provision for (benefit from) income taxes, as restated
    
    $
    11.8
    
    
    $
    10.6
  EBITDA.
  Year Ended December 31,2007
    
    
    2006(in millions)EBITDA, as previously reported
    
    $
    90.3
    
    
    $
    88.5Restatement adjustments
    
    
    (3.0
    )
    
    
    (4.1
    )EBITDA, as restated
    
    $
    87.3
    
    
    $
    84.4
 Net Income
 80




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##### Table of Contents



Year Ended December 31,2007
    
    
    2006(in millions)Net income, as previously reported
    
    $
    17.1
    
    
    $
    17.3Restatement adjustments
    
    
    (1.8
    )
    
    
    (2.5
    )Net income, as restated
    
    $
    15.3
    
    
    $
    14.8
 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 (as restated):Cost of services (exclusive of
rent cost of revenue and
depreciation and amortization
shown below) (as restated)
    
    
    149,819
    
    
    
    147,404
    
    
    
    143,439
    
    
    
    142,903
    
    
    
    140,578
    
    
    
    127,861
    
    
    
    120,356
    
    
    
    115,222Rent 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
    
    
    
    3,961166,540
    
    
    
    163,468
    
    
    
    158,547
    
    
    
    158,750
    
    
    
    156,216
    
    
    
    140,589
    
    
    
    131,497
    
    
    
    126,638Other 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
(as restated)
    
    
    14,977
    
    
    
    10,482
    
    
    
    13,567
    
    
    
    13,151
    
    
    
    11,702
    
    
    
    11,565
    
    
    
    (2,943
    )
    
    
    6,759Provision for (benefit from)
income taxes (as restated)
    
    
    5,642
    
    
    
    1,909
    
    
    
    5,363
    
    
    
    5,167
    
    
    
    5,040
    
    
    
    4,759
    
    
    
    (860
    )
    
    
    2,862Net income (loss) (as restated)
    
    
    9,335
    
    
    
    8,573
    
    
    
    8,204
    
    
    
    7,984
    
    
    
    6,662
    
    
    
    6,806
    
    
    
    (2,083
    )
    
    
    3,897Accretion on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,582
    )
    
    
    (4,772
    )Net (loss) income attributable to
common stockholders (as restated)
    
    $
    9,335
    
    
    $
    8,573
    
    
    $
    8,204
    
    
    $
    7,984
    
    
    $
    6,662
    
    
    $
    6,806
    
    
    $
    (4,665
    )
    
    $
    (875
    )Earnings per share data:Earnings per common share, basic
(as restated)
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )Earnings per common share,
diluted (as restated)
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )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
 81




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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 year
    
    
    5,012
    
    
    
    2,821
    
    
    
    37,138Cash and equivalents at end of year
    
    $
    2,047
    
    
    $
    5,012
    
    
    $
    2,821
 Years Ended December 31, 2008 and 2007
  Express
Recovery
 82




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##### Table of Contents



Years Ended December 31, 2007 and 2006
    
    
    $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 million provision of cash in 2007 from a $14.0 million
provision of cash in 2006, primarily due to the release of tax amounts accrued related
to the transactions.
 Express Recovery
  83




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##### Table of Contents



Principal Debt Obligations
    Term Loan and Revolving Loan
  84




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Senior Subordinated Notes
     Capital Expenditures
  85




---



##### Table of Contents



Liquidity
    86




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##### Table of Contents



Other Factors Affecting Liquidity and Capital Resources
 Medical and Professional Malpractice and Workers Compensation Insurance
  Inflation
  87




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##### Table of Contents



Seasonality.
 Global Market and Economic Conditions.
  Off Balance Sheet Arrangements
  Contractual Obligations
  Less Than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Yr.
    
    
    1-3 Yrs.
    
    
    3-5 Yrs.
    
    
    5 Yrs.Long-term debt obligationsSenior 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. 88




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##### Table of Contents



Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
  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.  Notional
    
    
    Trade
    
    
    Effective
    
    
    
    
    
    
    Year Ended
    
    
    Fair ValueLoan
    
    Amount
    
    
    Date
    
    
    Date
    
    
    Maturity
    
    
    December 31, 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,
 89




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##### Table of Contents



Item 8.
    
    Financial Statements and Supplementary Data
  
 Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    90




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##### Table of Contents



Managements Report on Internal Control over Financial Reporting
   
    
    pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance
with authorizations of our management and members of our board of directors; and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a
material effect on our financial statements.
    Additional Information Regarding the Material Weakness
  91




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##### Table of Contents



Remediation Steps to Address Material Weakness
  
    
    In May 2009, concurrent with the departure of the former employee, we transferred
our then Senior Vice President of Reimbursement and Financial Analysis (the
successor SVP) to fill the vacancy caused by the departure of the former employee.
The successor SVP is a qualified Certified Public Accountant with many years of
Operational Finance responsibility with other LTC providers and has been an employee
of the Company since July 2007. We have also changed the chain of reporting for the
role of the successor SVP. Instead of reporting directly to the President of the
Company, the position of the successor SVP now reports directly to the Chief
Financial Officer.
 
    
    Access rights to the patient accounts receivable system have been curtailed so
that the successor SVP cannot directly post transactions.
    
    We have strengthened the design of access and user rights to all of our reporting
systems and have implemented routine reviews of such access and user rights.
    
    We segregated testing and training environments from the production environment in
all key applications.
    
    We implemented regularly scheduled segregation of duties reviews for conflicts
identified by management, to be performed on each of the applications which have a
direct impact on financial reporting.
 
    
    The accounts receivable allowance for doubtful accounts calculation will be prepared by the Accounting
Department. The allowance for doubtful accounts calculation will then be reviewed by the successor SVP as
well as by the Chief Accounting Officer for quality control and oversight purposes.
    
    We are providing additional training on fraud risk and awareness to management and
other key personnel.
 
    
    In April 2009, we hired a Vice President of Internal Audit, who is a Certified
Public Accountant from a leading registered public accounting firm with an extensive
background in Sarbanes-Oxley compliance, internal audit and the LTC industry.
  92




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Changes in Internal Control Over Financial Reporting
  Report of Independent Registered Public Accounting Firm
 
      93




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Item 9B. Other Information
  94




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##### Table of Contents



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
  95




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##### Table of Contents



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, As Restated at December 31, 2008 and 2007
    
    
    F-2Consolidated Statements of Operations, As Restated for Each of the Years in the Three Year Period Ended December 31, 2008
    
    
    F-3Consolidated Statements of Stockholders Equity, As Restated for Each of the Years in the Three Year Period Ended December 31, 2008
    
    
    F-4Consolidated Statements of Cash Flows, As Restated 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 (as restated)
    
    
    S-1
  Exhibits:
 96




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##### 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).
 97




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##### Table of Contents



Number
    
    Description4.4
    
    
    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).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).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 Award Agreement (filed as Exhibit 10.1 to our Quarterly Report
on Form 10-Q, filed on May 5, 2009 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).
 98




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##### Table of Contents



Number
    
    Description10.16*
    
    
    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).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 2002.31.2
    
    
    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. Item 601 Exhibits
  99




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##### Table of Contents



SIGNATURES
  SKILLED HEALTHCARE GROUP, INC.By
    /s/ Boyd HendricksonBoyd HendricksonChairman of the Board,
Chief Executive Officer and Director   Date: June 29, 2009
    By
    /s/ Boyd HendricksonBoyd HendricksonChairman of the Board,
Chief Executive Officer and Director Date: June 29, 2009
    By
    /s/ Jose LynchJose LynchPresident, Chief Operating Officer and Director Date: June 29, 2009
    By
    /s/ Devasis GhoseDevasis GhoseExecutive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer) Date: June 29, 2009
    By
    /s/ Christopher N. FelfeChristopher N. FelfeSenior Vice President of Finance
and Chief Accounting Officer
(Principal Accounting Officer) Date: June 29, 2009
    By
    /s/ Robert M. Le BlancRobert M. Le BlancLead Director Date: June 29, 2009
    By
    /s/ Michael BoxerMichael BoxerDirector Date: June 29, 2009
    By
    /s/ M. Bernard PuckettM. Bernard PuckettDirector Date: June 29, 2009
    By
    /s/ Glenn SchaferGlenn SchaferDirector Date: June 29, 2009
    By
    /s/ William ScottWilliam ScottDirector Date: June 29, 2009
    By
    /s/ Michael D. StephensMichael D. StephensDirector 100




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##### Table of Contents



F-1




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##### Table of Contents



(In thousands, except per share data)
 December 31,2008
    
    
    2007(As Restated,
    
    
    (As Restated,See Note 2)
    
    
    See Note 2)Current assets:Cash and cash equivalents
    
    $
    2,047
    
    
    $
    5,012Accounts receivable, less allowance for doubtful
accounts of $26,593 and $16,890 at December 31, 2008
and 2007, respectively
    
    
    102,954
    
    
    
    105,746Deferred income taxes
    
    
    19,703
    
    
    
    17,891Prepaid expenses
    
    
    9,226
    
    
    
    5,708Other current assets
    
    
    7,483
    
    
    
    11,697Total current assets
    
    
    141,413
    
    
    
    146,054Property 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
    
    $
    1,006,580
    
    
    $
    965,857Liabilities 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
    
    
    721
    
    
    
    2,460Other long-term liabilities
    
    
    14,064
    
    
    
    21,810Long-term debt and capital leases, less current portion
    
    
    462,449
    
    
    
    452,101Total liabilities
    
    
    602,003
    
    
    
    595,801Stockholders 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
    
    
    362,982
    
    
    
    361,468Retained earnings
    
    
    43,400
    
    
    
    9,304Accumulated other comprehensive loss
    
    
    (1,842
    )
    
    
    (753
    )Total stockholders equity
    
    
    404,577
    
    
    
    370,056Total liabilities and stockholders equity
    
    $
    1,006,580
    
    
    $
    965,857
  F-2




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##### Table of Contents



(In thousands, except per share data)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(As Restated,
    
    
    (As Restated,
    
    
    (As Restated,See Note 2)
    
    
    See Note 2)
    
    
    See Note 2)Revenue
    
    $
    733,330
    
    
    $
    634,607
    
    
    $
    531,657Expenses:Cost of services (exclusive of rent cost of revenue
and depreciation and amortization shown below)
    
    
    583,565
    
    
    
    504,017
    
    
    
    421,858Rent cost of revenue
    
    
    18,248
    
    
    
    12,854
    
    
    
    10,027General and administrative
    
    
    24,514
    
    
    
    20,382
    
    
    
    17,105Depreciation and amortization
    
    
    20,978
    
    
    
    17,687
    
    
    
    13,897647,305
    
    
    
    554,940
    
    
    
    462,887Other 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
    
    
    52,177
    
    
    
    27,083
    
    
    
    25,386Provision for income taxes
    
    
    18,081
    
    
    
    11,801
    
    
    
    10,595Net income
    
    
    34,096
    
    
    
    15,282
    
    
    
    14,791Accretion on preferred stock
    
    
    
    
    
    
    (7,354
    )
    
    
    (18,406
    )Net income (loss) attributable to common stockholders
    
    $
    34,096
    
    
    $
    7,928
    
    
    $
    (3,615
    )Earnings per share data:Earnings per common share, basic
    
    $
    0.93
    
    
    $
    0.29
    
    
    $
    (0.31
    )Earnings per common share, diluted
    
    $
    0.92
    
    
    $
    0.29
    
    
    $
    (0.31
    )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



(In Thousands)
 Additional
    
    
    Retained
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Class A Common Stock
    
    
    Class B Common Stock
    
    
    Deferred
    
    
    Paid-In
    
    
    (Deficit)
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Comp
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    TotalBalance at December 31, 2005
    
    
    22
    
    
    $
    246
    
    
    
    12,553
    
    
    $
    13
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    (185
    )
    
    $
    222,853
    
    
    $
    
    
    
    $
    
    
    
    $
    222,927Proceeds from issuance of stock
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Net income, as restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,791
    
    
    
    
    
    
    
    14,791Reclassification 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,615
    )
    
    
    (14,791
    )
    
    
    
    
    
    
    Balance at December 31, 2006, as restated
    
    
    22
    
    
    
    18,652
    
    
    
    12,636
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,437
    
    
    
    
    
    
    
    
    
    
    
    238,102Net income, as restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,282
    
    
    
    
    
    
    
    15,282Conversion 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,376
    )
    
    
    (5,978
    )
    
    
    
    
    
    
    Unrealized loss on interest rate swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (753
    )
    
    
    (753
    )Balance at December 31, 2007, as restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,261
    
    
    
    19
    
    
    
    17,696
    
    
    
    18
    
    
    
    
    
    
    
    361,468
    
    
    
    9,304
    
    
    
    (753
    )
    
    
    370,056Net income, as restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,096
    
    
    
    
    
    
    
    34,096Conversion 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, as restated
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    20,189
    
    
    $
    20
    
    
    
    17,027
    
    
    $
    17
    
    
    $
    
    
    
    $
    362,982
    
    
    $
    43,400
    
    
    $
    (1,842
    )
    
    $
    404,577
  F-4




---



##### Table of Contents



(In thousands)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006(As Restated,
    
    
    (As Restated,
    
    
    (As Restated,See Note 2)
    
    
    See Note 2)
    
    
    See Note 2)Operating ActivitiesNet income
    
    $
    34,096
    
    
    $
    15,282
    
    
    $
    14,791Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    20,978
    
    
    
    17,687
    
    
    
    13,897Provision for doubtful accounts
    
    
    15,171
    
    
    
    9,134
    
    
    
    9,594Non-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
    
    
    (2,630
    )
    
    
    (802
    )
    
    
    (7,972
    )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
  F-6




---



##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 2. Restatement of Consolidated Financial Statements
   Materiality Considering Effects of Prior
Misstatements When Quantifying Misstatements in Current Year Financial Statements
   As of December 31,2008
    
    2007Previously
    
    Restatement
    
    As
    
    Previously
    
    Restatement
    
    AsBalance Sheet Line items
    
    Reported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedAccounts receivable, net
    
    $
    115,211
    
    
    $
    (12,257
    )
    
    $
    102,954
    
    
    $
    112,919
    
    
    $
    (7,173
    )
    
    $
    105,746Allowance for doubtful accounts
    
    
    14,336
    
    
    
    12,257
    
    
    
    26,593
    
    
    
    9,717
    
    
    
    7,173
    
    
    
    16,890Deferred income taxes  current
    
    
    14,708
    
    
    
    4,995
    
    
    
    19,703
    
    
    
    14,968
    
    
    
    2,923
    
    
    
    17,891Total current assets
    
    
    148,675
    
    
    
    (7,262
    )
    
    
    141,413
    
    
    
    150,304
    
    
    
    (4,250
    )
    
    
    146,054Total assets
    
    
    1,013,842
    
    
    
    (7,262
    )
    
    
    1,006,580
    
    
    
    970,107
    
    
    
    (4,250
    )
    
    
    965,857Deferred income taxes
    
    
    457
    
    
    
    264
    
    
    
    721
    
    
    
    2,297
    
    
    
    163
    
    
    
    2,460Total Liabilities
    
    
    601,739
    
    
    
    264
    
    
    
    602,003
    
    
    
    595,638
    
    
    
    163
    
    
    
    595,801Additional paid-in-capital
    
    
    366,565
    
    
    
    (3,583
    )
    
    
    362,982
    
    
    
    365,051
    
    
    
    (3,583
    )
    
    
    361,468Retained earnings
    
    
    47,343
    
    
    
    (3,943
    )
    
    
    43,400
    
    
    
    10,134
    
    
    
    (830
    )
    
    
    9,304Stockholders equity
    
    
    412,103
    
    
    
    (7,526
    )
    
    
    404,577
    
    
    
    374,469
    
    
    
    (4,413
    )
    
    
    370,056Total liabilities and stockholders equity
    
    
    1,013,842
    
    
    
    (7,262
    )
    
    
    1,006,580
    
    
    
    970,107
    
    
    
    (4,250
    )
    
    
    965,857
 F-7




---



##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 Year Ended December 31,2008
    
    2007
    
    2006Consolidated Statements of
    
    Previously
    
    Restatment
    
    As
    
    Previously
    
    Restatment
    
    As
    
    Previously
    
    Restatment
    
    AsOperations Data
    
    Reported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedCost of Services
    
    $
    578,481
    
    
    $
    5,084
    
    
    $
    583,565
    
    
    $
    500,999
    
    
    $
    3,018
    
    
    $
    504,017
    
    
    $
    417,703
    
    
    $
    4,155
    
    
    $
    421,858Income before provision
for income taxes
    
    
    57,261
    
    
    
    (5,084
    )
    
    
    52,177
    
    
    
    30,101
    
    
    
    (3,018
    )
    
    
    27,083
    
    
    
    29,541
    
    
    
    (4,155
    )
    
    
    25,386Provision for income taxes
    
    
    20,052
    
    
    
    (1,971
    )
    
    
    18,081
    
    
    
    12,952
    
    
    
    (1,151
    )
    
    
    11,801
    
    
    
    12,204
    
    
    
    (1,609
    )
    
    
    10,595Net income
    
    
    37,209
    
    
    
    (3,113
    )
    
    
    34,096
    
    
    
    17,149
    
    
    
    (1,867
    )
    
    
    15,282
    
    
    
    17,337
    
    
    
    (2,546
    )
    
    
    14,791Net income (loss)
attributable to common
stockholders
    
    
    37,209
    
    
    
    (3,113
    )
    
    
    34,096
    
    
    
    9,795
    
    
    
    (1,867
    )
    
    
    7,928
    
    
    
    (1,069
    )
    
    
    (2,546
    )
    
    
    (3,615
    )Earnings per
common share, basic
    
    $
    1.02
    
    
    $
    (0.09
    )
    
    
    0.93
    
    
    $
    0.36
    
    
    $
    (0.07
    )
    
    
    0.29
    
    
    
    (0.09
    )
    
    $
    (0.22
    )
    
    
    (0.31
    )Earnings per
common share, diluted
    
    $
    1.01
    
    
    $
    (0.09
    )
    
    
    0.92
    
    
    $
    0.35
    
    
    $
    (0.06
    )
    
    
    0.29
    
    
    
    (0.09
    )
    
    $
    (0.22
    )
    
    
    (0.31
    )
 Year Ended December 31,2008
    
    2007
    
    2006Consolidated
    
    Previously
    
    Restatment
    
    As
    
    Previously
    
    Restatment
    
    As
    
    Previously
    
    Restatment
    
    AsStatements of Cash Flows
    
    Reported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    Restated
    
    Reported
    
    Adjustments
    
    RestatedOperating ActivitiesNet income
    
    $
    37,209
    
    
    $
    (3,113
    )
    
    $
    34,096
    
    
    $
    17,149
    
    
    $
    (1,867
    )
    
    $
    15,282
    
    
    $
    17,337
    
    
    $
    (2,546
    )
    
    $
    14,791Provision for
doubtful accounts
    
    
    10,087
    
    
    
    5,084
    
    
    
    15,171
    
    
    
    6,116
    
    
    
    3,018
    
    
    
    9,134
    
    
    
    5,439
    
    
    
    4,155
    
    
    
    9,594Deferred income taxes
    
    
    (659
    )
    
    
    (1,971
    )
    
    
    (2,630
    )
    
    
    349
    
    
    
    (1,151
    )
    
    
    (802
    )
    
    
    (6,363
    )
    
    
    (1,609
    )
    
    
    (7,972
    )
 December 31,
    
    September 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,Quarterly Data - Previously
reported
    
    2008
    
    2008
    
    2008
    
    2008
    
    2007
    
    2007
    
    2007
    
    2007Accounts receivable, net
    
    $
    115,211
    
    
    $
    113,496
    
    
    $
    111,215
    
    
    $
    126,208
    
    
    $
    112,919
    
    
    $
    101,438
    
    
    $
    89,696
    
    
    $
    88,468Cost of services
    
    
    148,336
    
    
    
    145,749
    
    
    
    142,252
    
    
    
    142,144
    
    
    
    139,767
    
    
    
    127,761
    
    
    
    119,522
    
    
    
    113,949Income before provision for income taxes
    
    
    16,460
    
    
    
    12,137
    
    
    
    14,754
    
    
    
    13,910
    
    
    
    12,513
    
    
    
    11,665
    
    
    
    (2,109
    )
    
    
    8,032Provision for income taxes
    
    
    6,195
    
    
    
    2,561
    
    
    
    5,830
    
    
    
    5,466
    
    
    
    5,329
    
    
    
    4,801
    
    
    
    (556
    )
    
    
    3,378Net income
    
    
    10,265
    
    
    
    9,576
    
    
    
    8,924
    
    
    
    8,444
    
    
    
    7,184
    
    
    
    6,864
    
    
    
    (1,553
    )
    
    
    4,654Net income (loss) attributable to common
stockholders
    
    
    10,265
    
    
    
    9,576
    
    
    
    8,924
    
    
    
    8,444
    
    
    
    7,184
    
    
    
    6,864
    
    
    
    (4,135
    )
    
    
    (118
    )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
    )
 December 31,
    
    September 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,Quarterly Data - Restatement
Adjustments
    
    2008
    
    2008
    
    2008
    
    2008
    
    2007
    
    2007
    
    2007
    
    2007Accounts receivable, net
    
    $
    (12,257
    )
    
    $
    (10,774
    )
    
    $
    (9,119
    )
    
    $
    (7,932
    )
    
    $
    (7,173
    )
    
    $
    (6,362
    )
    
    $
    (6,262
    )
    
    $
    (5,428
    )Cost of Services
    
    
    1,483
    
    
    
    1,655
    
    
    
    1,187
    
    
    
    759
    
    
    
    811
    
    
    
    100
    
    
    
    834
    
    
    
    1,273Income before provision for income taxes
    
    
    (1,483
    )
    
    
    (1,655
    )
    
    
    (1,187
    )
    
    
    (759
    )
    
    
    (811
    )
    
    
    (100
    )
    
    
    (834
    )
    
    
    (1,273
    )Provision for income taxes
    
    
    (553
    )
    
    
    (652
    )
    
    
    (467
    )
    
    
    (299
    )
    
    
    (289
    )
    
    
    (42
    )
    
    
    (304
    )
    
    
    (516
    )Net income
    
    
    (930
    )
    
    
    (1,003
    )
    
    
    (720
    )
    
    
    (460
    )
    
    
    (522
    )
    
    
    (58
    )
    
    
    (530
    )
    
    
    (757
    )Net income (loss) attributable to common
stockholders
    
    
    (930
    )
    
    
    (1,003
    )
    
    
    (720
    )
    
    
    (460
    )
    
    
    (522
    )
    
    
    (58
    )
    
    
    (530
    )
    
    
    (757
    )Earnings per common share, basic
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )Earnings per common share,
diluted
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )
 December 31,
    
    September 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,Quarterly Data - As Restated
    
    2008
    
    2008
    
    2008
    
    2008
    
    2007
    
    2007
    
    2007
    
    2007Accounts receivable, net
    
    $
    102,954
    
    
    $
    102,722
    
    
    $
    102,096
    
    
    $
    118,276
    
    
    $
    105,746
    
    
    $
    95,076
    
    
    $
    83,434
    
    
    $
    83,040Cost of Services
    
    
    149,819
    
    
    
    147,404
    
    
    
    143,439
    
    
    
    142,903
    
    
    
    140,578
    
    
    
    127,861
    
    
    
    120,356
    
    
    
    115,222Income before provision for income taxes
    
    
    14,977
    
    
    
    10,482
    
    
    
    13,567
    
    
    
    13,151
    
    
    
    11,702
    
    
    
    11,565
    
    
    
    (2,943
    )
    
    
    6,759Provision for income taxes
    
    
    5,642
    
    
    
    1,909
    
    
    
    5,363
    
    
    
    5,167
    
    
    
    5,040
    
    
    
    4,759
    
    
    
    (860
    )
    
    
    2,862Net income
    
    
    9,335
    
    
    
    8,573
    
    
    
    8,204
    
    
    
    7,984
    
    
    
    6,662
    
    
    
    6,806
    
    
    
    (2,083
    )
    
    
    3,897Net income (loss) attributable to common
stockholders
    
    
    9,335
    
    
    
    8,573
    
    
    
    8,204
    
    
    
    7,984
    
    
    
    6,662
    
    
    
    6,806
    
    
    
    (4,665
    )
    
    
    (875
    )Earnings per common share, basic
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )Earnings per common share, diluted
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )
 3. Summary of Significant Accounting Policies
 Basis of Presentation
  F-8




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 Estimates and Assumptions
  Reclassifications
  Revenue and Accounts Receivables
   2008
    
    
    2007
    
    
    2006Percentage of
    
    
    
    
    
    
    Percentage of
    
    
    
    
    
    
    Percentage ofRevenue Dollars
    
    
    Revenue
    
    
    Revenue Dollars
    
    
    Revenue
    
    
    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
    
    
    497,678
    
    
    
    67.9
    
    
    
    430,638
    
    
    
    67.8
    
    
    
    361,434
    
    
    
    68.0and MedicaidManaged 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-9




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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
    
    
    2007Medicare
    
    $
    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
    
    
    (26,593
    )
    
    
    (16,890
    )(as restated)Accounts receivable, net (as restated)
    
    $
    102,954
    
    
    $
    105,746
 Risks and Uncertainties
    F-10




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 Concentration of Credit Risk
  Cash and Cash Equivalents
   Capitalized Interest
  F-11




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 Property and Equipment
  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.
  Goodwill Impairment Testing
  F-12




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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
  F-13




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  Stock Options and Equity Related Charges
 Share-Based Payments,
  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
 F-14




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
     Operating Leases
 Accounting for
Leases, Accounting for Operating Leases with Scheduled Rent
Increases
 Earnings per Share
 Earnings per Share
  F-15




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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 (as restated)
    
    $
    18,093
    
    
    $
    16,003
    
    
    $
    34,096
    
    
    $
    3,493
    
    
    $
    4,435
    
    
    $
    7,928Denominator:Weighted-average common
shares outstanding
    
    
    19,407
    
    
    
    17,166
    
    
    
    36,573
    
    
    
    11,922
    
    
    
    15,140
    
    
    
    27,062Earnings per common share,
basic (as restated)
    
    $
    0.93
    
    
    $
    0.93
    
    
    $
    0.93
    
    
    $
    0.29
    
    
    $
    0.29
    
    
    $
    0.29Earnings per share, dilutedNumerator:Allocation of income
attributable to common
stockholders (as restated)
    
    $
    17,971
    
    
    $
    16,125
    
    
    $
    34,096
    
    
    $
    3,411
    
    
    $
    4,517
    
    
    $
    7,928Denominator: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 (as restated)
    
    $
    0.92
    
    
    $
    0.92
    
    
    $
    0.92
    
    
    $
    0.29
    
    
    $
    0.29
    
    
    $
    0.29
  2006Earnings per share, basicNumerator:Net income (as restated)
    
    $
    14,791Accretion on preferred stock
    
    
    (18,406
    )Net (loss) income attributable to common stockholders (as
restated)
    
    $
    (3,615
    )Denominator:Weighted-average common shares outstanding
    
    
    11,638Earnings per common share, basic (as restated)
    
    $
    (0.31
    )
 F-16




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  2006Earnings per share, dilutedNumerator:Net (loss) income attributable to common stockholders
(as restated)
    
    $
    (3,615
    )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 (as restated)
    
    $
    (0.31
    )
 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
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 F-17




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  Fair Value Measurements 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
 Disclosures about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No.
133
 F-18




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  , Determination
of the Useful Life of Intangible Assets Goodwill and Other Intangible
Assets
 4. 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
    )
 F-19




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 Long-Term Debt
  5. 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
 F-20




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 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
 
 6.
    
    Acquisitions   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
 F-21




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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
  F-22




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  Year Ended December 31,2008
    
    
    2007Revenue
    
    $
    739,317
    
    
    $
    701,206Income from continuing operations (as restated)
    
    $
    34,234
    
    
    $
    14,498Net income available to common stockholders (as restated)
    
    $
    34,234
    
    
    $
    7,144Earnings per common share, basic (as restated)
    
    $
    0.94
    
    
    $
    0.26Earnings per common share, diluted (as restated)
    
    $
    0.93
    
    
    $
    0.26
 
 7.
    
    Business Segments    F-23




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  Long-termCare Services
    
    
    Ancillary 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)(as restated)
    
    $
    113,122
    
    
    $
    18,602
    
    
    $
    (21,988
    )
    
    $
    
    
    
    $
    109,736Year 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)(as restated)
    
    $
    98,537
    
    
    $
    19,607
    
    
    $
    (30,851
    )
    
    $
    
    
    
    $
    87,293Year 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)(as restated)
    
    $
    81,383
    
    
    $
    18,420
    
    
    $
    (15,422
    )
    
    $
    
    
    
    $
    84,381
  Long-term
    
    AncillaryCare Services
    
    Services
    
    Other
    
    TotalDecember 31, 2008:Segment total assets (as restated)
    
    $
    880,724
    
    
    $
    75,246
    
    
    $
    50,610
    
    
    $
    1,006,580Goodwill and intangibles included in total assets.
    
    $
    444,129
    
    
    $
    36,143
    
    
    $
    
    
    
    $
    480,272December 31, 2007:Segment total assets (as restated)
    
    $
    833,298
    
    
    $
    71,695
    
    
    $
    60,864
    
    
    $
    965,857Goodwill 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
   F-24




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
      F-25




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  
    
    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;
    
    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.
  F-26




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  2008
    
    
    2007
    
    
    2006Net income (as restated)
    
    $
    34,096
    
    
    $
    15,282
    
    
    $
    14,791PlusProvision for (benefit from) income
taxes (as restated)
    
    
    18,081
    
    
    
    11,801
    
    
    
    10,595Depreciation and amortization
    
    
    20,978
    
    
    
    17,687
    
    
    
    13,897Interest expense, net of interest income
    
    
    36,581
    
    
    
    42,523
    
    
    
    45,098EBITDA (as restated)
    
    
    109,736
    
    
    
    87,293
    
    
    
    84,381Change 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 (as restated)
    
    $
    109,798
    
    
    $
    98,981
    
    
    $
    84,578
 
 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. 8. 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 2012
    
    $
    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 2012
    
    
    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
    
    
    
    129,348
 F-27




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 2008
    
    
    2007Notes 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
  Senior Subordinated Notes
  F-28




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
     Debt Covenants
   F-29




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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 Ended
    
    Fair ValueLoan
    
    Notional Amount
    
    Trade Date
    
    Effective Date
    
    Maturity
    
    December 31, 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-30




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 9. 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
  F-31




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 Deposits
  10. 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
 
 11.
    
    Income Taxes  2008
    
    
    2007
    
    
    2006Federal:
    
    (As restated)
    
    (As restated)
    
    (As restated)Current
    
    $
    17,879
    
    
    $
    7,886
    
    
    $
    14,118Deferred
    
    
    (1,192
    )
    
    
    1,732
    
    
    
    (5,018
    )State:Current
    
    
    2,820
    
    
    
    2,163
    
    
    
    2,377Deferred
    
    
    (1,426
    )
    
    
    20
    
    
    
    (882
    )$
    18,081
    
    
    $
    11,801
    
    
    $
    10,595
  2008
    
    
    2007
    
    
    2006(As restated)
    
    (As restated)
    
    (As restated)Federal rate (35%)
    
    $
    18,262
    
    
    $
    9,479
    
    
    $
    8,885State taxes, net of federal tax benefit
    
    
    906
    
    
    
    1,419
    
    
    
    971Uncertain tax positions and related interest
    
    
    (1,350
    )
    
    
    916
    
    
    
    451Other, net
    
    
    263
    
    
    
    (13
    )
    
    
    288$
    18,081
    
    
    $
    11,801
    
    
    $
    10,595
  F-32




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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
(as restated)
    
    
    9,745
    
    
    
    
    
    
    
    6,701
    
    
    
    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 (as restated)
    
    
    748
    
    
    
    191
    
    
    
    331
    
    
    
    732Total deferred income tax assets
(as restated)
    
    
    19,703
    
    
    
    16,036
    
    
    
    17,891
    
    
    
    12,561Deferred 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
(as restated)
    
    
    19,703
    
    
    
    (664
    )
    
    
    17,891
    
    
    
    (1,160
    )Valuation allowance
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (1,300
    )Net deferred income tax assets
(liabilities) (as restated)
    
    $
    19,703
    
    
    $
    (721
    )
    
    $
    17,891
    
    
    $
    (2,460
    )
 F-33




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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
    F-34




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 12. 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
 
    
    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.
   13. Stock-Based Compensation
 2005 Restricted Stock Plan
  F-35




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  2007 Incentive Award Plan
      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
    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
    
    
    $
    
  F-36




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 14. Commitments and Contingencies
 Leases
   2009
    
    
    17,4252010
    
    
    16,0312011
    
    
    15,9982012
    
    
    15,2582013
    
    
    11,740Thereafter
    
    
    59,245$
    135,697
  Litigation
    F-37




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
    Insurance
  Workers Compensation.
  F-38




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
   General and Professional Liability.
      F-39




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  2008
    
    
    2007General and
    
    
    Employee
    
    
    Workers'
    
    
    
    
    
    
    Professional
    
    
    General and
    
    
    Workers'Professional Liability
    
    
    Medical
    
    
    Compensation
    
    
    Total
    
    
    Liability
    
    
    Employee 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
  15. Material Transactions with Related Parties
 Agreement with Onex Partners Manager LP
  16. Defined Contribution Plan
  F-40




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
 17. Quarterly Financial Information (Unaudited)
  Quarter EndedDecember 31
    
    
    September 30
    
    
    June 30
    
    
    March 31(Unaudited)2008:Accounts receivable, net (as restated)
    
    $
    102,954
    
    
    $
    102,722
    
    
    $
    102,092
    
    
    $
    118,276Revenue
    
    
    189,781
    
    
    
    182,474
    
    
    
    180,348
    
    
    
    180,727Total expense (as restated)
    
    
    166,540
    
    
    
    163,468
    
    
    
    158,547
    
    
    
    158,750Other income (expenses), net
    
    
    (8,264
    )
    
    
    (8,524
    )
    
    
    (8,234
    )
    
    
    (8,826
    )Income before provision for income taxes (as restated)
    
    
    14,977
    
    
    
    10,482
    
    
    
    13,567
    
    
    
    13,151Provision (benefit) for income taxes (as restated)
    
    
    5,642
    
    
    
    1,909
    
    
    
    5,363
    
    
    
    5,167Net income (loss) (as restated)
    
    
    9,335
    
    
    
    8,573
    
    
    
    8,204
    
    
    
    7,984Earnings per share data:Earnings per common share, basic (as restated)
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22Earnings per common share, diluted (as restated)
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22Weighted-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:Accounts receivable, net (as restated)
    
    $
    105,746
    
    
    $
    95,076
    
    
    $
    83,434
    
    
    $
    83,040Revenue
    
    
    177,393
    
    
    
    161,468
    
    
    
    151,091
    
    
    
    144,655Total expense (as restated)
    
    
    156,216
    
    
    
    140,589
    
    
    
    131,497
    
    
    
    126,638Other income (expenses), net
    
    
    (9,475
    )
    
    
    (9,314
    )
    
    
    (22,537
    )
    
    
    (11,258
    )Income before provision for income taxes (as restated)
    
    
    11,702
    
    
    
    11,565
    
    
    
    (2,943
    )
    
    
    6,759Provision (benefit) for income taxes (as restated)
    
    
    5,040
    
    
    
    4,759
    
    
    
    (860
    )
    
    
    2,862Net income (loss) (as restated)
    
    
    6,662
    
    
    
    6,806
    
    
    
    (2,083
    )
    
    
    3,897Accretion on preferred stock
    
    
    
    
    
    
    
    
    
    
    (2,582
    )
    
    
    (4,772
    )Net (loss) income attributable to common stockholders
(as restated)
    
    $
    6,662
    
    
    $
    6,806
    
    
    $
    (4,665
    )
    
    $
    (875
    )Earnings per share data:Earnings per common share, basic (as restated)
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )Earnings per common share, diluted (as restated)
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    (0.20
    )
    
    $
    (0.07
    )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-41




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##### Table of Contents



SKILLED HEALTHCARE GROUP, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Amounts In Thousands, Except Per Share Data)
  18.
Subsequent Events (unaudited)
  F-42




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##### Table of Contents



Financial Statement Schedule-Restated:
 SKILLED HEALTHCARE GROUP, INC.
 SCHEDULE II  VALUATION ACCOUNTS
(in thousands)
 Balance at
    
    
    Charged toBeginning of
    
    
    Costs and
    
    
    
    
    
    
    Balance at EndPeriod
    
    
    Expenses
    
    
    Deductions(1)
    
    
    of PeriodAccounts
receivable allowances (as restated)Year Ended December 31, 2008
    
    $
    16,890
    
    
    $
    15,171
    
    
    $
    (5,468
    )
    
    $
    26,593Year Ended December 31, 2007
    
    $
    12,044
    
    
    $
    9,134
    
    
    $
    (4,288
    )
    
    $
    16,890Year Ended December 31, 2006
    
    $
    5,678
    
    
    $
    9,946
    
    
    $
    (3,580
    )
    
    $
    12,044Notes 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




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##### 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).
 S-2




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##### Table of Contents



Number
    
    Description4.3
    
    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).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 Award Agreement (filed as Exhibit 10.1 to our Quarterly Report
on Form 10-Q, filed on May 5, 2009 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).
 S-3




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##### Table of Contents



Number
    
    Description10.16*
    
    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 2002.31.2
    
    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. S-4