Prepared and filed by St Ives Burrups

EX-99 8 ex99-1.htm EXHIBIT 99.1 Prepared and filed by St Ives Burrups

Exhibit 99.1

November 14, 2003

Dear Fellow Genesis Health Ventures, Inc. Shareholder:

In February 2003, we announced a plan to spin-off our eldercare businesses, including our inpatient, rehabilitation therapy, diagnostic, respiratory, hospitality, and healthcare consulting businesses, into a separate publicly traded company called Genesis HealthCare Corporation (“GHC”). The spin-off is expected to occur on December 1, 2003. As a result of the spin-off, shareholders of Genesis Health Ventures, Inc. will receive a pro-rata distribution in the form of GHC common stock, so that shareholders of GHC will own all of the eldercare businesses.

Our Board of Directors has determined that the brightest future for Genesis Health Ventures, Inc. and all of its shareholders is to create two separate companies through the spin-off of our eldercare businesses. Our business lines have very distinct operations with different opportunities, challenges, and strategies. By separating the two businesses, we anticipate that we will be better able to:

•

align management incentives with business specific operating performance;


	•	access capital;


	•	isolate operating risks; and


	•	improve sales and marketing opportunities, including the resolution of existing customer/competitor issues with respect to our pharmacy services business.

We also believe that a separation of the two companies will help to simplify the profile of each business, allowing investors to more easily evaluate each company in the future.

In the spin-off, shareholders of Genesis Health Ventures, Inc. common stock as of the close of business on October 15, 2003, will receive 0.5 shares of GHC common stock for every share of Genesis Health Ventures, Inc. common stock held on that date. No action on the part of Genesis Health Ventures, Inc. shareholders is required to receive GHC shares. We have received a private letter ruling from the Internal Revenue Service to the effect that, for United States federal income tax purposes, the distribution of GHC shares will qualify as tax free to Genesis Health Ventures, Inc. and its shareholders. We recommend that each shareholder consult a tax advisor as to the particular consequences of the distribution to such shareholder.

Following the distribution of GHC shares, we expect GHC common stock to be traded on the NASDAQ National Market System under the symbol “GHCI.” Genesis Health Ventures, Inc. common stock will continue to trade on the NASDAQ National Market System, but we expect the symbol to change to “NCRX” at the time of the spin-off, and we expect to change our name to NeighborCare, Inc.

Enclosed please find an information statement which describes the distribution of GHC common stock and includes important information regarding GHC’s business. We encourage shareholders to read this information carefully. Please note that shareholder approval is not required for the spin-off so we are not asking for a proxy.

Again, shareholders are NOT required to take any action to participate in the spin-off.

If you should have any questions regarding the spin-off, please contact Genesis Health Ventures, Inc.’s Investor Relations Department by sending a letter to:

Investor Relations
Genesis Health Ventures, Inc.
101 East State Street
Kennett Square, PA 19348

You may also contact us by calling our Investor Relations Hotline at 610-925-2000.


			Very truly yours,



			Robert H. Fish
			Chairman of the Board and Chief Executive Officer
			Genesis Health Ventures, Inc.

November 14, 2003

Dear Genesis HealthCare Corporation Shareholder:

Welcome to Genesis HealthCare Corporation (“GHC”). As part of the GHC spin-off from Genesis Health Ventures, Inc., we expect that you will become a GHC shareholder on December 1, 2003. GHC is one of the leading providers of healthcare and support services to the elderly. We anticipate that shares of GHC will begin trading publicly on a “when issued” basis for the first time on or about November 18, 2003.

As a new independent company, the GHC operations will be comprised of two primary business segments, inpatient services provided in skilled nursing and assisted living centers, and rehabilitation therapy services. Our core businesses will be complemented by supporting service capabilities including diagnostic services, respiratory therapy, and management services.

We believe that as an independent company, we will be better positioned to grow in and around our existing core geographic regions through the renewed allocation of resources to our businesses. Further, with our complete attention focused on the Genesis ElderCare^® businesses, we believe that we will be better able to improve operating performance and profitability as we develop and implement the best model for the delivery of care across our entire system.

This is a very exciting time for us and we are enthusiastic about what the future holds. We believe that we have a great opportunity to strengthen and enhance our business, and as a GHC shareholder, that you will have an outstanding opportunity to share in our progress. We are committed to building value over the years to come: for our customers and their families who put their confidence in us, for our employees who are dedicated to delivering the highest quality care, for our business partners and for you, our shareholders, who see the opportunity in our industry. I invite you to learn more about GHC as an independent company in the enclosed information statement.


	Very truly yours,



	George V. Hager, Jr. Chief Executive Officer Genesis HealthCare Corporation

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Information Statement

COMMON STOCK
(par value $0.01 per share)

At this time, Genesis HealthCare Corporation, a Pennsylvania corporation, is wholly-owned by Genesis Health Ventures, Inc., a Pennsylvania corporation. Upon consummation of the spin-off, Genesis Health Ventures, Inc. expects to change its name to NeighborCare, Inc. All references to “GHVI” in this information statement mean Genesis Health Ventures, Inc. together with its subsidiaries prior to the consummation of the spin-off. All references to “NCI” in this information statement mean Genesis Health Ventures, Inc. together with its subsidiaries immediately after the consummation of the spin-off. In the spin-off, GHVI will distribute all of the shares of GHC common stock on a pro rata basis to the holders of GHVI’s common stock. Each of you, as a holder of GHVI common stock, will receive 0.5 shares of GHC common stock for every share of GHVI common stock that you held at the close of business on October 15, 2003, the record date for the spin-off. Immediately after the spin-off is consummated, NCI will not own any shares of GHC common stock, and we will be an independent public company.

We are sending you this information statement to describe the spin-off. We expect the spin-off to occur on December 1, 2003. We refer to the date on which the spin-off occurs as the distribution date. On or shortly after the distribution date:

•

if you owned GHVI common stock in registered form (that is, the stock is registered in your name) at the close of business on the record date, you will have credited to a book-entry account established for you by, and maintained at, the distribution agent, your proportionate number of shares of GHC common stock and you will receive a check for the cash value of any fractional shares of GHC common stock; and


		•	if you owned GHVI common stock through a broker, bank or other nominee at the close of business on the record date, you will have credited to your brokerage, custodian or similar account through which you own your GHVI common stock, your proportionate number of shares of GHC common stock and you will receive a check for the cash value of any fractional shares of GHC common stock.

No shareholder vote is required for the spin-off to occur. No shareholder action is necessary for you to receive the shares of GHC common stock to which you are entitled in the spin-off. This means that to receive your shares of GHC common stock you do not need to:

•

pay any consideration to GHVI or to us; or


		•	surrender any shares of GHVI common stock.

There is no trading market for GHC common stock. We have applied for listing of GHC common stock on the Nasdaq National Market System, under the ticker symbol “GHCI,” and we expect that on November 18, 2003, shares of GHC common stock will begin trading on a “when issued” basis.

Consummation of the spin-off is subject to the consent of GHVI’s senior creditors to the spin-off and the replacement of GHVI’s credit facility with separate credit facilities for GHC and NCI. Accordingly, no assurance can be given that the spin-off will be consummated.

As you review this information statement, you should carefully consider the matters described in “Risk Factors” beginning on page 15.

We are not asking you for a proxy and you are requested not to send us a proxy.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

If you have inquiries related to the distribution, you should contact Genesis HealthCare Corporation, 101 East State Street, Kennett Square, Pennsylvania 19348, Telephone: (610) 925-2000, Fax: (610) 925-4000, Attention: Investor Relations.

The date of this information statement is November 14, 2003.

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Table of Contents

	Page

SUMMARY		1
SUMMARY COMBINED FINANCIAL AND OPERATING DATA		10
RISK FACTORS		15
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS		27
THE SPIN-OFF		29
TRADING MARKET		33
CAPITALIZATION		34
DIVIDEND POLICY		35
SELECTED COMBINED FINANCIAL DATA		36
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS		38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		48
BUSINESS		70
RELATIONSHIP WITH NCI		84
MANAGEMENT		90
SECURITY OWNERSHIP OF OUR STOCK		100
DESCRIPTION OF CAPITAL STOCK		102
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		107
INDEMNIFICATION OF DIRECTORS AND OFFICERS		109
WHERE YOU CAN FIND MORE INFORMATION		110
INDEX TO COMBINED FINANCIAL STATEMENTS		F-1

All references to “GHC,” “we,” “our,” “us,” and similar terms in this information statement refer to Genesis HealthCare Corporation together with its subsidiaries giving effect to certain internal restructuring transactions that will take place prior to the spin-off. All references to “GHVI” in this information statement refer to Genesis Health Ventures, Inc. together with its subsidiaries prior to the consummation of the spin-off. Upon the consummation of the spin-off, Genesis Health Ventures, Inc. expects to change its name to NeighborCare, Inc. All references to “NCI” in this information statement refer to Genesis Health Ventures, Inc. together with its subsidiaries immediately after the consummation of the spin-off.

Industry data pertaining to our business contained in this information statement, including our general expectations concerning our industry, our market position and market share within our industry are derived from data from various third-party sources. We have not independently verified any of this information and cannot assure you of its accuracy or completeness.

In addition, this information statement presents other information based on management estimates. While we believe our internal estimates are reliable, our estimates have not been verified by any independent source, and we cannot assure you as to their accuracy. While we are not aware of any misstatements regarding any industry or similar data presented herein, such data is subject to change based on various factors, including those discussed under the caption “Risk Factors” in this information statement.

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SUMMARY

This summary highlights information relating to our company, Genesis HealthCare Corporation, and GHC common stock being distributed in the spin-off. More detailed discussions of this information are contained in this information statement. You should read the entire information statement, including the risk factors and our combined financial statements and the notes thereto included elsewhere in this information statement.

Genesis HealthCare Corporation

Our Company

We are one of the largest providers of healthcare and support services to the elderly in the United States. Within our network of geographically concentrated facilities, we offer services focusing on the primary medical, physical and behavioral issues facing the medically complex elderly population. Through our physicians, nurses, therapists and other members of our interdisciplinary medical care team, we apply a comprehensive approach to the complex needs facing the elderly, which we believe has resulted in our above industry average occupancy levels and an enhanced quality payor mix. For the twelve months ended June 30, 2003, the average occupancy level in our inpatient facilities was approximately 91%, and approximately 28% of our net revenues were from Medicare patients.

Approximately 90% of our net revenues are generated through inpatient services. Our inpatient services business is offered through a network of skilled nursing and assisted living centers primarily located in the eastern United States. Our eldercare centers are concentrated in the states of Pennsylvania, New Jersey, Maryland and Massachusetts. We currently own 123 eldercare facilities, jointly-own 22 eldercare facilities, lease 37 eldercare facilities and manage 30 eldercare facilities. These eldercare facilities consist of 189 skilled nursing facilities and 23 assisted living facilities with 26,326 beds, including two skilled nursing facilities with 404 beds located in the state of Wisconsin that have been identified as held for sale.

Our rehabilitation therapy business provides an extensive range of rehabilitation therapy services to the elderly, including speech pathology, physical therapy and occupational therapy in our eldercare regional market concentrations. These services are provided by approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted by us at substantially all of the eldercare facilities we operate, as well as by contract to third-party healthcare facilities and through our 14 outpatient rehabilitation sites.

Our Industry

The aging of the population and increased life expectancies are the primary driving forces behind the growth of the nursing and assisted living facilities market in the United States. According to the United States Census Bureau, in 2000, there were approximately 35 million Americans aged 65 or older, comprising approximately 13% of the total United States population. The number of Americans aged 65 or older is expected to climb to approximately 40 million by 2010 and to approximately 54 million by 2020. There are approximately 16,500 nursing homes with approximately 1.8 million total beds certified to provide Medicare and/or Medicaid services in the United States. On average, approximately 3.5 million people live in nursing homes during the course of a year. We believe that these demographic trends will support a growing demand for the services provided by nursing and assisted living facility operators that deliver the most efficient, responsive, cost-effective and highest quality eldercare services to support a full range of needs and acuity levels.

Congress has enacted three major laws during the past six years that have significantly altered payment for skilled nursing services. The passage of the Balanced Budget Act of 1997, which eliminated the previously existing cost-based reimbursement system and implemented a prospective payment system, was designed to reduce and control the rate of increase in Medicare expenditures and significantly reduced our rate of Medicare reimbursement. The passage of the Balanced Budget Refinement Act of 1999 and the Benefits Improvement and Protection Act of 2000 restored some of the

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decline in funding caused by the Balanced Budget Act. However, the expiration of a number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act that provided for additional funding on September 30, 2002, referred to as the “skilled nursing facility Medicare cliff,” resulted in an approximate 10% reduction in the rates paid to us for providing services to Medicare patients before considering an upward 2.6% annual market basket adjustment. The final fiscal year 2004 prospective payment system rules for skilled nursing facilities became effective on October 1, 2003. The final rules enhance the reimbursement rates for fiscal year 2004 by increasing base rates by 6.26% (a 3% increase in the annual update factor and a 3.26% upward adjustment correcting previous forecast errors). These changes are estimated to increase Medicare payment rates per patient day by $19. The final rules also provide for the continuation through fiscal year 2004 of certain payment add-ons that were authorized in the Balanced Budget Refinement Act to compensate for non-therapy ancillaries.

Medicaid programs, which are administered at the state level, are impacted by fluctuations in state budgets. The recent economic downturn has had a detrimental effect on state revenues in most regions of the United States. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for skilled nursing services in the states in which we operate. State budget shortfalls have helped to elevate issues related to Medicaid onto the national agenda, which may result in additional federal support for the state-run Medicaid programs. In each of the major states where we provide services, we are working with trade groups, consultants and government officials to responsively address funding issues.

This volatility in the reimbursement system for the Medicare and Medicaid programs may continue in the short-term as the federal and state governments attempt to contain rising health care expenditures and implement revised payment mechanisms. However, we believe that sufficient broad-based support exists for the specific services we provide to ensure that adequate funding will continue for the foreseeable future.

We believe that these demographic considerations will place increased pressure on healthcare providers to find innovative, efficient means of delivering healthcare services. We also believe that these trends imply that there will be a growing demand for the services provided by nursing and assisted living facility operators that deliver the most efficient, responsive, cost-effective and high quality eldercare services to support a full range of needs.

Our Strategy

The principal elements of our business strategy are to:

Focus on operations. We are focused on the key areas that improve revenues, profits and cash flows. We are continually engaged in various efforts to improve our profitability by focusing on key operational initiatives, including:

•

leveraging our reputation for providing effective clinical outcomes in elderly care and rehabilitation to improve the quality of our payor mix by increasing our census of higher acuity Medicare patients;


	•	increasing our average occupancy level, which leverages our revenues over the fixed costs associated with operating our facilities;


	•	improving nursing staff scheduling and retention and reducing reliance on overtime compensation and temporary nursing agency services;


	•	capitalizing on best demonstrated practices in various areas of cost control, such as purchasing, centralization of certain key administrative processes and leveraging our investments in information technology; and


	•	aggressively managing our working capital.

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existing operations and to achieve greater operating efficiencies. In addition, we will seek opportunities to increase the number of managed eldercare centers within our markets.

Our Competitive Strengths

We believe the following competitive strengths will enable us to continue to improve our profitability and cash flow:

Geographically focused network. We are regionally focused and, within our markets, we have developed strong referral networks with hospitals and discharge planners. By focusing our operations in specific markets, we have achieved lower operating costs through greater purchasing power, operating efficiencies and economies of scale. We are also able to design and customize our systems and services to meet the specific needs of each of our markets.

High acuity capabilities. We focus on clinically complex elderly patients who require extensive therapies and treatments to stabilize health problems before returning home or transitioning into a permanent long-term care setting. Over 90% of our patients come to our facilities directly from an acute care hospital and require assistance to perform daily activities. Private insurance companies and other third-party payors have recognized that treating patients requiring complex care in eldercare facilities, such as those operated by us, is a cost-effective alternative to treatment in an acute care hospital.

High quality eldercare services. We believe we have a reputation as a leading provider of high quality eldercare services. As a result, we have excellent relationships with hospitals and discharge planners, our primary referral sources. We maintain a corporate compliance program to monitor and collect regulatory compliance data and to enhance and continuously improve the care provided in our facilities.

Significant facility ownership. We own rather than lease a majority of our eldercare facilities, unlike a number of our competitors. Excluding facilities held for sale and adjusted for the ElderTrust transaction described below, we own 125 facilities with 15,735 beds, which represents approximately 78% of the total number of beds we own or lease. We believe that owning properties increases our operating and financial flexibility by enabling us to more directly control our occupancy costs, divest facilities and exit markets at our discretion and refurbish or remodel facilities in order to satisfy market demand.

Admissions and discharge planning. We have developed a successful model to process admissions through the automated tracking of bed availability and specialty care capacity at each of our facilities. Our efficient model utilizes a multifaceted approach including clinical care coordinators and toll-free phone lines to assist our marketing staff and direct referral sources. As a result of our efforts, we have consistently achieved higher average occupancy levels as compared to industry averages. For the twelve month period ended June 30, 2003, our occupancy level was approximately 91% compared to the industry median occupancy level of approximately 88%, as reported in the December 2002 Nursing Facility State Occupancy Rate and Median Facility Occupancy Rate for Certified Beds CMS OSCAR Data Current Surveys issued by the American Health Care Association.

Stable and experienced management team. While we operate in a healthcare sector which has experienced significant volatility primarily due to a constantly changing reimbursement environment, our management team has remained substantially intact, with many years of operating experience working together. Our management team’s collective experience allows us to effectively address the continuing challenges facing the industry while providing the stability necessary to achieve meaningful operational and financial improvements.

Recent Developments

Over the past several years, our industry has experienced rising costs associated with liability insurance and litigation. See “Risk Factors.” This increase in insurance costs prompted us to exit our otherwise profitable operations in the state of Florida. In February 2003, we entered into two separate agreements to sell our eldercare assets located in the state of Florida. In one transaction, we sold four assisted living facilities for $8.5 million in April 2003. In a separate transaction completed in May

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2003, we sold nine skilled nursing facilities and transferred leasehold rights in one skilled nursing facility and one assisted living facility for $26.3 million, of which $6.0 million is in the form of a seller’s note receivable. The financial and operating data presented herein pertain to our continuing operations and therefore do not include results of our Florida operations.

We have entered into agreements with ElderTrust, a real estate investment trust from whom we currently lease or sublease 18 of our eldercare facilities and eight managed and jointly-owned facilities. The principal terms of the agreements are as follows:

•

We will purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million. We currently lease these properties from ElderTrust at an annual cash basis and accrual basis lease cost of $2.4 million and $1.5 million, respectively. On October 29, 2003, we purchased one of the aforementioned eldercare facilities having 183 beds for $10.3 million;


	•	We will pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties currently subleased to us by ElderTrust. On October 29,2003, we paid ElderTrust $2.3 Million to reduce the rents of two of the nine aforementioned eldercare facilities; and


	•	GHVI will pay ElderTrust $5.0 million upon consummation of the spin-off in exchange for ElderTrust’s consent to the assignment of all remaining leases and guarantees from GHVI to us.

On August 13, 2003, we acquired the remaining ownership interest in an unconsolidated joint-venture partnership that operates four skilled nursing facilities with 600 skilled nursing and 125 assisted living beds. Each of the four eldercare centers had been leased to the partnership from ElderTrust. We purchased our joint venture partner’s interest in the unconsolidated partnership for $3.1 million and will subsequently purchase one of the four eldercare properties from ElderTrust for $2.6 million. Additionally, we will pay ElderTrust $2.5 million to reduce the annual cash basis and accrual basis lease expense of one of the three remaining leased facilities by $0.4 million and $0.2 million, respectively. The lease terms of the three facilities that will continue to be leased from ElderTrust are expected to be extended from 2010 to 2015.

We refer to the spin off, the issuance of senior subordinated notes, our new senior credit facility, the purchase of real property and other transactions with ElderTrust and application of the proceeds of the issuance of senior subordinated notes and initial borrowings under our new senior credit facility as the “Transactions.”

Risk Factors

Our business is subject to numerous risks, including the following:


	•	further reduction in reimbursement rates or changes in methods of payment for our services by Medicare, Medicaid and other third party payors, which contributed to GHVI’s and our subsidiaries’ bankruptcy filing in 2000, may negatively impact our revenues and operating margins;


	•	federal and state governments and agencies’ efforts to address expiring reimbursement provisions and government funding may adversely affect our revenues;


	•	economic downturn in the markets that we operate in could have a material adverse effect on our operating results;


	•	changes in and violations of federal and state regulations may result in increased costs and sanctions;


	•	increase in insurance costs and lawsuits may adversely affect our operating cash flow and we may be liable for losses not covered by or in excess of our insurance;


	•	failure to attract and maintain a qualified staff could significantly increase our operating costs; and


	•	we entered into agreements with NCI which were negotiated by representatives of each company prior to consummation of the spin-off and which are generally exclusive.

For a discussion of these and other risk factors, see “Risk Factors.”

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The Spin-Off

The following is a brief summary of the terms of the spin-off:

Distributing Company

Genesis Health Ventures, Inc. Immediately after the consummation of the spin-off, GHVI will not own any shares of GHC common stock and expects to change its name to NeighborCare, Inc.


Spun-Off Company	Genesis HealthCare Corporation. After the spin-off, we will be an independent public company.

Securities to Be
Distributed

19,767,858 shares of GHC common stock, which will be all of the outstanding shares of GHC common stock (excluding fractional shares), all of which will be owned by GHVI immediately prior to the consummation of the spin-off. Immediately after the spin-off is consummated, we estimate that approximately 6,389 shareholders of record will hold shares of GHC common stock, although some of the shares may be registered in the name of a single shareholder who represents a number of shareholders. In addition, approximately 130,247 shares of GHC common stock will be issued into an escrow account immediately after the spin-off for future payment to holders of former unsecured claims of GHVI and its subsidiaries. See “The Spin-Off — Description of the Spin-Off.” Accordingly, we expect that approximately 19,898,105 shares of GHC common stock will be outstanding immediately after the spin-off.


Distribution Ratio	0.5 shares of GHC common stock for each share of GHVI common stock that you hold on the close of business on October 15, 2003, the record date for the spin-off.


Record Date	October 15, 2003 (close of business).


Spin-Off Date	December 1, 2003.


Distribution Agent	StockTrans, Inc.


Nasdaq National Market System	We have applied for listing of GHC common stock on the Nasdaq National Market System under the symbol “GHCI.”

Trading Market for GHC
common stock

Until November 18, 2003, there will be no trading market for GHC common stock. On that date, trading of shares of GHC common stock is expected to begin on a “when-issued” basis. “When-issued” trading refers to a transaction made conditionally because the security has been authorized but not yet issued. On the first trading day after the distribution date, any “when-issued” trading in respect of GHC common stock will end and “regular way” trading will begin.

Tax Consequences

GHVI has received a satisfactory private letter ruling from the Internal Revenue Service to the effect that the spin-off and certain related transactions will qualify as a tax-free distribution to GHVI and its shareholders under Section 355 of the Internal Revenue Code of 1986, as amended. See “The Spin-Off — Material Federal Income Tax Consequences of the Spin-Off” for a more detailed description of the United States federal income tax consequences of the spin-off.

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Book-Entry Shareholding	Effective as of the date of the spin-off, the distribution agent will distribute shares of GHC common stock for each eligible holder of GHVI common stock by crediting book-entry accounts with that holder’s proportionate number of whole shares of GHC common stock.


No Fractional Shares	GHVI will not distribute any fractional shares of GHC common stock. The distribution agent will aggregate all fractional interests, sell them on behalf of shareholders, and distribute the cash proceeds to the shareholders who are entitled to a fractional interest in GHC common stock. See “The Spin-Off — Description of the Spin-Off.”


Relationship with NCI After the Spin-Off	We and NCI have entered or will enter into the following agreements:


	•	a separation and distribution agreement, which sets forth the agreements between us and GHVI with respect to the principal corporate transactions required to consummate the spin-off, and a number of other agreements governing the relationship between us and NCI following the spin-off;


	•	a tax sharing agreement, which will govern the respective rights, responsibilities, and obligations of us and NCI after the spin-off, with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, other taxes and related tax returns;


	•	a transition services agreement, which will provide for the provision of transitional services by us to NCI and vice versa such as the provision of transitional services, tax services, investor relations services and corporate compliance services;


	•	a Tidewater membership agreement, referred to as the “Tidewater agreement,” which will provide to the skilled nursing facilities and assisted living facilities operated by us access to group purchasing and shared services programs through Tidewater Healthcare Shared Services Group, Inc., a wholly-owned group purchasing subsidiary of NCI;


	•	an employee benefits agreement, which will provide for our and NCI’s responsibilities and obligations regarding certain employee compensation, benefit and labor related matters after the spin-off;


	•	a master agreement for pharmacy, pharmacy consulting and related products and services, referred to as the “pharmacy services agreement,” which will provide the terms and conditions on which NCI’s subsidiary, NeighborCare Pharmacy Services, Inc., will provide pharmacy, pharmacy consulting and medical supply products and services to all long-term care facilities owned or leased by us or our affiliates;


	•	a pharmacy benefit management agreement, referred to as the “CareCard agreement,” which will set forth the terms and conditions under which CareCard, Inc., a subsidiary of NCI, will provide pharmacy benefit management services, as well as access to retail and mail pharmacy services, to us; and

•

a master agreement for specialty beds and oxygen concentrators, referred to as the “durable medical equipment agreement,” under which NeighborCare Pharmacy Services, Inc. will agree to

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		provide specialty beds and oxygen concentrators, and related services to us.


	We and NCI may enter into additional or modified agreements, arrangements and transactions after the spin-off.

Our Board of Directors,
  Management and
  Management Compensation
  After the Spin-Off

Currently, our board of directors consists of two directors, Robert H. Fish and George V. Hager, Jr. The following persons have been elected to our board of directors subject to the consummation of the spin-off in addition to Messrs. Fish and Hager: John F. DePodesta, J. Michael Gallagher, Kevin M. Kelley, Charles W. McQuery, Charlene C. Quinn, and Terry Allison Rappuhn. Our executive officers as of the date of the spin-off will be persons who are currently employees of GHVI. Mr. Hager, the chief financial officer of GHVI, will be our chief executive officer and will cease to be employed by GHVI. Our management team and the compensation awards and other benefits payable to selected members of management after the spin-off are described under “Management.”


Dividend Policy	We anticipate that future earnings will be used principally to support operations, service our indebtedness and finance the growth of our business. Thus, we do not intend to pay cash dividends on GHC common stock in the foreseeable future. In addition, we anticipate that our financing agreements will restrict our ability to pay dividends.

Incurrence of Debt


	In addition, we expect to be responsible for approximately $10.3 million of existing mortgage debt related to certain of our eldercare properties and $17.8 million of assumed debt in connection with the ElderTrust transactions.


	On October 28, 2003, we transferred the net proceeds of $218.5 million of the senior subordinated notes to GHVI. On October 30, 2003, GHVI used these proceeds along with available cash to repay $239.0 million of indebtedness outstanding under GHVI’S senior secured notes. We intend to transfer $97.0 million of the proceeds from the initial borrowings under the term loan portion of the senior credit facility to GHVI, which will use such funds to repay existing indebtedness of GHVI. We expect to retain $50.0 million of the proceeds from the initial borrowings under the term loan portion of our new senior credit facility to pay fees and expenses relating to the issuance of senior

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subordinated notes and the new senior credit facility and to fund working capital and other requirements. We expect to use the remaining proceeds from the initial borrowings under the term loan portion of our new senior credit facility to repay certain of our existing mortgages and other secured debt.

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You should carefully read the “Risk Factors” beginning on page 15.

If you have any questions relating to the spin-off, you should contact:

Genesis HealthCare Corporation
101 East State Street
Kennett Square, Pennsylvania 19348
Telephone: (610) 925-2000
Fax: (610) 925-4000
Attention: Investor Relations

No action is necessary for you to receive the shares of GHC common stock to which you are entitled in the spin-off. To receive your shares of GHC common stock in the spin-off, you do not need to pay any consideration to GHVI or to us, or surrender any shares of GHVI common stock.

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SUMMARY COMBINED FINANCIAL AND OPERATING DATA

The summary combined financial and operating data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and the notes thereto included elsewhere in this information statement. Our combined statement of operations data for the years ended September 30, 2002, 2001 and 2000 and our combined balance sheet data as of September 30, 2002 and 2001 have been derived from our audited combined financial statements included elsewhere in this information statement, which have been audited by KPMG LLP, whose report is included elsewhere in this information statement. Our combined statement of operations data for the nine months ended June 30, 2003 and 2002 and our combined balance sheet data as of June 30, 2003 have been derived from our unaudited condensed combined financial statements included elsewhere in this information statement. Our combined statement of operations data for the twelve months ended June 30, 2003 is unaudited and has been derived from our condensed combined statements of operations for the nine month periods ended June 30, 2003 and 2002, and the combined statement of operations for the year ended September 30, 2002. Our combined statement of operations data for the years ended September 30, 1999 and 1998 and our combined balance sheet data as of September 30, 2000, 1999 and 1998 have been derived from our unaudited combined financial statements, which are not presented in this information statement. The historical financial information presented below may not be indicative of our future performance and does not reflect the results of operations and financial position we would have had if we had operated as a separate, stand-alone entity during the periods and as of the dates presented.

Upon emergence from our subsidiaries’ Chapter 11 bankruptcy proceeding on October 2, 2001, our subsidiaries adopted the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code,” also referred to as “fresh-start reporting,” effective September 30, 2001. In connection with the adoption of fresh-start reporting, a new entity was deemed created for financial reporting purposes, the provisions of the 2001 joint plan of reorganization were implemented, assets and liabilities were adjusted to their estimated fair values and our accumulated owner’s deficit was eliminated. Any financial information labeled “predecessor company” refers to periods prior to the adoption of fresh-start reporting, while those labeled “successor company” refers to periods following September 30, 2001. Predecessor company and successor company financial information is generally not comparable and therefore separated by a vertical line. The lack of comparability within the combined statement of operations data is most apparent in our capital costs (lease, interest, depreciation and amortization), as well as with income taxes and debt restructuring and reorganization costs. Predecessor company and successor company balance sheet data are not comparable due to the change in accounting basis of long-lived assets to estimated fair value and the discharge of liabilities subject to compromise.

On October 1, 2001, we adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” referred to as “SFAS 144.” Under SFAS 144, discontinued businesses, including assets held for sale, are removed from the results of continuing operations. The results of operations in the current year and prior year periods, along with any costs to exit such businesses in the current year period, have been classified as discontinued operations in the following summary historical financial data. Businesses sold or closed prior to the adoption of SFAS 144 continue to be reported in the results of continuing operations.

On October 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002,” referred to as “SFAS 145.” The most significant impact of the adoption of SFAS 145 is that effective October 1, 2002, any gains or losses on the extinguishment of debt that were classified as extraordinary items in prior periods that do not meet the new criteria for classification as extraordinary items have been reclassified. This reclassification includes the $1.0 billion gain recognized in fiscal 2001 in connection with the discharge of liabilities subject to compromise upon our subsidiaries’ emergence from Chapter 11 proceedings which is now included in income from continuing operations.

The summary combined financial and operating data includes EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, Pro Forma Adjusted EBITDA margin and the pro forma financial ratios Adjusted EBITDA/interest expense and total debt/Adjusted EBITDA, which are

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non-GAAP financial measures. For purposes of SEC Regulation G, a non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States of America. Pursuant to the requirements of Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Management believes that the presentation of EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, Pro Forma Adjusted EBITDA margin and the pro forma financial ratios Adjusted EBITDA/interest expense and total debt/Adjusted EBITDA provide useful information to investors regarding our results of operations because they are useful for trending, analyzing and benchmarking the performance and value of our business. We use EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, Pro Forma Adjusted EBITDA margin and the pro forma financial ratios Adjusted EBITDA/interest expense and total debt/Adjusted EBITDA primarily as performance measures. We use EBITDA and Adjusted EBITDA as a measure to assess the relative performance of our eldercare properties and other of our operating businesses, as well as the employees responsible for operating such businesses. EBITDA and Adjusted EBITDA are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense, which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state in which a business unit operates. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, management is better able to evaluate operating performance of the business unit and the employees responsible for business unit performance. Consequently, management uses EBITDA and Adjusted EBITDA to determine the extent to which our employees have met performance goals, and therefore may or may not be eligible for incentive compensation awards. We also use EBITDA and Adjusted EBITDA in our annual budget process. We believe EBITDA and Adjusted EBITDA facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not consider certain material costs necessary to operate our business. These costs include the cost to service our debt, the non-cash depreciation and amortization associated with our long-lived assets, the cost of our federal and state tax obligations, our share of the earnings or losses of our less than 100% owned operations and the operating results of our discontinued businesses. Because EBITDA does not consider these important elements of our cost structure, a user of our financial information who relies on EBITDA as the only measure of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income an important measure of our financial performance because it provides the most complete measure of our performance.

We define EBITDA as earnings from continuing operations before equity in net income (loss) of unconsolidated affiliates, minority interests, interest, taxes, depreciation and amortization. Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. EBITDA does not represent net income (loss), as defined by GAAP.

Adjusted EBITDA is presented to exclude certain expenses and gains related to one-time transactional events or settlements. Specifically, in the nine month period ended June 30, 2003, we excluded a net gain recognized in connection with the early extinguishment of a mortgage debt. In addition, in the nine months ended June 30, 2002 and in each of the years in the three year period ended September 30, 2002, we excluded debt restructuring and reorganization costs and gains related to our subsidiaries’ Chapter 11 bankruptcy proceedings. Management believes that excluding such expenses and gains properly reflects our ongoing operations and provides better comparability to prior year results.

Pro Forma Adjusted EBITDA is presented to give effect to the Transactions (as defined and described in “Summary — Genesis HealthCare Corporation — Recent Developments”) as if they occurred as of October

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1, 2001. The difference between Adjusted EBITDA and Pro Forma Adjusted EBITDA is caused by our anticipated consolidation of a previously unconsolidated joint venture and the restructuring of certain facility lease contracts included as part of the Transactions. Management believes that the presentation of Pro Forma Adjusted EBITDA properly reflects our ongoing operations after giving effect to the Transactions. However, Pro Forma Adjusted EBITDA excludes $2.1 million of estimated incremental costs associated with being an independent public company and the loss of certain synergies and benefits of economies of scale that existed while we were a part of GHVI. We believe that the GAAP financial measure most directly comparable to Pro Forma Adjusted EBITDA is pro forma income from continuing operations.

EBITDA, Adjusted EBITDA, Pro Forma Adjusted EBITDA, EBITDA margin, Adjusted EBITDA margin, Pro Forma Adjusted EBITDA margin and the pro forma financial ratios Adjusted EBITDA/interest expense and total debt/Adjusted EBITDA should be considered in addition to, not as substitutes for or superior to, GAAP financial measures or as indicators of operating performance.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

	Successor Company													Predecessor Company

	Twelve Months Ended June 30,			Nine Months Ended June 30,						Year Ended September 30,			Years Ended September 30,
	Twelve Months Ended June 30,			Nine Months Ended June 30,						Year Ended September 30,			Years Ended September 30,

	2003			2003			2002			2002			2001 (9)			2000 (9)			1999			1998


	(dollars in thousands)
Statement of Operations Data (1):
Net revenues	$	1,382,021		$	1,035,047		$	1,015,192		$	1,362,166		$	1,291,163		$	1,262,084		$	819,046		$	843,521
Income (loss) from continuing operations		35,686			23,837			31,022			42,871			146,824			(794,218	)		(327,490	)		(21,245	)
Net income (loss)	$	19,212		$	9,446		$	27,785		$	37,551		$	113,319		$	(844,185	)	$	(339,296	)	$	(41,285	)

Other Financial Data (1):
EBITDA (2)	$	106,610		$	73,189		$	89,710		$	123,131		$	320,767		$	(586,603	)	$	(23,884	)	$	82,771
Net income/net revenues margin (3)		1	%		1	%		3	%		3	%		9	%		NM			NM			NM
EBITDA margin (2)(3)		8	%		7	%		9	%		9	%		25	%		NM			NM			10	%
Adjusted EBITDA (2)		106,962			72,066			91,410			126,306			37,556			(140,727	)		(22,488	)		84,259
Adjusted EBITDA margin (2)(3)		8	%		7	%		9	%		9	%		3	%		NM			NM			10	%
Lease expense		27,285			20,556			19,865			26,594			29,276			32,482			24,221			22,790
Interest expense		17,363			12,851			12,616			17,128			98,602			214,550			89,143			69,437

Operating Data:
Occupancy percentage		91	%		91	%		92	%		91	%		91	%		91	%		91	%		92	%
Payor Mix
Medicaid		50	%		50	%		48	%		48	%		48	%		49	%		52	%		49	%
Medicare		28	%		28	%		30	%		30	%		28	%		25	%		24	%		26	%
Private pay and other		22	%		22	%		22	%		22	%		24	%		26	%		24	%		25	%
Avg. owned/leased eldercare center beds (4)		22,610			21,198			24,221			24,139			24,783			14,286			15,522			15,137
Avg. managed eldercare center beds (4)		6,760			6,293			8,067			7,898			9,215			23,779			23,984			24,234

Pro Forma Financial Data (5):
Net revenues	$	1,418,793		$	1,062,964		$	1,042,504		$	1,398,333
Income from continuing operations		28,703			18,528			25,618			35,793
Adjusted EBITDA (6)		110,974			75,350			95,073			130,697
Income from continuing operations/net revenues margin (7)		2	%		2	%		2	%		3	%
Adjusted EBITDA margin (7)		8	%		7	%		9	%		9	%
Lease expense		27,902			21,025			20,300			27,177
Interest expense		31,071			23,303			23,303			31,017
Earnings per share from continuing operations		NM		$	0.90		$	1.24		$	1.74

	Successor Company								Predecessor Company

	Pro Forma (5) June 30,		June 30,		September 30,				September 30,

	2003		2003		2002		2001		2000 (9)			1999			1998


	(dollars in thousands)
Balance Sheet Data:
Working capital	$	147,347	$	76,305	$	78,473	$	41,598	$	(173,322	)	$	71,015		$	106,822
Property and equipment, net		692,958		668,243		728,447		785,654		1,039,668			538,188			537,502
Total assets		1,159,366		1,061,768		1,154,480		1,136,841		1,971,117			1,330,295			1,556,858
Liabilities subject to compromise		—		—		—		—		1,938,477			—			—
Long-term debt, including current portion		438,143		275,208		326,476		328,157		10,441			1,244,622			1,011,445
Owner’s equity (deficit)	$	534,436	$	585,771	$	602,764	$	572,147	$	(487,753	)	$	(91,534	)	$	350,689

Pro Forma Financial Ratios (8):
Income from continuing operations/Interest expense		0.9x
Adjusted EBITDA/Interest expense		3.6x
Total debt/Income from continuing operations		15.3x
Total debt/Adjusted EBITDA		3.9x

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(1)

For a discussion of operating results from fiscal 2000 through the nine month period ended June 30, 2003, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” Effective October 1, 2002, certain Medicare funding provisions expired, referred to as the “skilled nursing facility Medicare cliff.” The twelve month period ended June 30, 2003 includes approximately $5.9 million of net revenues and EBITDA which we would not have received had the skilled nursing facility Medicare cliff occurred at the beginning of such period.


	The net revenues and income (loss) from continuing operations data for all periods presented is from continuing operations and has been adjusted to exclude discontinued operations. Operating data has not been adjusted to exclude discontinued operations.


(2)	The following table reconciles net income (loss) with EBITDA and Adjusted EBITDA for the periods presented.

	Successor Company												Predecessor Company

	Twelve Months Ended June 30,			Nine Months Ended June 30,						Year Ended Sept. 30,			Years Ended September 30,
	Twelve Months Ended June 30,			Nine Months Ended June 30,						Year Ended Sept. 30,			Years Ended September 30,

	2003			2003			2002			2002			2001			2000			1999			1998

							(dollars in						thousands)
Net income (loss)	$	19,212		$	9,446		$	27,785		$	37,551		$	113,319		$	(844,185	)	$	(339,296	)	$	(41,285	)
Add back:
Cumulative change in accounting principle		—			—			—			—			—			10,412			—			—
Loss from discontinued operations, net of taxes		16,474			14,391			3,237			5,320			33,505			39,555			11,806			20,040
Equity in net (income) loss of unconsolidated affiliates		(1,879	)		(875	)		(192	)		(1,196	)		10,228			2,505			178,608			(435	)
Minority interests		242			—			—			242			—			—			1			6
Income tax expense (benefit)		14,483			7,397			19,712			26,798			—			(80,879	)		—			—
Interest expense		17,363			12,851			12,616			17,128			98,602			214,550			89,143			69,437
Depreciation and amortization expense		40,715			29,979			26,552			37,288			65,113			71,439			35,854			35,008

EBITDA		106,610			73,189			89,710			123,131			320,767			(586,603	)		(23,884	)		82,771
Loss (gain) on early extinguishment of debt		(1,123	)		(1,123	)		—			—			—			—			1,396			1,488
Debt restructuring and reorganization costs and net gain on debt discharge		1,475			—			1,700			3,175			(283,211	)		445,876			—			—

Adjusted EBITDA	$	106,962		$	72,066		$	91,410		$	126,306		$	37,556		$	(140,727	)	$	(22,488	)	$	84,259

(3)

The most directly comparable GAAP financial measure to EBITDA margin and Adjusted EBITDA margin is net income/net revenues margin, which is calculated by dividing net income by net revenues. EBITDA margin is calculated by dividing EBITDA by net revenues. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by net revenues.

(4)

In connection with the consummation of GHVI’s and our subsidiaries’ 2001 joint plan of reorganization, 10,702 Multicare beds previously classified as “Managed and Jointly-Owned Facilities” were reclassified as “Owned and Leased Facilities.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events — Multicare Transaction and Restructuring.”


(5)	Pro forma to reflect the Transactions as described in “Summary — Recent Developments.” See “Unaudited Pro Forma Condensed Combined Financial Statements.”


(6)	The following table reconciles pro forma income from continuing operations to Pro Forma EBITDA and Pro Forma Adjusted EBITDA for the periods presented.

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	Successor Company

	Twelve Months Ended			Nine Months Ended					Year Ended
	June 30,			June 30,					September 30,

	2003			2003			2002		2002

	(dollars in thousands)
Income from continuing operations	$	28,703		$	18,528		$	25,618	$	35,793
Add back:
Equity in net (income) loss of unconsolidated affiliates		(1,904	)		(753	)		145		(1,006	)
Minority interests		242			—			—		242
Income tax expense		10,005			4,081			16,471		22,395
Interest expense		31,071			23,303			23,303		31,071
Depreciation and amortization expense		42,505			31,314			27,836		39,027

EBITDA		110,622			76,473			93,373		127,522
Gain on early extinguishment of debt		(1,123	)		(1,123	)		—		—
Debt restructuring and reorganization costs and net gain on debt discharge		1,475			—			1,700		3,175

Adjusted EBITDA	$	110,974		$	75,350		$	95,073	$	130,697


(7)	The most directly comparable GAAP financial measure to Pro Forma Adjusted EBITDA margin is pro forma income from continuing operations/net revenues margin, which is calculated by dividing pro forma income from continuing operations by pro forma net revenues. Pro Forma Adjusted EBITDA margin is calculated by dividing Pro Forma Adjusted EBITDA by pro forma net revenues.

(8)

The most directly comparable GAAP financial measure to the pro forma financial ratio Adjusted EBITDA/interest expense is the pro forma financial ratio income from continuing operations/interest expense, which is calculated by dividing pro forma income from continuing operations by pro forma interest expense. The pro forma financial ratio Adjusted EBITDA/interest expense is calculated by dividing Pro Forma Adjusted EDITDA by pro forma interest expense.

The most directly comparable GAAP financial measure to the pro forma financial ratio total debt/Adjusted EBITDA is the pro forma financial ratio total debt/income from continuing operations, which is calculated by dividing pro forma total debt by pro forma income from continuing operations. The pro forma financial ratio total debt/Adjusted EBITDA is calculated by dividing pro forma total debt by Pro Forma Adjusted EBITDA.


(9)	We have restated our previously reported combined financial statements in fiscal years 2001 and 2000 to reflect certain adjustments as discussed in note 3 — “Restatement of 2001 and 2000 Combined Financial Statements” of the Combined Financial Statements which begin on page F-1 of this information statement.

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RISK FACTORS

You should carefully consider each of the following risks and all of the other information set forth in this information statement. Some of the following risks relate principally to establishing our company as independent from GHVI. Other risks relate principally to our business. Finally, we describe risks relating principally to the securities markets and ownership of our stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

If any of the following risks and uncertainties develop into actual events, this could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of GHC common stock could decline.

Risk Factors Relating to Establishing Our Company Independently from GHVI

We have no history operating as an independent entity.

Upon consummation of the spin-off, we will own and operate the inpatient services and other ancillary businesses and NCI will own and operate the pharmacy services business. Neither of these businesses has an operating history as a separate company. The spin-off may result in some temporary dislocation and inefficiencies to the business operations, as well as the overall management of each company. In addition, operating these businesses independently may be more expensive, more complicated or more difficult than operating them under the common GHVI umbrella.

Our historical financial information and our pro forma financial information may not be representative of our results as a separate company.

Historically, our operations were conducted as part of the consolidated GHVI entity and not as a stand-alone entity. Accordingly, the financial statements included in this information statement may not reflect the results of operations, financial condition and cash flows that would have been achieved had our company been operated independently during the periods and as of the dates presented.

Costs related to our corporate functions, including legal support, treasury administration, insurance administration, human resource management, internal audit and corporate accounting and income tax administration, which are not directly and solely related to our operations, have been allocated based upon various methodologies deemed reasonable by management. Although our management believes that the methods used to allocate and estimate such expenses are reasonable, there can be no assurance that these actual costs will not be higher, perhaps substantially, after the spin-off.

Furthermore, our historical combined financial statements may not reflect the costs to us of borrowing funds as a stand-alone entity.

Since GHVI, including our subsidiaries, emerged from bankruptcy on October 2, 2001, there is limited operating and financial data available from which to analyze our operating results and cash flows.

Financial information related to GHVI’s and our subsidiaries’ operations after their emergence from bankruptcy is limited and therefore it is difficult to compare such post-bankruptcy financial information with that of prior periods. Additionally, this information reflects the results of fresh-start reporting which also make comparison of results of operations and financial condition after GHVI’s and our subsidiaries’ emergence from bankruptcy to the results of prior periods difficult. Since our operating and financial data are derived from GHVI’s operating and financial data, there is limited operating and financial data available from which to analyze our operating results and cash flows. For additional information, see “Selected Combined Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Our ability to obtain debt financing to support our operations is uncertain.

The long-term care industry is capital-intensive by its nature, with significant investment in real property financed primarily with debt. Additionally, it is largely dependent upon government reimbursements for revenues and operating cash flow to service its debt requirements. Significant changes in reimbursement rates, such as those experienced with the introduction of the prospective payment system for Medicare as well as subsequent modifications to the Medicare payment rates, have negatively impacted our and our industry’s ability to service debt. At times, this has reduced the supply of willing lenders to, and therefore credit capacity for, us and our industry. Consequently, there is no assurance that we will be able to obtain additional financing, when needed, to finance working capital or other investment requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — New Financing Arrangements.”

We will be a highly leveraged business after the spin-off, which could limit our ability to borrow in the future and limit our ability to invest our cash flow.

We will be a highly leveraged business following the spin-off. We issued senior subordinated notes in an aggregate principal amount of $225.0 million and, prior to the consummation of the spin-off, we intend to enter into a senior credit facility consisting of a $185.0 million term loan, which will be fully drawn at the closing of the spin-off, and a $75.0 million revolving credit facility, none of which is expected to be drawn at the closing of the spin-off. Of the $410.0 million of borrowings under the new financing arrangements, we intend to retain $39.0 million to fund working capital and other requirements, expend $11.0 million for financing related fees, use $44.5 million to repay existing mortgage loans and transfer $315.5 million to GHVI, which will use such funds to repay existing indebtedness of GHVI. On October 28, 2003, we transferred the net proceeds of $218.5 million of the senior subordinated notes to GHVI. In addition, we expect to be responsible for $10.3 million of mortgage existing debt related to certain eldercare properties held by subsidiaries that will be transferred to us prior to the spin-off and $17.8 million of mortgage debt assumed in the ElderTrust transactions. As a result, a significant portion of our cash flow will be dedicated to debt service and will be unavailable for investment, capital expenditures or other operating expenses. There is no assurance that future cash flow or financings will be sufficient to service the debt as structured.

After giving effect to spin-off and the foregoing new borrowings and use of funding, at June 30, 2003, we had total debt of $438.1 million, which is expected to mature as follows: $4.6 million in fiscal 2004, $4.7 million in fiscal 2005, $5.0 million in fiscal 2006, $5.2 million in fiscal 2007, $5.4 million in fiscal 2008 and $413.2 million thereafter.

We will no longer be able to rely on GHVI for the diversification of business risk or to provide capital resources.

In the past, the business risk associated with our core operations was mitigated, to some extent, by the operations of GHVI’s pharmacy services business. Following the spin-off, we will have less financial and other resources than the larger pre-spin-off GHVI. Our ability to satisfy our obligations and maintain profitability will be solely dependent upon the future performance of our businesses, and we will not be able to rely upon the financial and other resources and cash flows of those business lines remaining with GHVI. As a result, we will be more sensitive to industry-related risks.

Our ability to engage in financings and acquisitions and other strategic transactions using our equity securities is subject to limitations because of the United States federal income tax requirements for a tax-free distribution.

Current tax law generally creates a presumption that the spin-off would be taxable to GHVI (but not to its shareholders) if we engage in, or enter into an agreement to engage in, a transaction that would result in a 50% or greater change (by vote or by value) in our stock ownership during the four-year period beginning on the date that begins two years before the distribution date, unless it is established that the transaction is not pursuant to a plan or series of transactions related to the spin-off. Temporary Treasury regulations currently in effect generally provide that whether an acquisition transaction and a distribution are part of a plan is determined based on all of the facts and circumstances, including but not limited to those specific factors listed in the regulations. In addition, the regulations provide several “safe harbors” for acquisition transactions that are not considered to be part of a plan.

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Our tax sharing agreement with GHVI limits our ability to use GHC common stock for acquisitions and other similar strategic transactions. We will also be subject to several restrictions (including restrictions on share issuances, business combinations, sales of assets and similar transactions) that are designed to preserve the tax-free status of the spin-off. Under the tax sharing agreement, we will be required to indemnify NCI against taxes and related losses resulting from actions we take that cause the spin-off to fail to qualify as a tax-free transaction. The amount of any such indemnification payment could be substantial. See “Relationship with NCI — Tax Sharing Agreement.” These restrictions may prevent us from entering into transactions which might be advantageous to us, such as issuing equity securities to satisfy our financing needs or acquiring businesses or assets by issuing equity securities. Many of our competitors are not subject to similar restrictions and therefore, may have a competitive advantage over us.

We may be responsible for federal income tax liabilities that relate to the distribution of GHC common stock by GHVI.

GHVI and we have made certain representations in connection with the private letter ruling and we will agree to restrictions on certain future actions designed to preserve the tax-free status of the spin-off.

If the spin-off were found to be taxable by reason of any act (or failure to act) described in certain covenants contained in the spin-off documents, any acquisition of our equity securities or assets, or any breach of any of our representations in the spin-off documents or in the private letter ruling request, the spin-off would be taxable to GHVI and may be taxable to holders of GHVI common stock who received shares of GHC common stock in the spin-off. In such case, we will be required to indemnify NCI against any taxes and related losses. The amount of any such indemnification payment could be substantial. See “Relationship with NCI — Tax Sharing Agreement.” See also “The Spin-Off — Material Federal Income Tax Consequences of the Spin-Off.”

We may be required to satisfy certain indemnification obligations to NCI, or may not be able to collect on indemnification rights from NCI.

Under the terms of the separation and distribution agreement, we and GHVI have each agreed to indemnify each other from and after the distribution with respect to the indebtedness, liabilities and obligations that will be retained by our respective companies. These indemnification obligations could be significant and we cannot presently determine the amount of indemnification obligations for which we will be liable or for which we will seek payment from NCI. Our ability to satisfy these indemnities, if we are called upon to do so, will depend upon our future financial performance. Similarly, NCI’s ability to satisfy any such obligations to us will depend on NCI’s future financial performance. We cannot assure you that we will have the ability to satisfy any substantial indemnification obligations to NCI. We also cannot assure you that if NCI is required to indemnify us for any substantial obligations, NCI will have the ability to satisfy those obligations.

After the spin-off, we will be subject to agreements with NCI which were negotiated by representatives of each company prior to consummation of the spin-off and which are generally exclusive.

In addition to the separation and distribution agreement, tax sharing agreement, transition services agreement and employee benefits agreement, which relate to the spin-off, we expect to enter into the following agreements, which relate to the provision of products and services to us by NCI and its subsidiaries:

•

the Tidewater agreement with NCI’s subsidiary, Tidewater Healthcare Shared Services Group, Inc.,


	•	the CareCard agreement with NCI’s subsidiary, CareCard, Inc., and


	•	the durable medical equipment agreement and pharmacy services agreement with NCI’s subsidiary, NeighborCare Pharmacy Services, Inc.

The agreements between us and NCI and its subsidiaries were negotiated by representatives of each company during a period in which GHC was a wholly-owned subsidiary of GHVI. The pharmacy services agreement and the Tidewater agreement will each have an initial term of ten years; the durable medical equipment agreement will have an initial term of five years and the CareCard agreement will expire on December 31, 2004. Each of the pharmacy services agreement and the durable medical equipment agreement will require that NeighborCare Pharmacy Services, Inc. be the exclusive provider of the products and services to be furnished under such agreements, other than as required by law and certain payor- or resident-specific circumstances. The Tidewater agreement will require us to purchase certain minimum amounts from NCI’s subsidiary; however, we will be permitted to be a member of other group purchasing organizations as well. We will agree to enroll all our employees participating in a GHC self-insured health plan in the CareCard Program. We are eligible for a pricing adjustment during the initial terms of the pharmacy services agreement and the Tidewater agreement upon satisfaction of certain volume levels and will be eligible for a market adjustment after five years of the initial ten-year terms. Pricing under the CareCard agreement and the durable medical equipment agreement is not subject to adjustment during the initial terms. There can be no assurance that we could not have obtained lower rates or better terms from other suppliers.

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One of our directors will also be a director of NCI. As a result of the spin-off, our management will own NCI common stock.

One of our directors, Robert H. Fish, will also serve as a director of NCI. Most of our management and some members of our board of directors currently own GHVI common stock and will therefore own NCI stock following the spin off. The agreements between us and NCI were negotiated by members of our and NCI’s management who own GHVI common stock and, upon consummation of the spin-off, will own both NCI and GHC common stock. Ownership of NCI common stock by our management and directors or the employment by NCI of any of our directors after our separation from GHVI could create, or appear to create, potential conflicts of interest for these officers and directors when faced with decisions that could have implications for both NCI and us. See “Management” and “Relationship with NCI.”

NCI, our single largest supplier of pharmaceutical products and services, will be subject to its own risks as a result of the spin-off and its operation as a stand-alone entity.

NCI will be the single largest supplier of pharmaceutical products and services to our skilled nursing and assisted living centers. While there are other qualified pharmacy suppliers, we expect to enter into a multi-year contractual arrangement with NCI that will require that NCI, through its subsidiary, NeighborCare Pharmacy Services, Inc., be the exclusive provider of pharmaceutical products and supplies, other than as required by law and certain payor – or resident – specific circumstances. After, and as a result of the spin-off, NCI will operate for the first time as an independent public entity. NCI is also exposed to many of the risks outlined herein, including initial operation without the support of the former GHVI corporate infrastructure. See “Relationship with NCI — Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services.”

If GHVI does not receive the consent of GHVI’s senior creditors to the spin-off and GHVI’s credit facility is not replaced with separate credit facilities for GHC and NCI, the spin-off will not occur.

GHVI has not yet received the consent of GHVI’s senior creditors to the spin-off. We and GHVI are in the process of negotiating new senior credit facilities. Neither we nor GHVI, however, have completed new senior credit facilities. If GHVI does not receive the consent of GHVI’s senior creditors to the spin-off or we and GHVI have not completed new senior credit facilities, the spin-off will not occur.

Risk Factors Relating to Our Business

Changes in the reimbursement rates or methods of payment from Medicare and Medicaid have adversely affected our revenues and operating margins, and additional changes in Medicare and Medicaid or the implementation of other measures to reduce the reimbursement for our services may further negatively impact us.

Our inpatient services business currently receives nearly 80% of its revenues from Medicare and Medicaid. The healthcare industry is experiencing a strong trend toward cost containment, as the government seeks to impose lower reimbursement and resource utilization group rates and negotiate reduced payment schedules with providers. These cost containment measures generally have resulted in reduced rates of reimbursement for the services that we provide. Prior reductions in governmental reimbursement rates contributed to our bankruptcy filing under Chapter 11 of the United States Code on June 22, 2000. Additional reductions in reimbursement rates for our services may further negatively impact us.

Changes to Medicare and Medicaid reimbursement programs have limited, and are expected to continue to limit, payment increases under these programs. Also, the timing of payments made under the Medicare and Medicaid programs is subject to regulatory action and governmental budgetary constraints resulting in an increase in the time period between submission of claims and payment. Further, within the statutory framework of the Medicare and Medicaid programs, a substantial number of areas are subject to administrative rulings and interpretations which may further affect payments. In addition, federal and state governments may reduce the funds available under those programs in the future or require more stringent utilization and quality reviews of eldercare centers or other providers.

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The Benefits Improvement and Protection Act mandates a phase out of intergovernmental transfer transactions by states whereby states inflate the payments to certain public facilities to increase federal matching funds. This action may reduce federal support for a number of state Medicaid plans. The reduced federal payments may adversely affect aggregate available funds, thereby requiring states to reduce payments to all providers. We operate in several of the states that will experience a contraction of federal matching funds.

With the repeal of the Boren Amendment which governed federal payment standards for Medicaid payments to skilled nursing facilities, there can be no assurances that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to skilled nursing facilities or that payments to skilled nursing facilities will be made on a timely basis.

Additionally, the recent economic downturn may reduce state spending on Medicaid programs. Recent data compiled by the National Conference of State Legislatures indicates that the recent economic downturn has had a detrimental effect on state revenues. Historically, these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities in the states in which we operate, which could result in Medicaid rate adjustments that are below the average inflationary increase in our operating costs. States may be unable to continue to financially support growing Medicaid programs as currently structured. There is no assurance that federal assistance with the funding of these programs will in fact result, or continue.

Our revenues are adversely affected by expiring Medicare provisions.

A number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act, providing additional funding for Medicare participating skilled nursing facilities, expired on September 30, 2002, resulting in an approximate 10% reduction in the rates paid to us for providing services to Medicare patients. We refer to the expiration of the additional funding as the “skilled nursing facility Medicare cliff.” Effective October 1, 2002, Medicare rates adjusted for the skilled nursing facility Medicare cliff were increased by a 2.6% annual market basket adjustment. For us, the net impact of these provisions is estimated to adversely impact annual revenue beginning October 1, 2002 by approximately $24.0 million. The expiration of these provisions, after considering the 2.6% annual market basket adjustment, has reduced our Medicare per diems per beneficiary, on average, by approximately $24, resulting in reduced revenue of approximately $18.0 million in our first nine months of fiscal 2003.

The final fiscal year 2004 prospective payment system rules for skilled nursing facilities became effective on October 1, 2003. The final rules enhance the reimbursement rates for fiscal year 2004 by increasing base rates by 6.26% (a 3% increase in the annual update factor and a 3.26% upward adjustment correcting previous forecast errors). These changes are estimated to increase Medicare payment rates per patient day by $19. The final rules also provide for the continuation through fiscal year 2004 of certain payment add-ons that were authorized in the Balanced Budget Refinement Act to compensate for non-therapy ancillaries.

The skilled nursing facility Medicare cliff could adversely impact the liquidity of our other service related business customers, resulting in their inability to pay us, or to pay us in a timely manner for our products and services. This factor, coupled with the adverse impact of the skilled nursing facility Medicare cliff to the liquidity of our inpatient services segment, could require us to borrow in order to fund our working capital needs, and in turn, cause us to become more highly leveraged.

There are additional provisions in the Medicare statutes affecting rehabilitation therapy and diagnostic services and the payment for services in other health settings. In February 2003, Congress passed legislation that prevented a formula driven reduction in practitioner fee schedules. This restoration of reimbursement rates affected not only doctors, but also payment for most professional practitioners including licensed rehabilitation professionals. In addition, effective January 1, 2003, the moratorium on implementing payment caps on Medicare Part B rehabilitation therapy services expired. The Centers for Medicare and Medicaid Services issued instructions that delayed enforcement until September 1, 2003. The therapy caps are expected to reduce our annual net revenues by approximately $18.9 million and EBITDA by approximately

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$4.9 million. Congress may again intervene to extend a moratorium on the therapy caps for calendar year 2004. No assurances can be made or given that Congress will extend the moratorium or take any other action to affect a discontinuance of the therapy caps.

It is not possible to quantify fully the effect of recent legislation, potential legislative or regulatory changes, the interpretation or administration of such legislation or any other governmental initiatives on our business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not further adversely affect our business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. Our financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

We conduct business in a heavily regulated industry, and changes in regulations and violations of regulations may result in increased costs or sanctions.

Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure and certification of eldercare centers, and reimbursement. For our eldercare centers, these regulations relate, among other things, to the adequacy of physical plant and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements. Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Because these regulations are amended from time to time and are subject to interpretation, we cannot predict when and to what extent liability may arise. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including (with respect to inpatient care) fines, restrictions on admission, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of a facility or site of service.

We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. Rights and remedies available to these programs include repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. These programs may also impose fines, criminal penalties or program exclusions. Other third-party payor sources also reserve rights to conduct audits and make monetary adjustments in connection with or exclusive of audit activities.

In the ordinary course of our business, we receive notices of deficiencies for failure to comply with conditions of participation in the Medicare and Medicaid programs. We review such notices and take appropriate corrective action. In these cases, we submit our plan to bring the center into compliance with regulations which must be accepted by the reviewing agency. In some cases or upon repeat violations, the reviewing agency may take various adverse actions against a provider, including but not limited to:

•

the imposition of fines;


	•	suspension of payments for new or all admissions to the center; and


	•	in extreme circumstances, decertification from participation in the Medicare or Medicaid programs and/or revocation of a center’s or service site’s license.

These actions may adversely affect a provider’s ability to continue to operate, the ability to provide certain services and/or eligibility to participate in the Medicare or Medicaid programs or to receive payments from other payors. Certain of our centers have received notices that, as a result of alleged deficiencies, the federal and/or state agency was taking steps to impose remedies. Additionally, actions taken against one center or service site may subject other centers or service sites under common control or ownership to adverse remedies.

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arrangements between healthcare providers that are designed to induce the referral of patients to a particular provider for medical products and services. Possible sanctions for violation of any of these restrictions or prohibitions include loss of eligibility to participate in reimbursement programs and/or civil and criminal penalties. Furthermore, some states restrict certain business relationships between physicians and other providers of healthcare services. Many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. From time to time, we may seek guidance as to the interpretation of these laws; however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with our practices.

In July 1998, the federal government issued a new initiative to promote the quality of care in nursing homes. Following this pronouncement, it has become more difficult for nursing facilities to maintain licensure and certification. We have experienced and expect to continue to experience increased costs in connection with maintaining our licenses and certifications as well as increased enforcement actions. Failure to provide quality of resident care may result in civil and/or criminal fines and penalties.

The operation of our eldercare centers is subject to federal and state laws prohibiting fraud by healthcare providers, including criminal provisions, which prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid, or failing to refund overpayments or improper payments. Violation of these criminal provisions is a felony punishable by imprisonment and/or fines. We may be subject to fines and treble damage claims if we violate the civil provisions that prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment.

State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers. The Health Insurance Portability and Accountability Act and the Balanced Budget Act expanded the penalties for healthcare fraud, including broader provisions for the exclusion of providers from the Medicaid program. We have established policies and procedures that we believe are sufficient to ensure that our facilities will operate in substantial compliance with these anti-fraud and abuse requirements. While we believe that our business practices are consistent with Medicare and Medicaid criteria, those criteria are often vague and subject to change and interpretation. Aggressive anti-fraud actions, however, could have an adverse effect on our financial position, results of operations and cash flows.

We face additional federal requirements that mandate major changes in the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996 was enacted to ensure, first, that employees can retain and at times transfer their health insurance when they change jobs, and second, to simplify healthcare administrative processes. This simplification includes expanded protection of the privacy and security of personal medical data and requires the adoption of standards for the exchange of electronic health information. Among the standards that the Secretary of Health and Human Services has adopted pursuant to the Health Insurance Portability and Accountability Act are standards for the following: electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security and electronic signatures, privacy and enforcement. Although the Health Insurance Portability and Accountability Act was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, we believe that implementation of this law will result in additional costs. Failure to comply with the Health Insurance Portability and Accountability Act could result in fines and penalties that could have a material adverse effect on us.

State laws and regulations could affect our ability to grow.

Several states in which we operate our business have adopted certificate of need or similar laws that generally require that a state agency approve certain acquisitions and determine that the need for certain bed additions, new services and capital expenditures or other changes exist prior to the acquisition or addition of beds or services, the implementation of other changes or the expenditure of capital. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in the inability to provide the service, to operate the centers, to complete the acquisition, addition or other change, and can also result in the imposition of sanctions or adverse action on the center’s license and adverse reimbursement action.

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There can be no assurance that we will be able to obtain certificate of need approval for all future projects requiring such approval.

Possible changes in the case mix of patients as well as payor mix and payment methodologies may significantly affect our profitability.

The sources and amounts of our patient revenues will be determined by a number of factors, including licensed bed capacity and occupancy rates of our centers, the mix of patients and the rates of reimbursement among payors. Likewise, therapy services provided by our rehabilitation therapy services business will vary based upon payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among private pay, Medicare and Medicaid will significantly affect our profitability. Particularly, any significant increase in our Medicaid population could have a material adverse effect on our financial position, results of operations and cash flow, especially if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates.

Further consolidation of managed care organizations and other third-party payors may adversely affect our profits.

Managed care organizations and other third-party payors have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a small number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. To the extent that such organizations terminate us as a preferred provider and/or engage our competitors as a preferred or exclusive provider, our business could be materially adversely affected. In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures.

We face intense competition in our business.

The healthcare industry is highly competitive. We compete with a variety of other companies in providing eldercare services, many of which have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than we do and may thereby attract patients or customers who are presently patients, customers or are otherwise receiving our services.

The primary competitive factors in our business include reputation, the cost of services, the quality of clinical services, responsiveness to patient and customer needs, and the ability to provide support in other areas such as third-party reimbursement, information management and patient record-keeping.

An increase in insurance costs may adversely affect our operating cash flow, and we may be liable for losses not covered by or in excess of our insurance.

We have experienced an adverse effect on our operating cash flow due to an increase in the cost of certain of our insurance programs. An increasing trend in malpractice litigation claims, rising costs of eldercare malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. Also, a tightening of the reinsurance market has affected property, auto and excess liability insurance carriers. Accordingly, the costs of all insurance premiums have increased.

This increase in insurance costs has prompted us to exit our otherwise profitable operations in the State of Florida. There is no assurance that liability exposure and the related costs of insurance will not migrate to other states.

We carry property, workers’ compensation insurance, general and professional liability coverage on our behalf and on behalf of our subsidiaries in amounts deemed adequate by management. However, there can be no assurance that any current or future claims will not exceed applicable insurance coverage.

Growth in health insurance premiums in the market have risen to 10% to 20% in recent years. Ours is a labor intensive business, and therefore health insurance costs represent a significant expense for us. In recent years, we have managed the increase in insurance premiums with changes in program offerings and the shift

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in responsibility for cost increases to the employee. Continuing increases substantially in excess of inflation could have a negative impact on our profitability, as further shifts in responsibility for these cost increases to the employee may not be possible.

In addition, we are self-insured for certain of our workers’ compensation insurance, professional liability coverage and health insurance provided to our employees. Accordingly, we are liable for payments to be made under those plans. To the extent claims are greater than estimated, they could adversely affect our financial position, results of operations and cash flows.

We could experience significant increases in our operating costs due to intense competition for qualified staff and minimum staffing laws in the healthcare industry.

We and the healthcare industry continue to experience shortages in qualified professional clinical staff. We compete with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. As the demand for these services continually exceeds the supply of available and qualified staff, we and our competitors have been forced to offer more attractive wage and benefit packages to these professionals and to utilize outside contractors for these services at premium rates. Furthermore, the competitive arena for this shrinking labor market has created high turnover among clinical professional staff as many seek to take advantage of the supply of available positions, each offering new and more attractive wage and benefit packages. In addition to the wage pressures inherent in this environment, the cost of training new employees amid the high turnover rates has increased pressure on our operating margins. Lastly, increased attention to the quality of care provided in skilled nursing facilities has caused several states to mandate and other states to consider mandating minimum staffing laws that further increase the gap between demand for and supply of qualified individuals and lead to higher labor costs. While we have been able to retain the services of an adequate number of qualified personnel to staff our facilities appropriately and maintain our standards of quality care, there can be no assurance that continued shortages will not in the future affect our ability to attract and maintain an adequate staff of qualified healthcare personnel. A lack of qualified personnel at a facility could result in significant increases in labor costs and an increased reliance on expensive temporary nursing agencies at such facility or otherwise adversely affect operations at such facility. Any of these developments could adversely affect our operating results.

If we are unable to control operating costs and generate sufficient cash flow to meet operational and financial requirements, including servicing our indebtedness, our business operations may be adversely affected.

Cost containment and lower reimbursement levels relative to inflationary increases in cost by third-party payors, including federal and state governments, have had a significant impact on the healthcare industry as a whole and on our cash flows. Our operating margins continue to be under pressure because of continuing regulatory scrutiny and growth in operating expenses, such as labor costs and insurance premiums. In addition, as a result of competitive pressures, our ability to maintain operating margins through price increases to private patients is limited.

Our ability to make payments on our existing and future debt and to pay our expenses will depend on our ability to generate cash in the future. Our ability to generate cash is subject to various risks and uncertainties, including those disclosed in this section and prevailing economic, regulatory and other conditions beyond our control. We cannot assure you that we will be able to do these things on commercially reasonable terms, if at all. In addition, the terms of our existing or future debt agreements may restrict us from pursuing any of these alternatives.

The agreements expected to govern our debt are likely to contain various covenants that may limit our discretion in the operation of our business.

The agreements and instruments that are expected to govern our debt are expected to contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to:

•

incur more debt;


	•	pay distributions, redeem stock or make other distributions;

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•

make certain investments;


	•	create liens;


	•	enter into transactions with affiliates;


	•	make acquisitions;


	•	merge or consolidate; and


	•	transfer or sell assets.

Our ability to comply with these covenants is subject to various risks and uncertainties. In addition, events beyond our control could affect our ability to comply with and maintain the financial tests and ratios. Any failure by us to comply with and maintain all applicable financial tests and ratios and to comply with all applicable covenants could result in an event of default with respect to, and the acceleration of the maturity of, and the termination of the commitments to make further extension of credit under a substantial portion of our debt. If we were unable to repay debt to our senior lenders, these lenders could proceed against the collateral securing that debt. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business in our sole discretion could harm our business by, among other things, limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.

A significant portion of our business is concentrated in certain markets and the recent economic downturn or changes in the laws affecting our business in those markets could have a material adverse effect on our operating results.

We receive approximately 70% of our inpatient services revenue from operations in Pennsylvania, New Jersey, Massachusetts and Maryland. The economic condition of these markets could affect the ability of our patients and third-party payors to reimburse us for our services through a reduction of disposable household income or the ultimate reduction of the tax base used to generate state funding of their respective Medicaid programs. An economic downturn, or changes in the laws affecting our business in these markets and in surrounding markets, could have a material adverse effect on our financial position, results of operations and cash flows.

We may make acquisitions that could subject us to a number of operating risks.

We anticipate that we may make acquisitions of, investments in, and strategic alliances with complementary businesses to enable us to capitalize on our strong position in the geographic markets in which we operate and to expand our businesses geographically. However, implementation of this strategy entails a number of risks, including:

•

inaccurate assessment of undisclosed liabilities;


	•	diversion of management’s attention from our existing operations;


	•	difficulties in assimilating the operations of an acquired business or in realizing projected revenue synergies, efficiencies and cost savings; and


	•	increase in our indebtedness and a limitation in our ability to access additional capital when needed.

Certain changes may be necessary to integrate the acquired businesses into our operations to assimilate new employees and to implement reporting, monitoring, compliance and forecasting policies and procedures.

Risk Factor Relating to Securities Markets and Ownership of GHC Common Stock

The combined post-spin-off value of NCI shares and our shares may not equal or exceed the
pre-spin-off trading price of GHVI shares.

We cannot assure you that after the distribution of 0.5 shares of GHC common stock for every share of issued and outstanding GHVI common stock, the combined values of NCI common stock and GHC common stock after the spin-off will be equal to or greater than the trading price of GHVI common stock prior to the spin-off.

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There has been no prior public market for shares of GHC common stock, and if an active trading market does not develop or the market price of GHC common stock fluctuates significantly following the spin-off, shareholders may be unable to sell their shares at acceptable prices.

There is currently no public market for GHC common stock. After the spin-off, trading prices for GHC common stock will be established by the public markets. We have not established a price for GHC common stock. An active trading market may not develop or be sustained in the future. See “Trading Market.”

We cannot predict the prices at which GHC common stock may trade after the spin-off. The market price of GHC common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including, but not limited to:

•

our business and/or investment profile may not fit the investment objectives of GHVI shareholders, causing them to sell GHC shares after the spin-off;


	•	actual or anticipated fluctuations in our operating results;


	•	changes in earnings estimated by securities analysts or our ability to meet those estimates;


	•	the operating and stock price performance of other comparable companies;


	•	overall market fluctuations;


	•	changes in business or regulatory conditions;


	•	developments in and publicity regarding eldercare centers and the industry; and


	•	economic conditions.

In particular, the realization of any of the risks described in these “Risk Factors” could have a significant and adverse impact on the market price of GHC common stock. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of GHC common stock, regardless of our actual performance.

Future equity and debt financing could dilute existing equity holders and limit our ability to take certain actions.

Future equity financings could dilute the relative percentage ownership of the then existing holders of GHC common stock. Future debt financings could involve restrictive covenants that limit our ability to take certain actions, including the incurrence of additional indebtedness and declaration of dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — New Financing Arrangements.”

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Our ability to pay dividends on GHC common stock is limited by our financial results and our debt instruments and we do not anticipate paying any distributions in the foreseeable future.

We anticipate that future earnings will be used principally to support operations and finance the growth of our business. Thus, we do not intend to pay cash distributions on GHC common stock in the foreseeable future. See “Dividend Policy.” Immediately prior to the spin-off, we expect to enter into a senior credit facility providing for both term and revolving credit borrowings, which would allow us to borrow funds for general corporate purposes, including the repayment of other debt, working capital and acquisitions and to issue subordinated notes. The new senior credit facility will likely contain affirmative and negative covenants that, among other things, would require us to satisfy certain financial tests and maintain certain financial ratios. We expect that the new senior credit facility will likely also limit our ability to declare and pay distributions on our shares of common stock. In addition, the senior subordinated notes issued in October 2003 also restrict our ability to declare and pay dividends on our shares of common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – New Financing Arrangements.” If our lenders and the subordinated notes permit us to declare dividends, the dividend amounts, if any, will be determined by our board. Our board will consider a number of factors, including our financial condition, capital requirements, funds generated from operations, future business prospects, applicable contractual restrictions and any other factors our board may deem relevant.

Provisions in Pennsylvania law and our corporate documents could delay or prevent a change in control.

As a Pennsylvania corporation, we are governed by the Pennsylvania Business Corporation Law of 1988, as amended, referred to as “Pennsylvania corporation law.” Pennsylvania corporation law provides that the board of directors of a corporation in discharging its duties, including its response to a potential merger or takeover, may consider the effect of any action upon employees, shareholders, suppliers, patients, customers and creditors of the corporation as well as upon, communities in which offices or other establishments of the corporation are located and all other pertinent factors. In addition, under Pennsylvania corporation law, subject to certain exceptions, a business combination between us and a beneficial owner of more than 20% of our common stock may be accomplished only if certain conditions are met.

Our articles of incorporation will contain certain provisions that may affect a person’s decision to implement a takeover of us, including the following provisions:

•

a classified board of directors;


	•	a provision confirming that we are subject to the restrictions in the Pennsylvania corporation law on certain business combinations involving us that are not approved by the board of directors; and


	•	the authority to issue preferred stock with rights to be designated by the board of directors.

Our articles of incorporation will also confirm that we are subject to the provisions of Pennsylvania corporation law that deny our shareholders the right to act by partial written consent without a meeting.

Additionally, we expect our board of directors to adopt a shareholder rights plan, which will make it extremely difficult for any person or group to acquire a significant interest in our common stock without advance approval of our board of directors.

The overall effect of the foregoing provisions may be to deter a future tender offer or other offers to acquire us or our shares. Shareholders might view such an offer to be in their best interest if the offer includes a substantial premium over the market price of the common stock at that time. In addition, these provisions may assist our management in retaining its position and place it in a better position to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business.

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

Statements made in this information statement, and in our other public filings and releases, which are not historical facts contain “forward-looking” statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time. These
forward-looking statements may include, but are not limited to:

•

statements contained in “Risk Factors;”


	•	statements contained in “Summary” concerning population demographics, strategy and competitive strengths;


	•	statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the notes to our combined financial statements, such as our ability to meet our liquidity needs, scheduled debt and interest payments, and expected future capital expenditure requirements; the expected changes in and effects of government regulation on our business; the expected sale of certain assets; the expected cost or certain expenses in fiscal 2003 and the foreseeable future; and estimates in our critical accounting policies, including our allowance for doubtful accounts, any anticipated impact of long-lived asset impairments and our ability to provide for loss reserves for self-insured programs;


	•	statements contained in “Business” concerning strategy, competitive strengths, corporate integrity programs, insurance coverage, environmental matters, government regulations and the Medicare and Medicaid programs, reimbursement for services provided and legal proceedings; and


	•	statements throughout concerning the new senior credit facility, the ElderTrust transactions and the spin-off.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that these statements are not guarantees of future performance and that actual results and trends in the future may differ materially.

Factors that could cause actual results to differ materially include, but are not limited to the following, which are discussed more fully in “Risk Factors;”

•

loss of key executives and ability to attract qualified management;


	•	higher incremental costs associated with being a separate company;


	•	the difficulty in evaluating certain of our financial information due to the spin-off and a lack of comparability following our subsidiaries’ emergence from bankruptcy;


	•	our ability to service our debt;


	•	availability of financial and other resources to us as a separate company;


	•	ability to obtain financing on terms favorable to us;


	•	ability to successfully engage in acquisitions and other strategic transactions;


	•	federal income tax liabilities and indemnification obligations related to the spin-off;


	•	conflicts of interest as a result of continuing relationships with NCI;


	•	the ability of NCI, as our single largest supplier of pharmaceutical products and services, to act as a stand-alone entity;


	•	changes in the reimbursement rates or methods of payment from Medicare and Medicaid, or the implementation of other measures to reduce the reimbursement for our services;


	•	the expiration of enactments providing for additional governmental funding;


	•	the impact of federal and state regulations;


	•	the impact of investigations relating to alleged violations of federal and/or state regulations;

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•

changes in case mix, payor mix and payment methodologies;


	•	further consolidation of managed care organizations and other third-party payors;


	•	competition in our businesses;


	•	an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance;


	•	competition for qualified staff in the healthcare industry;


	•	our ability to control operating costs and generate sufficient cash flow to meet operational and financial requirements;


	•	an economic downturn or changes in the laws affecting our business in those markets in which we operate; and


	•	acts of God or public authorities, war, civil unrest, terrorism, fire, floods, earthquakes and other matters beyond our control.

In addition to these factors and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in this information statement or the reports and other documents filed by us with the SEC that warn of risks or uncertainties associated with future results, events or circumstances also identify factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements.

We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this information statement or to reflect the occurrence of unanticipated events, except as may be required under applicable securities law.

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THE SPIN-OFF

The Separation of GHC from GHVI

We are currently a wholly-owned subsidiary of GHVI. We were incorporated in Pennsylvania in May 2003 in preparation for our spin-off from GHVI. GHVI and its subsidiaries will contribute or otherwise transfer to us generally all of the legal entities comprising the eldercare businesses, together with certain assets and liabilities associated with the eldercare businesses. We call this transfer of entities, assets and liabilities the “separation.” In the separation and distribution agreement, we and NCI agreed to transfer after the spin-off legal title to any remaining assets and any remaining liabilities of the eldercare businesses not transferred prior to the spin-off, most of which are assets and liabilities subject to regulatory and other delays, as soon as practicable. In the interim, we will operate and receive the economic benefits of (and bear the economic burdens of) these assets. These assets are not, individually or in the aggregate, material to our company. The information included in this information statement, including our combined financial statements, assumes the completion of all of these transfers.

Description of the Spin-Off

GHVI expects to effect the spin-off on December 1, 2003 by distributing on a pro rata basis all the shares of GHC common stock that it owns to holders of record of GHVI common stock at the close of business on October 15, 2003, the record date for the spin-off. Holders of shares of GHC common stock will not be entitled to preemptive rights. See “Description of Capital Stock.”

Based on the total number of shares of GHVI common stock outstanding at the close of business on the record date for the spin-off (39,796,209 shares), each record holder of GHVI common stock will receive 0.5 shares of GHC common stock for each share of GHVI common stock held at the close of business on the record date or cash in lieu of a fractional share of GHC common stock.

Additionally, immediately after the spin-off, we will issue a small number of shares of common stock into an escrow account for future delivery to former unsecured claimants of GHVI and its subsidiaries who are entitled to receive common equity securities under the terms of GHVI’s 2001 joint plan of reorganization. We refer to these shares of GHC common stock as the “unsecured claimant shares.” The number of unsecured claimant shares will be equal to the product of the distribution ratio and the number of shares of GHVI common stock reserved as of the spin-off date for issuance to former unsecured claimants of GHVI. As of October 15, 2003, the number of shares of GHVI common stock reserved for issuance to the unsecured claimants was 260,493. We expect this number to decrease by the date of the spin-off.

As part of the spin-off, we will be adopting a book-entry share transfer and registration system for GHC common stock. Instead of receiving physical share certificates, registered holders of two or more shares of GHVI common stock at the close of business on the record date, will have their shares of GHC common stock distributed on the date of the spin-off credited to book-entry accounts established for them by the distribution agent. The distribution agent will mail an account statement to each such registered holder stating the number of shares of GHC common stock credited to the holder’s account. After the spin-off, any holder may request:

•

a transfer of all or a portion of their shares of GHC common stock to a brokerage or other account; and


	•	receipt of one or more physical share certificates representing their shares of GHC common stock.

If you become a registered holder of GHC common stock in connection with the spin-off and you prefer to receive one or more physical share certificates representing your shareholding of GHC common stock, you will receive one or more certificates for all whole shares of GHC common stock and, if applicable, cash for any fractional interest. The distribution agent will mail you certificates representing your proportionate number of whole shares of GHC common stock as soon after the date of request as practicable.

For those holders of GHVI common stock who hold their shares through a broker, bank or other nominee, the distribution agent will credit to your brokerage, custodian or similar account through which you own your GHVI common stock, your proportionate number of shares of GHC common stock and you will

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receive a check for the cash value of any fractional shares of GHC common stock. We and GHVI anticipate that brokers, banks and other nominees will generally credit their customers’ accounts with GHC common stock on or shortly after December 1, 2003.

Employees of GHVI who hold options for GHVI common stock and who will continue as NCI employees after the spin-off will not receive options exercisable for GHC common stock.

Holders of GHVI Series A convertible preferred stock will not receive a distribution of GHC common stock with respect to their Series A convertible preferred stock.

Reasons for the Spin-Off

The decision of the GHVI board of directors to pursue the spin-off was based on the following considerations and assumptions, among others:

Targeted Incentives and Greater Accountability for Employees

The spin-off will permit each company to implement employee compensation and benefit programs, including stock-based and other incentive programs, that reward employees of each company based on the success of the individual company’s operations. Both companies expect the motivation of their employees and the focus of their management to be strengthened by incentive compensation programs that are tied to their core businesses’ financial results and the market performance of their common stock, without regard to the performance of other businesses that are dependent on different growth and performance profiles. As a result, both companies expect the distribution to enhance their ability to attract and retain qualified personnel.

Direct Access to Capital Markets

After the spin-off, we and NCI will no longer need to compete with each other for limited capital resources, and each company will be able to access the debt or equity capital markets directly. As a result of the defined focus of each company, investors should be better able to evaluate the different strategies, investment profiles, operating characteristics and credit fundamentals of the two companies, thereby enhancing the likelihood that each company will achieve appropriate market valuations. As a result, the management of each company will be able to adjust goals and evaluate strategic opportunities in light of investor expectations within its respective industry, without undue attention to investor expectations in other industries. In addition, each company will be able to focus its public relations efforts on cultivating its own separate identity.

Inherent Business Risks

The inpatient services business and the pharmacy services business face uncertainty because the rate of Medicare and Medicaid reimbursements, which are set by government regulators, are not constant and can be unpredictable. Each business’ reimbursement risks pose problems for the other. In the event that revenues of the inpatient services business or the pharmacy services business are reduced as a result of regulatory changes, GHVI may be forced to use profits from one business to cover the costs of the other, or to cover a disproportionate part of shared costs such as corporate overhead, resulting in a reduction in the amount of capital available to the business that did not suffer the revenue reduction, thereby limiting such business’ ability to expand in new markets or explore new products. In addition to risks associated with Medicare and Medicaid reimbursement, the inpatient services business’ and pharmacy services business’ participation in the Medicare and Medicaid reimbursement systems exposes each business to the risk that one business may cause the other to be burdened by onerous federal and state anti-fraud statutes.

The inpatient services business is exposed to general and professional liability risks relating to the quality of care that are much greater than those present in the pharmacy services business. The inpatient services business’ potential malpractice liability exposures create financial uncertainty and potentially reduce the amount of capital available for investment in the pharmacy services business. These exposures also cause GHVI to divert human and financial resources from the pharmacy services business in favor of the eldercare businesses.

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Sales and Marketing and Customer/Competitor Issues

The vast majority of GHVI’s pharmacy services business customers are in our business, the ownership or operation of eldercare properties. Many of the pharmacy services business customers or potential customers that operate in our geographic regions are our competitors. Many customers or potential customers believe that purchasing pharmacy services from GHVI’s pharmacy services business strengthens a competitor and, therefore, resist doing business with GHVI’s pharmacy services business.

The spin-off of our business from GHVI and the resulting elimination of the customer/competitor conflict are important to the future growth of GHVI’s pharmacy services business.

Regulatory Approvals

In connection with the spin-off, we have had to seek approval of certain state regulatory agencies that either license the facility to operate or approve the facility to receive state Medicaid funds. We believe that the necessary approvals have been or will be obtained by the effective date of the spin-off.

Material Federal Income Tax Consequences of the Spin-Off

The following discussion summarizes the material federal income tax consequences of the spin-off. This discussion is based on the Internal Revenue Code of 1986, as amended, referred to as the “Code,” the Treasury regulations promulgated thereunder, judicial opinions, published positions of the Internal Revenue Service, and all other applicable authorities as of the date of this information statement, all of which are subject to change (possibly with retroactive effect).

The following discussion is limited to holders of GHVI common stock that are United States persons for federal income tax purposes and may not describe all of the tax consequences that may be relevant to a holder in light of his or her particular circumstances or to holders subject to special rules. In addition, this summary is limited to holders that hold their GHVI common stock as a capital asset. This summary may not be applicable to shareholders who received their GHVI common stock pursuant to the exercise of employee stock options, or otherwise as compensation. Accordingly, each shareholder should consult his or her tax advisor as to the particular consequences of the spin-off of GHC common stock to such shareholder, including the application of state, local and foreign tax laws, and as to possible changes in tax laws that may affect the tax consequences described herein.

GHVI has received a private letter ruling from the Internal Revenue Service confirming, among other things, that the spin-off will qualify as tax-free to GHVI and its shareholders under Section 355 of the Code. Although the rulings relating to the qualification of the spin-off as a tax-free transaction are generally binding on the Internal Revenue Service, the continuing validity of the ruling is subject to factual representations and assumptions. GHVI and we are not aware of any facts or circumstances that would cause such representations and assumptions to be untrue. If the Internal Revenue Service subsequently held our spin-off to be taxable, the consequences described below would not apply and both GHVI and holders of GHVI common stock who received shares of GHC common stock in the spin-off could be subject to tax. In such case, we may have to indemnify NCI for some or all of the resulting taxes and related losses.

Subject to the discussion below relating to the receipt of cash in lieu of fractional shares, for United States federal income tax purposes the principal federal income tax consequences of the spin-off will be as follows:

•

no gain or loss will be recognized by, and no amount will be included in the income of, GHVI upon the spin-off other than with respect to any “excess loss account” or “intercompany transaction” required to be taken into account under Treasury regulations relating to consolidated returns;


	•	no gain or loss will be recognized by, and no amount will be included in the income of, a holder of GHVI common stock as a result of the receipt of shares of GHC common stock in the spin-off;

•

a holder of GHVI common stock will apportion the tax basis for such holder’s GHVI common stock on which our stock is distributed between NCI common stock and GHC common stock received in the spin-off (including any fractional shares of GHC common stock deemed received) in proportion to

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the relative fair market values of such NCI common stock and GHC common stock on the date of the spin-off; and


	•	the holding period of the shares of GHC common stock received by a holder of GHVI common stock in the spin-off will include the period during which such holder held the GHVI common stock on which GHC common stock is distributed.

Cash In Lieu of Fractional Shares. No fractional shares of GHC common stock will be issued in the spin-off. All fractional shares resulting from the spin-off will be aggregated and sold by the distribution agent and the proceeds will be distributed to the owners of such fractional shares. A shareholder who receives cash instead of a fractional share of GHC common stock as a part of the spin-off will generally recognize capital gain or loss measured by the difference between the cash received for such fractional share and the shareholder’s tax basis in the fractional share as described above. Any such capital gain or loss will be treated as a long-term or short-term gain or loss based on the shareholder’s holding period for the GHVI common stock with respect to which the shareholder received the distribution of GHC common stock.

Backup Withholding. Payments of cash in lieu of a fractional share of GHC common stock made in connection with the spin-off may, under certain circumstances, be subject to “backup withholding” at a rate of 28% unless a shareholder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Backup withholding does not constitute an additional tax, but merely an advance payment, which may be refunded or credited against a shareholder’s federal income tax liability, provided that the required information is supplied to the Internal Revenue Service.

Information Reporting. Current Treasury regulations require each GHVI shareholder who receives GHC common stock pursuant to the spin-off to attach to his or her United States federal income tax return, for the year in which the spin-off occurs, a detailed statement setting forth such data as may be appropriate in order to show the applicability to the spin-off of Section 355 of the Code. GHVI will provide appropriate information to each holder of record of GHVI common stock as of the record date.

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TRADING MARKET

There has been no public market for GHC common stock. An active trading market may not develop or be sustained in the future. However, we expect that a limited market for shares of GHC common stock, commonly known as a “when issued” trading market, will develop after November 18, 2003. We have applied to list GHC common stock on the Nasdaq National Market System under the symbol “GHCI.” While we believe that GHC common stock will be acceptable to Nasdaq for listing, there can be no assurance that Nasdaq will accept GHC common stock.

We cannot predict the prices at which GHC common stock may trade before the spin-off on a “when issued” basis or after the spin-off. “When-issued” trading refers to a transaction made conditionally because the security has been authorized but not yet issued. On the first trading day after the distribution date, any “when-issued” trading in respect of GHC common stock will end and “regular way” trading will begin. These prices will be determined by the marketplace and may be significantly below the book value per share of GHC common stock. Prices at which trading in shares of GHC common stock occurs may fluctuate significantly. These prices may be influenced by many factors, including quarter to quarter variations in our actual or anticipated financial results or those of our companies in the industries or the markets that we serve, investor perception of our company and the healthcare industry, and general economic and market conditions. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price of many stocks and that have often been unrelated or disproportionate to the operating performance of these companies. These are just some factors that may adversely affect the market price of GHC common stock.

Shares of GHC common stock that you will receive in the spin-off will be freely transferable, except if you are considered an “affiliate” of us under Rule 144 under the Securities Act of 1933, as amended. Persons who can be considered our affiliates after the spin-off generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with us, and may include certain of our officers and directors. Our affiliates may only sell common stock received in the spin-off under:

•

a registration statement that the SEC has declared effective under the Securities Act; or


	•	an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.

The number of options to purchase shares of GHC common stock that will be outstanding immediately after the spin-off cannot be determined until after the spin-off. These options will be granted under the 2003 stock option plan. See “Management — Benefit Plans — Stock Option Plan.” Shares of GHC common stock issued upon exercise of these options will be registered on a Form S-8 under the Securities Act and will, therefore, be freely transferable under the securities laws, subject, in the case of affiliates, to certain limitations as described above. The number of shares of GHC common stock that will be granted immediately after the spin-off under the 2003 stock incentive plan cannot be determined until after the spin-off. See “Management — Benefit Plans — Stock Incentive Plan.” Shares of GHC common stock issued pursuant to stock grants will be registered on a Form S-8 under the Securities Act and will, therefore, be freely transferable under the securities laws, subject, in the case of affiliates, to certain limitations as described above. Immediately upon the consummation of the spin-off and based upon the record date, our affiliates will hold 1,500 shares of GHC common stock (excluding fractional shares).

Except for the shares of GHC common stock distributed in the spin-off and the options and the stock grants described above, none of our equity securities will be outstanding on or immediately after the spin-off.

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CAPITALIZATION

Set forth below is our capitalization as of June 30, 2003 on a historical basis and as adjusted basis to give effect to the Transactions. This table should be read in conjunction with “Selected Combined Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements, including all related notes, included elsewhere in this information statement.

	June 30, 2003

	Historical		As Adjusted

	(dollars in thousands)
Total Debt
Allocated debt of GHVI	$	220,436	$	—
New senior credit facility (1)		—		185,000
8% senior subordinated notes (2)		—		225,000
Mortgages and other secured debt (3)		54,772		28,143

Total debt, including current portion	$	275,208	$	438,143

Total Owner’s Equity
Common stock and additional paid in capital	$	—	$	533,385
Accumulated other comprehensive income		1,051		1,051
GHVI’s equity in GHC		584,720		—

Total owner’s equity		585,771		534,436

Total capitalization	$	860,979	$	972,579

(1)

Although the information in this table assumes we have entered into a new senior credit facility, as of the date of this information statement, we have not completed the new senior credit facility. Accordingly, no assurance can be given that the new senior credit facility will be on the terms described in this information statement. Our new senior credit facility is expected to include a $185.0 million term loan, all of which will be drawn at the consummation of the spin-off, and a $75.0 million revolving credit facility, which is not expected to be drawn at the consummation of the spin-off. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — New Financing Arrangements.”


(2)	We issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million, with a term of ten years.


(3)	We expect to repay approximately $44.5 million of mortgages and other secured debt with the proceeds of our new financing arrangements, and we expect to incur $17.8 million of mortgage debt in connection with the ElderTrust transactions.

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DIVIDEND POLICY

We anticipate that future earnings will be used principally to support operations and finance the growth of our business. Thus, we do not intend to pay cash dividends on GHC common stock in the foreseeable future. In October 2003, we issued senior subordinated notes and, immediately prior to the spin-off, we expect to enter into a senior credit facility providing for both term loan and revolving credit facilities, which would allow us to borrow funds for general corporate purposes, including the repayment of other debt, working capital and acquisitions. The senior subordinated notes contain, and the senior credit facility will likely contain, affirmative and negative covenants that, among other things, require us to satisfy certain financial tests and maintain certain financial ratios. The senior subordinated notes limit our ability to declare and pay dividends on our shares and of common stock. We expect that the senior credit facility will further limit this ability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — New Financing Arrangements.” If our lenders or the senior subordinated notes permit us to declare dividends, the dividend amounts, if any, will be determined by our board of directors. Our board of directors will consider a number of factors, including our financial condition, capital requirements, funds generated from operations, future business prospects, applicable contractual restrictions and any other factors our board of directors may deem relevant.

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SELECTED COMBINED FINANCIAL DATA

The selected combined financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and the notes thereto included elsewhere in this information statement. Our combined statement of operations data for the years ended September 30, 2002, 2001 and 2000 and our combined balance sheet data as of September 30, 2002 and 2001 have been derived from our audited combined financial statements included elsewhere in this information statement, which have been audited by KPMG LLP, whose report is included elsewhere in this information statement. Our combined statement of operations data for the nine months ended June 30, 2003 and 2002 and our combined condensed balance sheet data as of June 30, 2003 have been derived from our unaudited condensed combined financial statements included elsewhere in this information statement. Our combined statement of operations data for the years ended September 30, 1999 and 1998 and our combined balance sheet data as of September 30, 2000, 1999 and 1998 have been derived from our unaudited combined financial statements, which are not presented in this information statement. The historical financial information presented below may not be indicative of our future performance and does not reflect the results of operations and financial position we would have had if we had operated as a separate, stand-alone entity during the periods and as of the dates presented.

Upon emergence from Chapter 11 bankruptcy proceedings on October 2, 2001, our subsidiaries adopted the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code,” also referred to as “fresh-start reporting,” effective September 30, 2001. In connection with the adoption of fresh-start reporting, a new entity was created for financial reporting purposes, the provisions of the 2001 joint plan of reorganization were implemented, assets and liabilities were adjusted to their estimated fair values and our accumulated owner’s deficit was eliminated. Any financial information labeled “predecessor company” refers to periods prior to the adoption of fresh-start reporting, while those labeled “successor company” refers to periods following September 30, 2001. Predecessor company and successor company financial information is generally not comparable and is therefore separated by a vertical line. The lack of comparability within the combined statement of operations data is most apparent in our capital costs (lease, interest, depreciation and amortization), as well as with income taxes, minority interests and debt restructuring and reorganization costs. Predecessor company and successor company balance sheet data are not comparable due to the change in accounting basis of long-lived assets to estimated fair value and the discharge of liabilities subject to compromise.

On October 1, 2001, we adopted the provisions of SFAS 144. Under SFAS 144, discontinued businesses, including assets held for sale, are removed from the results of continuing operations. The results of operations in the current year and prior year periods, along with any costs to exit such businesses in the current year period, have been classified as discontinued operations in the following selected historical financial data. Businesses sold or closed prior to the adoption of SFAS 144 continue to be reported in the results of continuing operations.

On October 1, 2002, we adopted SFAS 145. The most significant impact of the adoption of SFAS 145 is that effective October 1, 2002, any gains or losses on the extinguishment of debt that were classified as extraordinary items in prior periods that do not meet the new criteria for classification as extraordinary items have been reclassified. This reclassification includes the $1.0 billion gain recognized in fiscal 2001 in connection with the discharge of liabilities subject to compromise upon our subsidiaries’ emergence from Chapter 11 proceedings which is now included in income from continuing operations.

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The information set forth below should be read in conjunction with our combined financial statements and the related notes thereto, which are included elsewhere in this information statement. See “Where You Can Find More Information.”

	Successor Company										Predecessor Company

	Nine Months Ended June 30,						Year Ended September 30,			Years Ended September 30,
	Nine Months Ended June 30,						Year Ended September 30,			Years Ended September 30,

	2003			2002			2002				2001 (4)			2000 (4)			1999			1998

	(dollars in thousands)
Statement of Operations Data (1):
Net revenues	$	1,035,047		$	1,015,192		$	1,362,166			$	1,291,163		$	1,262,084		$	819,046		$	843,521
Income (loss) from continuing operations		23,837			31,022			42,871				146,824			(794,218	)		(327,490	)		(21,245	)
Net income (loss)	$	9,446		$	27,785		$	37,551			$	113,319		$	(844,185	)	$	(339,296	)	$	(41,285	)

Ratio of earnings to fixed charges (2):		2.43x			3.52x			3.45x				2.42x			NM			NM			NM

Operating Data:
Payor Mix
Medicaid		50	%		48	%		48	%			48	%		49	%		52	%		49	%
Medicare		28	%		30	%		30	%			28	%		25	%		24	%		26	%
Private pay and other		22	%		22	%		22	%			24	%		26	%		24	%		25	%
Avg. owned/leased eldercare center beds (3)		21,198			24,221			24,139				24,783			14,286			15,522			15,137
Occupancy percentage		91	%		92	%		91	%			91	%		91	%		91	%		92	%
Avg. managed eldercare center beds (3)		6,293			8,067			7,898				9,215			23,779			23,984			24,234

	Successor Company						Predecessor Company

	June 30,		September 30,					September 30,

	2003		2002		2001			2000 (4)			1999			1998

	(dollars in thousands)
Balance Sheet Data:
Working capital	$	76,305	$	78,473	$	41,598		$	(173,322	)	$	71,015		$	106,822
Total assets		1,061,768		1,154,480		1,136,841			1,971,117			1,330,295			1,556,858
Liabilities subject to compromise		—		—		—			1,938,477			—			—
Long-term debt, including current portion		275,208		326,476		328,157			10,441			1,244,622			1,011,445
Owner’s equity (deficit)	$	585,771	$	602,764	$	572,147		$	(487,753	)	$	(91,534	)	$	350,689

(1)

For a discussion of operating results from fiscal 2000 through the nine months ended June 30, 2003, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” Effective October 1, 2002, certain Medicare funding provisions expired, referred to as the “skilled nursing facility Medicare cliff.”


	The net revenues and income (loss) from continuing operations data for all periods presented are from continuing operations and have been adjusted to exclude discontinued operations.

(2)

The ratio of earnings to fixed charges is computed by dividing fixed charges into income from continuing operations before income taxes plus fixed charges. Fixed charges include interest (expensed or capitalized), amortization of debt issuance costs and the estimated interest component of rent expense. The interest component of rent expense is estimated at one-third of our reported lease expense. For the fiscal years ended September 30, 2000, 1999 and 1998, our earnings were insufficient to cover fixed charges by $872.6 million, $147.5 million, and $20.2 million, respectively.

(3)

In connection with the consummation of GHVI and our subsidiaries’ 2001 joint plan of reorganization, 10,702 Multicare beds previously classified as “Managed and Jointly-Owned Facilities” were reclassified as “Owned and Leased Facilities.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events — Multicare Transaction and Restructuring.”


(4)	We have restated our previously reported combined financial statements in fiscal years 2001 and 2000 to reflect certain adjustments as discussed in note 3 — “Restatement of 2001 and 2000 Combined Financial Statements” of the Combined Financial Statements which begin on page F-1 of this information statement.

Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events” for a description of significant transactions.

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UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined balance sheet as of June 30, 2003 and the unaudited pro forma condensed combined statements of operations for the nine months ended June 30, 2003 and 2002 and for the year ended September 30, 2002 give effect to the spin-off and certain transactions with ElderTrust. The pro forma condensed combined balance sheet is presented as if the spin-off and the ElderTrust transactions occurred on June 30, 2003, and the pro forma condensed combined statements of operations are presented as if the spin-off and the ElderTrust transactions occurred as of October 1, 2001.

The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable and are described in the notes accompanying the unaudited pro forma condensed combined financial statements. No changes in operating revenues and expenses have been made to reflect the results of any modifications to operations that might have been made had the spin-off and the ElderTrust transactions been completed on the aforesaid assumed effective dates for purposes of the pro forma results. The unaudited pro forma condensed combined financial information is provided for informational purposes only and does not purport to represent what our results of operations or financial position would actually have been had the spin-off and the ElderTrust transactions in fact occurred at such dates or to project our results of operations or financial position at or for any future date or period.

The following unaudited pro forma financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and corresponding notes included elsewhere in this information statement.

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Genesis HealthCare Corporation
Unaudited Pro Forma Condensed Combined Balance Sheet
(in thousands)

	At June 30, 2003

	Historical		Pro Forma

	GHC		Adjustments			GHC

Assets:
Current assets	$	242,006	$	44,124	(1)(9)	$	286,130
Property and equipment, net		668,243		24,715	(7)(9)		692,958
Other assets		151,519		28,759	(2)(8)(9)		180,278

Total assets	$	1,061,768	$	97,598		$	1,159,366

Liabilities and Owner’s Equity:
Current liabilities	$	165,701	$	(26,918	)(3)(9)	$	138,783
Long-term debt, excluding current maturities		244,265		191,260	(3)(7)		435,525
Other liabilities		66,031		(15,409	)(7)(8)		50,622
Owner’s equity:
GHVI’s equity in GHC		584,720		(584,720	)(13)		—
Common stock and additional paid in capital		—		533,385	(13)		533,385
Accumulated other comprehensive income		1,051		—			1,051

Total owner’s equity		585,771		(51,335	)		534,436

Total liabilities and owner’s equity	$	1,061,768	$	97,598		$	1,159,366

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

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Genesis HealthCare Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands)

	Year ended September 30, 2002

	Historical			Pro Forma

	GHC			Adjustments			GHC

Net revenues	$	1,362,166		$	36,167	(10)	$	1,398,333
Expenses:
Operating expenses		1,209,266			31,193	(10)		1,240,459
Lease expense		26,594			583	(10)(11)		27,177
Depreciation and amortization		37,288			1,739	(4)(10)(12)		39,027
Interest expense		17,128			13,943	(5)		31,071

Income from continuing operations before debt restructuring and reorganization costs, income tax expense, equity in net income of unconsolidated affiliates and minority interests		71,890			(11,291	)		60,599
Debt restructuring and reorganization costs		3,175			—			3,175

Income from continuing operations before income tax expense, equity in net income of unconsolidated affiliates and minority interests		68,715			(11,291	)		57,424
Income tax expense		26,798			(4,403	) (6)		22,395

Income from continuing operations before equity in net income of unconsolidated affiliates and minority interests		41,917			(6,888	)		35,029
Equity in net income of unconsolidated affiliates		1,196			(190	) (10)		1,006
Minority interests		(242	)		—			(242	)

Income from continuing operations	$	42,871		$	(7,078	)	$	35,793

Share information:
Weighted average shares outstanding (14):
Basic and diluted								20,568

Earnings per share from continuing operations (14):
Basic and diluted							$	1.74

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

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Genesis HealthCare Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands)

	Nine months ended June 30, 2003

	Historical			Pro Forma

	GHC			Adjustments			GHC

Net revenues	$	1,035,047		$	27,917	(10)	$	1,062,964
Expenses:
Operating expenses		942,425			24,164	(10)		966,589
Gain on early extinguishment of debt		(1,123	)		—			(1,123	)
Lease expense		20,556			469	(10)(11)		21,025
Depreciation and amortization		29,979			1,335	(4)(10)(12)		31,314
Interest expense		12,851			10,452	(5)		23,303

Income from continuing operations before income tax expense and equity in net income of unconsolidated affiliates		30,359			(8,503	)		21,856
Income tax expense		7,397			(3,316	) (6)		4,081

Income from continuing operations before equity in net income of unconsolidated affiliates		22,962			(5,187	)		17,775
Equity in net income of unconsolidated affiliates		875			(122	) (10)		753

Income from continuing operations	$	23,837		$	(5,309	)	$	18,528

Share information:
Weighted average shares outstanding (14):
Basic and diluted								20,567

Earnings per share from continuing operations (14):
Basic and diluted							$	0.90

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

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Genesis HealthCare Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands)

	Nine months ended June 30, 2002

	Historical		Pro Forma

	GHC		Adjustments			GHC

Net revenues	$	1,015,192	$	27,312	(10)	$	1,042,504
Expenses:
Operating expenses		903,917		23,214	(10)		927,131
Lease expense		19,865		435	(10)(11)		20,300
Depreciation and amortization		26,552		1,284	(4)(10)(12)		27,836
Interest expense		12,616		10,687	(5)		23,303

Income from continuing operations before debt restructuring and reorganization costs, income tax expense and equity in net income (loss) of unconsolidated affiliates		52,242		(8,308	)		43,934
Debt restructuring and reorganization costs		1,700		—			1,700

Income from continuing operations before income tax expense and equity in net income (loss) of unconsolidated affiliates		50,542		(8,308	)		42,234
Income tax expense		19,712		(3,241	) (6)		16,471

Income from continuing operations before equity in net income (loss) of unconsolidated affiliates		30,830		(5,067	)		25,763
Equity in net income (loss) of unconsolidated affiliates		192		(337	) (10)		(145	)

Income from continuing operations	$	31,022	$	(5,404	)	$	25,618

Share information:
Weighted average shares outstanding (14):
Basic and diluted							20,606

Earnings per share from continuing operations (14):
Basic and diluted						$	1.24

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

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Genesis HealthCare Corporation
Notes to Unaudited Pro Forma Condensed Combined Financial Statements

General note regarding the spin-off:

These unaudited pro forma condensed combined financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the pro forma financial position of GHC as of June 30, 2003, and the pro forma results of operations for the year ended September 30, 2002 and the nine months ended June 30, 2003 and 2002. These adjustments are described below.

The pro forma adjustments exclude estimated incremental costs associated with being an independent public company and the loss of certain synergies and benefits of economies of scale that existed while we were part of GHVI. We estimate these incremental pre-tax costs to be approximately $2.1 million of additional general and administrative expense. We estimated these costs in connection with the preparation of GHC’s detailed operating budget for the forthcoming year.

(1)

We expect to retain $50.0 million of the proceeds from the issuance of the senior subordinated notes and the borrowings under the term loan portion of our new senior credit facility. We intend to use the retained cash to pay fees and expenses of $11.0 million relating to our new financing arrangements, with the remaining $39.0 million to fund working capital and other requirements.


(2)	Represents the capitalization of $11.0 million of estimated direct financing costs in connection with the new debt agreements to be entered into by us, offset by the write-off of $3.7 million of unamortized deferred financing costs carried on our historical balance sheet.


(3)	Represents:

	Current maturities of long-term debt			Long-term debt			Total debt

	(dollars in thousands)
Repayment of GHVI debt	$	(26,015	)	$	(194,421	)	$	(220,436	)
Repayment of existing mortgages		(4,160	)		(40,316	)		(44,476	)
Borrowings under new financing arrangements		1,850			408,150			410,000

Net debt proceeds	$	(28,325	)	$	173,413		$	145,088

In October 2003, we issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million, with a term of ten years. We plan to enter into a new senior credit facility prior to the consummation of the spin-off that provides for a term loan of approximately $185.0 million, which will be fully drawn at the consummation of the spin-off, and a revolving credit facility of $75.0 million, none of which is expected to be drawn at the consummation of the spin-off. The term loan is expected to have a seven year term and amortize one percent per year through year six. The revolving credit facility is expected to have a five year term. Of the $410.0 million of borrowings under the new financing arrangements, we intend to retain $39.0 million to fund working capital and other requirements, expend $11.0 million for financing related fees, use $44.5 million to repay existing mortgage loans and transfer $315.5 million to GHVI, which will use such funds to repay existing indebtedness of GHVI. On October 28, 2003, we transferred the net proceeds of $218.5 million of the senior subordinated notes to GHVI. Our new senior credit facility is expected to include an excess cash flow recapture requirement that may increase the required principal payments above contractual minimum amounts each year depending on a formula yet to be determined as well as other mandatory prepayment provisions as part of the negotiation of terms. The term loan portion of our new senior credit facility is expected to have a rate of interest of LIBOR plus an applicable margin or a base rate plus an applicable margin. The revolving portion of our new senior credit facility is expected to have a rate of interest of LIBOR plus an applicable margin or a base rate plus an applicable margin on any borrowings thereunder, and we expect to pay a commitment fee on the revolving portion whether or not any amounts are advanced. While we have received a commitment letter from Wachovia Bank, National Association and Wachovia Capital Markets, LLC to commit a portion and arrange for the balance of the new senior credit facility and Wachovia Bank, National Association and Wachovia Capital Markets, LLC in turn have received commitments to fund the new senior credit facility,

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we have not completed the new senior credit facility. Accordingly, no assurance can be given that the new senior credit facility will be on the terms described in this information statement.


(4)	Represents the amortization of $11.0 million of estimated deferred financing fees and expenses related to our new financing arrangements offset by reduced historical amortization of deferred financing fees that are expected to be written off following the repayment of the existing indebtedness.

	Year ended September 30, 2002			Nine months ended June 30, 2003			Nine months ended June 30, 2002

	(dollars in thousands)
Historical financing fee amortization	$	(984	)	$	(738	)	$	(738	)
New financing fee amortization		1,260			945			945

Depreciation and amortization	$	276		$	207		$	207


(5)	Reflects the increase in estimated interest expense based upon the incurrence of an additional $162.9 million of incremental debt, as reflected in footnotes 3 and 7, at an estimated weighted average borrowing rate to 7.4%. As a result, we would expect our interest expense in each of the periods presented to be as follows:

	Year ended			Nine months ended			Nine months ended
	September 30,			June 30,			June 30,
	2002			2003			2002

	(dollars in thousands)
Pro forma interest expense ($438.1 million at 7.4%)	$	32,423		$	24,317		$	24,317
Less: interest allocated to discontinued operations		(1,352	)		(1,014	)		(1,014	)
Less: historical interest expense reported		(17,128	)		(12,851	)		(12,616	)

Interest expense	$	13,943		$	10,452		$	10,687


	Debt service under our new senior credit facility is expected to be based upon a variable interest rate that will fluctuate due to market conditions and/or our operating performance. A variance of 1/8% in variable rates of interest would change interest expense by $231,250 for the fiscal year ended 2002, and $173,438 for the nine months ended June 30, 2003 and 2002.


	Our pro forma debt balance of $438.1 million is expected to consist of a $225.0 million senior subordinated note offering, a $185.0 million term loan component of a senior credit facility, $10.3 million of existing mortgages held by certain of our eldercare properties, and $17.8 million of debt assumed in the ElderTrust transactions and described under footnote 7.


(6)	Income tax is reported at an estimated effective tax rate of 39%, offset in the nine months ended June 30, 2003 by a $4.4 million tax credit realized as a result of a change in tax law.

General note regarding the ElderTrust transactions:

The net pro forma adjustments to the unaudited condensed combined balance sheet in connection with the expected transactions with ElderTrust result in changes to GHVI’s equity in GHC since GHC’s cash accounts are linked to GHVI’s centralized cash management system and, consequently, if the transactions were consummated on June 30, 2003, GHVI would finance the transactions with available cash on hand, and GHVI’s equity in GHC would increase accordingly.


	GHVI is expected to make a payment of $5.0 million in exchange for ElderTrust’s consent to the assignment from GHVI to GHC of all remaining leases and guarantees. The $5.0 million consideration will be recognized as a spin-off transaction cost of GHVI when it is incurred, and is therefore not reflected in these unaudited pro forma condensed combined financial statements.

Certain of the following footnotes make reference to the changes in both cash basis and accrual basis lease cost as a result of the ElderTrust transactions. GHC’s lease expense is presented on an accrual

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basis in accordance with GAAP. Differences between lease expense on an accrual basis and the amount of cash disbursed for lease payments is caused by:


		•	Unfavorable or favorable lease balances established in GHC’s September 30, 2001 adoption of fresh-start reporting which are amortized on a straight-line basis over the lease term; and


		•	The amortization of advanced rent payments made to ElderTrust in order to reduce lease payments over the lease term.


(7)	Represents the purchase of five previously leased properties for approximately $24.8 million including $17.8 million of debt assumed in the ElderTrust transactions, offset by the elimination of the carrying value of a net unfavorable lease liability of $4.6 million.

	June 30, 2003

	(dollars in thousands)
Property and equipment, net	$	20,245

Long-term debt		17,847
Other liabilities		(4,605	)
GHVI’s equity in GHC		7,003

	$	20,245


(8)	Represents the capitalization of $32.3 million paid for a reduction in future lease costs of nine eldercare properties and the acquisition of options to purchase seven of the nine properties for $66.5 million at the end of the lease term, offset by the elimination of the $10.8 million carrying value of net unfavorable lease liability associated with the nine properties.

	June 30, 2003

	(dollars in thousands)
Other assets		21,446

Other liabilities		(10,804	)
GHVI’s equity in GHC		32,250

	$	21,446


	No value was ascribed to GHC’s option to purchase seven of the nine properties, as the estimated fair value of the underlying properties is less than the fixed price purchase option.

(9)

Represents the consolidation of a previously unconsolidated partnership that operates four eldercare centers. The adjustments entitled “Investments” represent the $2.6 million purchase of one of the four eldercare properties operated by the partnership, the capitalization of a $2.5 million payment to ElderTrust to reduce the future rents of one property and the $3.1 million purchase by GHC of the remaining 50% interest in this partnership from our joint venture partner. The adjustments entitled “Eliminations” represent the elimination of GHC’s equity investment in the partnership and amounts due to GHC from the partnership. The remaining three properties will continue to be leased from ElderTrust.


	June 30, 2003:

	Consolidation of partnership		Investments		Eliminations			Net Adjustments

	(dollars in thousands)
Current assets	$	6,418	$	—	$	(1,294	)	$	5,124
Property and equipment, net		1,870		2,600		—			4,470
Other assets		354		5,600		(5,941	)		13

	$	8,642	$	8,200	$	(7,235	)	$	9,607

Current liabilities	$	2,701	$	—	$	(1,294	)	$	1,407
GHVI’s equity in GHC		5,941		8,200		(5,941	)		8,200

	$	8,642	$	8,200	$	(7,235	)	$	9,607

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(10)

Represents the consolidation of revenues and operating expenses of four properties described under footnote 9 previously treated under the equity method of accounting. The adjustments entitled “Eliminations” represent the elimination of management fees and ancillary service revenues charged by GHC to the partnership. The adjustments entitled “Adjustments to Capital Costs” represent a reduction in lease expense and a corresponding increase in depreciation expense as a result of the purchase of one previously leased property, and an annual reduction in lease expense of one leased property in consideration for a $2.5 million payment. The $2.5 million payment will result in a $0.4 million annual reduction in cash basis lease expense, offset by the annual amortization of $0.2 million of the advanced rent payment. Depreciation expense is estimated using a weighted average useful life of 20 years for the acquired property and equipment.


	Year ended September 30, 2002:


	Consolidation of partnership		Eliminations			Adjustments to Capital Costs			Net Adjustments

	(dollars in thousands)
Net revenues	$	38,382	$	(2,215	)	$	—		$	36,167
Operating expenses		33,408		(2,215	)		—			31,193
Lease expense		4,284		—			(1,026	)		3,258
Depreciation expense		321		—			130			451
Equity in net income of unconsolidated affiliates		—		(190	)		—			(190	)


	Nine months ended June 30, 2003:

	Consolidation of partnership		Eliminations			Adjustments to Capital Costs			Net Adjustments

	(dollars in thousands)
Net revenues	$	29,434	$	(1,517	)	$	—		$	27,917
Operating expenses		25,681		(1,517	)		—			24,164
Lease expense		3,250		—			(775	)		2,475
Depreciation expense		271		—			98			369
Equity in net income of unconsolidated affiliates		—		(122	)		—			(122	)


	Nine months ended June 30, 2002:

	Consolidation of partnership		Eliminations			Adjustments to Capital Costs			Net Adjustments

	(dollars in thousands)
Net revenues	$	28,985	$	(1,673	)	$	—		$	27,312
Operating expenses		24,887		(1,673	)		—			23,214
Lease expense		3,210		—			(769	)		2,441
Depreciation expense		220		—			98			318
Equity in net income of unconsolidated affiliates		—		(337	)		—			(337	)


(11)	Represents the net reduction in accrual basis lease costs as a result of the transactions described under footnotes 7 and 8.

	Year ended			Nine months ended			Nine months ended
	September 30,			June 30,			June 30,
	2002			2003			2002

	(dollars in thousands)
Purchase of five properties and resulting elimination of lease expense (footnote 7)	$	(1,487	)	$	(1,115	)	$	(1,115	)
Lease expense reductions of nine properties (footnote 8)		(1,188	)		(891	)		(891	)

Lease expense	$	(2,675	)	$	(2,006	)	$	(2,006	)

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(12)	Represents the increase in depreciation expense as a result of the capitalization of properties described under footnote 7.

	Year ended		Nine months ended		Nine months ended
	September 30,		June 30,		June 30,
	2002		2003		2002

	(dollars in thousands)
Depreciation expense	$	1,012	$	759	$	759


	Depreciation expense is estimated using a weighted average useful life of 20 years for the acquired property and equipment.


(13)	GHVI’s equity in GHC represents the cumulative investments in, distributions from, and earnings of GHC which will be contributed at the time of the spin-off. The adjustments reflect the amounts we expect to transfer to GHVI as described in previously described pro forma adjustments. The adjustments also reflect the elimination of GHVI’s net investment in us and the related reclassification to additional paid in capital due to the anticipated distribution of all of our shares to GHVI’s shareholders.

	June 30, 2003

	(dollars in thousands)
Transfer of incremental debt proceeds to GHVI of $145,088 (footnote 3) less cash retained of $50,000 (footnote 1)	$	(95,088	)
Write-off of unamortized financing fees (footnote 2)		(3,700	)
Transactions with ElderTrust (footnotes 7, 8 and 9)		47,453
Reclassification of GHVI’s equity in GHC to additional paid in capital		584,720

	$	533,385


(14)	Pro forma basic and diluted earnings per share from continuing operations is computed as if the shares of our common stock were issued and outstanding for the periods presented, assuming a distribution ratio of one share of our common stock for every two shares of GHVI common stock, excluding treasury shares. Because there are no dilutive GHVI common stock equivalents attributed to GHC during the periods presented, the pro forma weighted average shares for both the basic and diluted calculations are the same.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General

Approximately 90% of our net revenues are generated through inpatient services. Our inpatient services business is offered through a network of skilled nursing and assisted living centers primarily located in the eastern United States. Our eldercare centers are concentrated in the states of Pennsylvania, New Jersey, Maryland and Massachusetts. We currently own, lease, manage or jointly-own 212 eldercare facilities, consisting of 189 skilled nursing facilities and 23 assisted living facilities with 26,326 beds, including two skilled nursing facilities with 404 beds located in the state of Wisconsin that have been identified as held for sale.

Our rehabilitation therapy business provides an extensive range of rehabilitation therapy services to the elderly, including speech pathology, physical therapy and occupational therapy in our eldercare regional market concentrations. These services are provided by approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted by us at substantially all of the eldercare facilities we operate, as well as by contract to third-party healthcare facilities operated by other providers and through our 14 outpatient rehabilitation agencies.

We also provide diagnostic services and respiratory therapy services, the revenues for which are included in other revenues in our segment financial information.

We have restated our previously reported combined financial statements in fiscal years 2001 and 2000 to reflect certain adjustments as discussed in note 3 — “Restatement of 2001 and 2000 Combined Financial Statements” of the Combined Financial Statements which begin on page F-1 of this information statement.

The Spin-off

Our net assets and operations are currently wholly owned by subsidiaries of GHVI. In addition to our businesses, GHVI is comprised of a pharmacy services business operating under the brand name NeighborCare^® Pharmacy. NeighborCare Pharmacy primarily provides institutional pharmacy services to skilled nursing and assisting living centers similar to ours. In addition, NeighborCare Pharmacy operates a retail pharmacy business. Approximately 94% of NeighborCare Pharmacy’s revenues are generated by sales to independent healthcare providers and the remaining 6% is generated by sales to us. Upon the consummation of the spin-off, GHVI expects to change its name to NeighborCare, Inc. All references to “NCI” that follow refer to GHVI immediately after the spin-off.

The inpatient services segment and pharmacy services segment are distinct businesses with significant differences in their markets, products, investment needs and plans for growth. GHVI’s board of directors believes that a separation into two independent public companies will better align management incentives with business-specific operating performance, provide each organization with the ability to independently access capital markets, isolate inherent business risks and will resolve existing sales and marketing issues by eliminating customer/competitor conflicts. The spin-off is subject to the consent of GHVI’s senior creditors to the spin-off and the replacement of GHVI’s senior credit facility with separate credit facilities for GHC and NCI.

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Certain Transactions and Events

ElderTrust Transactions

•


	•	We will pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties currently subleased to us by ElderTrust. On October 29, 2003, we paid ElderTrust $2.3 million to reduce the rents of two of the nine aforementioned eldercare facilities; and


	•	GHVI will pay ElderTrust $5.0 million upon consummation of the spin-off in exchange for ElderTrust’s consent to the assignment of all remaining leases and guarantees from GHVI to us.

Distribution Transactions

Following the spin-off, we and NCI will operate independently of one another. We will agree contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, we will agree to certain mutually beneficial commercial arrangements.

We and GHVI have entered into the separation and distribution agreement and plan to enter into the tax sharing agreement, the employee benefits agreement, the transition services agreement, the Tidewater agreement, the pharmacy services agreement, the CareCard agreement and the durable medical equipment agreement. For a summary of these agreements, see “Relationship with NCI.”

Chapter 11 Proceedings

Background

On June 22, 2000, GHVI and certain of its direct and indirect subsidiaries filed for voluntary relief under Chapter 11 of the United States Code, referred to as the “Bankruptcy Code,” with the United States Bankruptcy Court for the District of Delaware, referred to as the “Bankruptcy Court.” On the same date, GHVI’s 43.6% owned affiliate, The Multicare Companies, Inc., and certain of its direct and indirect subsidiaries and certain of its affiliates, referred to as “Multicare,” also filed for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. The vast majority of GHVI and Multicare subsidiaries that will become subsidiaries of ours following the spin-off filed for bankruptcy.

GHVI and Multicare’s financial difficulties were attributed to a number of factors. The federal government made fundamental changes to the reimbursement for medical services provided to individuals. The changes had a significant adverse impact on the healthcare industry as a whole and on GHVI’s and Multicare’s cash flows. The federal reimbursement changes exacerbated a long-standing problem of inadequate reimbursement by the states for medical services provided to indigent persons under the various

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state Medicaid programs. Numerous other factors adversely affected GHVI’s and Multicare’s cash flows, including increased labor costs, increased professional liability and other insurance costs, and increased interest rates. As a result of declining governmental reimbursement rates and in the face of rising inflationary costs, GHVI and Multicare were too highly leveraged to service their debt, including long-term lease obligations.

On October 2, 2001, GHVI and Multicare consummated a joint plan of reorganization under Chapter 11 of the Bankruptcy Code, referred to as the “Chapter 11 proceedings,” pursuant to a September 20, 2001 order entered by the Bankruptcy Court approving the joint plan of reorganization proposed by GHVI and Multicare. In general, the 2001 joint plan of reorganization provided for the resolution of all claims against GHVI and Multicare as of June 22, 2000 in exchange for new indebtedness, preferred stock, warrants and/or common stock of GHVI. In addition, Multicare became GHVI’s wholly-owned subsidiary and a new board of directors was constituted.

Fresh-Start Reporting

Upon emergence from Chapter 11 proceedings, GHVI and our subsidiaries adopted the principles of fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code,” referred to as “SOP 90-7.” For financial reporting purposes, GHVI and our subsidiaries adopted the provisions of
fresh-start reporting effective September 30, 2001. In connection with the adoption of fresh-start reporting, a new entity was deemed created for financial reporting purposes, the provisions of the 2001 joint plan of reorganization were implemented, assets and liabilities were adjusted to their estimated fair values and our accumulated owner’s deficit was eliminated.

Our reorganization value, before consideration of post filing current and long term liabilities, was determined with the assistance of financial advisors in reliance upon various valuation methods, including discounted projected cash flow analysis, price/earnings ratios, and other applicable ratios and economic industry information, and through negotiations with the various creditor parties in interest.

Other

We have entered into an agreement to acquire our joint venture partner’s interest in two skilled nursing facilities which we currently manage and are located in Massachusetts. We currently own a 50% interest in one facility and a 20% interest in the other; upon completion of the transaction, we will own 100% of both facilities. The aggregate consideration will consist of $6.0 million in cash and the assumption or satisfaction of debt in the amount of approximately $19.9 million.

Assets Held for Sale or Closed

In the normal course of business, we continually evaluate the performance of our operating units, with an emphasis on selling or closing under-performing or non-strategic assets. On September 30, 2001, we adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” (SFAS 144). Under SFAS 144, discontinued businesses, including assets held for sale, are removed from the results of continuing operations. The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are classified as discontinued operations in the combined statements of operations. Businesses sold or closed prior to our adoption of SFAS 144 continue to be reported in the results of continuing operations.

Since our adoption of SFAS 144, we have classified several businesses as held for sale or closed. An increasing trend in malpractice litigation claims, rising costs of eldercare malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the state of Florida where, because of higher claim amounts, general liability and professional liability costs have become increasingly expensive. This increase in insurance costs prompted us to sell our otherwise profitable operations in the state of Florida. Since our inception, we have continued to develop our eldercare network in concentrated geographic markets in the eastern United States. The geographic location of our eldercare centers in the states of Illinois and Wisconsin relative to our strategic geographic markets, combined with the operating performance of those centers, has prompted us to

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identify those assets as held for sale. In addition to these assets, we have identified 12 eldercare centers in other states, one rehabilitation services clinic, one physician services practice and our ambulance business as held for sale or closed due to under-performance.

Consolidated interest expense has been allocated to discontinued operations for all periods presented based on allocated debt expected to be repaid in connection with the sale of the assets, as required under GHVI’s senior credit facility. The amount of after-tax interest expense allocated to discontinued operations for the nine months ended June 30, 2003, fiscal 2002, fiscal 2001 and fiscal 2000 was $2.1 million, $3.7 million, $8.6 million and $10.9 million, respectively.

We have separately classified $18.3 million of carrying value associated with our assets held for sale in our combined balance sheet at June 30, 2003.

The following table sets forth the components of net revenue and loss from discontinued operations for the nine months ended June 30, 2003, fiscal 2002, fiscal 2001 and fiscal 2000:

	Successor Company						Predecessor Company

	Nine Months Ended June 30,			Year Ended September 30,			Years Ended September 30,
	Nine Months Ended June 30,			Year Ended September 30,			Years Ended September 30,

	2003			2002			2001			2000

	(dollars in thousands)
Net revenues	$	113,103		$	232,351		$	229,716		$	210,668

Net operating loss of discontinued businesses	$	(11,121	)	$	(2,233	)	$	(33,505	)	$	(39,555	)
Loss on discontinuation of businesses		(12,471	)		(6,487	)		—			—
Income tax benefit		9,201			3,400			—			—

Loss from discontinued operations, net of taxes	$	(14,391	)	$	(5,320	)	$	(33,505	)	$	(39,555)

The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value.

Sale of Ohio Operations

Effective May 31, 2000, we sold 14 eldercare centers with 1,128 beds located in the State of Ohio for $33.0 million. In fiscal 2000, we recorded a loss on the sale of the Ohio properties of $7.9 million which is included as a component of other operating expenses in our combined statements of operations.

Multicare Transaction and Restructuring

In fiscal 1998, Genesis ElderCare Corp., a Delaware corporation of which GHVI owned 43.6%, acquired Multicare pursuant to a tender offer and merger. Multicare was in the business of providing eldercare and specialty medical services in selected geographic regions. Contemporaneous with the acquisition, GHVI entered into a management agreement pursuant to which GHVI managed Multicare’s operations. The operations of Multicare have been attributed to GHC for the purposes of preparing GHC’s carve-out financial statements. In connection with the respective investments in the common stock of Genesis ElderCare Corp., GHVI and its joint venture partners entered into a put/call agreement relating to their respective ownership interests in Genesis ElderCare Corp. Under the put/call agreement, GHVI had the option to purchase Genesis ElderCare Corp. common stock held by its joint venture partners at a price determined pursuant to the terms of the put/call agreement (the “call”). GHVI’s joint venture partners had the option to sell such Genesis ElderCare Corp. common stock to GHVI at a price determined pursuant to the put/call agreement (the “put”). The put did not include a guaranteed return to the joint venture partners and it could be satisfied at GHVI’s election by the issuance of its common stock.

In fiscal 2000, GHVI entered into a restructuring agreement with its Multicare joint venture partners. Under the agreement, in exchange for 24,369 shares of GHVI’s Series H Senior Subordinated Convertible Participating Cumulative Preferred Stock and 17,631 shares of GHVI’s Series I Senior Convertible Exchangeable Participating Cumulative Preferred Stock (collectively the “Series H and I Preferred”), the other joint venture partners, among other things:

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•

terminated the put option under the put/call agreement;


	•	amended the call option to provide GHVI with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by GHVI for $2.0 million in cash at any time prior to the October 8, 2009 expiration. GHVI’s joint venture partners continued to own 56.4% of Genesis ElderCare Corp.’s common stock;


	•	granted GHVI an irrevocable proxy to vote the shares of common stock of Genesis ElderCare Corp. held by GHVI’s joint venture partners on all matters to be voted on by shareholders, including the election of directors;


	•	granted GHVI the right to appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors;


	•	granted GHVI the right to appoint 100% of the members of the operating committee of the Genesis ElderCare Corp. board of directors; and


	•	provided, in a separate but related transaction, a $50.0 million infusion of cash in the form of the joint venture partners’ purchase of GHVI common stock.

Amendments made to the stockholders’ agreement and the put/call agreement gave GHVI managerial, operational and financial control of Multicare, such that we began consolidating the financial statements of Multicare effective October 1, 1999.

Because of the amendments to the stockholders’ agreement and the fact that the amended call agreement gave GHVI the right to purchase the remaining 56.4% interest in Multicare for a nominal $2.0 million, we effectively acquired the joint venture partners’ 56.4% equity interest in the restructuring transaction and began accounting for Multicare as a wholly-owned subsidiary.

The Multicare joint venture restructuring transaction has been accounted for as a step acquisition, whereby we recorded the assets and liabilities of Multicare at 43.6% of their historical cost and 56.4% of their fair value. The Series H and I Preferred issued by GHVI as consideration in the Multicare joint venture restructuring was recorded at its estimated fair value of $198.0 million, representing the then market value of the underlying GHVI common stock into which the Series H and I Preferred was convertible. Because the Series H and I Preferred were issued by GHVI, not GHC, the capitalization of the Series H and I Preferred is reflected in the combined balance sheet in GHVI’s equity in GHC. The Series H and I Preferred was issued with a face value of $420.0 million. Subsequent to the Multicare joint venture restructuring transaction, and using the effective interest method, we recorded interest expense in fiscal 2000 of $12.8 million representing an allocation from GHVI of the accretion of the $198.0 million fair value to the $420.0 million face value of the Series H and I Preferred. This accretion was recorded until our subsidiaries filed for Chapter 11 bankruptcy protection at which time we recognized a charge included in debt restructuring and reorganization costs for the remaining difference between the carrying value and face value of the Series H and I Preferred because the face value of the Series H and I Preferred was an allowed bankruptcy claim.

In connection with the step acquisition accounting, we recorded approximately $168.0 million of goodwill. The most significant other purchase accounting adjustment was the recognition of 56.4% of Multicare’s debt obligations at fair value, resulting in a debt discount of approximately $207.4 million. Subsequent to the Multicare joint venture restructuring transaction, and using the effective interest method, we accreted the $568.6 million carrying value of Multicare debt to the $776.0 million contractual obligation of the debt. This accretion was recorded until our subsidiaries filed for Chapter 11 bankruptcy protection at which time we recognized a charge included in debt restructuring and reorganization costs for the remaining difference between the carrying value and face value of the debt because the face value of the debt was an allowed bankruptcy claim.

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Results of Operations

As a consequence of the implementation of fresh-start reporting effective September 30, 2001, the financial information presented in our combined statements of operations and cash flows for the year ended September 30, 2002 are generally not comparable to the financial results for the corresponding periods in the previous two years. To highlight the lack of comparability, a solid vertical line separates the pre-emergence financial information from the post-emergence financial information in our accompanying combined financial statements and the notes thereto included elsewhere in this information statement. Any financial information in this information statement labeled “predecessor company” refers to periods prior to the adoption of fresh-start reporting, while those labeled “successor company” refer to periods following our subsidiaries’ adoption of fresh-start reporting. The lack of comparability in our accompanying combined financial statements is most apparent in our capital costs (lease, depreciation and amortization), as well as with debt restructuring and reorganization costs. Management believes that business segment operating revenues and Adjusted EBITDA of the successor company are generally comparable to those of the predecessor company. See “— Certain Transactions and Events — Chapter 11 Proceedings.”

Financial information for all periods presented has been adjusted to exclude operations identified as either held for sale or closed since our subsidiaries’ adoption of SFAS 144 on September 30, 2001. Properties identified as held for sale or closed prior to our September 30, 2001 adoption of SFAS 144 continue to be reflected in the results from continuing operations. See “— Certain Transactions and Events — Assets Held for Sale or Closed.”

The following discussion includes EBITDA and Adjusted EBITDA which are non-GAAP financial measures. For purposes of SEC Regulation G, a non-GAAP financial measure is a numerical measure of a registrant’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in the United States of America. Pursuant to the requirements of Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Management believes that the presentation of EBITDA and Adjusted EBITDA provides useful information to investors regarding our results of operations because they are useful for trending, analyzing and benchmarking the performance and value of our business. We use EBITDA and Adjusted EBITDA primarily as performance measures and believe that the GAAP financial measure most directly comparable to EBITDA and Adjusted EBITDA is net income (loss). We use EBITDA and Adjusted EBITDA as a measure to assess the relative performance of our eldercare properties and other of our operating businesses, as well as the employees responsible for operating such businesses. EBITDA and Adjusted EBITDA are useful in this regard because they do not include such costs as interest expense, income taxes and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state that a business unit operates in. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, management is better able to evaluate operating performance of the business unit and the employees responsible for business unit performance. Consequently, management uses EBITDA and Adjusted EBITDA to determine the extent to which our employees have met performance goals, and therefore may or may not be eligible for incentive compensation awards. We also use EBITDA and Adjusted EBITDA in our annual budget process. We believe EBITDA and Adjusted EBITDA facilitate internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not consider certain material costs necessary to operate our business. These costs include the cost to service our debt, the non-cash depreciation and amortization associated with our long-lived assets, the cost of our federal and state tax obligations, our share of the earnings or losses of our less than 100% owned operations and the operating results of our discontinued businesses. Because EBITDA does not consider these important elements of our cost structure, a user of our financial information who relies on EBITDA as the only measure of our performance could draw an incomplete or misleading conclusion regarding our financial performance. Consequently, a user of our financial information should consider net income (loss) an

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important measure of our financial performance because it provides the most complete measure of our performance.

Adjusted EBITDA is presented because management uses this information in evaluating the continuing operations of our business and believes that this information provides investors a useful insight into our operating results. Management also believes that excluding such expenses and gains properly reflects our ongoing operations and provides better comparability to prior year results.

EBITDA and Adjusted EBITDA should be considered in addition to, not as substitutes for, or superior to, GAAP financial measures or as indicators of operating performance.

Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA

The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA.

	Successor Company									Predecessor Company

	Nine Months Ended June 30,						Year Ended Sept. 30,			Years Ended September 30,

	2003			2002			2002			2001			2000

	(dollars in thousands)
Net income (loss)	$	9,446		$	27,785		$	37,551		$	113,319		$	(844,185	)
Add back:
Cumulative change in accounting principle		—			—			—			—			10,412
Loss from discontinued operations, net of taxes		14,391			3,237			5,320			33,505			39,555
Equity in net (income) loss of unconsolidated affiliates		(875	)		(192	)		(1,196	)		10,228			2,505
Minority interests		—			—			242			—			—
Income tax expense (benefit)		7,397			19,712			26,798			—			(80,879	)
Interest expense		12,851			12,616			17,128			98,602			214,550
Depreciation and amortization expense		29,979			26,552			37,288			65,113			71,439

EBITDA		73,189			89,710			123,131			320,767			(586,603	)

Gain on early extinguishment of debt (1)		(1,123	)		—			—			—			—
Debt restructuring and reorganization costs and net gain on debt discharge (2)		—			1,700			3,175			(283,211	)		445,876

Adjusted EBITDA	$	72,066		$	91,410		$	126,306		$	37,556		$	(140,727	)

(1)

The gain on early extinguishment of debt is the result of a negotiated discount on a mortgage loan liquidated by us at the request of the mortgage lender. We have has excluded this gain on early extinguishment of debt from the calculation of Adjusted EBITDA because management does not view such a gain as likely to occur in the foreseeable future, nor have we encountered a similar transaction in recent years. While we often may be interested in extinguishing certain of our mortgage loans by refinancing such loans with senior credit facility borrowings at more favorable rates of interest, because most of these mortgage loans require expensive prepayment penalties, it often is not economically feasible for us to do so. To have a mortgage lender approach GHC to extinguish

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mortgage debt so that we are able to negotiate favorable extinguishment terms is deemed by management to be an unusual event that is reasonably unlikely to occur within the next two years.

(2)

The debt restructuring and reorganization costs and net gain on debt discharge represents expenses and gains specific to our subsidiares’ Chapter 11 bankruptcy proceedings. Prior to 2000, our subsidiaries were not involved in a Chapter 11 proceeding, and the Chapter 11 bankruptcy proceedings are deemed by management to be an unusual event that is reasonably unlikely to occur within the next two years.

Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002

For the current year to date period, revenues were $1,035.0 million, an increase of $19.9 million or approximately 2% over the same period in the prior year. Of this growth, inpatient services revenue increased by $5.9 million, our external rehabilitation services revenue grew $23.9 million and other businesses revenue declined $9.9 million. The increase in inpatient services revenues is attributed to an increase in our average Medicaid rate per patient day, $145 for the year-to-date period in 2003 versus $136 in the same period of the prior year, and private payors, $202 for the year-to-date period in 2003 versus $196 in the same period of the prior year, offset by the negative impact of the skilled nursing facility Medicare cliff on our average Medicare rate per patient day, $312 for the year-to-date period in 2003 versus $341 in the same period of the prior year. The increase in our external rehabilitation services revenue is attributed to the net addition of 67 contracts with new customers, which contributed an additional $13.2 million with the remaining $10.7 million of revenue growth attributed to increased sales volume with existing customers. The decline in revenue of our other businesses is attributed to the loss of facility management contracts in the amount of $2.0 million, a decline in our hospitality business of $5.6 million and other non-core business lines of $2.3 million.

For the current year to date period, income from continuing operations declined $7.2 million to $23.8 million from $31.0 million in the same period in the prior year. This decline is principally attributed to an estimated $18.0 million reduction in net Medicare reimbursement principally due to the skilled nursing facility Medicare cliff, increased utility and snow removal costs of $1.5 million due to inclement weather in the current year-to-date period, and $3.4 million of increased depreciation and amortization expense further discussed below under capital cost and other. These events, which had a negative impact on our income from continuing operations, were offset by reduced utilization of higher cost nursing agencies used to supplement our employed labor, higher reimbursement rates from non- Medicare payor sources and reduced income tax expense as a result of our overall lower profitability and the recognition of $4.4 million in tax credits due to a change in U.S. tax law.

For the current year to date period, Adjusted EBITDA was $72.1 million compared with $91.4 million in the prior year. Reduced Adjusted EBITDA in the current year to date period also reflects the negative impact of the skilled nursing facility Medicare cliff, increased utility and snow removal costs due to inclement weather in the current year to date period, offset by reduced utilization of nursing agencies and higher rates of reimbursement from non-Medicare payor sources.

Capital Costs and Other

Depreciation and amortization expense increased $3.4 million to $30.0 million in current year to date period compared to $26.6 million for the same period in the prior year. The increase is attributed to incremental depreciation expense on capital expenditures made since the prior year in excess of fixed asset retirements.

Interest expense increased $0.3 million to $12.9 million in current year to date period compared to $12.6 million for the same period in the prior year. This decrease is attributed to the reduction in our indebtedness, offset by an increase in our weighted average borrowing rate.

Income tax expense in current year to date and prior year to date periods is estimated using an effective tax rate of 39%, offset by tax credits of $4.4 million realized in the current year to date period pursuant to the Job Creation and Worker Assistance Act of 2002.

Loss from discontinued operations, net of taxes, in the current year to date period increased $11.2 million to $14.4 million from $3.2 million for the same period in the prior year. The increase in losses from discontinued operations in the current year to date period compared to the same period in the prior year is principally due to higher levels of asset write-downs to net realizable value of our discontinued businesses in the current year period and the negative impact of the skilled nursing facility Medicare cliff on our

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discontinued business in the current year to date period. See “— Certain Transactions and Events — Assets Held For Sale and Closed.”

Fiscal 2002 Compared to Fiscal 2001

Fiscal 2002 revenues were $1,362.2 million, an increase of $71.0 million or 5% over the same period in the prior year. Of this growth, inpatient services revenue increased by $66.2 million, external rehabilitation services revenue grew by $15.2 million and all other business lines declined by $10.4 million. The growth in inpatient services revenue is principally attributed to increased payment rates. Our average rate per patient day was $184 in fiscal 2002 versus $171 in fiscal 2001. This increase in average rate per patient day was principally driven by the positive impact of the full year effect of the April 2001 implementation of the Benefits Improvement and Protection Act on our average Medicare rate per patient day, $339 in 2002 versus $327 in 2001, as well as a higher average Medicaid rate, $138 in 2002 versus $128 in 2001, in certain states, most notably Maryland. The growth in our rehabilitation services revenue is primarily attributed to the addition of 124 contracts with new customers which contributed $9.9 million. The remainder of the increase is due to increases in our Medicare Part B rates in January 2002 and higher volume with existing customers. The decline in revenue of our other businesses is attributed to the loss of facility management contracts in the amount of $2.8 million and a general decline in our other non-core business lines.

Fiscal 2002 income from continuing operations was $42.9 million versus income from continuing operations of $146.8 million in the same period in the prior year. As described above, these periods are not comparable as a result of our subsidiaries’ emergence from bankruptcy and the impact of the adoption of fresh-start reporting effective September 30, 2001. Generally, we believe that Adjusted EBITDA of the successor company and predecessor company are comparable.

Fiscal 2002 Adjusted EBITDA was $126.3 million compared with $37.6 million in the prior year. Adjusted EBITDA in fiscal 2001 was reduced $73.6 million as a result of provisions recorded to recognize the following expenses:

•

$27.4 million to reserve for uncollectible receivables due from certain affiliated businesses in light of the adverse impact of the Medicare prospective payment system on their liquidity and profitability;


	•	$20.4 million of additional allowances for doubtful trade accounts receivable following our re-evaluation of our uncollected accounts triggered by deteriorations in the aging of certain categories of receivables. We believe that such deteriorations were due to several prolonged negative factors related to the operational effects of our subsidiaries’ Chapter 11 proceedings, such as personnel shortages and the time demands required in normalizing relations with vendors and addressing a multitude of bankruptcy issues;


	•	$12.3 million of additional reserves for self-insured programs as a result of adverse claims development;


	•	$13.0 million of other expenses, principally related to contract and litigation settlements; and


	•	$0.5 million net loss on the sale of eldercare properties.

The Adjusted EBITDA of our inpatient services and rehabilitation services segments grew $21.5 million and $3.6 million, respectively. The Adjusted EBITDA of all other businesses and our corporate functions declined $8.6 million. The growth in Adjusted EBITDA of our inpatient services segment is attributed to the positive impact of the full year effect of the April 2001 implementation of the Benefits Improvement and Protection Act and reduced lease expense following the discharge of a lease financing facility upon emergence from our Chapter 11 proceedings. The growth in Adjusted EBITDA of our rehabilitation services segment is attributed to higher volume with existing customers and growth in contracts with new customers. The decline in Adjusted EBITDA of our other businesses and corporate functions is attributed to the loss of facility management contracts, higher bad debt expense in our hospitality services business and an increase in corporate overhead costs principally due to inflationary cost increases.

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Capital Costs and Other

Depreciation and amortization expense decreased $27.8 million to $37.3 million in fiscal 2002 compared to $65.1 million for the same period in the prior year. The decrease was primarily caused by the impact of fresh-start reporting on the carrying value of our property and equipment, and goodwill, which were written-down to their estimated fair values as of September 30, 2001. This write-down resulted in less long-lived asset depreciation and amortization expense in fiscal 2002. In fresh-start reporting, we wrote-off over $480.3 million of our previously carried goodwill, which in fiscal 2001 had an amortization expense of $14.3 million.

Interest expense decreased $81.5 million to $17.1 million in fiscal 2002 compared to $98.6 million for the same period in the prior year. This decrease is attributed to the overall reduction in our debt levels following our emergence from bankruptcy in addition to a lower weighted average borrowing rate.

During fiscal 2002, we recorded $3.2 million of debt restructuring and reorganization costs of which $1.5 million related to post-confirmation liabilities payable to the United States Trustee related to the Chapter 11 proceedings. The remaining $1.7 million represents a post confirmation charge resulting from a settlement reached with the lender of a pre-petition mortgage obligation for an amount that exceeded the estimated loan value established at September 30, 2001. During fiscal 2001, we recorded a net gain of $283.2 million for debt restructuring and reorganization costs, consisting of legal, bank, accounting and other costs of $40.9 million; $10.8 million for certain bankruptcy related salary and benefit costs, principally for a court approved special recognition program; $3.7 million of costs associated with the divestiture of certain businesses; and fresh-start valuation adjustments of $672.7 million. Fresh-start valuation adjustments were recorded pursuant to the provisions of SOP 90-7, which require entities to record their assets and their liabilities at estimated fair values. The fresh-start valuation adjustment as described relates only to continuing operations and is principally the result of the elimination of predecessor company goodwill and the revaluation of property and equipment to estimated fair values. In addition, in fiscal 2001, we recorded a gain of $1.0 billion representing the discharge of our liabilities subject to compromise in accordance with the 2001 joint plan of reorganization.

Income tax expense in fiscal 2002 of $26.8 million is estimated using an effective tax rate of 39%. We did not record any income tax expense in fiscal 2001 due to our taxable losses.

In fiscal 2002, equity in net earnings of unconsolidated affiliates was $1.2 million compared to equity in net loss of unconsolidated affiliates of $10.2 million for the same period in the prior year, which was attributed to changes in the earnings/losses reported by our unconsolidated affiliates. The less favorable operating performance of our unconsolidated affiliates in fiscal 2001 is attributed to certain asset impairment charges recorded by our affiliates in that year.

Fiscal 2002 losses from discontinued operations decreased $28.2 million to $5.3 million from $33.5 million for the same period in the prior year. The results of operations in the current year and prior year periods, along with any costs to exit businesses identified as held for sale or closed in the year of discontinuation, have been classified as discontinued operations in the combined statements of operations. Businesses sold or closed prior to our October 1, 2001 adoption of SFAS 144 continue to be reported in the results of continuing operations. The decrease in losses from discontinued operations in fiscal 2002 compared to the same period in the prior year is principally due to the level of fixed asset write-downs to fair value in the 2001 period incurred by the discontinued businesses in connection with their adoption of fresh-start reporting. See “— Certain Transactions and Events — Assets Held For Sale or Closed.”

Fiscal 2001 Compared to Fiscal 2000

Fiscal 2001 revenues were $1,291.2 million, an increase of $29.1 million or 2% over the same period in the prior year. Of this growth, inpatient services revenue increased by $19.5 million, external rehabilitation services revenue grew by $9.8 million and all other business lines declined by $0.2 million. Growth in inpatient services revenue of $62.6 million is due to increased payment rates. Our average rate per patient day was $171 in fiscal 2001 versus $157 in fiscal 2000. This increase in average rate per patient day was principally attributed to the April 2001 implementation of the Benefits Improvement and Protection Act which increased our Medicare rate per patient day, $327 in 2001 versus $296 in 2000, for half of fiscal 2001. These rate increases are offset by $43.1 million of reduced revenue resulting from the divestiture of eldercare properties, principally in the state of Ohio. The growth in our rehabilitation services revenue is primarily

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attributed to the addition of 90 contracts with new customers which contributed $8.4 million. The remainder of the increase is due to increases in our Medicare Part B rates in January 2001 and higher volume with existing customers.

Fiscal 2001 income from continuing operations was $146.8 million versus a loss from continuing operations of $794.2 million in the same period in the prior year. The income from continuing operations in fiscal 2001 was positively impacted by our adoption of fresh- start reporting and the resulting gain of $283.2 million, net of debt restructuring and reorganization costs, associated with the discharge of our liabilities subject to compromise in accordance with the 2001 joint plan of reorganization. The significant loss from continuing operations incurred in fiscal 2000 is principally attributed to the write-down of long-lived assets and other charges of $245.8 million and debt restructuring costs of $445.9 million. These charges are described in greater detail in the discussions that follow.

Fiscal 2001 Adjusted EBITDA was $37.6 million compared with negative Adjusted EBITDA of $140.7 million in the prior year. Adjusted EBITDA in fiscal 2001 and 2000 was reduced $73.1 million and $245.8 million, respectively, as a result of provisions recorded to recognize the following expenses (in thousands):

	Years Ended September 30,
	2001		2000

Asset impairments	$	—	$	174,231
Uncollectible receivables		47,753		32,955
Other charges		25,339		38,638

Expenses included in operating expenses	$	73,092	$	245,824

Asset Impairments. During 2000, in connection with budget preparations for the forthcoming year and in accordance with Statement of Financial Accounting Standards No. 121 “Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (SFAS 121), management reviewed the current and projected undiscounted cash flows of each eldercare center. This review indicated that the assets of certain eldercare centers were impaired. The fair market value of the eldercare centers deemed potentially impaired were then estimated and compared to the carrying values of the long-lived assets. Any excess long-lived asset carrying value over the estimated fair value was written-off. Fair value was estimated using a per bed value determined by management. The total loss for SFAS 121 impairments of $174.7 million was associated with 48 eldercare centers. Of this charge, $28.9 million relates to discontinued businesses and is included in the loss from discontinued operations in the combined statements of operations. Also, during fiscal 2000, management closed or terminated the leases of six underperforming eldercare centers. As a result, a charge of $28.4 million was recorded to account for certain impaired and abandoned assets of these eldercare centers.

Uncollectible Receivables. During fiscal 2001 and 2000, we performed periodic assessments of the collectibility of amounts due from certain current and former customers in light of the adverse impact of changes to the Medicare reimbursement system on their liquidity and profitability. In certain cases, customers filed for protection under Chapter 11 of the Bankruptcy Code. As a result of management’s assessments, the carrying value of notes receivable, advances and trade receivables due from these customers was written down by $27.4 million and $20.5 million in fiscal 2001 and fiscal 2000, respectively.

In fiscal 2001, management performed a re-evaluation of its allowance for doubtful accounts triggered by deterioration in the agings of certain categories of receivables. Management believed that such deterioration in the agings was due to several prolonged negative factors related to the operational effects of the bankruptcy filings such as personnel shortages and the time demands required in normalizing relations with vendors and addressing a multitude of bankruptcy issues. As a result of this re-evaluation, management determined that an increase in the allowance for doubtful accounts of $20.4 million was necessary.

In fiscal 2000, management performed an assessment of the collectibility of certain aged amounts due from third party payors (principally Medicare and Medicaid) and concluded that $12.5 million was unrecoverable.

Other Charges. In fiscal 2001 and 2000, as a result of adverse claims development management re-evaluated the levels of reserves established for certain self-insured and other programs, including workers’

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compensation, health insurance and general liability insurance, resulting in charges of $12.3 million and $20.0 million, respectively.

In fiscal 2001 and 2000, GHC incurred charges of $13.0 million and $18.6 million, respectively, principally related to contract and litigation matters and settlements, and certain other charges.

The inpatient services segment Adjusted EBITDA declined $3.2 million, the rehabilitation services segment Adjusted EBITDA increased $2.1 million and all our other services and corporate functions Adjusted EBITDA loss increased $0.7 million or 2%. The deterioration in our inpatient services Adjusted EBITDA in 2001 is attributed to the divestiture of our Ohio properties, an increase in our utilization of nursing agency services, who charge us a premium over the cost to employ nurses, offset by the positive impact of the April 2001 implementation of the Benefits Improvement and Protection Act. Our rehabilitation service business grew due to volume growth with existing customers and new business.

Capital Costs and Other

Depreciation and amortization expense decreased $6.3 million to $65.1 million in fiscal 2001 compared to $71.4 million for the same period in the prior year. The decrease was primarily caused by the write-off of impaired goodwill, property and equipment, and the divestiture of eldercare centers.

Interest expense decreased $116.0 million to $98.6 million in fiscal 2001 compared to $214.6 million for the same period in the prior year. In accordance with SOP 90-7, we ceased accruing interest on certain long-term debt instruments classified as liabilities subject to compromise. Our contractual interest expense for fiscal 2001 was $178.0 million, leaving approximately $79.4 million of interest expense unaccrued for that period as a result of the Chapter 11 proceedings. Contractual interest expense decreased $26.0 million in fiscal 2001 from $204.0 million in fiscal 2000. The decline is primarily attributed to a lower weighted average borrowing rate.

During fiscal 2001, we recorded a net gain of $283.2 million for debt restructuring and reorganization costs which is described in the results from operations discussion that compares fiscal 2002 to fiscal 2001. Debt restructuring and reorganization costs of $445.9 million in fiscal 2000 consist of legal, bank, accounting and other professional costs of $18.2 million; $3.6 million for certain bankruptcy related salary and benefit costs, principally for a court approved special recognition program; $28.3 million related to a termination fee recognized on an interest rate swap; and $395.7 million for the accelerated accretion of the carrying value of certain debt and GHVI preferred stock instruments to the amount of such instruments contractual value upon the Company’s filing for Chapter 11 bankruptcy protection.

Fiscal 2001 equity in net loss of unconsolidated affiliates of $10.2 million, compared to equity in net loss of unconsolidated affiliates of $2.5 million for the same period in the prior year, is attributed to changes in the earnings/losses reported by our unconsolidated affiliates. The less favorable operating performance of our unconsolidated affiliates in fiscal 2001 is attributed to certain asset impairment charges recorded by our affiliates in that year.

Fiscal 2001 losses from discontinued operations were $33.5 million compared to a loss from discontinued operations of $39.6 million in fiscal 2000. The losses from discontinued operations in fiscal 2001 and 2000 are principally due to the level of fixed asset write- downs to fair value in the 2001 period by the discontinued businesses in connection with their adoption of fresh start reporting and asset impairment charges recorded in fiscal 2000. See “— Certain Transactions and Events — Assets Held For Sale or Closed.”

Liquidity and Capital Resources

Working Capital and Cash Flows

Our need for funds arises primarily from our working capital requirements, including the need to finance our receivables, as well as expenditures for property and equipment. At June 30, 2003, we had working capital of $76.3 million. Our cash flow from operations before debt restructuring and reorganization costs for the nine months ended June 30, 2003 and for the fiscal year ended September 30, 2002 were $49.7 million and $132.3 million, respectively.

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Prior to the spin-off, substantially all of our cash accounts are linked to GHVI’s centralized cash management system. Accordingly, substantially all of the cash generated from operations has been transferred to GHVI. The net effect of these cash transfers has been reflected in the “GHVI’s Equity in GHC” account as shown in the equity section of our combined balance sheets. A majority of the cash and equivalents reported in our combined balance sheets represent petty cash, restricted patient trust cash, and cash balances held in accounts that are restricted as to their use under several loan agreements specific to certain of our eldercare centers.

We believe that the net cash provided by our operating activities, supplemented as necessary with borrowings available under an expected revolving credit facility described under “— New Financing Arrangements” will provide sufficient resources to meet our working capital requirements, debt service and other cash needs over the next year. However, we have not entered into our new financing arrangements and cannot assure you that we will be able to obtain our revolving credit facility and other financing arrangements on favorable terms.

At June 30, 2003, we had restricted investments in marketable securities of $93.7 million, which are held by Liberty Health Corp. LTD., our wholly-owned captive insurance subsidiary incorporated under the laws of Bermuda. The investments held by Liberty Health Corp. are restricted by statutory capital requirements in Bermuda. Liberty Health Corp. is required by its insurance license to maintain equity greater than a minimum statutory amount. As of June 30, 2003, Liberty Health Corp.’s equity exceeded the minimum statutory requirement. Liberty Health Corp. is also required to maintain a minimum liquidity ratio whereby the value of its relevant assets is not less than 75% of its relevant liabilities. Relevant assets include cash and equivalents, investments in marketable securities, and certain other current assets. Relevant liabilities are total outstanding loss reserves and certain other liabilities. At June 30, 2003, Liberty Health Corp. met the statutory liquidity ratio. In addition, certain of these investments are pledged as security for letters of credit issued by Liberty Health Corp. As a result of such restrictions and encumbrances, we and Liberty Health Corp. are precluded from freely transferring funds through intercompany loans, advances or cash dividends.

Cash activities from net investing activities for the nine months ended June 30, 2003 and the year ended September 30, 2002 were a source of cash of $28.3 million and a use of cash of $76.3 million, respectively. The source of cash from investing activities generated for the nine months ended June 30, 2003 includes $56.0 million of proceeds received from the sale of eldercare centers, offset by a use of cash of $25.0 million for capital expenditures, a $7.4 million use of cash to purchase restricted investments in marketable securities to fund our self-insured programs and use of cash of $5.9 million related to the acquisition of a rehabilitation services company. The use of investing cash for the year ended September 30, 2002 is attributed to $34.9 million of capital expenditures, a $10.5 million use of cash to exercise an option to purchase three eldercare centers, a $33.9 million net use of cash to purchase restricted investments in marketable securities to fund our self-insured programs, offset by $3.0 million of cash proceeds from the sale of an eldercare center. Capital expenditures consist primarily of betterments and expansion of eldercare centers and investments in computer hardware and software. In order to maintain our physical properties in a suitable condition to conduct our business and meet regulatory requirements, we expect to continue to incur capital expenditure costs at levels at or above those for the nine months ended June 30, 2003 for the foreseeable future.

For nine months ended June 30, 2003 and the year ended September 30, 2002, we incurred $20.6 million and $26.6 million of lease obligation costs and expect to incur lease costs approximately $0.5 million above levels approximating those for the nine months ended June 30, 2003 following consummation of the ElderTrust transactions. For the nine months ended June 30, 2003 and the year ended September 30, 2002, our lease expense was reduced $3.8 million and $5.6 million, respectively, in connection with the amortization of net unfavorable lease liability established in fresh-start reporting. Consequently, our cash basis lease cost for the nine months ended June 30, 2003 and for the year ended September 30, 2002 was $24.4 million and $32.2 million, respectively.

Included in our financial statements is an allocated portion of GHVI’s debt issued in connection with the Chapter 11 proceedings of GHVI in 2001, which we guarantee. For the purpose of preparing the carve-out financial statements at September 30, 2001, our allocation of this guaranteed debt was based upon the level of debt estimated to be attributed to the operations of GHC upon emergence from bankruptcy. This allocation is

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consistent with the capital structure agreed to by our creditors and the bankruptcy court. Specifically, the initial debt allocation equals three times fiscal 2001 Adjusted EBITDA, as adjusted. Adjusted EBITDA, as adjusted, is calculated by subtracting from revenue all operating expenses and lease expense before certain charges described in our results of operations discussion comparing fiscal 2002 to fiscal 2001. The allocated portion of this guaranteed debt in periods subsequent to September 30, 2001 includes the effect of subsequent financing activities attributed to our operations. At June 30, 2003, we are guarantors of approximately $556.1 million of GHVI’s senior debt, of which $220.4 million has been allocated to us for purposes of preparing our carve-out financial statements. Following the spin-off, we and our subsidiaries will cease to be guarantors of GHVI debt.

New Financing Arrangements

In October 2003, we issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million, with a term of ten years. We intend to enter into a senior credit facility prior to the consummation of the spin-off that provides for a term loan of approximately $185.0 million, which will be fully drawn at the consummation of the spin-off and a revolving credit facility of $75.0 million, none of which is expected to be drawn at the consummation of the spin-off. The term loan is expected to have a seven year term and amortize one percent per year through year six. The revolving credit facility is expected to have a five year term. Of the $410.0 million of borrowings under the new financing arrangements, we intend to retain $39.0 million to fund working capital and other requirements, expend $11.0 million for financing related fees, use $44.5 million to repay existing mortgage loans and transfer $315.5 million to GHVI, which will use the funds to repay existing indebtedness of GHVI. On October 28, 2003, we transferred the net proceeds of $218.5 million of the senior subordinated notes to GHVI. In addition, we expect to be responsible for approximately $10.3 million of existing mortgage debt related to certain eldercare properties held by subsidiaries that will be transferred to us prior to the spin-off and $17.8 million of debt assumed in the ElderTrust transactions. Our new senior credit facility is expected to include an excess cash flow recapture requirement that may increase the required principal payments above contractual minimum amounts each year depending on a formula yet to be determined as well as other mandatory prepayment provisions as part of the negotiation of terms. The term loan portion of our new senior credit facility is expected to have a rate of interest of LIBOR plus an applicable margin or a base rate plus an applicable margin. The revolving portion of our new senior credit facility is expected to have a rate of interest of LIBOR plus an applicable margin or a base rate plus an applicable margin on any borrowings thereunder, and we expect to pay a commitment fee on the revolving portion whether or not any amounts are advanced. While we have received a commitment letter from Wachovia Bank, National Association and Wachovia Capital Markets, LLC to commit a portion and arrange for the balance of the new senior credit facility and Wachovia Bank, National Association and Wachovia Capital Markets, LLC in turn have received commitments to fund the new senior credit facility, we have not completed the new senior credit facility. Accordingly, no assurance can be given that the new senior credit facility will be on the terms described in this information statement.

Financial Commitments

We have future obligations for debt repayments, and future minimum rentals under operating leases. The obligations as of June 30, 2003 are summarized as follows (dollars in thousands):

	Payments Due by Period

			Less than
Contractual Obligations	Total		1 year		1-3 years		4-5 years		Thereafter

Mortgages and other secured debt	$	275,208	$	30,943	$	11,424	$	194,631	$	38,210
Operating leases		191,120		33,138		62,516		47,640		47,826

	$	466,328	$	64,081	$	73,940	$	242,271	$	86,036

We are guarantors of approximately $556.1 million of GHVI’s senior debt at June 30, 2003, of which $220.4 million has been allocated to us for purposes of preparing our carve out financial statements. GHVI’s debt instruments amortize at a rate of one percent each year (approximately $6.0 million) and mature in 2007, and include excess cash flow recapture provisions.

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GHVI’s debt and certain of our lease obligations require us to maintain compliance with financial and non-financial covenants, including minimum EBITDAR (earnings before interest, taxes, depreciation, amortization and rent), limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth. Failure to meet these covenants or the occurrence of other defaults, such as non-payment, could result in the acceleration of the maturity of such obligations. We anticipate that our new financing arrangements will have similar requirements.

We and GHVI also have contingent obligations related to outstanding lines of credit, letters of credit and guarantees. We anticipate that these off balance sheet commitments will be assigned to us after the spin-off, and the discussions that follow assume such assignment. These commitments as of June 30, 2003 are summarized as follows (dollars in thousands):

	Amount of Commitment Expiration Per Period

			Less than
Off Balance Sheet Commitments	Total		1 year		1-3 years		4-5 years		Thereafter

Lines of credit	$	4,641	$	—	$	—	$	—	$	4,641
Guarantees		23,976		3,845		1,000		1,198		17,933

	$	28,617	$	3,845	$	1,000	$	1,198	$	22,574

Requests for providing commitments to extend financial guarantees and extend credit are reviewed and approved by senior management. Management regularly reviews all outstanding commitments, letters of credit and financial guarantees, and the results of these reviews are considered in assessing the need for any reserves for possible credit and guarantee loss.

We have extended $7.4 million in working capital lines of credit to certain jointly owned and managed companies, of which $4.6 million was unused at June 30, 2003. Credit risk represents the accounting loss that would be recognized at the reporting date if the affiliate companies were unable to repay any amounts utilized under the working capital lines of credit. Commitments to extend credit to third parties are conditional agreements generally having fixed expiration or termination dates and specific interest rates and purposes.

We are a party to joint venture partnerships whereby our ownership interests are 50% or less of the total capital of the partnerships. We account for these partnerships using the equity method of accounting and, therefore, the assets, liabilities and operating results of these partnerships are not consolidated with ours. The carrying value of our investment in joint venture partnerships is $11.5 million at June 30, 2003.

Although we are not contractually obligated to fund operating losses of these partnerships, in certain cases we have extended credit to such joint venture partnerships in the past and may decide to do so in the future in order to realize economic benefits from our joint venture relationship. Management assesses the creditworthiness of such partnerships in the same manner it does other third-parties. We have provided $11.5 million of financial guarantees related to loan commitments of four jointly owned and managed companies that are attributed to our operations. We have also provided $12.4 million of financial guarantees related to lease obligations of one jointly-owned and managed company that operates four eldercare centers that are attributed to our operations. The guarantees are not recorded as liabilities on our balance sheet unless we are required to perform under the guarantee. Credit risk represents the accounting loss that would be recognized at the reporting date if the counter-parties failed to perform completely as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties. Following the spin-off, we may continue to be obligated under these guarantee agreements.

Our business activities do not include the use of unconsolidated special purpose entities.

Revenue Sources

We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long-term care facilities that utilize our rehabilitation therapy services and other specialty medical services. The healthcare industry is experiencing the effects of the federal and state governments’ trend toward cost containment, as government and other third party payors seek to impose lower reimbursement

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and utilization rates and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, have put pressure on the rates of reimbursement for services we provide.

A number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act that provided for additional funding for Medicare participating skilled nursing facilities expired on September 30, 2002, resulting in an approximate 10% reduction in the rates paid to us for providing services to Medicare patients. We refer to the expiration of the additional funding as the “skilled nursing facility Medicare cliff.” Effective October 1, 2002, Medicare rates adjusted for the skilled nursing facility Medicare cliff were increased by a 2.6% annual market basket adjustment. For us, the net impact of these provisions is estimated to adversely impact annual revenue beginning October 1, 2002 by approximately $24.0 million. The expiration of these provisions, after considering the 2.6% annual market basket adjustment, has reduced our Medicare per diems per beneficiary, on average, by approximately $24, resulting in reduced revenue of approximately $18.0 million in our first nine months of fiscal 2003.

The skilled nursing facility Medicare cliff could adversely impact the liquidity of our other service related business customers, resulting in their inability to pay us, or to pay us timely, for our products and services. This factor, coupled with the adverse impact of the skilled nursing facility Medicare cliff to the liquidity of our inpatient services segment, could require us to borrow in order to fund our working capital needs, and in turn, cause us to become more highly leveraged.

There are additional provisions in the Medicare statute affecting rehabilitation therapy, diagnostic services and the payment for services in other health settings. In February 2003, Congress passed legislation that prevented a formula driven reduction in practitioner fee schedules. This restoration of reimbursement rates affected not only doctors, but also payment for most professional practitioners including licensed rehabilitation professionals. In addition, effective January 1, 2003, the moratorium on implementing payment caps on Medicare Part B rehabilitation therapy services expired. The Centers for Medicare and Medicaid Services issued instructions that delayed enforcement until September 1, 2003. The therapy caps are expected to reduce our annual net revenues by approximately $18.9 million and EBITDA by approximately $4.9 million. Congress may again intervene to extend a moratorium on the therapy caps for calendar year 2004. No assurances can be made or given that Congress will extend the moratorium or take any other action to affect a discontinuance of the therapy caps.

The recent economic downturn is having a detrimental affect on state revenues in most jurisdictions. Budget shortfalls range from 4% to 5% of outlays upwards to 20% of outlays in certain states. Historically these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities in the states in which we operate. In each of the major states where we provide services, we are working with trade groups, consultants and government officials to responsively address the particular services funding issues.

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by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

Critical Accounting Policies

An accounting policy is considered to be critical if it is important to the registrant’s financial condition and results, and requires significant judgment and estimates on the part of management in its application. Our critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require revision. Application of the critical accounting policies requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. Our senior management has reviewed these critical accounting policies and estimates with GHVI’s audit committee. We believe that the following represents our critical accounting policies. For a summary of all of our significant accounting policies, including critical accounting policies discussed below, see note 2 — “Summary of Significant Accounting Policies” to our combined financial statements.

Allowance for Doubtful Accounts

We utilize the “Aging Method” to evaluate the adequacy of our allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each type of payor. We have developed estimated standard allowance requirement percentages by utilizing historical collection trends and our understanding of the nature and collectibility of receivables in the various aging categories and the various segments of our business. The standard allowance percentages are developed by payor type as the accounts receivable from each payor type have unique characteristics. The allowance for doubtful accounts is determined utilizing the aging method described above while also considering accounts specifically identified as uncollectible. Accounts receivable that we specifically estimate to be uncollectible, based upon the age of the receivables, the results of collection efforts or other circumstances, are reserved for in the allowance for doubtful accounts until they are written-off.

In fiscal 2001, we performed a re-evaluation of our allowance for doubtful accounts triggered by deterioration in the agings of certain categories of receivables. We believe that such deteriorations were due to several prolonged negative factors related to the operational effects of our subsidiaries’ bankruptcy filings, personnel shortages, the time demands required in normalizing relations with vendors and addressing a multitude of other bankruptcy issues. As a result of this re-evaluation, we determined that an increase to the allowance for doubtful accounts of $20.4 million was necessary, and certain changes to the aging method resulting in higher levels of allowance for doubtful accounts requirements were also necessary.

In fiscal 2000, we performed a specific account review for certain large customers in light of the adverse impact of the prospective payment system on their liquidity and profitability. As a result of these assessments, we determined that an increase to the allowance for doubtful accounts of $12.5 million was necessary. Because such adjustments were based upon a specific account review of several high risk customers, no significant changes to the aging method were deemed necessary.

Over the past three years, and in connection with the adjustments made in fiscal 2000 and 2001, we have continued to refine our assumptions and methodologies underlying the aging method. We believe the assumptions used in the aging method employed in fiscal 2002, coupled with continued improvements in our collection patterns, suggest that our allowance for doubtful accounts is adequately provided for at June 30, 2003. However, because the assumptions underlying the aging method are based upon historical collection data, there is a risk that our current assumptions are not reflective of more recent collection patterns. Changes in overall collection patterns can be caused by market conditions and/or budgetary constraints of government funded programs such as Medicare and Medicaid. Such changes can adversely impact the collectibility of receivables, but not be addressed in a timely fashion when using the aging method, until updates to GHC’s periodic historical collection studies are completed and implemented.

At least annually, we update our historical collection studies in order to evaluate the propriety of the assumptions underlying the aging method. Any changes to the underlying assumptions are implemented

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immediately. Changes to these assumptions can have a material impact on our bad debt expense, which is reported in the combined statements of operations as a component of other operating expenses.

Loss Reserves For Certain Self-Insured Programs

General and Professional Liability and Workers’ Compensation

General and professional liability costs for the long-term care industry have become increasingly expensive. Specifically, rising costs of eldercare malpractice litigation, and losses stemming from these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the State of Florida where, because certain laws allow for significantly higher liability awards than in other states, general liability and professional liability costs have increased substantially. Until May 2003, we owned or leased approximately 1,500 skilled nursing beds in the State of Florida, then representing six percent of our total owned and leased beds.

Prior to June 1, 2000, we had first dollar coverage for general and professional liability costs with third party insurers; accordingly, we have no exposure for claims prior to that date. Effective June 1, 2000, we began insuring a substantial portion of our professional liability risks through our wholly-owned insurance company, Liberty Health Corp. Specifically, we are responsible for the first dollar of each claim (on a claims-made basis), up to a self-insurance retention limit determined by the individual policies, subject to aggregate limits for each policy year. The self-insured retention limits amount to $22.0 million, $19.0 million and $14.0 million for the policy years ended May 31, 2003, 2002 and 2001, respectively. For policy years 2002 and 2001, any costs above these retention limits are covered by third- party insurance carriers. For policy year 2003 (June 1, 2002 — May 31, 2003), we have retained an additional self-insurance layer of $5.0 million. Since the June 1, 2000 inception of the self-insurance program through September 30, 2002, our cumulative self-insurance retention levels are $42.0 million and our provision for these losses is $28.2. Assuming our actual losses were to reach our retention limits in each of the three policy years, our additional exposure is approximately $13.8 million which, if incurred, would be recognized as an increase to our other operating expenses in our combined statements of operations in the period such exposure became known. In addition, we have provided $3.7 million for the estimated costs of claims incurred but not reported as of September 30, 2002.

Beginning in 1994, we insured our workers’ compensation exposure, principally through self-insurance retentions and large deductible programs. We in turn insured these programs through Liberty Health Corp. In addition, we inherited legacy workers’ compensation programs from acquisitions we completed.

Over the past three years, the majority of our workers’ compensation coverage was structured as follows: for policy year 2001 (June 1, 2000 — May 31, 2001) we were insured on a first dollar coverage basis for our Multicare subsidiaries, and insured through an incurred loss retrospectively rated policy for our non-Multicare subsidiaries; and for policy years 2002–2003 (June 1, 2001 — May 31, 2003) we have large deductible programs, the deductibles for which are insured through Liberty Health Corp.

For policy year 2001, our incurred losses recognized through September 30, 2002 were $15.5 million. Our development factors are updated quarterly and are based upon commonly used industry standards. Any changes to the incurred losses are recognized quarterly as an adjustment to salaries, wages and benefits in our combined statements of operations. We are insured through a third-party insurer for aggregate claims in excess of $44.1 million.

For policy years 2003 and 2002, Liberty Health Corp. insures us for up to the first $0.5 million per workers’ compensation incident. All workers’ compensation claims above $0.5 million per incident are insured through a third-party insurer. We have aggregate self- insured retentions of $52.8 million and $48.0 million in policy years 2003 and 2002, respectively. Workers’ compensation claims above these aggregate limits are insured through a third party-insurer as of September 30, 2002. Our provision for losses in these policy years is $30.1 million as of September 30, 2002. Our reserve levels are evaluated on a quarterly basis. Any necessary adjustments are recognized as an adjustment to salaries, wages and benefits in our combined statements of operations.

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We record outstanding losses and loss expenses for both general and professional liability and workers’ compensation liability based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and management’s judgment using our past experience and industry experience. As of September 30, 2002, our estimated range of discounted exposure for these liabilities is $57.1 million to $74.0 million. Our recorded reserves for these liabilities were $59.2 million as of September 30, 2002, of which $2.1 million is included in accrued expenses and the remainder in self-insurance liability reserves in our combined balance sheet. Through Liberty Health Corp., we have restricted investments in marketable securities of $86.1 million at September 30, 2002 which are substantially restricted to securing the outstanding claim losses of Liberty Health Corp.

General and professional liability and workers’ compensation claims are discounted at a rate of 4.5% in 2002 and 2001, which estimates the present value of funds required to pay losses at a future date. Had we provided losses at undiscounted levels at September 30, 2002 and 2001, the reserve for outstanding losses and loss expenses would have been increased by approximately $6.6 million in 2002 and $6.0 million in 2001.

We believe that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred as of September 30, 2002, but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. It is at least reasonably possible that we will revise our estimates significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.

Health Insurance

We offer employees an option to participate in a self-insured health plan. Health claims under this plan are self-insured with a stop-loss umbrella policy in place to limit maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. We maintain an accrual for claims that have been incurred but not yet reported to the plan administrator and therefore have not been paid. The incurred but not reported reserve is based on the historical claim lag period and current payment trends of health insurance claims (generally two to three months).

We charge our employees a portion of the cost of our self-insured health plan, and we determine this charge at the beginning of each plan year based upon historical and projected medical utilization data, along with projected inflationary increases in medical costs. Any differences between our projections and our actual experience are borne by us. A one percent variance between our projections and the actual medical utilization or inflationary increases in cost would result in a $0.5 million change in our expense, which would be reflected in salaries, wages and benefits in our combined statements of operations.

Revenue Recognition/Contractual Allowances

Within our inpatient services segment, revenue is recognized in the period the related services are rendered. We derive a substantial portion of our inpatient services revenue under Medicaid and Medicare reimbursement systems.

Within our rehabilitation services and other ancillary service businesses, we record revenues at the time services or products are provided or delivered to the customer. Upon delivery of products or services, we have no additional performance obligation to the customer. We receive payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private third-party insurers and long-term care facilities.

Most Medicaid systems, Medicare and certain other third party payors, reimburse us at a predetermined rate based upon the historical cost to provide the service, demographics of the site of service and the acuity of the customer. The differences between the established billing rates and the predetermined rates are recorded as contractual adjustments and deducted from revenues. Under a prospective reimbursement system, there is no adjustment or settlement of the difference between the actual cost to provide the service and the predetermined rate. We recorded contractual adjustments from continuing operations of $354.8 million, $364.2 million and $362.7 million in fiscal years 2002, 2001 and 2000, respectively.

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Long-lived Asset Impairments

We account for long-lived assets, other than goodwill with an indefinite useful life, in accordance with the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and other Intangible Assets” (SFAS 144). This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

With regard to goodwill, we adopted the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (SFAS 142) on September 30, 2001 in accordance with the early adoptions provisions of SOP 90-7. SFAS 142 provides that goodwill no longer be amortized on a recurring basis but rather is subject to periodic impairment testing. Prior to adopting SFAS 142, we amortized goodwill over periods not exceeding 40 years. The impairment test requires us to compare the fair value of our businesses to their carrying value including assigned goodwill. SFAS 142 requires an impairment test annually. Following the implementation of fresh-start reporting effective September 30, 2001, we do not carry a material amount of goodwill.

In fiscal years 2001 and 2000, we recorded material adjustments to the carrying value of long-lived assets.

In fiscal 2001, our continuing operations included a $672.7 million charge primarily to write-down the carrying value of our property and equipment, and goodwill in connection with our adoption of fresh-start reporting. Fresh-start reporting requires companies that emerge from bankruptcy to adjust their long-lived assets to fair value. We estimated fair value by using both third-party appraisals and commonly used discounted cash flow techniques. These adjustments were recognized as fresh-start valuation adjustments and recorded as debt restructuring and reorganization costs in the combined statements of operations.

In fiscal 2000, in connection with our budget preparations for the forthcoming year and in accordance with SFAS 121, the predecessor of SFAS 144, we reviewed the then-current and projected undiscounted cash flows of our eldercare centers. This review indicated that the assets of 48 eldercare centers were potentially impaired. The fair market value of the eldercare centers deemed potentially impaired were then compared to the carrying values of the long-lived assets. Fair value was estimated using a per bed value determined by us. Any excess long-lived asset carrying value over the estimated fair value was written-off. This evaluation resulted in the write-down of $174.7 million of long-lived assets.

Income Taxes

We do not file a separate federal tax return. We are included in the consolidated federal tax return filed by GHVI.

The tax provisions reflected in the combined statements of operations and the deferred and current tax amounts reflected in the combined balance sheets have been computed based on our separate company book/tax differences to arrive at our taxable income. Our net operating loss carryforward represents unutilized taxable losses after reduction for cancellation of debt income available for net operating loss, referred to as “NOL,” carryforwards.

At September 30, 2002 and 2001, our deferred tax balances were determined by reference to the differences in book and tax values of assets and liabilities.

Current and deferred taxes calculated under the separate company approach to intercorporate tax allocation followed in preparing the combined financial statements may not necessarily reflect the impact of income taxes on results of operations, cash flows or our financial position in the future.

For the years ended September 30, 2002, 2001 and 2000, we provided $26.8 million, $0, and $(80.9) million, respectively, for income taxes (benefit) from continuing operations and utilized no net operating loss carryforwards. At September 30, 2002 and 2001, we had deferred tax assets in excess of

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deferred tax liabilities, inclusive of tax benefits related to net operating loss carryforwards. Because management believes it is more likely than not that the net deferred tax assets will not be realized, the net deferred tax assets in their entirety remain subject to a 100% valuation allowance. At September 30, 2002, based on our interpretation of applicable provisions of the Internal Revenue Code, we had approximately $300.0 million of net operating loss carryforwards, utilization of which are subject to limitation. The actual net operating loss carryforwards available to us following the spin-off will be significantly less than the net operating loss carryforwards presented for the purpose of preparing our carve-out financial statements. The ultimate net operating loss carryforwards available to us will not be determinable until the fiscal year ended September 30, 2004. Pursuant to SOP 90-7, future utilization of deferred tax assets existing at the October 2, 2001 bankruptcy emergence date were applied first as a reduction of identifiable intangible assets and, then, as an increase to owner’s equity.

Other

We manage the operations of 52 eldercare centers. Under a majority of these arrangements, we employ the operational staff of the managed business for ease of benefit administration and bill the related wage and benefit costs on a dollar-for-dollar basis to the owner of the managed property. In this capacity, we operate as an agent on behalf of the managed property owner and are not the primary obligor in the context of a traditional employee/employer relationship. Historically, we have treated these transactions on a “net basis,” thereby not reflecting the billed labor and benefit costs as a component of our net revenue or expenses. For the nine months ended June 30, 2003 and the years ended September 30, 2002, 2001 and 2000, we billed our managed clients $97.2 million, $140.5 million, $153.6 million, and $154.7 million, respectively, for such labor related costs.

Seasonality

Our earnings generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors, which include the timing of rate increases and payroll tax obligations, seasonal census cycles, weather conditions, and the number of calendar days in a given quarter.

Impact of Inflation

The healthcare industry is labor intensive. Wages and other labor costs are especially sensitive to inflation and marketplace labor shortages. We have implemented cost control measures to limit increases in operating costs and expenses but cannot predict our ability to control such operating cost increases in the future. See “Special Note About Forward-Looking Statements,” “Risk Factors” and “— Fiscal 2001 Compared to Fiscal 2000.”

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates. For all periods presented, we were considered in GHVI’s overall risk management strategy. As part of this strategy, GHVI managed its risks based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. GHVI primarily utilized interest rate swap and cap agreements to economically hedge or reduce these exposures. As a stand-alone company, we intend to routinely monitor our risks associated with fluctuations in interest rates. We plan to address these risks through controlled risk management, including the use of derivative financial instruments to economically hedge or reduce these exposures. We do not expect to enter into financial instruments for trading or speculative purposes.

To ensure the adequacy and effectiveness of our interest rate positions, we will continually monitor, from an accounting and economic perspective, our interest rate swap positions on a stand-alone basis. However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, there can be no assurance that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in interest rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our operating results and financial position.

GHVI’s senior credit facility and senior secured notes, for which we are guarantors, are variable rate debt instruments. Our exposure to market risk for changes in interest rates results from our debt obligations

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and related derivative financial instruments. At June 30, 2003 and September 30, 2002, GHVI held interest rate swap and cap agreements to reduce the impact of interest rate changes on its floating rate long-term debt. These derivative financial instruments allowed GHVI and us to hold long-term borrowings at floating rates and then swap them into fixed rates that are anticipated to be lower than those available if fixed-rate borrowings were made directly.

The information below summarizes our allocated portion of our market risks associated with debt obligations and a corresponding allocation of derivative financial instruments held by GHVI as of September 30, 2002. Fair values were based upon confirmations from third party financial institutions, if available, or based on discounted cash flows using market rates of interest as of the end of the reported period. For debt obligations, the table presents principal cash flows and related interest rates by expected fiscal year of maturity. For interest rate swaps and caps, the table presents the notional amounts and related weighted average interest rates by fiscal year of maturity. The variable rates are the average forward rates for the term of each contract.

	Expected Maturity

	2003			2004			2005			2006			2007			Thereafter			Total			Fair Value
	(dollars in thousands)
Fixed rate debt	$	3,149		$	3,307		$	3,436		$	3,582		$	3,788		$	56,476		$	73,738		$	91,399
Weighted average rate		9.34	%		9.43	%		8.97	%		8.58	%		8.59	%		9.05	%		9.03	%

Variable rate debt	$	42,417		$	2,545		$	2,426		$	2,426		$	202,924		$	—		$	252,738		$	252,738
Weighted average rate		L+3.61	%		L+4.10	%		L+4.10	%		L+4.10	%		L+4.13	%		—			L+4.10	%

Variable to fixed swaps (1)
Pay fixed rate		—			—			3.10	%		—			3.77	%		—			3.52	%
Receive variable rate		—			—			L			—			L			—			L

Interest rate cap (2)	$	—		$	31,413		$	—		$	—		$	—		$	—		$	31,413		$	167

L = three month LIBOR (approximately 1.79% at September 30, 2002)

(1)	Amounts under expected maturity dates represent allocation of notional amounts.

(2)

The interest rate cap pays interest to us when LIBOR exceeds 3%. The amount paid to us is equal to the allocated notional principal balance of $31.4 million multiplied by (LIBOR minus 3%) in those periods in which LIBOR exceeds 3%. Our allocated portion of the purchase price of the interest rate cap of $0.3 million is being amortized to interest expense over the two year term of the underlying agreement.

After considering the impact of the variable to fixed rate swaps at September 30, 2002 and June 30, 2003, we had $169.0 million and $135.5 million of allocated debt subject to variable market rates of interest, respectively. Also, after considering the impact of the variable to fixed rate swaps at September 30, 2002 and June 30, 2003, for each additional percentage point increase in the LIBOR, we will incur additional interest expense of approximately $1.7 million and $1.4 million on an annual basis, respectively.

Our wholly-owned subsidiary, Liberty Health Corp., LTD, holds investments in marketable securities. Securities that are affected by market rates of interest at June 30, 2003 amounted to $18.5 million. A one percent change in the rate of interest would result in a change to operating income of $0.2 million annually.

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BUSINESS

Description of our Business

Operations

Our business is comprised of two primary businesses: inpatient services and rehabilitation therapy services. These segments are supported by complementary service capabilities.

The following table sets forth the amount of our total net revenue from continuing operations contributed by our inpatient services segment, our rehabilitation therapy services segment and all other revenues for the periods presented (dollars in thousands):

	Twelve Months Ended June 30,			Nine Months Ended June 30,			Nine Months Ended June 30,			Years Ended September 30,

	2003			2003			2002			2002			2001			2000

Inpatient services	$	1,210,192		$	905,178		$	899,306		$	1,204,320		$	1,138,154		$	1,118,672
Rehabilitation therapy services		196,968			151,214			127,685			173,439			153,597			140,953
Other revenue		129,564			90,135			115,770			155,199			153,610			145,112
Elimination of intercompany revenue		(154,703	)		(111,480	)		(127,569	)		(170,792	)		(154,198	)		(142,653	)

	$	1,382,021		$	1,035,047		$	1,015,192		$	1,362,166		$	1,291,163		$	1,262,084

See note 22 —“Segment Information” to our combined financial statements, note 6 —“Segment Information” to our unaudited condensed combined financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” for additional disclosure of financial information regarding our segments. Also, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General” for a discussion of our reportable segments and our other businesses. Also, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality,” for a description of the seasonality of our business.

Inpatient Services

As of November 2003, we owned, leased, managed or jointly-owned 212 eldercare centers having 26,326 beds, including 23 stand-alone assisted living facilities and 12 transitional care units, located in 13 states, and concentrated in three geographic regions: New England Region (Massachusetts/Connecticut/New Hampshire/Vermont/Rhode Island); Midatlantic Region (Greater Philadelphia/Delaware Valley/New Jersey); and Chesapeake Region (Southern Delaware/Eastern Shore of Maryland/Baltimore, Maryland/Washington D.C./ Virginia/West Virginia/Western Pennsylvania/North Carolina). Included in our count of eldercare centers are two centers located in Wisconsin and having 404 beds that have been identified as held for sale.

Our services focus on the primary medical, physical and behavioral issues facing the more medically complex elderly. Through the talents of our nurses, physicians, therapists and other members of the

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interdisciplinary team, we believe that our holistic approach to meeting the complex needs facing the elderly has resulted in a high occupancy of available beds and enhanced quality payor mix.

We employ physicians, physician assistants and nurse practitioners who are primarily involved in providing medical direction and/or direct patient care. The emphasis on physician leadership is a strength that differentiates GHC from other long-term care companies. Our physician executives are administratively and clinically accountable for clinical care and quality improvement. The nursing center medical directors are dually accountable to the administrator and the physician executive. This medical staff structure allows for significant involvement of physicians at all levels of the organization thus ensuring that an emphasis on quality care is maintained. We maintain a corporate quality improvement program to enhance and continuously improve care provided in each center.

We have established and actively market programs for the elderly and other patients who require more complex levels of medical care. We focus on clinically complex elderly patients who need extensive therapies and treatments to stabilize health problems before returning home or transitioning into a permanent long-term care setting. Over 90% of patients come to our centers directly from an acute hospital stay and have four or more health problems that affect their ability to carry out everyday activities. Half of the elders who enter our centers for post-acute care are discharged within 27 days while the average stay for a long-term care patient is 174 days. Private insurance companies and other third-party payors, including certain state Medicaid programs, have recognized that treating patients requiring complex medical care in centers such as those we operate is a cost-effective alternative to treatment in an acute care hospital. We provide high acuity care at rates that we believe are substantially below the rates typically charged by acute care hospitals for comparable services.

The following table reflects our average number of beds in service and our average occupancy levels for the periods presented. The following data has not been adjusted to exclude discontinued operations:

	Twelve Months Ended June 30,			Nine Months Ended June 30,			Years Ended September 30,

	2003			2003			2002			2001			2000

Average Beds in Service: (1)
Owned and Leased Facilities		22,610			21,198			24,139			24,783			14,286
Managed and Jointly-Owned Facilities		6,760			6,293			7,898			9,215			23,799

Occupancy Based on Average Beds in Service:
Owned and Leased Facilities		91	%		91	%		91	%		91	%		91	%
Managed and Jointly-Owned Facilities		92	%		92	%		91	%		88	%		91	%

(1)

In connection with the consummation of GHVI and our subsidiaries’ 2001 joint plan of reorganization, 10,702 Multicare beds previously classified as “Managed and Jointly-Owned Facilities” prior to 2001 were reclassified as “Owned and Leased Facilities.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events — Multicare Transaction and Restructuring.”

The following table reflects the payor mix of inpatient services revenues for the periods presented, and has not been adjusted to exclude discontinued operations.

	Twelve Months Ended June 30,			Nine Months Ended June 30,			Years Ended September 30,

	2003			2003			2002			2001			2000

Medicaid		50	%		50	%		48	%		48	%		49	%
Medicare		28	%		28	%		30	%		28	%		25	%
Private pay and other		22	%		22	%		22	%		24	%		26	%

		100	%		100	%		100	%		100	%		100	%

See “— Revenue Sources” and “— Government Regulation.”

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Rehabilitation Therapy

We provide an extensive range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy in all of our eldercare regional market concentrations. These services are provided by approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted by us at substantially all of the eldercare centers we operate, as well as by contract to healthcare facilities operated by others and through any one of our 14 certified outpatient rehabilitation agencies.

Other Services

We provide management services to 52 eldercare centers and transitional care units, which are the eldercare centers jointly-owned and/or managed referred to in “— Inpatient Services” above, pursuant to management agreements that provide generally for the day-to-day responsibility for the operation and management of the centers. In turn, we receive management fees, depending on the agreement, computed as either an overall fixed fee, a fixed fee per customer, a percentage of net revenues of the center plus an incentive fee, or a percentage of gross revenues of the center with some incentive clauses. The various management agreements, including renewal option periods, are scheduled to terminate between 2003 and 2011, 14 of which are scheduled to terminate within the next twelve months. We expect to renew a majority of the terminating contracts.

We also provide an array of other specialty medical services in certain parts of our eldercare network, including portable x-ray and other diagnostic services, and respiratory health services.

See note 22 — “Segment Information” to our combined financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” for additional disclosure of financial information regarding our segments.

Our Industry

Congress has enacted three major laws during the past six years that have significantly altered payment for skilled nursing services. The passage of the Balanced Budget Act, which eliminated the previously existing cost-based reimbursement system and implemented a prospective payment system, was designed to reduce and control the rate of increase in Medicare expenditures and significantly reduced our rate of Medicare reimbursement. The passage of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act restored some of the decline in funding caused by the Balanced Budget Act. However, the expiration of a number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act that provided for additional funding on September 30, 2002, referred to as the “skilled nursing facility Medicare cliff,” resulted in an approximate 10% reduction in the rates paid to us for providing services to Medicare patients before considering an upward 2.6% annual market basket adjustment. The final fiscal year 2004 prospective payment system rules for skilled nursing facilities became effective on October 1, 2003. The final rules enhance the reimbursement rates for fiscal year 2004 by increasing base rates by 6.26% (a 3% increase in the annual update factor and a 3.26% upward adjustment correcting previous forecast errors). These changes are estimated to increase Medicare payment rates per patient day by $19. The final rules also provide for the continuation through fiscal year 2004 of certain payment add-ons that were authorized in the Balanced Budget Refinement Act to compensate for non-therapy ancillaries.

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Our Strategy

The principal elements of our business strategy are to:

•


	•	increasing our average occupancy level, which leverages our revenues over the fixed costs associated with operating our facilities;


	•	improving nursing staff scheduling and retention and reducing reliance on overtime compensation and temporary nursing agency services;


	•	capitalizing on best demonstrated practices in various areas of cost control, such as purchasing, centralization of certain key administrative processes and leveraging our investments in information technology; and


	•	aggressively managing our working capital.

Strengthen our presence in existing markets. To grow revenues and profitability, we intend to selectively invest in attractive assets within our geographic concentrations, allowing us to leverage existing operations and to achieve greater operating efficiencies. In addition, we will seek opportunities to increase the number of managed eldercare centers within our markets.

Our Competitive Strengths

We believe the following competitive strengths will enable us to continue to improve our profitability and cash flow:

Geographically focused network. We are regionally focused, and within our markets, we have developed strong referral networks with hospitals and discharge planners. By focusing our operations in specific markets, we have achieved lower operating costs through greater purchasing power, operating efficiencies and economies of scale. We are also able to design and customize our systems and services to meet the specific needs of each of our markets.

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long-term care setting. Over 90% of our patients come to our facilities directly from an acute care hospital and require assistance to perform daily activities. Private insurance companies and other third-party payors have recognized that treating patients requiring complex care in eldercare facilities, such as those operated by us, is a cost-effective alternative to treatment in an acute care hospital.

Significant facility ownership. We own rather than lease a majority of our eldercare facilities, unlike a number of our competitors. Excluding facilities held for sale and adjusted for the ElderTrust transaction, we own 125 facilities with 15,735 beds, which represents approximately 78% of the total number of beds we own or lease. We believe that owning properties increases our operating and financial flexibility by enabling us to more directly control our occupancy costs, divest facilities and exit markets at our discretion and refurbish or remodel facilities in order to satisfy market demand.

Revenue Sources

We receive revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize our rehabilitation therapy services and other service related businesses.

The sources and amounts of our revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of our eldercare centers, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including services provided by our rehabilitation therapy services business, vary based upon the type of payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among Medicare, Medicaid and private pay can significantly affect our profitability.

Medicare and Medicaid

The Health Insurance for Aged and Disabled Act (Title XVIII of the Social Security Act), known as “Medicare,” has made available to nearly every United States citizen 65 years of age and older a broad program of health insurance designed to help the nation’s elderly meet hospital and other healthcare costs. Health insurance coverage has been extended to certain persons under the age of 65 qualifying as disabled and those having end-stage renal disease. Medicare includes three related health insurance programs:

•

hospital insurance, referred to as “Medicare Part A;”


	•	supplementary medical insurance, referred to as “Medicare Part B;” and

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•

a managed care option for beneficiaries who are entitled to Medicare Part A and enrolled in Medicare Part B.

The Medicare reimbursement program is currently administered by fiscal intermediaries (for Medicare Part A and some Medicare Part B services) and carriers (for Medicare Part B) under the direction of the Centers for Medicare and Medicaid Services, a division of the Department of Health and Human Services.

Medicaid (Title XIX of the Social Security Act) is a federal-state matching program, whereby the federal government, under a needs based formula, matches funds provided by the participating states for medical assistance to “medically indigent” persons. The programs are administered by the applicable state welfare or social service agencies under federal rules. Although Medicaid programs vary from state to state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates determined in accordance with each state’s regulations. For skilled nursing centers, most states pay prospective rates, and have some form of acuity adjustment. In addition to facility based services, most states cover an array of medical ancillary services. Payment methodologies for these services vary based upon state preferences and practices permitted under federal rules.

Medicare and Medicaid are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially affect the timing and/or levels of payments to us for our services.

We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. These rights and remedies may include requiring the repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. Such programs may also impose fines, criminal penalties or program exclusions. Other third-party payor sources also reserve rights to conduct audits and make monetary adjustments in connection with or inclusive of auditing activities.

Laws Affecting Revenues

Congress has enacted three major laws during the past six years that have significantly altered payment for skilled nursing facilities and medical ancillary services. The Balanced Budget Act, signed into law on August 5, 1997, reduced federal spending on Medicare and Medicaid programs. The Medicare Balanced Budget Refinement Act, enacted in November 1999, addressed a number of the funding difficulties caused by the Balanced Budget Act. The Benefits Improvement and Protection Act, enacted on December 15, 2000, further modified the law and restored additional funding. The following is a brief summary of these laws and an overview of the impact of these enactments on us.

Under the Balanced Budget Act, participating skilled nursing facilities are reimbursed under a prospective payment system for inpatient Medicare covered services. The prospective payment system commenced with a facility’s first cost reporting period beginning on or after July 1, 1998. Under the prospective payment system, skilled nursing facilities are paid a predetermined amount per patient, per day or “per diem” based on the anticipated costs of treating patients. The per diem rate is determined by classifying each patient into one of 44 resource utilization groups using the information gathered as a result of each patient’s minimum data set assessment. There is a separate per diem rate for each of the resource utilization group classifications. The per diem rate also covers rehabilitation and non-rehabilitation ancillary services. The law phased in the prospective payment system over a three-year period.

As implemented by the Centers for Medicare and Medicaid Services, the prospective payment system has had an adverse impact on the Medicare revenues of many skilled nursing facilities. There have been three primary problems. First, the base year calculations understate costs. Second, the market basket index used to trend payments forward does not adequately reflect market experience. Third, the resource utilization group case mix allocation is not adequately predictive of the costs of care for patients, and does not equitably allocate funding, especially for non-therapy ancillary services.

In November 1999, the Balanced Budget Refinement Act was passed in Congress. This enactment provided relief for certain reductions in Medicare reimbursement caused by the Balanced Budget Act. For

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covered skilled nursing facility services furnished on or after April 1, 2000, the Medicare per diem rate was increased by 20% for 15 resource utilization group payment categories, which we refer to as “payment add-ons.” While this provision was initially expected to adjust payment rates for only six months, the Centers for Medicare and Medicaid Services withdrew proposed resource utilization group refinement rules. These payment add-ons will continue until the Centers for Medicare and Medicaid Services completes certain mandated recalculations of current resource utilization group weightings.

The skilled nursing facility Medicare cliff could adversely impact the liquidity of our other service related business customers, resulting in their inability to pay us, or to pay us timely, for our products and services. This factor, coupled with the adverse impact of the skilled nursing facility Medicare cliff to the liquidity of our inpatient services segment, could require us to borrow in order to fund our working capital needs, and in turn, cause us to become more highly leveraged.

Many of these alternative payment provisions are expected to be considered during the 108th Congress either as part of consideration of the “Medicare Modernization” initiative or as freestanding legislation. It is premature to predict what actions the Congress will take.

The recent economic downturn is having a detrimental affect on state revenues in most jurisdictions. Budget shortfalls range from 4% to 5% of outlays upwards to 20% of outlays in a handful of states. Historically these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities in the states in which we operate. In each of the major states where we provide services, we are working with trade groups, consultants and government officials to responsively address the particular services funding issues.

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The plight of state governments has helped to elevate issues related to Medicaid onto the national agenda. During the 107th Congress, the Senate passed legislation providing states with a temporary increase in the federal matching assistance percentage. This legislation was not passed. It has, however, been reintroduced in both the Senate and the House of Representatives. In his proposed federal budget for fiscal year 2004, the President offered modest additional fiscal support and advanced several ideas for revising the Medicaid program. The 108th Congress is expected to consider an array of Medicaid reform proposals. The American Health Care Association, the national trade association for the nursing home sector, has appointed a special work group to assist in evaluating the various Medicaid legislative options and in advocating for preferred reforms.

Government Regulation

General

Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure, certification and government reimbursement. For our eldercare centers, these regulations relate, among other things, to the adequacy of physical plant and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements. Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely effect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including fines, restrictions on admission, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of the facility.

Licensing and Certification

All of our eldercare centers and healthcare services, to the extent required, are currently licensed under applicable law. All skilled nursing centers and healthcare services, or practitioners providing the services therein, are certified or approved as providers under one or more of the Medicaid and Medicare programs. Generally, assisted living centers are not eligible to be certified under Medicare or Medicaid. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State and local agencies survey all skilled nursing centers on a regular basis to determine whether such centers are in compliance with governmental operating and health standards and conditions for participation in government sponsored third-party payor programs. We believe that our eldercare centers and other sites of service are in substantial compliance with the various Medicare, Medicaid and state regulatory requirements applicable to them. However, in the ordinary course of our business, we receive notices of deficiencies for failure to comply with condition of participation in the Medicare and Medicaid programs. We review such notices and take appropriate corrective action. In these cases, we submit our plan to bring the center into compliance with regulations which must be accepted by the reviewing agency. In some cases, the reviewing federal or state agency may take various adverse actions against a provider, including but not limited to:

•

the imposition of fines;


	•	suspension of payments for all or new admissions to the center; and


	•	in extreme circumstances, decertification from participation in the Medicare or Medicaid programs and/or revocation of a center’s or site of service’s license.

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These actions may adversely affect a center’s ability to continue to operate, ability to provide certain services, and/or eligibility to participate in the Medicare or Medicaid programs or to receive payments from other payors. Certain of our centers have received notices that, as a result of certain alleged deficiencies, the federal and/or state agency was taking steps to impose remedies. Additionally, actions taken by one center or service site may subject other centers or service sites under common control or ownership to adverse remedies.

All of our skilled nursing centers participate in the Medicare and Medicaid programs. Both initial and continuing qualifications of a skilled nursing center to participate in such programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls.

During 2002, the Centers for Medicare and Medicaid Services piloted a new nursing home quality initiative in six states. Our facilities cooperated in these initiatives to generate improved reporting and public awareness. Based on the success of the pilot program, the Centers for Medicare and Medicaid Services has rolled out the program nationwide. In addition to the changes being driven by public agencies, a number of nursing home companies in conjunction with several national trade associations have signed a quality covenant. This covenant establishes quality benchmarks the signing companies are striving to obtain.

Several states in which we operate have adopted certificate of need or similar laws which generally require that a state agency approve certain acquisitions and determine that the need for certain bed additions, new services, and capital expenditures. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in:

•

the inability to provide the service;


	•	the inability to operate the centers;


	•	the inability to complete the acquisition, addition or other change; and


	•	the imposition of sanctions or adverse action on the center’s license and adverse reimbursement action.

During recent years several states have passed legislation altering their certificate of need requirements. Virginia is expected to phase out its certificate of need requirement and Maryland is studying a similar action. These changes are not expected to materially alter our business opportunities.

Laws Affecting Billing and Business Practices

We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include:

•

the “anti-kickback” provisions of the federal Medicare and Medicaid programs, which prohibit, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid. Penalties may include felony of possibly of five years imprisonment, fines, exclusion from participation in the Medicare and Medicaid programs and loss of license; and


	•	the “Stark laws” which prohibit, with limited exceptions, the referral of patients by physicians for certain services, including home health services, physical therapy and occupational therapy, to an entity in which the physician has a financial interest. Penalties may include denial of payment, mandatory refund of prior payment, civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs.

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There have also been a number of recent federal and state legislative and regulatory initiatives concerning reimbursement under the Medicare and Medicaid programs. During the past few years, the Department of Health and Human Services has issued a series of voluntary compliance guidelines. These compliance guidelines provide guidance on acceptable practices. Skilled nursing facility services and durable medical equipment, prosthetics, orthotics, supplies, and supplier performance practices have been among the services addressed in these publications. Our Corporate Integrity Program is working to assure that our practices conform to regulatory requirements. The Department of Health and Human Services also issues fraud alerts and advisory opinions. For example, directives concerning double billing, home health services, the provision of medical supplies to nursing facilities, and most recently, contractual joint venture relationships have been released. It is anticipated that areas addressed by these advisories may come under closer scrutiny by the government. While we have reviewed government guidance, we cannot accurately predict the impact of any such initiatives.

Laws Governing Health Information

Although the Health Insurance Portability and Accountability Act was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, we believe that implementation of this law will result in additional costs. We have established a Health Insurance Portability and Accountability Act task force consisting of clinical, financial and informational services professionals focused on the Health Insurance Portability and Accountability Act compliance.

The Department of Health and Human Services has released two rules to date mandating the use of new standards with respect to certain healthcare transactions and health information. The first rule establishes uniform standards for common healthcare transactions, including:

•

healthcare claims information;


	•	plan eligibility, referral certification and authorization;


	•	claims status;


	•	plan enrollment and disenrollment;


	•	payment and remittance advice;


	•	plan premium payments; and


	•	coordination of benefits.

Second, the Department of Health and Human Services has released standards relating to the privacy of individually identifiable health information. These standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to whom we disclose information.

The Department of Health and Human Services finalized the transaction standards on August 17, 2000. The Department of Health and Human Services issued the privacy standards on December 28, 2000, and, after certain delays, they became effective on April 14, 2001, with a compliance date of April 14, 2003. On February 20, 2003, the Department of Health and Human Services issued final rules governing the security of health information. This rule specifies a series of administrative, technical and physical security procedures to assure the confidentiality of electronic protected health information. Affected parties will have approximately

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two years to be fully compliant. Sanctions for failing to comply with the Health Insurance Portability and Accountability Act health information practices provisions include criminal penalties and civil sanctions.

Management is in the process of evaluating the effect of the Health Insurance Portability and Accountability Act on us. At this time, management anticipates that we will be able to fully comply with those Health Insurance Portability and Accountability Act requirements that have been adopted. As part of our corporate integrity program, we will monitor our compliance with the Health Insurance Portability and Accountability Act. Our compliance and privacy officer will be responsible for administering the corporate integrity program which includes this Health Insurance Portability and Accountability Act related compliance. However, management cannot at this time estimate the cost of compliance, nor can management estimate the cost of compliance with standards that have not yet been finalized by the Department of Health and Human Services.

Personnel

We employ over 35,000 people. We have 53 facilities that are covered by, or are negotiating, collective bargaining agreements. The agreements expire at various dates through 2006 and cover approximately 4,700 employees. We believe that our relationship with our employees is generally good.

We and our industry continue to experience shortages in qualified clinical professional staff. We compete with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. As the demand for these services continually exceeds the supply of available and qualified staff, we and our competitors have been forced to offer more attractive wage and benefit packages to these professionals and to utilize outside contractors for these services at premium rates. Furthermore, the competitive arena for this shrinking labor market has created high turnover among clinical professional staff as many seek to take advantage of the supply of available positions, each offering new and more attractive wage and benefit packages. In addition to the wage pressures inherent in this environment, the cost of training new employees amid the high turnover rates has created added pressure on our operating margins. Lastly, increased attention to the quality of care provided in skilled nursing facilities has caused several states to mandate and other states to consider mandating minimum staffing laws that further increase the gap between demand for and supply of qualified individuals and lead to higher labor costs. While we have been able to retain the services of an adequate number of qualified personnel to staff our facilities and sites of service appropriately and maintain our standards of quality care, there can be no assurance that continued shortages will not affect our ability to attract and maintain an adequate staff of qualified healthcare personnel in the future. A lack of qualified personnel at a facility could result in significant increases in labor costs and an increased reliance on expensive temporary nursing agencies at such facility or otherwise adversely affect operations at such facility. Any of these developments could adversely affect our operating results or expansion plans.

In recognition of the competitive nature of nurse recruitment and retention, we expect to create reward, recognition and professional development programs for nurses. Shared Governance, a structure to support the participation of nurses in the development and implementation of policies, projects and processes which affect their practice has been instituted. Additionally, STEPP (Steps To Excellence in Professional Practice), a clinical advancement program which allows nurses to receive recognition and compensation for clinical expertise, has been implemented.

Marketing

Marketing for eldercare centers is focused at the local level and is conducted primarily by a dedicated regional marketing staff, who call on referral sources such as hospitals, hospital discharge planners, doctors and various community organizations. In addition to those efforts, our marketing objective is to maintain public awareness of our eldercare centers and their capabilities. We take advantage of our regional concentrations in our marketing efforts, where appropriate, through consolidated marketing programs, which benefit more than one center. Toll-free regional phone lines assist the marketing staff and direct referral sources, which speeds admissions by automated tracking of bed availability and specialty care capabilities for each of our centers and all of our affiliated centers.

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We market our rehabilitation therapy services, respiratory therapy and diagnostic services through a direct sales force which primarily calls on eldercare centers, hospitals, clinics and home health agencies.

Historically, we operate our core business under the name Genesis ElderCare¹. Our logos, trademarks and service marks are featured in print advertisements in publications serving the regional markets in which we operate. We are using advertising, including our toll free ElderCare lines, to promote our brand names in trade, professional and business publications and to promote services directly to consumers.

Corporate Integrity Program

Our corporate integrity program was developed to assure that we strive to achieve our goal of providing a high level of care and service in a manner consistent with all applicable state and federal laws and regulations, and our internal standard of conduct. This program is intended to allow personnel to prevent, detect and resolve any conduct or action that fails to satisfy all applicable laws and our standard of conduct.

We have a corporate compliance officer responsible for administering the corporate integrity program. The corporate compliance officer, with the approval of the chief executive officer or the board of directors, may use any of our resources to evaluate and resolve compliance issues. The corporate compliance officer reports significant compliance issues to the board of directors.

We established the corporate integrity program hotline, which offers a toll-free number available to all of our employees to report compliance issues, including any alleged privacy violations under the Health Insurance Portability and Accountability Act. All calls reporting alleged non-compliance are logged, investigated, addressed and remedied by appropriate company officials.

The corporate integrity subcommittee was established to ensure a mechanism exists for us to monitor compliance issues. The corporate integrity subcommittee members are senior members of the reimbursement, risk management, human resources, legal, clinical practices, internal audit and operations departments.

Periodically, we receive information from the Department of Health and Human Services regarding individuals and providers that are excluded from participation in Medicare, Medicaid and other federal healthcare programs. Providers may include medical directors, attending physicians, vendors, consultants and therapists. On a monthly basis, management compares the information provided by the Department of Health and Human Services to databases containing providers and individuals doing business with us. Any potential matches are investigated and any necessary corrective action is taken to ensure we cease doing business with that provider and/or individual.

Competition in the Healthcare Services Industry

We compete with a variety of other companies in providing healthcare services. Certain competing companies have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than us and may thereby attract our patients who are either presently residents of our eldercare centers or are otherwise receiving our healthcare services.

We operate eldercare centers in 13 states. In each market, our eldercare centers may compete for patients with rehabilitation hospitals, subacute units of hospitals, skilled or intermediate nursing centers, and personal care or residential centers. Certain of these providers are operated by not-for-profit organizations and similar businesses that can finance capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to us. In competing for patients, a center’s local reputation is of paramount importance. Referrals typically come from acute care hospitals, physicians, religious groups, health maintenance organizations, the patient’s families and friends, and other community organizations.

Members of a patient’s family generally actively participate in the selection of an eldercare center. Competition for medically complex patients is intense among acute care hospitals with long-term care capability, rehabilitation hospitals and other specialty providers and is expected to remain so in the future. Important competitive factors include the reputation in the community, services offered, the appearance of a center, and the cost of services.

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We compete in providing other healthcare services with a variety of different companies. Generally, this competition is, regional and local in nature. The primary competitive factors in these businesses are similar to those in the inpatient services business and include reputation, the cost of services, the quality of clinical services, responsiveness to patient needs, and the ability to provide support in other areas such as third-party reimbursement, information management and patient record-keeping.

Insurance

We have experienced an adverse effect on our operating cash flow due to an increase in the cost of certain of our insurance programs. Rising costs of eldercare malpractice litigation and losses stemming from these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for skilled nursing facilities. Also, a tightening of the reinsurance market has affected property, auto and excess liability insurance carriers. Accordingly, the costs of all insurance premiums have increased.

Prior to June 1, 2000, we purchased general and professional liability insurance coverage from various commercial insurers on a first dollar coverage basis. Beginning with the June 1, 2000 policy, we have purchased general and professional liability insurance coverage from a commercial insurer subject to per claim retentions. These retentions are insured by our wholly-owned captive insurance company, Liberty Health Corp. Liberty Health Corp. is currently insuring our workers’ compensation, auto and general and professional liability insurance retentions.

Workers’ compensation insurance has been maintained as statutorily required, and in certain jurisdictions for certain periods, we have qualified as exempt or self-insured. Most of the commercial insurance purchased is loss sensitive in nature. As a result, we are responsible for adverse loss development.

We provide several health insurance options to our employees, including a self-insured health plan and several fully-insured health maintenance organizations. Growth in health insurance premiums in the market have risen to 10% to 20% in recent years. Ours is a labor intensive business, and therefore health insurance costs represent a significant expense for us. In recent years, we have managed this increase with changes in program offerings and the shift in responsibility for cost increases to the employee. Continuing increases substantially in excess of inflation could have a negative impact on our profitability, as further shifts in responsibility for these cost increases to the employee may not be possible.

We believe that adequate reserves are in place to cover the ultimate liability related to general and professional liability, workers’ compensation and health insurance claims exposure. However, there can be no assurance that any current or future claims will not exceed applicable insurance coverage.

Environmental Matters

We are subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Management does not believe that we will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect our capital expenditures, results of operations or financial condition.

Legal Proceedings

We are involved in legal proceedings and regulatory enforcement investigations from time to time in the ordinary course of our business.

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Properties

The following table provides information by state as of November 2003 regarding the eldercare centers we owned, leased and managed. Included in the center count are 23 stand-alone assisted living facilities with 2,133 units and 17 skilled nursing facilities with 631 assisted living units.

	Wholly-Owned				Leased
	Centers				Centers				Managed Centers (1)				Total

State	Facilities		Beds		Facilities		Beds		Facilities		Beds		Facilities		Beds

Pennsylvania		31		4,169		9		1,087		4		705		44		5,961
New Jersey		18		2,634		10		1,738		8		755		36		5,127
Maryland		13		1,613		6		825		12		1,658		31		4,096
Massachusetts		13		1,742		2		250		17		1,378		32		3,370
West Virginia		14		1,306		5		394		4		270		23		1,970
Connecticut		10		1,511		—		—		2		168		12		1,679
New Hampshire		8		814		4		366		1		85		13		1,265
Delaware		5		583		—		—		2		237		7		820
Wisconsin		2		404		—		—		—		—		2		404
Virginia		3		367		1		240		—		—		4		607
Rhode Island		3		373		—		—		—		—		3		373
North Carolina		—		—		—		—		2		340		2		340
Vermont		3		314		—		—		—		—		3		314

Total		123		15,830		37		4,900		52		5,596		212		26,326

(1)

Managed facilities include 22 properties with 3,086 beds that are jointly-owned by us and independent third-parties. On a weighted average basis, we have an approximate 22% ownership interest in our jointly-owned properties. Also included in “managed centers” are 12 transitional care units with 301 beds located in hospitals principally in the Commonwealth of Massachusetts.

Included in the total centers listed above are two facilities with 404 beds located in the State of Wisconsin that have been identified as held for sale.

We believe that our physical properties are well maintained and are in a suitable condition for the conduct of our business.

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RELATIONSHIP WITH NCI

We and GHVI will enter into a number of agreements in connection with our separation and spin-off from GHVI. We will consummate the spin-off pursuant to the agreements described below. These agreements provide a framework for our ongoing relationship with NCI, including some transitional arrangements. GHVI will contribute or otherwise transfer to us, directly or indirectly, generally all of the entities comprising the eldercare businesses, together with certain additional assets and liabilities associated with the eldercare businesses. We and NCI will agree to transfer after the spin-off legal title to any remaining assets and any remaining liabilities of the eldercare businesses not transferred prior to the spin-off, most of which are assets and liabilities subject to regulatory and other delays, as soon as practicable. In the interim, we will operate and receive the economic benefits of (and bear the economic burdens of) these assets. These assets are not, individually or in the aggregate, material to our company. The information included in this information statement, including our combined financial statements, assumes the completion of all of these transfers.

The following is a summary of the terms of the separation and distribution agreement and the other material agreements we expect to enter into with GHVI. This summary is qualified by reference to the full text of the agreements to be filed as exhibits to the registration statement on Form 10 of which this information statement is a part.

Separation and Distribution Agreement

We and NCI entered into the separation and distribution agreement on October 27, 2003. The separation and distribution agreement sets forth the agreements between us and GHVI with respect to the principal corporate transactions required to consummate the spin-off, and a number of other agreements governing the relationship between us and NCI following the spin-off. We will only consummate the spin-off if specified conditions are met. These conditions include, among others, the receipt of a satisfactory private letter ruling from the Internal Revenue Service, which was received on September 30, 2003, that the spin- off and certain related transactions will qualify as a tax-free distribution to GHVI and its shareholders under Section 355 of the Internal Revenue Code of 1986, as amended, the consent of GHVI’s senior creditors to the spin-off and the replacement of GHVI’s credit facility with separate credit facilities for GHC and NCI, the consent of certain lessors of GHVI, and the receipt of required governmental regulatory approvals.

Even if these conditions are satisfied, other events or circumstances could occur that could impact the timing or terms of the spin-off or our ability or plans to consummate the spin-off. As a result of these factors, the spin-off may not occur and, if it does occur, it may not occur on the terms or in the manner described, or in the time frame contemplated.

The Separation

Pursuant to the separation and distribution agreement, GHVI has agreed to transfer to us, or cause its subsidiaries to transfer to us, the legal entities comprising the eldercare businesses and, to the extent not transferred as a result of the transfer of legal entities:

•

all assets reflected in the most recent combined balance sheet of the eldercare businesses;


	•	all assets that are exclusively dedicated to, used in or related to the eldercare businesses;


	•	specified contracts that relate to the eldercare businesses; and


	•	other specified assets.

These assets are referred to as the “eldercare business assets.”

We have also agreed to assume or fulfill, to the extent the legal entities comprising the eldercare businesses are not already responsible for, the following:

•

all liabilities reflected in the most recent combined balance sheet of the eldercare businesses;


	•	all liabilities, including litigation, to the extent arising out of, relating to or resulting from the operations of the eldercare businesses, including contracts and assets;


	•	specified liabilities resulting from the spin-off;


	•	obligations and commitments under specified contracts; and

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•

other specified liabilities.

These liabilities are referred to as the “eldercare business liabilities.”

Generally, neither we nor GHVI made any representation or warranty as to:

•

the assets, businesses or liabilities transferred or assumed;


	•	any consents or approvals required in connection with that transfer or assumption;


	•	the value or freedom from any lien or other security interest of any of the eldercare business assets; and


	•	the absence of any defenses or freedom from counterclaims relating to any claim of any person, or as to the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset transferred.

In addition, the eldercare business assets will be transferred on an “as is,” “where is” basis, and we will bear the economic and legal risks that the conveyance is insufficient to vest good and marketable title, free and clear of any lien or other security interest.

We and GHVI have also agreed to terminate all agreements, understandings and arrangements among us and GHVI with specified exceptions.

Series A Preferred Stock

GHVI has agreed that, in connection with the spin-off, it will elect to adjust the conversion price of the Series A Preferred Stock of GHVI in accordance with the terms thereof.

Unsecured Bankruptcy Claimants

We have agreed that, immediately after the spin-off, we will issue shares of GHC common stock into an escrow account for future delivery to former unsecured claimants of GHVI and its subsidiaries who are entitled to receive common equity securities under the terms of GHVI’s 2001 joint plan of reorganization. We refer to these shares of GHC common stock as the “unsecured claimant shares.” The number of unsecured claimant shares will be equal to the product of the distribution ratio and the number of shares of GHVI common stock reserved as of the distribution date for issuance to former unsecured claimants of GHVI. As of October 15, 2003, the number of shares of GHVI common stock reserved for issuance to the unsecured claimants was 260,493.

Releases and Indemnification

The separation and distribution agreement generally provides for a full and complete release and discharge as of the date of the consummation of the spin-off of all liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date of the consummation of the spin-off between or among GHVI and its affiliates, on the one hand, and us and our affiliates, on the other hand, including any contractual agreements or arrangements existing or alleged to exist between or among those parties on or before that date.

We have agreed to indemnify, defend and hold harmless NCI and its affiliates, and each of their directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

•

the failure of us, or our affiliates, or any other person to pay, perform or otherwise promptly discharge any of the liabilities of the eldercare businesses;


	•	any liabilities of the eldercare businesses and the operation of the eldercare businesses at any time before or after the spin-off;


	•	any breach by us or our affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement;

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•

one-half of any liabilities arising out of GHVI’s 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and


	•	specified disclosure liabilities.

NCI has agreed to indemnify, defend and hold harmless, us and our affiliates, and each of our directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

•

the failure of NCI, or its affiliates, or any other person to pay, perform or otherwise promptly discharge any liabilities of NCI, other than liabilities of the eldercare businesses;


	•	any liabilities of NCI, other than liabilities of the eldercare businesses, and the operation of GHVI’s business other than the eldercare business at any time before or after the spin-off;


	•	any breach by NCI or its affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement;


	•	one-half of any liabilities arising out of GHVI’s 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and


	•	specified disclosure liabilities.

The separation and distribution agreement also specifies procedures for claims for indemnification made under the provisions described above.

Termination

The separation and distribution agreement provides that it may be terminated at any time before the completion of the distribution by GHVI in its sole discretion. If GHVI terminates the separation and distribution agreement, neither party will have any liability or further obligation to any other party.

Amendments and Waivers

The separation and distribution agreement provides that no provisions of it or any ancillary agreement will be deemed waived, amended, supplemented or modified by any party unless the waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the party against whom that waiver, amendment, supplement or modification is sought to be enforced.

Tax Sharing Agreement

Until the spin-off occurs, we will be included in GHVI’s U.S. federal consolidated income tax group, and our tax liability thus will be included in the consolidated federal income tax liability of GHVI and its subsidiaries. We also will be included with GHVI or certain GHVI’s subsidiaries in consolidated, combined or unitary income tax groups for state and local tax purposes until the spin-off occurs.

Prior to the spin-off, we will enter into a tax sharing agreement with GHVI. The tax sharing agreement will govern the respective rights, responsibilities, and obligations of us and NCI after the spin-off, with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, other taxes and related tax returns.

In general, NCI will prepare and file the federal consolidated return, and any combined, consolidated or unitary tax returns that include both NCI or one of its subsidiaries and us or one of our subsidiaries and will be responsible for all income taxes and other taxes with respect to such returns. We will prepare and file any tax return required to be filed by us or any of our subsidiaries that does not include NCI or any entity that will be a subsidiary of NCI after the spin-off and will be responsible for all income taxes or other taxes with respect to any such tax return. In general, NCI is responsible for any increase (and will receive the benefit of any decrease) in the income tax of any entity that is or was reflected on a tax return filed by NCI and NCI controls all audits and administrative matters relating to such tax returns.

We generally may not (i) take or fail to take any action that would cause any representations, information or covenants in the spin-off documents or documents relating to the private letter ruling request to be untrue, (ii) take or fail to take any action that would cause the spin-off to lose its tax-free status, (iii)

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sell, issue, redeem or otherwise acquire our equity securities for a period of two years following the spin-off, except in certain specified transactions, and (iv) sell or otherwise dispose of a substantial portion of our assets, liquidate, merge or consolidate with any other person for a period of two years following the spin-off. During that two-year period, we may take certain actions prohibited by the covenants if, for example, NCI obtains a supplemental private letter ruling or an unqualified opinion of counsel to the effect that these actions will not affect the tax-free nature of the spin-off, in each case satisfactory to NCI in its sole and absolute discretion. Notwithstanding the receipt of any such private letter ruling or opinion, we must indemnify NCI for any taxes and related losses resulting from (i) any act or failure to act described in the covenants above, (ii) any acquisition of our equity securities or assets (or equity securities or assets of any member of our group), and (iii) any breach by us or any member of our group of certain representations in the spin-off documents or the documents relating to the private letter ruling.

In addition, the tax sharing agreement will provide for cooperation and information sharing with respect to taxes.

Transition Services Agreement

The transition services agreement will provide for the provision of certain transitional services by us to NCI. The services may include the provision of information systems (e.g., access to computer systems that are expected to be owned by us), tax services, investor relations services, corporate compliance services, treasury functions, financial systems and reporting, bankruptcy claims processing and certain additional services identified by the parties. The transition services agreement will provide for a term of 18 months. In addition, NCI may extend the transition services agreement for an additional six months with adequate notice. The pricing is expected to be based on actual costs incurred by us in rendering the services.

Tidewater Membership Agreement

The Tidewater membership agreement, referred to as the “Tidewater agreement,” will provide group purchasing and shared service programs to skilled nursing facilities and assisted living facilities operated by us. Under the Tidewater agreement, we will engage Tidewater, a wholly-owned group purchasing subsidiary of NCI, as an independent group purchasing organization, and Tidewater will grant to us access to its vendor contracts. The initial term of the Tidewater agreement will be ten years. We will not make any payments to NCI under the Tidewater agreement. Instead, Tidewater will receive administrative fees from various suppliers. Such fees are based on a percentage of the volume of purchases made by all of Tidewater’s members, including us. We will remain directly responsible to vendors for purchases through the Tidewater agreement. The Tidewater agreement will obligate us to purchase certain minimum amounts; however, we will be permitted to be a member of other group purchasing organizations as well. We may earn financial incentives during the initial term of the agreement, such as fee sharing, for meeting certain purchasing volumes under the Tidewater agreement. In addition, after five years, pricing may be reset depending upon the availability of offerings from other vendors.

Employee Benefits Agreement

Prior to the spin-off, we and GHVI will enter into an employee benefits agreement, which will provide for certain employee compensation, benefit and labor-related matters. In general, after the spin-off, we and NCI will be responsible for all obligations and liabilities relating to our respective current and former employees and their dependents and beneficiaries.

As of the date of the spin-off, and except with respect to health and welfare plans and flexible benefit plan as set forth below, we will cease to participate in any benefit plan or trust under any such plan sponsored or maintained by NCI and NCI will cease to participate in any benefit plan or trust under any such plan sponsored or maintained by us. With respect to employees who are transferred to or from us or NCI, both parties will mutually recognize and credit service with the other employer.

Except as otherwise provided below, all liabilities relating to employee benefits incurred by or on behalf of either company’s employees or their covered dependents on or before the date of the spin-off will remain liabilities under NCI plans or liabilities of NCI. Liabilities and assets will be transferred from the GHVI retirement plan to a comparable plan to be established by us. Similarly, liabilities and assets will be transferred from the GHVI union retirement savings plan, the sponsorship of which will be assumed by us. Liabilities under the GHVI deferred compensation plan (a nonqualified plan) and assets relating to such plan

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held in a rabbi trust will be transferred to a comparable plan and trust established by us. In the event that GHVI or we elect to contribute the full matching amount due to participants covered under each company’s respective plan and entitled to a match at the end of the 2003 plan year, each company will reimburse the other for 50% of the amount contributed with respect to specified employees who are transferred between companies in connection with the spin-off. A similar arrangement will apply with respect to bonus amounts due for the 2003 fiscal year. In general, all liabilities relating to workers’ compensation claims incurred by or on behalf of either company’s employees on or before the date of the spin-off will remain liabilities of GHC.

To avoid the administrative inconvenience and expense that would result from our having to establish separate health and welfare plans and flexible benefit plan for the remainder of the calendar year during which the spin-off occurs, it is presently intended that during the period beginning immediately following the spin-off and ending on December 31, 2003, current and former employees of ours will remain covered under NCI’s existing health and welfare plans and flexible benefit plan. We will reimburse NCI for all expenses it incurs as a result of this arrangement. As of January 1, 2004, current and former employees of ours and NCI will be covered under their own health insurance plans.

Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services

We and NCI’s subsidiary, NeighborCare Pharmacy Services, Inc., referred to as “NCPS,” will enter into a master agreement for pharmacy, pharmacy consulting and related services, referred to as the “pharmacy services agreement.” The agreement will have an initial term of ten years, plus a renewal term of five years if NCPS matches third-party bids for comparable services. The pharmacy services agreement will provide the terms and conditions on which NCPS and its affiliates will provide pharmacy, pharmacy consulting and medical supply products and services to all long-term care facilities owned or leased by us and our affiliates. These services will include the provision of all of the needed prescription and non-prescription medications, pharmacy consulting services, Medicare Part B supplies and services, Medicare Part B claim filing services, enteral products, durable and disposable medical supplies and equipment, and related services as required by applicable law and as reasonably requested by each facility. NCPS will also agree to participate with us in a joint committee to review drug utilization at our facilities, to establish a formulary, to provide reports reasonably requested by us relating to utilization, and to review the role of the consultant pharmacist. NCPS will agree to designate one dedicated full-time relationship representative to implement the terms of the pharmacy services agreement, as well as to address any concerns and resolve any issues raised by us with respect to pharmacy services. The agreement will require that NCPS be the exclusive provider of pharmaceutical products and supplies, other than as required by law and certain payor – or resident – specific circumstances.

We also expect that each of our eldercare facilities will enter into an individual services agreement with NCPS that will reflect the terms of the pharmacy services agreement. The individual services agreements will govern the terms under which pharmacy, pharmacy consulting and medical supply products and services will be provided to each eldercare facility by NCPS.

Pricing under the pharmacy services agreement was established at prices or formulas consistent with market pricing for the applicable services and will be set forth in the individual service agreements. Pricing under the pharmacy services agreement is determined based on a formula comprised of the average wholesale price plus a dispensing fee per prescription. We believe that pricing under the pharmacy services agreement is consistent with pharmaceutical customers of similar size and reflective of fair market value considering the breadth of product and service offerings and pricing adjustment opportunities. NCPS will have the right to adjust prices which are not determined by formula not more that once a year to account for increases in its costs in providing the services (including inflation). We will be eligible for a pricing reduction at specified percentages for certain specified products and services if and so long as the aggregate number of skilled nursing facility beds served by NCPS increases to reach certain targets over baseline amount. In addition, we and NCPS will negotiate in good faith to enter into arrangements whereby we will contract directly with certain manufacturers of enteral products, durable medical equipment and other non-pharmaceutical products historically purchased from NCPS to receive “end user pricing,” and NCPS will distribute enteral products and durable medical equipment to our facilities for a fee priced at the fair market value of such distribution services. In addition, after five years, pricing may be reset depending upon NCPS’s pricing to its other customers of similar size.

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We may terminate the pharmacy services agreement with respect to any facility in connection with a sale of the facility to a third party or the closing of the facility so long as we use the best efforts to persuade the buyer or successor of the facility, if any, to assume the applicable service agreement. This right is limited to five facilities through the first year, 10 facilities through the second year, 20 facilities through the third year, and a maximum of 30 facilities over the 10-year term of the pharmacy services agreement.

If the pharmacy services agreement or any individual service agreement is terminated due to a material breach by us, then NCPS will be entitled to recover a specified amount per facility multiplied by the remaining number of months in the term. Each of GHC and NCPS will indemnify the other against all claims, losses and liabilities arising out of the acts or omissions of the other party in connection with the pharmacy services agreement.

The pharmacy services agreement will provide that we will not compete with NCPS or solicit NCPS’s employees or customers until 2015 or, if later, two years following termination of the pharmacy services agreement.

Either party may assign the pharmacy services agreement, or any individual services agreement, upon receipt of the written consent of the other (which consent may not be unreasonably withheld, conditioned or delayed), but NCPS may assign its interest without our consent to an affiliate, joint venture or a provider whose service and/or quality levels are at least comparable to those currently provided by NCPS.

Pharmacy Benefit Management (CareCard) Agreement

We and NCI’s subsidiary, CareCard, Inc., will enter into a pharmacy benefit management agreement, referred to as the “CareCard agreement.” The CareCard agreement will set forth the agreements between us and CareCard, Inc. relating to the provision of services to us by NCI’s CareCard business. The term of the CareCard agreement will expire on December 31, 2004. Under the CareCard agreement, CareCard will provide pharmacy benefit management services to us and provide us with access to retail and mail pharmacy services. Pricing under the CareCard agreement is determined on a per-prescription basis and was established at prices or formulas consistent with market pricing between CareCard and independent third parties. We will agree to enroll all our employees participating in a GHC self-insured health plan in the CareCard Program. The CareCard agreement may be assigned by either party upon receipt of the written consent of the other (which consent may not be unreasonably withheld, conditioned or delayed), but CareCard may assign its interest without GHC’s consent to an affiliate, joint venture or a provider whose service and/or quality levels are at least comparable to those currently provided by CareCard.

Master Agreement for Specialty Beds and Oxygen Concentrators

The master agreement for specialty beds and oxygen concentrators, referred to as the “durable medical equipment agreement,” will set forth the agreements between us and NCPS, relating to the provision of certain equipment and related services to our skilled nursing and assisted living facilities. The durable medical equipment agreement will provide for an initial five-year term with one-year automatic renewals (unless terminated upon 90 days’ notice prior to the expiration of the then-current term). Under the durable medical equipment agreement, NCPS will agree to provide our facilities with durable medical equipment (specialty beds and oxygen concentrators), equipment maintenance, and warehousing of equipment at prices determined on a per-day and per-month basis, consistent with market pricing, as set forth in the durable medical equipment agreement. The durable medical equipment agreement provides that, except as otherwise required by law, NCPS will be the exclusive provider of speciality beds and oxygen concentrators to the contracting facilities. Either party may assign the agreement upon receipt of the written consent of the other (which consent may not be reasonably withheld, conditioned or delayed), but NCPS may assign its interest without GHC’s consent to an affiliate, joint venture or a provider whose service and/or quality levels are at least comparable to those currently provided by NCPS.

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MANAGEMENT

Executive Officers and Directors of GHC

The following table sets forth information as to persons who serve or who are currently expected to serve as our executive officers and directors immediately following the spin-off. Other than Mr. Fish, who will serve as one of our directors and who will remain a director of NCI, none of the identified executive officers and directors will retain their positions with NCI after the spin-off.

Name	Age		Position

George V. Hager, Jr.		47		Chief Executive Officer and Class 1 Director
James V. McKeon		38		Chief Financial Officer
Robert A. Reitz		53		Chief Operating Officer and Regional President/MidAtlantic ElderCare Region
David C. Almquist		49		Regional President/Chesapeake ElderCare Region
Richard P. Blinn		49		Regional President/New England ElderCare Region
Eileen M. Coggins		39		Senior Vice President, General Counsel
Barbara J. Hauswald		44		Senior Vice President, Planning and Development, and Treasurer
John F. DePodesta		58		Class 3 Director Designee
Robert H. Fish		53		Class 2 Director
J. Michael Gallagher		56		Class 3 Director Designee
Kevin M. Kelley		46		Class 1 Director Designee
Charles W. McQueary		51		Class 2 Director Designee
Charlene Connolly Quinn		49		Class 2 Director Designee
Terry Allison Rappuhn		47		Class 3 Director Designee

George V. Hager, Jr. joined GHVI in 1992 and most recently served as GHVI’s executive vice president and chief financial officer and is responsible for corporate finance, treasury, investor relations, information services, third-party reimbursement and risk management. Mr. Hager serves on the board of directors of Adolor Corporation. He holds a Bachelor of Arts degree in Economics from Dickinson College and a Master of Business Administration degree from Rutgers Graduate School of Management.

James V. McKeon has served as GHVI’s senior vice president and corporate controller since April 2000. From April 1997 to April 2000, Mr. McKeon served as GHVI’s vice president and corporate controller.
Mr. McKeon joined GHVI in June 1994 as director of financial reporting and investor relations and served as GHVI’s vice president of finance and investor relations from November 1995 to April 1997.

Robert A. “Mike” Reitz has served as president of GHVI’s MidAtlantic ElderCare Region since September 1997. He has served for nineteen years in various management positions with Meridian Healthcare prior to its acquisition by GHVI in 1993.

David C. Almquist has served as president of GHVI’s Chesapeake ElderCare Region since 1996. Mr. Almquist has over 27 years of experience in the healthcare industry.

Richard P. Blinn has served as president of GHVI’s New England ElderCare Region since 1998. Mr. Blinn has over 25 years of experience in the healthcare industry.

Eileen M. Coggins, Esquire, has served as GHVI’s corporate compliance and privacy officer since December 2002. Prior to that appointment, from April 1998 to December 2002, she was GHVI’s vice president of compliance, and prior to that was GHVI’s deputy general counsel.

Barbara J. Hauswald has served as GHVI’s senior vice president since April 2000, and joined GHVI as vice president and treasurer in April 1998. Prior to joining GHVI, Ms. Hauswald served as first vice president in the healthcare banking department of Mellon Bank N.A.

John F. DePodesta is a cofounder, director and executive vice president of Primus Telecommunications Group, Incorporated, a global telecommunications service provider, where he has served since 1994. From 1996 to March of 1998, Mr. DePodesta served as senior vice president of law and public policy for Genesis

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Health Ventures, Inc. Mr. DePodesta holds a Bachelor of Arts Degree from Harvard College and Law Degree from the University of Pennsylvania.

Robert H. Fish has served as chairman of the board and chief executive officer of GHVI since January 2003. Mr. Fish served as a director since October 2001, interim chief executive officer since June 2002 and interim chairman since November 2002. Since November 1999, he has been a managing partner of Sonoma-Seacrest, LLC, a California-based healthcare practice specializing in strategic planning, performance improvement, and merger and acquisition issues. Prior to joining Sonoma, Mr. Fish served as president and chief executive officer of St. Joseph Health System, a healthcare provider, from August 1995 to September 1999. Mr. Fish holds a Bachelor of Arts degree in Sociology and Anthropology from Whittier College and a Masters in Hospital Administration from the University of California at Berkeley.

J. Michael Gallagher is president of J. Michael Gallagher & Associates, Inc., a California and Nevada based healthcare practice specializing in strategy, development and project management where he has served since 1999. Mr. Gallagher served as senior vice president of health system development for Catholic Healthcare West from 1997-1999. From 1984-1996 he served as president of the Hospital Council of Northern and Central California. Mr. Gallagher holds a Bachelor of Arts degree in Social Psychology and a Master of Arts in Government from California State University.

Kevin M. Kelley serves as director of AEP Industries, Inc. and Elmer’s Products Inc. From 1999 to 2003, Mr. Kelley served as executive vice president of Borden Inc., an Ohio-based chemical, food and consumer products company. From 1996 to 1999, he served as managing director of Ripplewood Holdings LLC, a New York-based investment firm. Mr. Kelley holds a Bachelor of Science in Mechanical Engineering from Ohio State University and a Masters in Business Administration from Harvard University.

Charles W. McQueary has served since January 2002 as chairman and managing partner of Corinthian Health Services, Inc., a home infusion care company based in Texas. From 1997 to 2001, Mr. McQueary served as chief executive officer of ProMedCo Management Company, a national medical practice management company. In 2001, ProMedCo Management Company and certain of its subsidiaries filed for bankruptcy protection pursuant to Chapter 11 of the Bankruptcy Code. Mr. McQueary holds a Bachelor of Arts degree from the University of Texas.

Charlene Connolly Quinn, Ph.D., RN has served since 2001 as an assistant professor at the University of Maryland School of Medicine, conducting research in geriatric health and long term care services and implementing gerontology education programs for health care professionals. From 1999 to 2001, Dr. Quinn was a post-doctoral fellow with the University of Maryland School of Medicine. From 1994 to 1998, Dr. Quinn worked as a consultant and conducted research at The Johns Hopkins University School of Hygiene and Public Health. A former White House Fellow and state and federal health policy advisor on long term care services, Dr. Quinn holds a Bachelor of Science degree in Nursing from Duke University, a Masters of Science in Gerontology from the University of Maryland and a Doctorate of Philosophy from The Johns Hopkins University School of Hygiene and Public Health.

Terry Allison Rappuhn, CPA has served since 2002 as project leader/consultant for the Patient Friendly Billing Project^®, a national initiative led by Healthcare Financial Management Association to make financial communications with patients clear, correct, concise and patient focused. From 1999 to 2001, Ms. Rappuhn served as senior vice president and chief financial officer of Quorum Health Group, Inc., an owner and operator of acute care hospitals. From 1996 to 1999 and from 1993 to 1996, Ms. Rappuhn served as Quorum’s vice president, controller and assistant treasurer; and as vice president, internal audit, respectively. Ms. Rappuhn holds a Bachelor’s degree in Business Administration from Middle Tennessee State University.

Board of Directors

We expect that our board of directors following the spin-off will be comprised of eight directors. Since our formation in May 2003, our board of directors has been comprised of two directors, Messrs. Fish and Hager. We expect that Messrs. Fish and Hager will remain as directors of our company following the spin-off and that Mr. Fish will also serve as a director of NCI. In addition to Messrs. Fish and Hager, the following persons have been elected to our board of directors, subject to the consummation of the spin-off: Messrs. DePodesta, Gallagher,

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Kelley and McQueary and Mmes. Quinn and Rappuhn. Messrs. DePodesta, Gallagher, Kelley and McQueary and Mmes. Quinn and Rappuhn will be “independent directors” under NASD Market place Rule 4200(a)(14).

Upon consummation of the spin-off, our board of directors will be divided into three classes. Approximately one-third will be class 1 directors, with terms expiring at the annual meeting of shareholders to be held in 2005, approximately one-third will be class 2 directors with terms expiring at the annual meeting of shareholders to be held in 2006 and approximately one-third will be class 3 directors with terms expiring at the annual meeting of shareholders to be held in 2007. Commencing with the annual meeting of shareholders to be held in 2005, directors for each class will be elected at the annual meeting of shareholders held in the year in which the term for that class expires and thereafter will serve for a term of three years.

Board Committees

Our board of directors will have five standing committees: a nominating and corporate governance committee, an audit committee, a compliance committee, a compensation committee, and an executive committee. Each committee will be composed and have the responsibilities as described below:

Nominating and Corporate Governance Committee

The nominating and corporate governance committee will be responsible for, among other things:

•

identifying individuals who are qualified to become members of the board of directors and recommending to the board of directors individuals to be considered by the board of directors to fill vacancies and serve on the board of directors’ committees and selecting the nominees for directorships to be proposed for election by shareholders;


	•	developing and recommending to the board of directors a set of corporate governance principles applicable to our company;


	•	recommending criteria for selecting new directors to the board of directors;


	•	determining director and committee member compensation;


	•	overseeing the process for evaluating the board of directors and management; and


	•	reviewing and evaluating, at least annually, the performance of the nominating and corporate governance committee, including the compliance of the nominating and corporate governance committee with its charter.

The members of the nominating and corporate governance committee are expected to be Messrs. DePodesta, Gallagher and McQueary.

Audit Committee

The principle responsibilities of the audit committee will be, among other things, to:

•

review with the independent accountants the adequacy and effectiveness of the accounting and auditing principles and controls of our company;


	•	oversee, appoint and compensate our independent accountants;


	•	approve non-audit services to be performed by our independent accountants;


	•	review with the independent accountants the plans and results of the auditing engagement; and


	•	consider the independence of our accountants.

The members of the audit committee are expected to be Messrs. DePodesta, McQueary and Ms. Rappuhn.

Compliance Committee

The principal responsibilities of the compliance committee will be, among other things, to:

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•

ensure that our company adopts and implements policies and procedures designed to ensure that our company complies with all applicable statutes, regulations and policies;


	•	ensure that our company has a system in place to respond to federal, state, internal and external reports of quality of care issues and alleged non-compliance with applicable statutes or regulations;


	•	review reports on the progress of our company’s efforts to improve the efficiency and quality of services;


	•	review reports on our company’s efforts to reduce vulnerability to fraud and abuse;


	•	review and reassess the adequacy of the compliance committee’s charter annually; and


	•	make such other recommendations to the board of directors on such matters, within the scope of its functions, as may come to its attention and which in its discretion warrant consideration by the board of directors.

The members of the compliance committee are expected to be Messrs. Fish and Kelley and Ms. Quinn.

Compensation Committee

The principal responsibilities of the compensation committee will be, among other things, to:

•

discharge the responsibilities of the board of directors relating to the compensation of our officers;


	•	produce an annual report on executive compensation for inclusion in our annual proxy statement, in accordance with applicable rules and regulations;


	•	review and approve corporate goals and objectives relevant to the compensation of the chief executive officer and other senior officers, evaluate the performance of these officers in light of those goals and objectives and set the compensation of these officers based on the evaluation;


	•	make recommendations to the board of directors with respect to benefit plans;


	•	grant or recommend the grant of stock options under our stock option plan; and


	•	review and evaluate, at least annually, the performance of the compensation committee and its members, including the compliance of the compensation committee with its charter.


The members of the compensation committee are expected to be Messrs. Gallagher and Kelley and Ms. Rappuhn.

Executive Committee

The principal responsibilities of the executive committee, subject to applicable provisions of Pennsylvania corporation law, will be, among other things, to:

•

exercise the power of the board of directors in the management of the business and affairs of our company in accordance with our bylaws during intervals between meetings of the board of directors;


	•	declare dividends;


	•	authorize the issuance of our capital stock;


	•	authorize amendements of our articles of incorporation; and


	•	authorize mergers and other actions and transactions under Pennsylvania corporation law that do not require the approval of shareholders.


The members of the executive committee are expected to be Messrs. Gallagher, Hager, Kelley and McQueary.

Compensation of Directors

We anticipate paying compensation to directors who do not receive compensation as officers or employees of us or any of our affiliates. Each such director will be paid an annual board membership fee of $25,000, $1,500 for each day during which he or she participates in a meeting of our board of directors, and

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$1,000 for each day during which he or she participates in a meeting of a committee of our board of directors of which he or she is a member, with the exception of the meetings of the audit committee, which will have a $1,500 daily meeting fee. An additional annual fee of $7,500 will be paid to the chair and financial expert of the audit committee (that fee will be split evenly if the chair and financial expert are different people). In addition, we plan to make an annual grant of $95,000 worth of shares of restricted common stock to each director.

GHVI’s Chapter 11 Proceedings

Mr. Fish served on the board of directors at the time of GHVI’s emergence from bankruptcy and was subsequently appointed as chief executive officer and chairman of the board of GHVI. All of the executive officers set forth under “— Executive Officers and Directors of GHC” were employed by GHVI either prior to or during its bankruptcy proceedings.

Executive Compensation

We have not yet paid any compensation to any person expected to be an executive officer after the spin-off. The form and amount of the compensation will be paid to each of our executive officers in accordance with an employment agreement or as determined by the compensation committee of our board of directors.

Information regarding the compensation of the persons who, after the spin-off, we anticipate will serve as our chief executive officer and our four most highly compensated executive officers (collectively referred to as our “named executive officers”) is set forth below. All compensation set forth below was paid by GHVI and does not reflect the compensation to be paid to our named executive officers in the future. The services rendered to GHVI were, in some cases, in capacities not equivalent to those to be provided to us.

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Summary Compensation Table

	Annual Compensation						Long Term Compensation

Name and Position with GHC	Fiscal Year		Salary ($) (1)		Bonus ($) (2)		Restricted Stock Awards ($) (3)		Securities Underlying Options/ SARs (3)		All Other Compensation (4)

George V. Hager, Jr.		2002	$	398,078	$	35,000	$	1,524,750		75,000	$	601,698
Chief Executive Officer		2001		350,000		274,875		—		—		1,700
		2000		356,637		—		—		—		2,275

James V. McKeon		2002	$	230,953	$	66,400	$	254,125		35,000	$	—
Chief Financial Officer		2001		215,961		69,600		—		—		—
		2000		198,461		—		—		—		1,788

Robert A. Reitz		2002	$	289,620	$	85,239	$	254,125		35,000	$	1,700
Chief Operating Officer and		2001		252,990		30,359		—		—		1,700
President, MidAtlantic		2000		252,858		—		—		—		1,685
ElderCare Region

David C. Almquist		2002	$	262,954	$	88,394	$	254,125		35,000	$	—
President, Chesapeake ElderCare		2001		240,531		27,591		—		—		—
Region		2000		236,482		—		—		—		4,407

Richard P. Blinn		2002	$	253,610	$	43,673	$	254,125		35,000	$	—
President, New England		2001		234,860		28,010		—		—		—
ElderCare Region		2000		230,674		—		—		—		3,202

Richard Pell, Jr. (5)		2002	$	260,382	$	46,400	$	304,950		50,000	$	—
Senior Vice President,		2001		224,039		64,601		—		—		—
Administration		2000		199,810		—		—		—		—

(1)	Includes compensation deferred under the GHVI 401(k) Retirement Plan, Non-Qualified Deferred Compensation Plan and other arrangements with GHVI.


(2)	In 2002, a bankruptcy court-approved special recognition bonus was received by Messrs. McKeon, Almquist, Blinn, Reitz and Pell in the amounts of $16,400, $18,394, $18,673, $20,239 and $16,400 respectively. All other amounts in 2002 reflect performance bonuses.


	In 2001, Mr. Hager deferred the receipt of 50% of his emergence bonus ($137,437) and 50% of his cash bonus ($11,000) into the GHVI Non-Qualified Deferred Compensation Plan.


	In 2001, a bankruptcy court approved special recognition bonus was received by Messrs. McKeon, Almquist, Blinn, Reitz and Pell in the amounts of $24,600, $27,591, $28,010, $30,359 and $24,601 respectively. Messrs. McKeon and Pell also received performance bonuses in 2001 in the respective amounts of $45,000 and $40,000.

(3)

Restricted stock grants were authorized by GHVI’s board of directors on October 2, 2001 and vest quarterly over a five-year period beginning January 1, 2002. GHVI common stock market value as of October 2, 2001 was $20.33 per share. In fiscal 2002, the vested value of the restricted stock grants made to Messrs. Hager, McKeon, Almquist, Blinn, Reitz and Pell was $246,600, $41,100, $41,100, $41,100, $41,100, and $49,320 respectively, assuming the market value of GHVI’s common stock of $16.44 on September 30, 2002. GHVI offered to its employees, including executive officers except for its chief executive officer, to tender all options to purchase GHVI common stock. Each named executive officer tendered his outstanding options to purchase GHVI common stock in exchange for accelerated vesting of shares of restricted stock awarded to such named executive officer. The tendered options to purchase GHVI common stock were accepted by GHVI on May 13, 2003.

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(4)	Includes note forgiveness as well as GHVI’s matching contribution under the GHVI 401(k) Retirement Plan and Non-Qualified Deferred Compensation Plan. Mr. Hager received $599,998 of note forgiveness and $1,700 of 401(k) matching compensation. All other amounts reflect 401(k) matching compensation.

(5)

Subsequent to the fiscal year ended 2002, Mr. Pell received a cash payment in the amount of $661,400 as consideration for the termination of his employment agreement with GHVI and modifications to reduce his employment responsibilities as an employee of GHC. As an employee of GHC, Mr Pell’s annual base salary is expected to be approximately $114,000.

Options Granted

We have not granted any stock options or stock appreciation rights to our named executive officers.

The following table sets forth certain information concerning stock options granted under GHVI’s 2001 Stock Option Plan during its fiscal year ended September 30, 2002 to our named executive officers:

Option/SAR Grants in Last Fiscal Year

	Individual Grants								Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Terms

Name	Number of Securities Underlying Options/SARs Granted (1)		Percent of Total Options/SARs Granted to Employees in Fiscal Year		Exercise Price ($/share)		Expiration Date (1)		5%		10%

George V. Hager, Jr.		75,000		2.96%		20.33		9/30/11	$	1,315,635	$	2,998,088
James V. McKeon		35,000		1.38%		20.33		9/30/11		613,963		1,399,108
Robert A. Reitz		35,000		1.38%		20.33		9/30/11		613,963		1,399,108
David C. Almquist		35,000		1.38%		20.33		9/30/11		613,963		1,399,108
Richard P. Blinn		35,000		1.38%		20.33		9/30/11		613,963		1,399,108
Richard Pell, Jr.		50,000		1.98%		20.33		9/30/11		877,090		1,998,725

(1)

Includes compensation deferred under the GHVI 401(k) Retirement Plan, Non-Qualified Deferred Compensation Plan and other arrangements with GHVI. In GHVI’s offer to its employees, including executive officers except for its chief executive officer, to tender all options to purchase GHVI common stock, each named executive officer tendered his outstanding options to purchase GHVI common stock in exchange for accelerated vesting of shares of restricted stock awarded to such named executive officer. The tendered options to purchase GHVI common stock were accepted by GHVI on May 13, 2003.

Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

None of our named executive officers held options to purchase GHC common stock in fiscal year ended September 30, 2002. The following table sets forth certain information concerning option exercises of GHVI’s common stock for the fiscal year ended September 30, 2002 of our named executive officers:

Name

Shares
Acquired on
Exercise (#)

Value
Realized ($)(1)

Number of Unexercised
Securities Underlying
Options/SARs Fiscal Year- End
Exercisable/Unexercisable (#)

Value of Unexercised
In-the-Money
Options/SARs at
Fiscal Year-End ($)
Exercisable/ Unexercisable

George V. Hager, Jr.

—

18,750/56,250

0.00/0.00

James V. McKeon

—

6,563/28,437

0.00/0.00

Robert A. Reitz

—

6,563/28,437

0.00/0.00

David C. Almquist

—

6,563/28,437

0.00/0.00

Richard P. Blinn

—

6,563/28,437

0.00/0.00

Richard Pell, Jr.

—

12,500/37,500

0.00/0.00

(1)

The GHVI stock price at close of business on September 30, 2002 was $16.44. In GHVI’s offer to its employees, including executive officers except for its chief executive officer, to tender all options to purchase GHVI common stock, each named executive officer tendered his outstanding options to purchase GHVI common stock in exchange for accelerated vesting of shares of restricted stock awarded to such named executive officer. The tendered options to purchase GHVI common stock were accepted by GHVI on May 13, 2003.

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Employment Agreements

We expect to enter into an employment agreement with Mr. Hager upon the consummation of the spin-off. We expect Mr. Hager’s employment agreement to have a term of two years with automatic one year renewals thereafter. The automatic extension of the agreement may be terminated by an affirmative vote of two-thirds of the non-management membership of the board of directors or by Mr. Hager giving notice prior to the applicable automatic extension date. We anticipate that Mr. Hager will receive an annual salary of $600,000 that is reviewable at least annually by the Compensation Committee. Mr. Hager will have the opportunity to earn an annual bonus equal to 100% of his base salary for that year to the extent the Compensation Committee certifies that he achieved performance goals set by the Compensation Committee. The employment agreement will provide for option grants and eligibility to participate in each employee benefit plan or perquisite applicable generally to our executive officers. Mr. Hager will also be entitled to a $3.0 million “whole life” insurance coverage during the term of his employment agreement.

Upon termination of the employment agreement for any reason (including cause as defined in the agreement), Mr. Hager will be entitled to his accrued and unpaid base salary through the date of termination, any earned but unpaid bonus for any fiscal year ending prior to the date of termination, any benefits accrued and vested under the terms of our employee benefit plans and programs through the date of termination, all deferred compensation of any kind and the option to have assigned to him any assignable insurance policy relating to him. In addition, upon death, we will pay Mr. Hager’s estate a lump sum equal to his base salary for the period from the date of death through the end of the term, benefits as if his employment had terminated on the last day of the month and a pro rata bonus for the portion of the year of termination preceding the date of his death based upon an annual amount equal to 100% of Mr. Hager’s salary. Also, all restricted stock, stock options and performance share awards will automatically vest as of the date of death.

If Mr. Hager’s employment agreement is terminated by us without cause at any time or due to his disability (as defined by the agreement) or by him for good reason (as defined by the agreement), a change in control (as defined by the agreement) of our company or as a result of a non-extension (as defined by the agreement), in addition to the foregoing:

•

we will pay him a pro rata bonus for the portion of the year of termination preceding his termination based upon an annual amount equal to 100% of his salary, and a lump-sum cash payment equal to two times his termination base salary (as defined by the agreement) plus in lieu of bonus, two times his termination base salary, less any applicable disability insurance benefits (if terminated as a result of disability) for the two-year period beginning with the date of termination;


	•	we will also continue to provide the health and life insurance benefits provided to him and his spouse and eligible dependants immediately prior to his date of termination for a period of two years following the date of termination; and


	•	all restricted stock, stock option and performance share awards made to him will fully vest.

Mr. Hager’s employment agreement contains nondisclosure provisions that apply during and after the term of employment and noncompetition provisions that limit him from competing with us for the term of employment and for a period of two years thereafter, regardless of reason for the termination of employment.

We and GHVI have entered into letter agreements dated as of July 15, 2003, as amended and restated, with each of Messrs. Almquist, Blinn, McKeon and Reitz which provide the general terms and conditions of the transition of their employment from GHVI to us. The letter agreements contain anticipated terms of the employment agreements to be entered into with us upon consummation of the spin-off.

The letter agreements contemplate that our employment agreements will contain certain terms currently in effect under the employment agreements with GHVI, including:

•

the ability to participate in stock option, incentive compensation and other plans;


	•	the ability to participate in welfare benefit plans and pension, profit sharing, retirement, deferred compensation or savings plans;


	•	the payment of a lump-sum cash payment upon termination by us without cause, termination by executive for good reason or termination as a result of non-extension; and


	•	nondisclosure provisions that apply during and after the term of employment and noncompetition provisions that limit executive from competing with us for the term of employment and for a period thereafter, regardless of the reason for the termination of employment.

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The letter agreements also set forth the material differences between our anticipated employment agreements and the employment agreements with GHVI, including:

•

the extension by GHC of the term of employment through October 1, 2005;


	•	the reduction by GHC of the amount of the cash payment received upon termination by us without cause or termination by executive for good reason;


	•	the reduction by GHC of the post-employment noncompetition period from two years to one year;


	•	the payment by GHC of a lump-sum cash payment upon termination of executive by us without cause or by executive for good reason within two years of a change of control;


	•	the payment by GHC to Messrs. Almquist, Blinn, McKeon and Reitz of a lump-sum cash payment in the amount of $349,559, $331,670, $318,200 and $377,116, respectively;


	•	the grant by GHC of 62,500, 62,500, 75,000 and 62,500 stock options to Messrs. Almquist, Blinn, McKeon and Reitz, respectively, upon each of the consummation of the spin-off and the six-month anniversary thereof;


	•	the payment by GHC to Messrs. Almquist, Blinn, McKeon and Reitz of a lump-sum cash bonus upon consummation of the spin-off in the amount of $118,000, $118,000, $112,000 and $128,000, respectively; and


	•	the grant by GHC of 20,000 shares of restricted stock to Mr. McKeon, which will vest over a five year period commencing on January 1, 2004.

In addition, we expect that the base annual salary of Messrs. Almquist and Blinn will remain unchanged from the $295,000 currently earned under their respective employment agreements with GHVI. It is anticipated that Messrs. Reitz and McKeon will assume the responsibilities of chief operating officer and chief financial officer of GHC, respectively, and, consequently, that their annual base salaries will increase from $320,000 and $280,000, respectively, to $345,000 and $325,000, respectively.

The terms of the employment agreements to be entered into with Messrs. Almquist, Blinn, McKeon and Reitz have not been approved by our compensation committee and may differ from the provisions contained in the letter agreements or described in this information statement.

Benefit Plans

The following summarizes the GHVI employee benefits plans pursuant to which our named executives received benefits and the plans we have adopted or expect to adopt prior to the spin-off.

Stock Option Plan

GHVI has a stock option plan that provides for the grant of incentive stock options (as defined in Section 422 of the Internal Revenue Code) and non-qualified stock options for officers, key employees and non-employee directors. Employees and non-employee directors are eligible to receive awards under the stock option plan, but only employees may receive incentive stock options.

We adopted a similar stock option plan that will be effective upon the consummation of the spin-off. A total of 1,500,000 shares of GHC common stock will be reserved for issuance under our stock option plan. Additionally, no individual will be able to receive options for more than 80% of the total number of shares that may be awarded under the stock option plan.

Once established, the compensation committee of our board of directors will generally administer the stock option plan. The compensation committee will select the participants who will receive awards and determine the terms and conditions of such awards, including the number of shares subject to the award, the

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exercise or purchase price, and the vesting and/or exercisability of the award. Stock options will be generally subject to vesting, which means the optionee earns the right to exercise an increasing number of the shares underlying the option over a specific period of time only if he or she continues to provide services to our company over that period. Incentive stock options granted under the stock option plan must have a per share exercise price of at least 100% of the fair market value of GHC common stock on the date of grant, and not less than 110% of the fair market value in the case of incentive stock options granted to an employee who holds more than 10% of the total voting power of all classes of our stock or any parent or subsidiary’s stock. Payment of the exercise price or purchase price with respect to any award may be made in cash or other consideration as determined by the compensation committee.

The compensation committee or a majority of the independent directors of our board of directors will administer the stock option plan.

On April 1, 2003, GHVI commenced an offer to its employees, including executive officers except for its chief executive officer, to tender all options to purchase shares of GHVI common stock, par value $.02 per share, outstanding under the GHVI stock option plan, for the following consideration: (a) for those holders of options who have received awards of more than 2,000 restricted shares of common stock under the GHVI stock incentive plan, the acceleration of vesting of all such restricted shares plus a cash payment of $2.50 per share underlying the option for options having an exercise price below $20.00 per share, and (b) with respect to those holders of options who have not received awards of more than 2,000 restricted shares, (i) for those options having an exercise price of at least $20.00 per share, a cash payment of $2.00 per share underlying the option, and (ii) for those options having an exercise price below $20.00 per share, a cash payment of $2.50 per share subject to the option. The offer expired on May 12, 2003. GHVI accepted for exchange and cancellation options to purchase 1,724,000 shares of GHVI common stock, which represented all of the eligible outstanding options properly tendered for exchange by eligible option holders. All eligible options held by our employees were tendered in the offer, with the exception of options to purchase 35,000 shares.

Stock Incentive Plan

GHVI has a stock incentive plan that provides for the grant of restricted stock to all of its officers and employees of its company selected by its board of directors. We adopted a similar stock incentive plan that will be effective upon the consummation of the spin-off. A total of 750,000 shares of GHC common stock will be reserved for issuance under our stock incentive plan. Additionally, an individual will not be able to receive awards for more than 80% of the total number of shares authorized for issuance under the stock incentive plan. The compensation committee or a majority of the independent directors of our board of directors will administer the stock incentive plan.

Deferred Compensation Plan

GHVI has a deferred compensation plan for all highly compensated employees as such term is defined in the Internal Revenue Code which allows these individuals to defer receipt of compensation and supplement retirement savings under its retirement plan. The deferred compensation plan allows eligible employees to defer up to 50% of base pay and 100% of bonus as well as restricted stock awards subject to a $1,000 minimum each calendar year and to receive distribution of the deferred compensation at a future date. We adopted a similar non-qualified deferred compensation plan for all highly compensated employees. Upon consummation of the spin-off, the deferred compensation plan will become effective. Employees are expected to be able to elect to transfer their accounts under the GHVI deferred compensation plan to our deferred compensation plan after the spin-off. The deferred compensation plan will be administered by a trustee.

Incentive Compensation Program

GHVI has an incentive compensation program for management-level employees. The goal of the incentive compensation program is to reward management-level employees for their contributions to individual and corporate objectives. The incentive compensation program provides for a bonus equal to a percentage of a participant’s year-end base salary. The bonus varies depending upon the attainment of certain individual and corporate objectives.

We expect to adopt a similar incentive compensation program effective upon consummation of the spin-off.

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SECURITY OWNERSHIP OF OUR STOCK

Prior to the spin-off, all of the outstanding shares of GHC common stock have been and will be owned beneficially and of record by GHVI. To the extent our directors and executive officers own GHVI common stock on the record date, they will receive shares of GHC common stock in the spin-off on the same basis as other holders of GHVI common stock. The following table sets forth information with respect to the beneficial ownership of what would have been the outstanding common stock of GHC if the spin-off had occurred on October 15, 2003 by:

•

each person who is known by us to be the beneficial owner of 5% or more of GHC common stock;


	•	each of our directors and named executive officers; and


	•	all of our director designees and expected executive officers as a group.

Assuming that the spin-off occurred on October 15, 2003, the share amounts in the table below reflect what the ownership of GHC common stock would have been by each person or entity based on that person’s or entity’s ownership of GHVI common stock on October 15, 2003. Ownership of GHVI common stock was determined by a review of GHVI’s records and statements filed with the Securities and Exchange Commission pursuant to Sections 13(d) or 13(g) of the Exchange Act. Percentage ownership is calculated based on the 19,898,105 shares of GHC common stock that would have been outstanding on October 15, 2003 (excluding fractional shares), if the spin-off had occurred on such date. Except as set forth in the table below, upon consummation of the spin-off, we do not expect any person to own more than five percent of our outstanding common stock.

Except as otherwise noted in the footnotes below, the entity, individual director or executive officer or their family members or principal shareholder has sole voting and investment power with respect to such securities. All addresses for the expected executive officers, directors and director designees are c/o Genesis HealthCare Corporation, 101 East State Street, Kennett Square, Pennsylvania 19348.

			Percent of
	Shares of GHC		GHC
	Common Stock		Common Stock
	Beneficially Owned (1)		Beneficially Owned (1)

Goldman, Sachs Group
85 Broad Street
New York, NY 10004 (2)		1,914,266		9.62	%

Highland Capital Management, L.P.
Two Galleria Tower
13455 Noel Road, Suite 1300
Dallas, TX 75240 (3)		1,542,477		7.75	%

Angelo, Gordon & Co., L.P.
245 Park Avenue
New York, NY 10167 (4)		870,961		4.38	%

Robert H. Fish		—		*

David C. Almquist		—		*

Richard P. Blinn		—		*

George V. Hager, Jr.		—		*

James V. McKeon		—		*

Richard Pell, Jr.		—		*

Robert A. Reitz		—		*

John F. DePodesta		—		*

J. Michael Gallagher		—		*

Kevin M. Kelley		—		*

Charles W. McQueary		—		*

Charlene Connolly Quinn		—		*

Terry Allison Rappuhn		—		*

All executive officers and directors as a group (15 persons) (5)		1,500		*

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*	Less than one percent.


(1)	Excludes the beneficial ownership of units of GHVI common stock held by certain executive officers and directors pursuant to the GHVI deferred compensation plan, which such executive officers and directors can not vote.


(2)	Goldman, Sachs & Co. is a wholly-owned subsidiary of Goldman, Sachs Group. Goldman, Sachs & Co.’s direct beneficial ownership consists of 1,914,266 shares of GHC common stock. This is based in part upon a Schedule 13D filed with the SEC on October 22, 2001.

(3)

Includes 20,769 shares of GHC common stock beneficially and directly owned by Highland Capital Management, L.P. (“Highland Capital”); 726,217 shares of GHC common stock beneficially and directly owned by Highland Equity Focus Fund, L.P. (“HEFF”); 576,424 shares of GHC common stock beneficially and directly owned by Highland Crusader Offshore Partners, L.P. (“Crusader”); 119,887 shares of GHC common stock beneficially and directly owned by Prospect Street High Income Portfolio, Inc. (“Prospect”); 20,550 shares of GHC common stock owned by PCMG Trading Partners XXIII, L.P. (“PCMG”); 78,630 shares of GHC common stock beneficially and directly owned by KZH Pamco, LLC. Beneficial ownership consists of shares held by a filing group consisting of Highland Capital and its affiliates, Crusader, HEFF, Prospect, KZH Pamco, LLC and SRV Highland, Inc. Highland Capital is the general partner of Crusader and the investment advisor of HEFF, Prospect, KZH Pamco, LLC and SRV Highland, Inc. The general partner of Highland Capital is Strand Advisors, Inc. (“Strand”).


(4)	Includes 285 shares of GHC common stock owned by Angelo, Gordon & Co., L.P. and 870,676 shares of GHC common stock held for the account of fifteen private investment funds for which Angelo, Gordon & Co., L.P. acts as a General Manager and/or Investment Adviser. This is based upon a Schedule 13G filed with the SEC on April 8, 2003.


(5)	This includes 1,500 shares of GHC common stock directly beneficially owned by Ms. Coggins.

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DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock assumes the adoption of our amended and restated articles of incorporation and amended and restated bylaws, which will become effective upon the consummation of the spin-off. Our articles of incorporation provide that our authorized capital stock consists of 50,000,000 shares, $.01 par value, including 45,000,000 shares of common stock and 5,000,000 shares of preferred stock, $.01 par value, including 1,000,000 shares of Series A Junior Participating Preferred Stock, or “junior preferred stock.”

Common Stock

Subject to the rights specifically granted to holders of any then outstanding preferred stock, our common shareholders are entitled to vote together as a class on all matters submitted to a vote of our shareholders and are entitled to any distributions that may be declared by our board of directors. Our common shareholders do not have cumulative voting rights or preemptive rights. Upon our dissolution or liquidation, holders of GHC common stock are entitled to share ratably in our net assets after payment or provision for all liabilities and any preferential liquidation rights of our preferred stock then outstanding. The issued and outstanding shares of GHC common stock is not subject to any redemption provisions and is not convertible into any other shares of our capital stock. All outstanding GHC common stock is, and the common stock to be issued in the spin-off will be, fully paid and nonassessable. The rights, preferences and privileges of holders of GHC common stock will be subject to those of the holders of any shares of our preferred stock we may issue in the future.

Preferred Stock

Our board of directors may from time to time authorize the issuance of one or more classes or series of preferred stock without shareholder approval. Subject to the provisions of our articles of incorporation and limitations prescribed by law, our board of directors is authorized to adopt resolutions to issue preferred stock, establish the number of preferred stock, change the number of preferred stock constituting any class or series, and provide or change the voting powers, designations, preferences and relative rights, qualifications, limitations or restrictions on our preferred stock, including distribution rights, terms of redemption, conversion rights and liquidation preferences, in each case without any action or vote by our shareholders.

One of the effects of undesignated stock whose terms may be set by the board of directors may be to enable our board of directors to discourage an attempt to obtain control of our company by means of a tender offer, proxy contest, merger or otherwise. The issuance of such preferred stock may adversely affect the rights of our common shareholders by, among other things:

•

restricting the payment of distributions on GHC common stock;


	•	diluting the voting power of GHC common stock;


	•	impairing the liquidation rights of GHC common stock;


	•	delaying or preventing a change in control without further action by the shareholders; or


	•	decreasing the market price of GHC common stock.

Options

We adopted a stock option plan that will be effective upon the consummation of the spin-off and 1,500,000 shares of GHC common stock will be reserved for issuance under the stock option plan.

Restricted Stock Awards

We adopted a stock incentive plan that will be effective upon the consummation of the spin-off and 750,000 shares of GHC common stock will be reserved for issuance under the stock incentive plan.

Effects of Authorized But Unissued Shares

Upon consummation of the spin-off, there will be 45,000,000 authorized shares of GHC common stock, of which 22,862,646 shares will be unissued and unreserved for specific purposes, and 5,000,000 authorized shares of preferred stock, all of which will be available for our future issuance without shareholder approval and 1,000,000 of which will be designated as junior preferred stock. Of the shares of GHC common stock that

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will be available for future issuance, 1,500,000 shares will be reserved for issuance upon exercise of stock options to be granted pursuant to our stock option plan and 750,000 shares will be reserved for issuance upon vesting of shares of restricted GHC common stock to be granted pursuant to our stock incentive plan. Of the shares of preferred stock available for future issuance, 1,000,000 authorized shares of junior preferred stock will be reserved for issuance under the rights agreement described below.

Common stock and preferred stock available for future issuance may be utilized for a variety of corporate purposes, including facilitating acquisitions or public offerings to raise additional capital. We do not currently have any plans to issue additional GHC common stock or preferred stock, other than GHC common stock reserved for issuance under our stock option plan and the junior preferred stock reserved for issuance under the rights agreement.

Anti-Takeover Considerations and Special Provisions of the Articles of Incorporation, Bylaws and Pennsylvania Law

Pennsylvania Anti-Takeover Provisions

We are governed by Pennsylvania corporation law which provides that the board of directors of a corporation in discharging its duties, including its response to a potential merger or takeover, may consider the effect of any action upon employees, shareholders, suppliers, patients, customers and creditors of the corporation as well as upon communities in which offices or other establishments of the corporation are located and all other pertinent factors.

The overall effect of this may be to deter a future tender offer or other offers to acquire us or our shares. Shareholders might view such an offer to be in their best interests should the offer include a substantial premium over the market price of the common stock at that time. In addition, these provisions may have the effect of assisting our management to retain its position and place it in a better position to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business.

Business Combinations

We will be subject to the provisions of Pennsylvania corporation law restricting business combinations, such as mergers and sales of our assets, that are not approved by the board of directors. If the board of directors does not approve a business combination with a person who owns 20% or more of our voting shares before the person attains that level of ownership, the person will not be able to engage in a business combination with us for five years unless the person acquires at least 80% of our voting stock and a majority of the remaining shares approve the business combination.

Articles of Incorporation and Bylaws

A number of provisions of our articles of incorporation and bylaws will concern matters of corporate governance and the rights of our shareholders. Provisions that grant our board of directors the ability to issue preferred stock and to set the voting rights, preferences and other terms thereof may discourage takeover attempts that are not first approved by our board of directors, including takeovers which may be considered by some shareholders to be in their best interests. Certain provisions could delay or impede the removal of incumbent directors or the assumption of control by shareholders, even if such removal or assumption would be beneficial to our shareholders. These provisions also could discourage or make more difficult a merger, tender offer or proxy contest, even if they could be favorable to the interests of shareholders, and could potentially depress the market price of GHC common stock. Our board of directors believes that these provisions are appropriate to protect our interests and the interests of our shareholders.

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Classified Board of Directors

Our articles of incorporation provide that, except as otherwise provided in the terms of any class or series of our shares relating to the rights of the holders of the class or series to elect additional directors under specified circumstances, the number of directors will be fixed from time to time exclusively by a resolution adopted by a majority of the total number of directors that we would have if there were no vacancies, or the whole board, but will not be less than three. Our directors, other than those who may be elected by the holders of any class or series of our preferred stock having the right to elect additional directors under specified circumstances, will be classified into three classes, as nearly equal in number as possible, one class originally to be elected for a term expiring at the annual meeting of shareholders to be held in 2005, another class to be originally elected for a term expiring at the annual meeting of shareholders to be held in 2006 and another class to be originally elected for a term expiring at the annual meeting of shareholders to be held in 2007, with each director to hold office until his or her successor is duly elected and qualified. Commencing with the 2005 annual meeting of shareholders, directors elected to succeed directors whose terms then expire will be elected for a term of office to expire at the third succeeding annual meeting of shareholders after their election, with each director to hold office until such person’s successor is duly elected and qualified. We do not expect to hold an annual meeting until 2005.

Our articles of incorporation provide that, except as otherwise provided with respect to the rights of the holders of any class or series of stock to elect directors under specified circumstances, newly created directorships resulting from any increase in the number of directors and any vacancies on our board of directors resulting from death, resignation, disqualification, removal or other cause will be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors, and not by the shareholders. Any director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until the director’s successor will have been duly elected and qualified. No decrease in the number of directors constituting our board of directors will shorten the term of any incumbent director. Subject to the rights of any class or series of stock having the right to elect directors under specified circumstances, any director may be removed from office only for cause by the affirmative vote of at least 80% of the votes cast by all shareholders entitled to vote thereon, voting together as a single class.

These provisions would preclude a third party from removing incumbent directors and simultaneously gaining control of our board by filling the vacancies created by removal with its own nominees. Under the classified board provisions described above, it would take at least two elections of directors for any individual or group to gain control of our board of directors. Accordingly, these provisions could discourage a third party from initiating a proxy contest, making a tender offer or otherwise attempting to gain control of us.

Shareholder Action by Written Consent; Special Meetings

Shareholders must effect any action required or permitted to be taken at a duly called annual or special meeting of shareholders and those actions may not be effected by any consent in writing by the shareholders. Our articles of incorporation provide that, except as otherwise required by law or by the terms of a class or series of our stock, special meetings of shareholders may be called only by a majority of the whole board, by our chairman or by shareholders owning at least 30% of our outstanding voting shares. No business other than that stated in the notice of meeting may be transacted at any special meeting. These provisions may have the effect of delaying consideration of a shareholder proposal until the next annual meeting unless a special meeting is called by our board, by our chairman or by the required number of shareholders.

Advance Notice Procedures

Our bylaws establish an advance notice procedure for shareholders to make nominations of candidates for election as directors or to bring other business before an annual meeting of shareholders. These shareholder notice procedures provide that only persons who are nominated by our board of directors, or by a shareholder who was a shareholder of record at the time of giving notice and has given timely written notice to our secretary before the meeting at which directors are to be elected, will be eligible for election as directors. These shareholder notice procedures also provide that at an annual meeting only the business that has been brought before the meeting by our board of directors, or by a shareholder who has given timely written notice to our secretary of the shareholder’s intention to bring the business before the meeting, may be conducted. Under these shareholder notice procedures, for notice of shareholder nominations to be made at an annual meeting to be timely, the notice must be received by our secretary not later than the close of business on the 60th calendar day and not earlier than the close of business on the 90th calendar day before the first anniversary of the preceding year’s annual meeting, except that, if the date of the annual meeting is more than 30 calendar days before or more than 60 calendar days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 90th calendar day before the annual meeting and not later than the close of business on the later of the 60th calendar day before the annual meeting or the tenth calendar day following the day on which public announcement of a meeting date is first made by us.

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Nevertheless, if the number of directors to be elected to our board of directors is increased and there is no public announcement by us naming all of the nominees for director or specifying the size of our increased board of directors at least 70 calendar days before the first anniversary of the preceding year’s annual meeting, a shareholder’s notice also will be considered timely, but only with respect to nominees for any new positions created by the increase, if it is delivered not later than the close of business on the tenth calendar day following the day on which the public announcement is first made by us.

In addition, under these shareholder notice procedures, a shareholder’s notice to us proposing to nominate a person for election as a director or relating to the conduct of business other than the nomination of directors will be required to contain some specified information.

Article and Bylaw Amendments

Our articles of incorporation provide that the affirmative vote of the holders of at least 80% of our voting stock then outstanding, voting together as a single class, is required to amend or repeal provisions of our articles of incorporation relating to shareholder action; the number, election and tenure of directors; the nomination of director candidates and the proposal of business by shareholders; the filling of vacancies; and the removal of directors. Our articles of incorporation provide that bylaws related to such charter provisions may be amended or repealed only by the affirmative vote of a majority of the whole board or by the affirmative vote of at least 80% of the votes cast by all shareholders entitled to vote thereon, voting together as a single class. Except for such provisions, our bylaws generally may be amended by affirmative vote of a majority of our whole board or by affirmative vote of at least two-thirds of the votes cast by all shareholders entitled to vote thereon.

Rights Agreement

We expect that our board of directors will adopt a rights agreement on or before the consummation of the spin-off, to be effective as of the spin-off date. Under the rights agreement, we expect to issue one preferred share purchase right for each outstanding common stock. Each right will entitle the registered holder to purchase from us one one-hundredth of a share of junior preferred stock, at a price of $75.00, subject to adjustment in some circumstances. The description and terms of the rights is set forth in a rights agreement between us and the designated rights agent. The description set forth below is intended as a summary only and is qualified in its entirety by reference to the form of the rights agreement, which is filed as an exhibit to the registration statement of which this document is a part.

The rights will be evidenced by the certificates representing our common stock and will not be exercisable until the earlier to occur of:

•

ten days following a public announcement that a person or group of affiliated or associated persons has become an “acquiring person” by obtaining beneficial ownership of at least 20% or more of the outstanding common stock; or


	•	ten business days (or a later date determined by our board of directors) after a person or group commences a tender offer or exchange offer, the consummation of which would result in that person or group becoming an acquiring person.

We refer to the date when the rights become exercisable as the “distribution date.” We expect the rights agreement to provide that, until the distribution date or earlier redemption or expiration of the rights, the rights will be transferred with and only with our common stock. Until the distribution date or earlier redemption or expiration of the rights, our common stock certificates will contain a notation incorporating the rights agreement by reference. As soon as practicable following the distribution date, separate certificates evidencing the rights will be mailed to holders of record of our common stock as of the close of business on the distribution date and the separate right certificates alone will evidence the rights.

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The rights will not be exercisable until the distribution date. The rights will expire on the tenth anniversary of the rights agreement, unless the final expiration date is extended or unless the rights are earlier redeemed or exchanged by us, in each case, as summarized below.

In the event that any person or group of affiliated or associated persons becomes an acquiring person, proper provision will be made so that each holder of a right, other than rights beneficially owned by the acquiring person, which will thereafter be void, will later have the right to receive upon exercise the number of our common stock having a market value of two times the exercise price of the right. If we are acquired in a merger or other business combination transaction or 50% or more of our consolidated assets or earning power is sold after a person or group of affiliated or associated persons becomes an acquiring person, proper provision will be made so that each holder of a right will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the right, that number of shares of common stock of the acquiring company which at the time of the transaction will have a market value of two times the exercise price of the right.

At any time after the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 20% or more of our outstanding common stock and before the acquisition by the person or group of 50% or more of our outstanding common stock, our board of directors may exchange the rights, other than rights owned by the person or group which have become void, in whole or in part, at an exchange ratio of one share of common stock, or one one-hundredth of one of our shares of junior preferred stock, or of a share of a class or series having equivalent rights, preferences and privileges, per right subject to adjustment.

At any time before the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 20% or more of our outstanding common stock, our board of directors may redeem the rights in whole, but not in part, at a price of $.01 per right, as adjusted. The redemption of the rights may be made effective at such time on such basis and with such conditions as our board of directors, in its sole discretion, may establish. Immediately upon any redemption of the rights, the right to exercise the rights will terminate and the only right that the holders of the rights will be eligible to receive will be the redemption price.

The terms of the rights may be amended by our board of directors without the consent of the holders of the rights; provided, however, that, our board may not reduce the threshold at which a person or group becomes an acquiring person to below 10% of our outstanding common stock, and from and after such time as any person or group of affiliated or associated persons becomes an acquiring person, no amendment may adversely affect the interests of the holders of the rights.

Until a right is exercised, the holder of that right, as a holder, will have no additional rights as our shareholder solely by virtue of holding that right, including, without limitation, the right to vote or to receive dividends.

The number of outstanding rights and the number of one one-hundredths of a share of our junior preferred stock issuable upon exercise of each right also will be subject to adjustment in the event of a split of our common stock or a dividend on our common stock payable in our common stock or subdivisions, consolidations or combinations of our common stock occurring, in any case, before the distribution date.

The purchase price payable, and the number of our junior preferred shares or other securities or property issuable, upon exercise of the rights will be subject to adjustment from time to time to prevent dilution:

•

in the event of a stock dividend on, or a subdivision, combination or reclassification of, our junior preferred stock;

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	•	upon the grant to holders of our junior preferred stock of some rights or warrants to subscribe for or purchase our junior preferred stock at a price, or securities convertible into our junior preferred stock with a conversion price, less than the then-current market price of our junior preferred stock; or


	•	upon the distribution to holders of our junior preferred stock of evidences of indebtedness or assets excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in our junior preferred stock or of subscription rights or warrants other than those referred to above.

With some exceptions, no adjustment in the purchase price will be required until cumulative adjustments require an adjustment of at least 1% in the purchase price. No fractional shares of junior preferred stock will be issued, other than fractions that are integral multiples of one one-hundredth of one share of our junior preferred stock, which may, at our election, be evidenced by depositary receipts and instead, an adjustment in cash will be made based on the market price of our junior preferred stock on the last trading day before the date of exercise.

Our junior preferred stock purchasable upon exercise of the rights will not be redeemable. Each share of our junior preferred stock will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared on each share of our common stock. In the event of liquidation, the holders of our junior preferred stock will be entitled to a

minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per common stock. Each share of our junior preferred stock will have 100 votes voting together with our common stock. Finally, in the event of any merger, consolidation or other transaction in which common stock is exchanged, each share of our junior preferred stock will be entitled to receive 100 times the amount received per one share of common stock. These rights are protected by customary anti-dilution provisions.

Due to the nature of our junior preferred stock’s dividend, liquidation and voting rights, the value of the one one-hundredth interest in one share of our junior preferred stock purchasable upon exercise of each right should approximate the value of one share of common stock.

The rights have anti-takeover effects. The rights will cause substantial dilution to a person or group of persons that attempts to acquire us on terms not approved by our board of directors. The rights should not interfere with any merger or other business combination approved by our board of directors before the time that a person or group has acquired beneficial ownership of 20% percent or more of the common stock since the rights may be redeemed by us at the redemption price until such time.

Listing on Nasdaq National Market System

We have applied for listing of GHC common stock on the Nasdaq National Market System under the symbol “GHCI.” While we believe that GHC common stock will be acceptable to Nasdaq for listing, there can be no assurance that Nasdaq will accept GHC common stock.

Registrar and Transfer Agent

The registrar and transfer agent for GHC common stock is StockTrans, Inc.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to the former GHVI Senior Executive Officer Ownership Plan, GHVI had a loan outstanding to Mr. Hager in the principal amount of $599,998 at October 2, 2002. On February 23, 2001, the U.S. Bankruptcy Court ordered that the outstanding loan be forgiven on the first anniversary of GHVI’s emergence from bankruptcy. Therefore, on October 2, 2002, Mr. Hager’s loan was forgiven.

Following the spin-off, we will have a continuing relationship with NCI as a result of the agreements we are entering into in connection with the spin-off, including the separation and distribution agreement, the transition services agreement, the Tidewater agreement, the employee benefits agreement, the tax sharing agreement, the pharmacy services agreement, pharmacy benefit management agreement and durable medical equipment agreement. We believe the charges for services under the transition services agreement, the Tidewater agreement and the pharmacy services agreement will be no less favorable to us than those we could have obtained by negotiating these agreements with an independent third-party. For a detailed discussion of each of these agreements, see “Relationship with NCI.”

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Some of our officers and directors will own shares of NCI common stock and options to acquire additional shares of NCI common stock. Additionally, Mr. Fish is an employee and director of NCI, and will continue to be employed by and a director of NCI. Ownership of NCI common stock, including options to acquire NCI common stock, or employment by NCI, could create or appear to create conflicts of interest for such directors and officers when faced with decisions that could have disparate implications for NCI and us. See “Management” and “Security Ownership of Our Stock.”

We purchased the 10% general partnership interest in a partnership which leases four assisted living facilities in Massachusetts for a total purchase price of $200,000. We own the 90% limited partnership interest in the partnership. The principal of the seller of the general partnership interest is Mr. DePodesta, a designee for director of our board of directors. Simultaneously with the purchase of the general partnership interest, we made a lease termination payment to ElderTrust and sold the leaseholds to an unrelated third party.

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INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by Pennsylvania corporation law, our articles of incorporation provide that a director will not be personally liable for monetary damages for any action taken, or any failure to take any action, unless the director breaches or fails to perform the duties of his or her office under Pennsylvania corporation law, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. These provisions of our articles of incorporation, however, will not apply to the responsibility or liability of a director pursuant to any criminal statute, or to the liability of a director for the payment of taxes pursuant to local, Pennsylvania or federal law. Our articles of incorporation also limit the liability of our officers in the same fashion as our directors.

Our bylaws provide that we must indemnify our directors and officers against expenses, judgments, fines, excise taxes and amounts paid in settlement in connection with any threatened, pending or completed action, suit or proceeding to which they are or were a party, or are threatened to be made a party, by reason of being or having been our director or officer, or serving or having served any other business enterprise or trust as a director, officer, employee, general partner, agent or fiduciary at our request. Our bylaws will also permit us similarly to indemnify other persons. However, under our bylaws, no indemnification will be provided to any of our directors or officers if a court determines that such director or officer engaged in willful misconduct or recklessness. We intend to obtain directors’ and officers’ insurance for our directors, officers and some employees for specified liabilities.

The limitation of liability and indemnification provisions in our bylaws may discourage shareholders from bringing a lawsuit against officers and directors for breach of their fiduciary duty. They may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though an action of this kind, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholders’ investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. However, we believe that these indemnification provisions are necessary to attract and retain qualified directors and officers.

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WHERE YOU CAN FIND MORE INFORMATION

Following the separation, we will be required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, and will file annual, quarterly and other reports with the Securities and Exchange Commission, or SEC. We will also be subject to the proxy solicitation requirements of the Exchange Act. Our Internet site and the information contained on that site, or connected to that site, is not incorporated into this information statement or the registration statement on Form 10. We will make available free of charge on our Internet site our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We expect to maintain an Internet site at http://www.genesishcc.com.

We have filed a registration statement on Form 10 under the Exchange Act with the SEC to register the shares of GHC common stock to be issued on the separation date. This information statement does not contain all the information set forth in the registration statement and the exhibits and schedules thereto, as some items are omitted in accordance with the rules and regulations of the SEC. For further information about us and GHC common stock, we refer you to the registration statement on Form 10. Statements contained in this information statement as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance reference is made to the copy of each contract, agreement or other document filed as an exhibit to the registration statement, each statement being qualified by this reference.

You may read and copy all or any portion of the registration statement or any reports, proxy and information statements or other information we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings, including the registration statement, will also be available to you on the SEC’s website (http:// www.sec.gov). In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number:

Genesis HealthCare Corporation
101 East State Street
Kennett Square, Pennsylvania 19348
Attention: Investor Relations
Telephone: (610) 925-2000

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INDEX TO COMBINED FINANCIAL STATEMENTS

	Page

Independent Auditors’ Report		F-2
Combined Balance Sheets as of September 30, 2002 and 2001 (Successor)		F-3
Combined Statements of Operations for the years ended September 30, 2002 (Successor), 2001 and 2000 (Predecessor)		F-4
Combined Statements of Cash Flows for the years ended September 30, 2002 (Successor), 2001 and 2000 (Predecessor)		F-5
Combined Statements of Owner’s Equity (Deficit) for the years ended September 30, 2002 (Successor), 2001 and 2000 (Predecessor)		F-6
Notes to Combined Financial Statements		F-7
Unaudited Condensed Combined Balance Sheet as of June 30, 2003 and September 30, 2002		F-37
Unaudited Condensed Combined Statements of Operations for the nine months ended June 30, 2003 and 2002		F-38
Unaudited Condensed Combined Statements of Cash Flows for the nine months ended June 30, 2003 and 2002		F-39
Notes to Unaudited Condensed Combined Financial Statements		F-40
Independent Auditors’ Report		S-1
Schedule II Valuation and Qualifying Accounts for the years ended September 30, 2002, 2001 and 2000		S-2

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Independent Auditors’ Report

The Board of Directors
Genesis HealthCare Corporation

We have audited the accompanying combined balance sheets of Genesis HealthCare Corporation (the Company) as of September 30, 2002 and 2001 and the related combined statements of operations, owner’s equity (deficit) and cash flows for each of the years in the three year period ended September 30, 2002. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three year period ended September 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 3 to the accompanying combined financial statements, the Company has restated the combined statements of operations, owner’s equity (deficit) and cash flows for each of the years in the two year period ended September 30, 2001.

As disclosed in note 2 to the combined financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 145 with regard to accounting for extinguishment of debt effective October 1, 2002.

As described in note 5 to the combined financial statements, on October 2, 2001 the Company consummated a Joint Plan of Reorganization (the “Plan”) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change in ownership of the Company and, accordingly, effective September 30, 2001 the Company accounted for the change in ownership through “fresh-start” reporting. As a result, the combined information prior to September 30, 2001 is presented on a different cost basis than that as of and subsequent to September 30, 2001 and, therefore, is not comparable.

As discussed in note 2 to the combined financial statements, the Company changed its method of accounting for the costs of start-up activities effective October 1, 1999.

/s/ KPMG LLP

Philadelphia, Pennsylvania
September 30, 2003

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Genesis HealthCare Corporation
Combined Balance Sheets
September 30, 2002 and 2001

	Successor Company

(in thousands)	September 30, 2002			September 30, 2001

Assets
Current assets:
Cash and equivalents, primarily restricted	$	7,420		$	4,599
Restricted investments in marketable securities		15,074			12,932
Accounts receivable, net of allowance for doubtful accounts
of $36,566 in 2002 and $62,445 in 2001		200,158			203,996
Prepaid expenses and other current assets		32,405			30,527
Assets held for sale		28,634			—

Total current assets		283,691			252,054

Property and equipment		766,651			788,997
Accumulated depreciation		(38,204	)		(3,343	)

		728,447			785,654
Restricted investments in marketable securities		71,073			38,693
Assets held for sale		17,500			—
Other long-term assets		53,769			49,641
Indentifiable intangible assets		—			10,799

Total assets	$	1,154,480		$	1,136,841

Liabilities and Owner’s Equity
Current liabilities:
Current installments of long-term debt	$	45,566		$	33,818
Accounts payable		38,117			39,165
Accrued expenses		30,189			46,115
Accrued compensation		73,453			71,080
Accrued interest		2,819			7,346
Current portion of self-insurance liability reserves		15,074			12,932

Total current liabilities		205,218			210,456

Long-term debt		280,910			294,339
Self-insurance liability reserves		42,019			26,834
Other long-term liabilities		23,569			33,065
Owner’s equity:
GHVI’s equity in GHC		601,925			571,955
Accumulated other comprehensive income		839			192

Total owner’s equity		602,764			572,147

Total liabilities and owner’s equity	$	1,154,480		$	1,136,841

See accompanying Notes to Combined Financial Statements

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Genesis HealthCare Corporation
Combined Statements of Operations
For the Years Ended September 30, 2002, 2001 and 2000

	Successor Company			Predecessor Company

	Year ended September 30,			As restated (1) Years ended September 30,
(in thousands)	2002			2001			2000

Net revenues	$	1,362,166		$	1,291,163		$	1,262,084
Operating expenses:
Salaries, wages and benefits		801,624			767,748			760,376
Other operating expenses		324,162			380,474			541,065
General and administrative costs		83,480			76,109			68,888
Depreciation and amortization expense		37,288			65,113			71,439
Lease expense		26,594			29,276			32,482
Interest expense (contractually was $178 million in 2001, and $204 million in 2000)		17,128			98,602			214,550

Income (loss) before debt restructuring and reorganization
costs, income taxes, equity in net income (loss) of
unconsolidated affiliates and minority interests		71,890			(126,159	)		(426,716	)
Debt restructuring and reorganization costs and net (gain) on debt discharge		3,175			(283,211	)		445,876

Income (loss) before income taxes, equity in net
income (loss) of unconsolidated affiliates and
minority interests		68,715			157,052			(872,592	)
Income tax expense (benefit)		26,798			—			(80,879	)

Income (loss) before equity in net income (loss) of
unconsolidated affiliates and minority interests		41,917			157,052			(791,713	)
Equity in net income (loss) of unconsolidated affiliates		1,196			(10,228	)		(2,505	)
Minority interests		(242	)		—			—

Income (loss) from continuing operations		42,871			146,824			(794,218	)
Loss from discontinued operations, net of taxes		(5,320	)		(33,505	)		(39,555	)
Cumulative change in accounting principle		—			—			(10,412	)

Net income (loss)	$	37,551		$	113,319		$	(844,185	)


(1)	— See note 3 — “Restatement of 2001 and 2000 Combined Financial Statements.”

See accompanying Notes to Combined Financial Statements

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Genesis HealthCare Corporation
Combined Statements of Cash Flows
For the Years Ended September 30, 2002, 2001 and 2000

	Successor Company			Predecessor Company

	Year ended September 30,			As restated (1) Years ended September 30,
(in thousands)	2002			2001			2000

Cash flows from operating activities:
Net income (loss)	$	37,551		$	113,319		$	(844,185	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Items that did not use (provide) cash:
Gain on discharge of debt		—			(1,011,345	)		—
Cumulative change in accounting principle, net of taxes		—			—			10,412
Debt restructuring and reorganization costs		3,175			758,287			445,876
Loss on impairment of assets and other charges		6,364			75,313			268,287
Depreciation and amortization		37,288			65,113			71,439
Provision for losses on accounts receivable		21,483			27,780			27,991
Equity in net (income) loss of unconsolidated
affiliates and minority interests		(954	)		10,228			2,505
Loss on sale of assets		—			540			7,922
Provision for deferred taxes		23,398			—			(80,879	)
Amortization of deferred gains and net unfavorable leases		(5,575	)		(7,903	)		(6,937	)
Amortization of debt discount and preferred stock accretion		—			—			33,651
Working capital changes that provided (used) cash:
Accounts receivable		(17,645	)		(33,714	)		5,139
Accounts payable and other accrued liabilities		29,124			40,629			16,529
Other		(1,878	)		(3,906	)		23,735

Total adjustments		94,780			(78,978	)		825,670

Net cash provided by (used in) operations before
debt restructuring and reorganization costs		132,331			34,341			(18,515	)

Cash paid for debt restructuring and reorganization costs		(30,926	)		(27,051	)		(9,816	)

Net cash provided by (used in) operating activities		101,405			7,290			(28,331	)


Cash flows from investing activities:
Capital expenditures		(34,887	)		(34,779	)		(41,175	)
Purchase of restricted marketable securities		(86,077	)		(55,057	)		(39,614	)
Proceeds on maturity or sale of restricted marketable securities		52,202			33,311			34,954
Purchase of eldercare centers		(10,453	)		—			—
Proceeds from sale of eldercare centers		2,955			7,010			33,000

Net cash used in investing activities		(76,260	)		(49,515	)		(12,835	)


Cash flows from financing activities:
Proceeds from issuance of long-term debt		38,000			—			—
Repayment of long-term debt		(39,681	)		—			—
Net transactions with GHVI		(20,643	)		41,526			42,927

Net cash (used in) provided by financing activities		(22,324	)		41,526			42,927


Net increase (decrease) in cash and equivalents		2,821			(699	)		1,761
Cash and equivalents:
Beginning of period		4,599			5,298			3,537

End of period	$	7,420		$	4,599		$	5,298



Supplemental disclosure of cash flow information:
Interest paid	$	27,568		$	60,091		$	161,831
Taxes paid		—			—			—
Non-cash investing activity – acquisition of 56.4% equity interest in Multicare	$	—		$	—		$	200,000


(1)	— See note 3 — “Restatement of 2001 and 2000 Combined Financial Statements.”

See accompanying Notes to Combined Financial Statements

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Genesis HealthCare Corporation
Combined Statements of Owner’s Equity (Deficit)
For the Years Ended September 30, 2002, 2001 and 2000

(in thousands)	GHVI’s equity (deficit) in GHC			Accumulated other comprehensive income (loss)			Total owner’s equity (deficit)			Total comprehensive income (loss)

(Predecessor Company)
Balance at September 30, 1999	$	(91,106	)	$	(428	)	$	(91,534	)

Comprehensive loss
Net loss (1)		(844,185	)					(844,185	)	$	(844,185	)
Net unrealized loss on marketable securities					(1,361	)		(1,361	)		(1,361	)

Total comprehensive loss (1)										$	(845,546	)

Advances from GHVI, net of distributions		449,327						449,327

(Predecessor Company)
Balance at September 30, 2000 (1)		(485,964	)		(1,789	)		(487,753	)

Comprehensive income
Net income (1)		113,319						113,319		$	113,319
Net unrealized gain on marketable securities					1,981			1,981			1,981

Total comprehensive income (1)										$	115,300

Advances from GHVI, net of distributions		944,600						944,600

(Successor Company)
Balance at September 30, 2001		571,955			192			572,147

Comprehensive income
Net income		37,551						37,551		$	37,551
Net unrealized gain on marketable securities					647			647			647

Total comprehensive income										$	38,198

Distributions to GHVI, net of advances		(7,581	)					(7,581	)

(Successor Company)
Balance at September 30, 2002	$	601,925		$	839		$	602,764


(1)	— As Restated. See note 3 — “Restatement of 2001 and 2000 Combined Financial Statements.”

See accompanying Notes to Combined Financial Statements

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Genesis HealthCare Corporation
Notes to Combined Financial Statements

(1) Basis of Presentation

General

The accompanying combined financial statements have been prepared on a basis which reflects the historical financial statements of Genesis HealthCare Corporation (GHC or the Company) assuming that the operations of Genesis Health Ventures, Inc. (GHVI) expected to be contributed to GHC prior to the spin-off of GHC to GHVI’s shareholders (the spin-off) were organized as a separate legal entity, owning certain net assets of GHVI. All future references to “NCI” in these combined financial statements mean GHVI’s pharmacy services operation, which will be the only significant remaining business operated by GHVI after the spin-off. Generally, only those assets and liabilities of the ongoing GHC business expected to be transferred to GHC prior to the spin-off were included in the combined balance sheets.

Historically, GHVI provided certain general and administrative services to GHC, including finance, legal, treasury, information systems and human resources. The cost for these services was allocated to GHC based upon various allocation percentages dependent upon the type of service provided. For instance, certain costs were allocated based upon GHC’s proportionate share of revenue, labor related costs or other operating expenses; as well as other methods which management believes to be reasonable. These cost allocations were $47.1 million, $42.4 million and $38.4 million in fiscal 2002, 2001 and 2000, respectively. As a result of the spin-off, GHC will be required to perform these general and administrative services using its own resources or purchased services and will be responsible for the costs and expenses associated with the management of a public company. Management believes GHC may incur incremental costs associated with being an independent public company and the loss of synergies and benefits of economies of scale that existed while a part of GHVI, but does not believe such incremental costs will be material. GHC and NCI will agree contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, GHC and NCI will agree to certain mutually beneficial commercial arrangements intended to reflect terms similar to those that would be agreed to by parties bargaining at arm’s-length.

Certain assets and liabilities related to GHC have been managed and controlled by GHVI on a centralized basis. Such assets and liabilities have been allocated to GHC in the manner described in the preceding paragraph for allocating general and administrative service costs.

Prior to the spin-off, substantially all of our cash accounts are linked to GHVI’s centralized cash management system. Accordingly, substantially all cash generated from or used in GHC’s operations has been transferred to and from GHVI. For instance, GHVI funds nearly all routine and capital cash disbursements on behalf of GHC. Likewise, on a daily basis, GHC transfers its cash receipts directly to the concentrated bank account of GHVI. The net effect of these cash transfers has been reflected in the “GHVI’s Equity in GHC” account as shown in the equity section of the combined balance sheets. The net transactions with GHVI as reflected in our combined statements of cash flows represent cash activities between GHVI and GHC as previously described. The advances and distributions to and from GHVI as reflected in the combined statements of owner’s equity (deficit) include the cash activities as reflected in the combined statements of cash flows as well as certain non-cash adjustments to GHVI’s equity in GHC. Such non-cash adjustments to GHVI’s equity in GHC principally relate to the distribution of GHVI common and preferred stock in connection with transactions that are directly attributable to GHC subsidiaries. The financing activities between GHVI and GHC have been in the form of equity capital advances and there are no formal repayment or interest arrangements, nor any expectation of any such arrangements in the future. The average balance of GHVI’s equity (deficit) in GHC for the years ended September 30, 2002, 2001 and 2000 were $586.9 million, $43.0 million and $(288.5) million, respectively.

Cash and equivalents not specifically owned by legal entities which comprise GHC were not allocated to GHC in the historical combined financial statements.

The allocation methodology followed in preparing the combined financial statements may not necessarily reflect the results of operations, cash flows or financial position of GHC in the future, or what the results of operations, cash flows or financial position would have been had GHC been a separate stand-alone public entity.

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The accompanying combined financial statements include the accounts of the Successor Company of GHC and its subsidiaries as of September 30, 2002 and 2001 and for the year ended September 30, 2002, and the Predecessor Company of GHC and its subsidiaries for the two years ended September 30, 2001 as well as affiliated entities of GHVI which are expected to be contributed to GHC in connection with the spin-off. All significant intercompany accounts and transactions have been eliminated in consolidation.

Investments in unconsolidated affiliated companies, owned 20% to 50% inclusive, are stated at cost of acquisition plus the Company’s equity in undistributed net income (loss) since acquisition. The equity in net income (loss) of these companies is reflected as a component of net income or loss in the combined statements of operations.

Following a restructuring transaction effective October 1, 1999, GHC gained managerial, operational and financial control of Multicare, and consequently consolidated the results of Multicare, with no minority interest. (See note 7 — “Significant Transactions and Events”)

The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the combined financial statements for the periods presented include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

Factors Affecting Comparability of Financial Information

As a consequence of the implementation of fresh-start reporting effective September 30, 2001 (see note 4 — “Reorganization” and note 5 — “Fresh-Start Reporting”), the financial information presented in the combined statements of operations and cash flows for the year ended September 30, 2002 are generally not comparable to the financial results for the corresponding periods in the previous two years. To highlight the lack of comparability, a solid vertical line separates the pre-emergence financial information from the post-emergence financial information in the accompanying combined financial statements and the notes thereto. Any financial information herein labeled “Predecessor Company” refers to periods prior to the adoption of fresh-start reporting, while those labeled “Successor Company” refer to periods following GHC’s adoption of fresh-start reporting.

The lack of comparability in the accompanying combined financial statements is most apparent in GHC’s capital costs (lease, interest, depreciation and amortization), as well as with debt restructuring and reorganization costs. Management believes that business segment operating revenues and EBITDA of the Successor Company are generally comparable to those of the Predecessor Company.

Pending Spin-off

In February 2003, GHVI’s board of directors approved in principle a plan to spin-off it’s eldercare operations to the shareholders of GHVI. In the spin-off, each of GHVI’s shareholders will receive a pro rata share of the voting common stock of GHC in a special dividend and GHC will become a separately traded, publicly held company.

GHVI’s board of directors believes that a separation into two independent public companies will better align management incentives with business specific operating performance, isolate inherent business risks, provide each organization with the ability to independently access capital markets and eliminate existing customer/competitor conflicts.

Following the spin-off, the operations of GHVI’s inpatient services segment, rehabilitation therapy business, management services and certain other ancillary service businesses will continue to operate under the brand name Genesis ElderCare.

The spin-off is subject to several conditions, including financing and GHC’s receipt of an Internal Revenue Service ruling that, for U.S. federal income tax purposes, the spin-off generally will not be taxable, which was received on September 30, 2003.

Description of Business

GHC’s business is comprised of two primary business segments, inpatient services and rehabilitation therapy services. These segments are supported by complementary service capabilities.

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GHC provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. As of September 2003, the Company has 226 owned, leased, managed and jointly-owned eldercare centers with 27,182 beds, of which 5 centers having 715 beds have been identified as held for sale. Revenues of GHC’s owned and leased centers constitute approximately 90% of GHC’s revenues, and are presented in GHC’s segment information as inpatient services revenues. Management fees earned from eldercare centers that are managed and/or jointly-owned by GHC are included in all other revenues presented in GHC’s segment information. (See note 22 — “Segment Information”).

GHC provides an extensive range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. These services are provided by approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted at substantially all of the eldercare centers operated by GHC, as well as by contract to healthcare facilities operated by others and through any one of our 14 certified outpatient rehabilitation agencies. After the elimination of intercompany revenues, the rehabilitation services segment constitutes approximately 7% of GHC’s revenues.

GHC also provides an array of other specialty medical services, including portable x-ray and other diagnostic services and respiratory therapy services.

(2) Summary of Significant Accounting Policies

Revenue Recognition/Contractual Allowances

Within the Company’s inpatient services segment, revenue and the related receivables are recorded in the accounting records on an accrual basis at the Company’s established billing rates in the period the related services are rendered. The provision for contractual adjustments, which represents the differences between the established billing rates and predetermined rates, is also recorded on an accrual basis and deducted from gross revenue to determine net revenue. The Company recorded contractual allowances from continuing operations of $354.8 million, $364.2 million and $362.7 million in fiscal year 2002, 2001 and 2000, respectively.

Within the Company’s rehabilitation therapy services business and other ancillary service businesses, the Company records revenues at the time services or products are provided or delivered to the customer. Upon delivery of products or services, the Company has no additional performance obligation to the customer. The Company receives payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), private third-party insurers and long-term care facilities.

Cash and Equivalents, Primarily Restricted

Short-term investments that have a maturity of ninety days or less at acquisition are considered cash equivalents. Investments in cash equivalents are carried at cost, which approximates fair value. The Company’s cash balances at September 30, 2002 and 2001 principally consist of restricted cash. Restricted cash includes cash held by the Company’s wholly-owned captive insurance subsidiary, Liberty Health Corp., LTD (“LHC”) which is substantially restricted to securing the outstanding claims losses of LHC. Restricted cash includes cash held in trust on behalf of our eldercare residents and cash that is restricted under certain of our loan agreements.

Restricted Investments in Marketable Securities

Restricted investments in marketable securities, which are comprised of fixed interest securities, equity securities and money market funds are considered to be available for sale and accordingly are reported at fair value with unrealized gains and losses, net of related tax effects, included within accumulated other comprehensive income (loss) as a separate component of owner’s equity. Fair values for fixed interest securities and equity securities are based on quoted market prices.

A decline in the market value of any security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.

Premiums and discounts on fixed interest securities are amortized or accreted over the life of the related security as an adjustment to yield. Realized gains and losses for securities classified as available for sale are derived using the specific identification method for determining the cost of securities sold.

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Marketable securities are held by the Company’s wholly-owned captive insurance subsidiary, LHC and are substantially restricted to securing the outstanding claims losses of LHC.

Allowance for Doubtful Accounts

The Company utilizes the “Aging Method” to evaluate the adequacy of its allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each type of payor. The Company has developed estimated standard allowance requirement percentages by utilizing historical collection trends and its understanding of the nature and collectibility of receivables in the various aging categories and the various segments of the Company’s business. The standard allowance percentages are developed by payor type as the accounts receivable from each payor type have unique characteristics. The allowance for doubtful accounts is determined utilizing the aging method described above while also considering accounts specifically identified as uncollectible. Accounts receivable that Company management specifically estimates to be uncollectible, based upon the age of the receivables, the results of collection efforts or other circumstances, are reserved for in the allowance for doubtful accounts until they are written-off.

Management believes the assumptions used in the aging method employed in fiscal 2002 and 2001, coupled with continued improvements in our collection patterns suggests the allowance for doubtful accounts is adequately provided for. However, because the assumptions underlying the aging method are based upon historical collection data, there is a risk that GHC’s current assumptions are not reflective of more recent collection patterns. Changes in overall collection patterns can be caused by market conditions and/or budgetary constraints of government funded programs such as Medicare and Medicaid. Such changes can adversely impact the collectibility of receivables, but not be addressed in a timely fashion when using the aging method, until updates to GHC’s periodic historical collection studies are completed and implemented.

Property and Equipment

As part of fresh-start reporting, substantially all property and equipment was re-valued to estimated fair value as of September 30, 2001, which became the new cost basis. In addition, the depreciable lives of certain assets were changed. All capital additions made subsequent to September 30, 2001 are stated at cost.

Depreciation is calculated on the straight-line method over estimated useful lives of 20-35 years for building improvements, land improvements and buildings, and 3-15 years for equipment, furniture and fixtures and information systems. Expenditures for maintenance and repairs necessary to maintain property and equipment in efficient operating condition are charged to operations as incurred. Costs of additions and betterments are capitalized. Interest costs associated with construction or renovation are capitalized in the period in which they are incurred.

Total depreciation expense for the years ended September 30, 2002, 2001 and 2000 was $35.7 million, $45.1 million and $51.2 million, respectively.

Long-Lived Assets

The Company accounts for long-lived assets, other than goodwill with an indefinite useful life, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

Loss Reserves For Self-Insured Programs

Workers’ compensation and general and professional liability

Certain of the Company’s workers’ compensation, and general and professional liability coverage is provided by the Company’s wholly-owned insurance company, Liberty Health Corp., LTD (“LHC”).

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Outstanding losses and loss expenses comprise estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary using the past experience of the Company and the industry.

Effective June 1, 2000, the Company began insuring a substantial portion of its professional liability risks through LHC. Specifically, the Company is responsible for the first dollar of each claim (on a claims-made basis), up to a self-insurance retention limit determined by the individual policies, subject to aggregate limits for each policy year. The self-insured retention limits amount to $22 million, $19 million and $14 million for the policy years ended May 31, 2003, 2002 and 2001, respectively. For policy years 2001 and 2002, any costs above these retention limits are covered by third party insurance carriers. For policy year 2003 (June 2002 to May 2003), the Company has retained an additional self-insurance layer of $5 million. Since the June 1, 2000 inception of the self-insurance program through September 30, 2002, the Company’s cumulative self-insurance retention levels are $42 million and its provision for these losses is $28.2 million. Assuming actual losses were to reach the retention limits in each of the three policy years, the Company’s additional exposure is approximately $13.8 million which, if incurred, would be recognized as an increase to other operating expenses in the Company’s combined statements of operations in the period such exposure became known. In addition, the Company has provided $3.7 million for the estimated costs of claims incurred but not reported as of September 30, 2002.

Beginning in 1994, the Company insured its workers’ compensation exposure, principally via self-insurance retentions and large deductible programs through LHC.

Over the past three years, the majority of the Company’s workers’ compensation coverage was structured as follows: For policy year 2001 (June 1, 2000 — May 31, 2001) the Company was insured on a first dollar coverage basis for its Multicare subsidiaries, and insured through an incurred loss retrospectively rated policy for its non-Multicare subsidiaries; and for policy years 2002-2003 (June 1, 2001 — May 31, 2003) it has large deductible programs, the deductibles for which are insured through LHC.

For policy year 2001, the Company’s incurred losses recognized through September 30, 2002 were $15.5 million. The Company’s development factors are updated quarterly and are based upon commonly used industry standards. Any changes to the incurred losses are recognized quarterly as an adjustment to salaries, wages and benefits in the Company’s combined statements of operations. The Company is insured through a third-party insurer for aggregate claims in excess of $44.1 million.

For policy years 2003 and 2002, the Company is self-insured up to the first $0.5 million per workers’ compensation incident. All workers’ compensation claims above $0.5 million per incident are insured through a third-party insurer. The Company has aggregate self-insured retentions of $52.8 million and $48 million in policy years 2003 and 2002, respectively. Workers’ compensation claims above these aggregate limits are insured through a third party-insurer as of September 30, 2002. The Company’s provision for losses in these policy years is $30.1 million. The Company’s reserve levels are evaluated on a quarterly basis. Any necessary adjustments are recognized as an adjustment to salaries, wages and benefits in the Company’s combined statements of operations.

The Company records outstanding losses and loss expenses for both general and professional liability and workers’ compensation liability based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and management’s judgment using its past experience and industry experience. As of September 30, 2002, the estimated range of discounted exposure for these liabilities is $57.1 million to $74 million. The Company’s recorded reserves for these liabilities were $59.2 million as of September 30, 2002 of which $2.1 million is included in accrued expenses and the remainder in self-insurance liability reserves in the Company’s combined balance sheet. The Company (through LHC) has restricted investments in marketable securities of $86.1 million at September 30, 2002 which are substantially restricted to securing the outstanding claim losses of LHC.

General and professional liability and workers’ compensation claims are discounted at a rate of 4.5% in 2002 and 2001, which estimates the present value of funds required to pay losses at a future date. Had the Company provided losses at undiscounted levels at September 30, 2002 and 2001, the reserve for outstanding

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losses and loss expenses would have been increased by approximately $6.6 million in 2002 and $6 million in 2001.

Management believes, based on the recommendations of an independent actuary, that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred as of the balance sheet date but the provision is necessarily an estimate and may ultimately be settled for significantly different amounts. It is at least reasonably possible that management will revise this estimate significantly in the near term. Any subsequent revisions are recorded in the period in which they are determined.

Health Plan

The Company offers employees an option to participate in a self-insured health plan. Health claims under this plan are self-insured with a stop-loss umbrella policy in place to limit maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. The Company maintains an accrual for claims that have been incurred but not yet reported (IBNR) to the plan administrator and therefore have not been paid. The IBNR reserve is based on the historical claim lag period and current payment trends of health insurance claims (generally 2-3 months). The liability for the self-insurance health plan is recorded in accrued compensation in the accompanying combined balance sheets.

Income Taxes

GHC does not file a separate federal tax return. It is included in the consolidated federal tax return filed by GHVI.

The tax provisions reflected in the combined statements of operations and the deferred and current tax amounts reflected in the combined balance sheets have been computed based on GHC’s separate company book/tax differences to arrive at GHC’s taxable income. GHC’s net operating loss carryforward represents unutilized taxable losses after reduction for cancellation of debt income available for net operating loss (“NOL”) carryforwards.

At September 30, 2002 and 2001, GHC’s deferred tax balances were determined by reference to the differences in book and tax values of assets and liabilities.

For the years ended September 30, 2002, 2001 and 2000, GHC provided $26.8 million, $0, and $(80.9) million respectively for income taxes from continuing operations, and utilized no NOL carryforwards. At September 30, 2002 and 2001, GHC had deferred tax assets in excess of deferred tax liabilities, inclusive of tax benefits related to net operating loss carryforwards. Because management believes it is more likely than not that the deferred tax assets will not be realized, the net deferred tax assets in their entirety remain subject to a 100% valuation allowance. At September 30, 2002, based on its interpretation of applicable provisions of the Internal Revenue Code, GHC had approximately $300 million of NOL carryforwards, utilization of which is subject to limitation. The actual net operating loss carryforwards available to GHC following the spin-off will be significantly less than the net operating loss carryforwards presented for the purpose of preparing GHC’s carve-out financial statements. The ultimate net operating loss carryforwards available to GHC will not be determinable until the fiscal year ended September 30, 2004. Pursuant to SOP 90-7, (as defined in note 5 — “Fresh-Start Reporting”) future utilization of deferred tax assets existing at the October 2, 2001 bankruptcy emergence date were applied first as a reduction of identifiable intangible assets and, then, as an increase to owner’s equity.

Comprehensive Income (Loss)

Pursuant to the adoption of SFAS No. 130, “Reporting Comprehensive Income”, comprehensive income (loss) includes all changes to shareholders’ equity during a period, except those resulting from investments by and distributions to shareholders. The components of comprehensive income (loss) are shown in the combined statements of owner’s equity (deficit). See note 23 – “Comprehensive Income (Loss)”.

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Unfavorable Leases

At September 30, 2002, an unfavorable lease liability of $23.4 million is carried on the combined balance sheets in other long-term liabilities. The unfavorable lease credit was established at September 30, 2001 in accordance with the implementation of fresh-start reporting. Amortization of unfavorable leases is computed using the straight-line method over the individual terms of each unfavorable lease. See note 13 —“Leases and Lease Commitments”.

Stock Option Plan

GHVI applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, GHVI has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123.

In fiscal 2002, GHVI adopted the 2001 Stock Option Plan (the “2001 Plan”). The aggregate number of shares of common stock that may be issued under the 2001 Plan is 3,480,000, of which 3,305,000 may be issued to non-directors and 175,000 may be issued solely to directors.

GHC’s employees participate in the 2001 Plan. Prior to the spin-off, a majority of employee stock options under the 2001 Plan were tendered in consideration for either cash or an accelerated vesting of restricted stock grants held by certain key executives.

The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period. Pro forma compensation expense has been allocated to GHC using management’s estimate of the portion of stock option grants made to employees that provide services to GHC.

	Successor Company			Predecessor Company

	2002			2001		2000

Net income (loss) as reported	$	37,551		$	113,319	$	(844,185	)
Less: pro forma compensation expense adjustment		(8,029	)		—		(261	)

Net income (loss) as adjusted	$	29,522		$	113,319	$	(884,446	)

The fair value of stock options granted in 2002 and 2000 is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions for 2002 and 2000: dividend yield of 0% (2002 and 2000); expected volatility of 36.92% (2002) and 179.22% (2000); a risk-free return of 3.8% (2002) and 5.17% (2000); and expected lives of 8.1 years (2002) and 6.6 years (2000).

GHVI did not make any stock option grants in 2001 and as a result of GHVI’s deteriorating stock price following its voluntary petition for relief under Chapter 11 Bankruptcy, there were no outstanding stock options with intrinsic value during the year ended September 30, 2001. Consequently, there is no compensation cost in fiscal 2001 pursuant to the provisions of SFAS 123.

Reimbursement of Managed Property Labor Costs

The Company manages the operations of 63 eldercare centers. Under a majority of these arrangements, the Company employs the operational staff of the managed business for ease of benefit administration and bills the related wage and benefit costs on a dollar-for-dollar basis to the owner of the managed property. In this capacity, the Company operates as an agent on behalf of the managed property owner and is not the primary obligor in the context of a traditional employee/employer relationship. Historically, the Company has treated these transactions on a “net basis”, thereby not reflecting the billed labor and benefit costs as a component of its net revenue or expenses. For the years ended September 30, 2002, 2001 and 2000 the Company billed its managed clients $140.5 million, $153.6 million, and $154.7 million, respectively for such labor related costs.

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Earnings Per Share

Historical earnings per share have not been presented as GHC was wholly-owned by GHVI for all periods presented in the accompanying combined financial statements.

Use of Estimates

The Company has made a number of estimates relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with accounting principles generally accepted in the United States of America. Some of the more significant estimates impact accounts receivable, long-lived assets and loss reserves for self-insurance programs. Additionally, the preparation of these combined financial statements required an extensive use of estimates to allocate assets, liabilities, revenues and expenses to GHC. Actual results could differ significantly from those estimates. See note 6 — “Certain Significant Risks and Uncertainties”.

Cumulative Change in Accounting Principle

Effective October 1, 1999, the Company adopted the provisions of the American Institute of Certified Public Accountants Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” (“SOP 98-5”). The statement requires costs of start-up activities, including organizational costs, to be expensed as incurred. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new process in an existing facility, or commencing a new operation. The cumulative effect of expensing all unamortized start-up costs at October 1, 1999 was $10.4 million.

Derivative Financial Instruments

The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities – an Amendment of FASB Statement No. 133”.

In the normal course of business, GHC’s operations are exposed to risks associated with fluctuations in interest rates. For all periods presented, GHC was considered in GHVI’s overall risk management strategy. As part of this strategy, GHVI managed its risks based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. GHVI primarily utilized interest rate swap and cap agreements to economically hedge or reduce these exposures. As a stand-alone company, GHC intends to routinely monitor its risks associated with fluctuations in interest rates. Management of GHC plans to address these risks through controlled risk management, including the use of derivative financial instruments to economically hedge or reduce these exposures. Management of GHC does not expect to enter into financial instruments for trading or speculative purposes.

It will be GHC’s accounting policy to recognize all derivative financial instruments for which it is obligated on the balance sheet at fair value. Changes in the fair value of a derivative that is designated as and meets the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified to earnings as the underlying hedged item affects earnings. Amounts reclassified into earnings related to interest rate swap and cap agreements are included in interest expense.

GHC has recognized an allocated portion of interest expense in the accompanying statements of operations using a weighted average rate that considers the impact of GHVI’s interest rate swap and cap agreements. The GHVI interest rate swap and cap agreements were in force for the last two weeks of the year ended September 30, 2002, and therefore had an insignificant impact on the statement of operations in fiscal 2002. Because such interest rate swap and cap agreements are held by GHVI and are not a contractual obligation of GHC, the fair value of these derivative financial instruments was not recognized on the balance sheet of GHC. If such derivative financial instruments were a contractual obligation of GHC, and GHC were to assume an allocated portion of such derivative financial instruments at the approximate percentage of GHVI debt allocated to GHC, an allocated fair value of the derivative financial instruments of $1.7 million would have been classified in other long-term liabilities in the combined balance sheet at September 30, 2002 related to cash flow hedges, and $1 million of after tax net unrealized losses related to interest rate swap and cap agreements would be included in accumulated other comprehensive income at September 30, 2002.

The fair value of the GHVI interest rate swap and cap agreements at September 30, 2002 were determined based upon confirmations from third party financial institutions.

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New Accounting Pronouncements

In May 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002” (“SFAS 145”). SFAS 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, which required that gains and losses from extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. Under SFAS 145, gains or losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 (“APB 30”), “Reporting Results of Operations – Reporting the Effects of Disposal of a Segment of a Business.” Applying the criteria in APB 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. SFAS 145 is effective for fiscal years beginning after May 15, 2002 for provisions related to SFAS No. 4, effective for all transactions occurring after May 15, 2002 for provisions related to SFAS No. 13 and effective for all financial statements issued on or after May 15, 2002 for all other provisions of SFAS 145. The most significant impact of the adoption of SFAS 145 is that effective October 1, 2002 any gains or losses on the extinguishment of debt that were classified as extraordinary items in prior periods that do not meet the new criteria of APB 30 for classification as extraordinary items have been reclassified. This reclassification includes the $1.0 billion gain recognized in fiscal 2001 in connection with the discharge of liabilities subject to compromise upon the Company’s emergence from Chapter 11 bankruptcy which is now included in income from continuing operations.

In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others” (the “Interpretation”), which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees. The new requirements are effective for interim and annual financial statements ending after December 15, 2002. The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee. This is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The Company will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002. GHVI has provided $22.8 million of financial guarantees that are attributable to GHC’s operations prior to December 31, 2002, related to loan and lease commitments of five jointly-owned and managed companies. The adoption of the Interpretation did not have any impact on the combined financial statements of GHC.

In January 2003, FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” with the objective of improving financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A company that consolidates a variable interest entity is called the “primary beneficiary” of that entity. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003, with early adoption permitted. Also, certain disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has concluded that one of its joint venture partnerships that operates four eldercare centers requires consolidation under FIN 46 because the Company holds a majority of the related financial risks and rewards, despite the Company’s lack of voting control. This partnership has assets of $7.3 million, annual revenues of

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approximately $15.5 million, and de minimus net income. Effective in the second fiscal quarter of 2003, the Company will begin consolidating this entity, which is held for sale. Upon consolidation, the Company will eliminate its $2.4 million investment in this partnership. GHC’s maximum exposure to loss as a result of its involvement with this partnership is $13.7 million, consisting of GHC’s $2.4 million equity investment and an $11.3 million financial guarantee related to the lease obligations of the joint venture partnership.

(3) Restatement of 2001 and 2000 Combined Financial Statements

Subsequent to the issuance of GHC’s combined financial statements for 2002, the Company restated the combined financial statements for fiscal 2001 and 2000. The Company’s restated financial statements reflect the Multicare joint venture restructuring transaction (see Note 7 — “Significant Transactions and Events”) in fiscal 2000 as a substantive acquisition of the 56.4% equity interest owned by the joint venture partners for total consideration of $200 million, including redeemable preferred stock issued by GHVI with an estimated fair value of $198 million. Previously, the Company recognized a $420 million charge in connection with the restructuring. The $420 million represented the face amount of the redeemable preferred stock issued by GHVI in connection with the restructuring. The operations of Multicare and the related accounting for the restructuring have been attributed to GHC for the purposes of preparing GHC’s carve-out financial statements. The restatement resulted in a decrease in GHC’s reported net income in 2001 of $0.5 million and a decrease in the reported net loss in 2000 of $0.5 million. No adjustments were required to restate the balance sheet as of September 30, 2001 or for any financial statements for any periods subsequent to that date due to the adoption of fresh-start reporting as of September 30, 2001. The following summarizes the impact of the restatement (in thousands):

	2001

	Previously Reported			Adjustments			As Restated

Combined statements of operations:
Net revenues	$	1,291,163		$	—		$	1,291,163
Salaries, wages and benefits		767,748			—			767,748
Other operating expenses		380,474			—			380,474
General and administrative costs		76,109			—			76,109
Depreciation and amortization		66,209			(1,096	)		65,113	⁽²⁾
Lease expense		30,250			(974	)		29,276	⁽³⁾
Interest expense		98,602			—			98,602
Debt restructuring and reorganization costs and (net gain) on debt discharge		(264,609	)		(18,602	)		(283,211	)⁽⁵⁾

Income before equity in net loss of unconsolidated affiliates and minority interests		136,380			20,672			157,052
Equity in net loss of unconsolidated affiliates		(10,228	)		—			(10,228	)
Minority interests		21,207			(21,207	)		—	⁽⁷⁾


Income from continuing operations		147,359			(535	)		146,824
Loss from discontinued operations		(33,505	)		—			(33,505	)


Net income	$	113,854		$	(535	)	$	113,319

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	2000

	Previously Reported			Adjustments			As Restated

Combined statements of operations:
Net revenues	$	1,262,084		$	—		$	1,262,084
Salaries, wages and benefits		760,376			—			760,376
Other operating expenses		1,020,358			(479,293	)		541,065	⁽¹⁾
General and administrative costs		68,888			—			68,888
Depreciation and amortization		74,016			(2,577	)		71,439	⁽²⁾
Lease expense		33,456			(974	)		32,482	⁽³⁾
Interest expense		180,899			33,651			214,550	⁽⁴⁾
Debt restructuring and reorganization costs and net gain on debt discharge		50,145			395,731			445,876	⁽⁵⁾


Income before equity in net loss of unconsolidated affiliates and minority interests		(926,054	)		53,462			(872,592	)
Income tax benefit		—			80,879			80,879	⁽⁶⁾
Equity in net loss of unconsolidated affiliates		(2,505	)		—			(2,505	)
Minority interests		133,806			(133,806	)		—	⁽⁷⁾


Loss from continuing operations		(794,753	)		535			(794,218	)
Loss from discontinued operations		(39,555	)		—			(39,555	)
Cumulative change in accounting principle		(10,412	)		—			(10,412	)


Net loss	$	(844,720	)	$	535		$	(844,185	)

The adjustments to restate were as follows:

(1)

In fiscal 2000, the Company reversed its previously recognized $420 million Multicare joint venture restructuring charge. Additionally, the Company reduced the level of goodwill impairment charges by $59.3 million in fiscal 2000. As the Company’s restated financial statements reflect the Multicare joint venture restructuring transaction as a step acquisition, there was less goodwill at the time the impairment charges were recognized than previously reported.


(2)	As a result of having less goodwill than previously reported, the Company also reduced the level of goodwill amortization expense in fiscal 2001 by $1.1 million and in 2000 by $2.6 million.


(3)	The Company reduced lease expense by $1.0 million in both fiscal 2001 and 2000 as a result of amortizing the liability for unfavorable lease agreements established in the step acquisition accounting for the Multicare joint venture restructuring.

(4)

The Company increased interest expense by $20.9 million in fiscal 2000 representing the accretion of debt recorded at fair value in the step acquisition accounting for the Multicare joint venture restructuring. This accretion was recorded until the Company filed for Chapter 11 bankruptcy protection. See (5). Also in fiscal 2000, the Company increased interest expense by $12.8 million representing an allocation from GHVI of accretion of the preferred stock through the date of the Chapter 11 filing.

(5)

In fiscal 2001, the Company reduced debt restructuring and reorganization costs by $18.6 million, principally due to lower fresh-start valuation charges as a result of having less goodwill than previously reported. In fiscal 2000, the Company increased debt restructuring and reorganization costs by $186.5 million representing the accelerated accretion of debt. The accelerated accretion occurred in the third quarter of fiscal 2000 following the Company’s filing for Chapter 11 bankruptcy protection because the face value of the debt was an allowed bankruptcy claim. Also in fiscal 2000, the Company increased debt restructuring and reorganization costs by $209.2 million representing an allocation from GHVI of accelerated accretion of the preferred stock issued by GHVI as its consideration in the Multicare joint restructuring transaction. The accelerated accretion occurred in the third quarter of fiscal 2000 following the Company’s filing for Chapter 11 bankruptcy protection because the face value of the preferred stock was an allowed bankruptcy claim.

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(6)	A deferred tax benefit was recognized in fiscal 2000 primarily as a result of the accretion of debt described under (4) and (5). The related deferred tax liability had been recorded in connection with the step acquisition accounting.


(7)	In fiscal 2001 and 2000, the Company eliminated the allocation of operating losses of Multicare to its minority owners as the joint venture restructuring transaction resulted in the substantive acquisition of the 56.4% equity interest held by the joint venture partners.

(4) Reorganization

GHC is wholly-owned by GHVI. On June 22, 2000, (the “Petition Date”) GHVI and certain of its direct and indirect subsidiaries filed for voluntary relief under Chapter 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On the same date, GHVI’s 43.6% owned affiliate, The Multicare Companies, Inc. and certain of its direct and indirect subsidiaries (“Multicare”) and certain of its affiliates also filed for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court (singularly and collectively referred to herein as “the Chapter 11 cases” or other general references to these cases unless the context otherwise requires).

GHVI and Multicare’s financial difficulties were attributed to a number of factors. First, the federal government made fundamental changes to the reimbursement for medical services provided to individuals. The changes had a significant adverse impact on the healthcare industry as a whole and on GHVI’s and Multicare’s cash flows. Second, the federal reimbursement changes exacerbated a long-standing problem of inadequate reimbursement by the states for medical services provided to indigent persons under the various states Medicaid programs. Third, numerous other factors adversely affected GHVI’s and Multicare’s cash flows, including increased labor costs, increased professional liability and other insurance costs, and increased interest rates. Finally, as a result of declining governmental reimbursement rates and in the face of rising inflationary costs, GHVI and Multicare were too highly leveraged to service their debt, including long-term lease obligations.

On October 2, 2001, (the “effective date”), GHVI and Multicare consummated a joint plan of reorganization (the “Plan”) under Chapter 11 of the Bankruptcy Code (the “Reorganization”) pursuant to a September 20, 2001 order entered by the Bankruptcy Court approving the Plan proposed by GHVI and Multicare. In general, the Plan provided for the resolution of all claims against GHVI and Multicare as of the Petition Date in exchange for new indebtedness, preferred stock, warrants and/or common stock of GHVI. In addition, Multicare became GHVI’s wholly-owned subsidiary and a new board of directors was constituted. (See note 7 — “Significant Transactions and Events”)

In accordance with SOP 90-7 (as defined in note 5 — “Fresh-Start Reporting”), GHVI recorded all expenses incurred as a result of the Bankruptcy filing separately as debt restructuring and reorganization costs. For purposes of preparing the accompanying combined statements of operations, debt restructuring and reorganization costs specifically attributable to GHC have been allocated accordingly. Certain debt restructuring and reorganization costs were allocated to GHC based upon GHC’s proportionate share of revenue. A summary of the principal categories of debt restructuring and reorganization costs and gain on discharge of debt from continuing operations follows (in thousands):

	Successor Company		Predecessor Company

	2002		2001			2000

Professional, bank and other fees	$	1,475	$	40,932		$	18,236
Employee benefit related costs		—		10,834			3,578
Swap termination fee		—		—			28,331
Accretion of allowed claims		—		—			395,731
Fresh-start valuation adjustment		—		672,689			—
Gain on discharge of debt		—		(1,011,345	)		—
Other		1,700		3,679			—

	$	3,175	$	(283,211	)	$	445,876

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The fresh start valuation adjustment represents the net write-down to fair value of the GHC’s assets and liabilities at September 30, 2001. The gain on debt discharge in 2001 represents the relief of GHC’s proportionate share of GHVI’s obligations for liabilities subject to compromise. The accretion of allowed claims represents the accelerated accretion of the carrying value of certain debt and GHVI preferred stock instruments to the amount of such instruments contractual value upon the Company’s filing for Chapter 11 bankruptcy.

(5) Fresh-Start Reporting

Upon emergence from Chapter 11 proceedings, GHC adopted the principles of fresh-start reporting in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting By Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”)/(“fresh-start reporting”). For financial reporting purposes, GHC adopted the provisions of fresh-start reporting effective September 30, 2001. In connection with the adoption of fresh-start reporting, a new entity was deemed created for financial reporting purposes, the provisions of the Plan were implemented, assets and liabilities were adjusted to their estimated fair values and GHC’s accumulated owner’s deficit was eliminated.

The reorganization value of GHC, before consideration of post filing current and long term liabilities, was determined with the assistance of financial advisors in reliance upon various valuation methods, including discounted projected cash flow analysis, price/earnings ratios, and other applicable ratios and economic industry information, and through negotiations with the various creditor parties in interest.

The following reconciliation of the Predecessor Company’s combined balance sheet as of September 30, 2001 to that of the Successor Company was prepared to present the adjustments that give effect to the reorganization and fresh-start reporting.

The adjustments entitled “Reorganization” reflect the consummation of the Plan, and are summarized as follows:

•

Other long-term assets – represents the write-off of unamortized financing fees associated with debts that were discharged in connection with the Plan.


	•	Current installments of long-term debt and long-term debt – represents the allocation of GHVI newly issued joint and several debt in accordance with the Plan, as well as debts specifically held by GHC subsidiaries that were deemed unimpaired in accordance with the Plan.


	•	Liabilities subject to compromise – represents the write-off of liabilities that were discharged under the Plan and the reclassification of debt obligations to appropriate debt accounts for those debts specifically held by GHC subsidiaries that were deemed unimpaired in accordance with the Plan.


	•	Owner’s equity (deficit) – represents the recapitalization of GHVI’s investment in GHC following the discharge of liabilities subject to compromise in accordance with the Plan.

The adjustments entitled “Fresh-Start Adjustments” reflect the adoption of fresh-start reporting, including management’s estimates of the fair value of its assets and liabilities by utilizing both independent appraisals and commonly used discounted cash flow valuation methods. The fresh-start adjustments are summarized as follows:

•

Property and equipment, net – represents the net write-down of property and equipment to its fair value.


	•	Other long-term assets – represents the write-down of cost report receivables due principally from the Medicare program. In connection with the reorganization, the Company entered into a global settlement with the federal government regarding various unresolved reimbursement appeal issues. As a result of the settlement, the Company agreed not to further pursue collection of certain of its cost report receivable accounts due from Medicare.


	•	Identifiable intangible assets – represents the fair value of customer contracts, trademarks and tradenames, and non-compete agreements.


	•	Goodwill, net – represents the write-off of all unamortized goodwill, which was deemed unrecoverable.

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	•	Other long-term liabilities – represents the write-off of $40.1 million of deferred gains recorded on sale lease back transactions, offset by the recognition of $27.8 million of net unfavorable lease liabilities recognized in order to carry certain above market operating leases at fair value.


	•	Deferred income taxes – represents the revaluation of deferred tax assets and liabilities.


	•	Minority interest – represents the elimination of GHC’s right to purchase its joint venture partners’ minority interest in Multicare for $2.0 million.


	•	Owner’s equity (deficit) – represents the offsetting net loss recognized in fresh-start reporting related to the previously described fresh-start adjustments.

Several of the Company’s subsidiaries did not file for Chapter 11 protection. The non-filing subsidiaries were not subject to the fresh-start reporting provisions under SOP 90-7 and, consequently, their balance sheets are reflected in the combined balance sheet at historical carrying value.

(in thousands)	Predecessor Company			Reorganization			Fresh-Start Adjustments			Successor Company
(in thousands)	Predecessor Company			Reorganization			Fresh-Start Adjustments			Successor Company

Assets:
Cash and equivalents, primarily restricted	$	4,599		$	—		$	—		$	4,599
Restricted investments in marketable securities		12,932			—			—			12,932
Accounts receivable, net		203,996			—			—			203,996
Prepaid expenses and other current assets		30,527			—			—			30,527

Total current assets		252,054			—			—			252,054

Property and equipment		1,251,888			—			(462,891	)		788,997
Accumulated depreciation		(239,903	)		—			236,560			(3,343	)

Property and equipment, net		1,011,985			—			(226,331	)		785,654
Restricted investments in marketable securities		38,693			—			—			38,693
Other long-term assets		87,567			(21,294	)		(16,632	)		49,641
Deferred income taxes		4,623			—			(4,623	)		—
Identifiable intangible assets		—			—			10,799			10,799
Goodwill, net		480,332			—			(480,332	)		—

Total assets	$	1,875,254		$	(21,294	)	$	(717,119	)	$	1,136,841


Liabilities and Owner’s Equity (Deficit)
Current installments of long-term debt	$	—		$	33,818		$	—		$	33,818
Accounts payable		39,165			—			—			39,165
Accrued expenses		45,953			—			162			46,115
Accrued compensation		71,080			—			—			71,080
Accrued interest		7,346			—			—			7,346
Current portion of self-insured liability reserves		12,932			—			—			12,932

Total current liabilities		176,476			33,818			162			210,456

Liabilities subject to compromise		1,938,477			(1,938,477	)		—			—
Long-term debt		10,441			283,898			—			294,339
Self-insurance liability reserves		26,834			—			—			26,834
Other long-term liabilities		45,367			—			(12,302	)		33,065
Minority interest		2,000			—			(2,000	)		—
Owner’s equity (deficit)		(324,341	)		1,599,467			(702,979	)		572,147

Total liabilities and owner’s equity (deficit)	$	1,875,254		$	(21,294	)	$	(717,119	)	$	1,136,841

Accounting Pronouncements Adopted in Fresh-Start Reporting

As of September 30, 2001, and in accordance with the early adoption provisions of SOP 90-7, the Company adopted the provisions of Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS No. 141”), Statement of Financial Accounting Standards No. 142 “Goodwill and

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Other Intangible Assets” (“SFAS No. 142”), and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).

The principal provisions of SFAS No. 141 require that all business combinations be accounted for by the purchase method of accounting and identifiable intangible assets are to be recognized apart from goodwill.

The principal provisions of SFAS No. 142 require that goodwill and other intangible assets deemed to have an indefinite useful life are not amortized but rather tested annually for impairment. Under SFAS No. 142, intangible assets that have finite useful lives continue to be amortized over their useful lives. SFAS No. 142 requires companies to test intangible assets for impairment that are not amortized at least annually by comparing the fair value of those assets to their recorded amounts. See note 11 — “Goodwill and Identifiable Intangible Assets”.

The principal provisions of SFAS No. 144 address financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes Statement of Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” (“SFAS No. 121”), it retains many of the fundamental provisions of that statement. Under SFAS No. 144, assets held for sale or discontinued businesses are removed from the financial results of continuing operations. See note 21 — “Assets Held for Sale or Closed”.

(6) Certain Significant Risks and Uncertainties

Spin-off

GHC has not yet operated as a stand-alone company, and will have a new board of directors appointed by GHVI. Following the spin-off, GHC will have less financial and other resources than the larger pre-spin-off GHVI. GHC’s ability to satisfy its obligations and maintain profitability will be solely dependent upon the future performance of its operating businesses, and GHC will not be able to rely upon the financial and other resources of those business lines remaining with GHVI.

GHC’s corporate functions, including legal functions, treasury administration, insurance administration, internal audit, human resource management, and corporate accounting and income tax administration have been performed by GHVI. There can be no assurances that these costs will not increase, perhaps substantially, after the spin-off. Following the spin-off, GHC also will be responsible for the additional costs associated with being an independent public company, including costs related to public reporting, corporate governance, listed and registered securities and investor relations.

GHC and NCI will agree contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, GHC and NCI will agree to certain mutually beneficial commercial arrangements intended to reflect terms similar to those that would be agreed to by parties bargaining at arm’s-length.

Management is in the process of creating its own corporate business functions to replace many of the corporate business functions GHVI currently provides. GHC may incur costs for these functions that are higher than the amounts reflected in the accompanying historical combined financial statements.

Revenue Sources

GHC receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long-term care facilities which utilize the Company’s other ancillary services.

The Medicaid and Medicare programs are highly regulated. The failure of the Company or its customers to comply with applicable reimbursement regulations could adversely affect the Company’s business. The Company monitors its receivables from third party payor programs and reports such revenues at the net realizable value expected to be received.

On December 15, 2000, Congress passed the Benefits Improvement Protection Act that increased the nursing component of federal prospective payment system’s rates by approximately 16.7% for the period from April 1, 2001 through September 30, 2002. The legislation also changed the 20% add-on to 3 of the 14 rehabilitation resource utilization group categories to a 6.7% add-on to all 14 rehabilitation resource

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utilization group categories beginning April 1, 2001. The Medicare Part B consolidated billing provision of the Balance Budget Refinement Act was repealed except for Medicare Part B therapy services and the moratorium on the $1,500 therapy caps was extended through calendar year 2002. These changes had a positive impact on operating results.

A number of provisions of the Balanced Budget Refinement Act and the Benefits Improvement and Protection Act enactments, providing additional funding for Medicare participating skilled nursing facilities, expired on September 30, 2002 (the Skilled Nursing Facility Medicare Cliff). Effective October 1, 2002, Medicare rates adjusted for the Skilled Nursing Facility Medicare Cliff were increased by a 2.6% annual market basket adjustment. For GHC, the net impact of these provisions is estimated to adversely impact annual revenue beginning October 1, 2002 by approximately $24 million. The expiration of these provisions after considering the 2.6% annual market basket adjustment, has reduced our Medicare per diems per beneficiary, on average, by approximately $24, resulting in reduced revenue and EBITDA of approximately $18.0 million in the Company’s first nine months of fiscal 2003.

On August 4, 2003, the Centers for Medicare and Medicaid Services published in the Federal Register the fiscal year 2004 prospective payment system rules for skilled nursing facilities, which are effective October 1, 2003. The final rules enhance the reimbursement rates for fiscal year 2004 by increasing base rates by 6.26% (a 3% increase in the annual update factor and a 3.26% upward adjustment correcting previous forecast errors). These changes are estimated to increase Medicare payment rates per patient day by $19. The final rules also provide for the continuation through fiscal year 2004 of certain payment add-ons that were authorized in the Balanced Budget Refinement Act to compensate for non-therapy ancillaries.

The Skilled Nursing Facility Medicare Cliff could adversely impact the liquidity of GHC’s other service related business customers, resulting in their inability to pay GHC, or to pay GHC timely, for its products and services. This factor, coupled with the adverse impact of the Skilled Nursing Facility Medicare Cliff to the liquidity of GHC’s inpatient services segment, could require it to borrow in order to fund working capital needs, and in turn, cause GHC to become more highly leveraged.

There are additional provisions in the Medicare statute affecting rehabilitation therapy, diagnostic services and the payment for services in other health settings. In February 2003, Congress passed legislation adjusting practitioner fee schedules. The Congressional action prevented a formula driven reduction in fee schedules. This restoration of rates affected not only doctors, but also payment for most professional practitioners including licensed rehabilitation professionals. In addition, effective September 1, 2003, the moratorium on implementing payment caps on Medicare Part B rehabilitation therapy services expired. The therapy caps are expected to reduce annual net revenues by approximately $18.9 million and EBITDA by approximately $4.9 million.

It is not possible to quantify fully the effect of potential legislative or regulatory changes, the administration of such legislation or any other governmental initiatives on GHC’s business. Accordingly, there can be no assurance that the impact of these changes or any future healthcare legislation will not further adversely affect GHC’s business. There can be no assurance that payments under governmental and private third party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. GHC’s financial condition and results of operations may be affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays between the time that revenue is recognized and the time that reimbursement amounts are settled.

GHC’s inpatient services segment earned revenues from the following payor sources for the periods presented:

	Fiscal year ended

	2002			2001			2000

Medicaid		48	%		48	%		49	%
Medicare		30	%		28	%		25	%
Private pay and other		22	%		24	%		26	%

		100	%		100	%		100	%

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(7) Significant Transactions and Events

Multicare Joint Venture Restructuring

•

terminated the put option under the put/call agreement;


	•	amended the call option to provide GHVI with the right to purchase all of the shares of common stock of Genesis ElderCare Corp. not owned by GHVI for $2.0 million in cash at any time prior to the October 8, 2009 expiration. GHVI’s joint venture partners continued to own 56.4% of Genesis ElderCare Corp.’s common stock;


	•	granted GHVI an irrevocable proxy to vote the shares of common stock of Genesis ElderCare Corp. held by GHVI’s joint venture partners on all matters to be voted on by shareholders, including the election of directors;


	•	granted GHVI the right to appoint two-thirds of the members of the Genesis ElderCare Corp. board of directors;


	•	granted GHVI the right to appoint 100% of the members of the operating committee of the Genesis ElderCare Corp. board of directors; and


	•	provided, in a separate but related transaction, a $50.0 million infusion of cash in the form of the joint venture partners’ purchase of GHVI common stock.

Amendments made to the stockholders’ agreement and the put / call agreement gave the Company managerial, operational and financial control of Multicare, such that the Company began consolidating the financial statements of Multicare effective October 1, 1999.

Because of the amendments to the stockholders’ agreement and the fact that the amended call agreement gave the Company the right to purchase the remaining 56.4% interest in Multicare for a nominal $2 million, the Company effectively acquired the joint venture partners 56.4% equity interest in the restructuring transaction and began accounting for Multicare as a wholly-owned subsidiary.

The Multicare joint venture restructuring transaction has been accounted for as a step acquisition, whereby the Company recorded the assets and liabilities of Multicare at 43.6% of their historical cost and 56.4% of their fair value. The Series H and I Preferred stock issued by GHVI as consideration in the Multicare joint venture restructuring was recorded at its estimated fair value of $198.0 million, representing the then market value of the underlying GHVI common stock that the Series H and I Preferred were convertible into. Because the Series H and I Preferred were issued by GHVI, not GHC, the capitalization of the Series H and I Preferred is reflected in the combined balance sheet in GHVI’s equity in GHC. The Series

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H and I Preferred was issued with a face value of $420.0 million. Subsequent to the Multicare joint venture restructuring transaction, and using the effective interest method, the Company recorded interest expense in fiscal 2000 of $12.8 million representing an allocation from GHVI of the accretion of the $198.0 million fair value to the $420.0 million face value of the Series H and I Preferred. This accretion was recorded until the Company filed for Chapter 11 bankruptcy protection at which time the Company recognized a charge included in debt restructuring and reorganization costs for the remaining difference between the carrying value and face value of the Series H and I Preferred because the face value of the Series H and I Preferred was an allowed bankruptcy claim.

In connection with the step acquisition accounting, the Company recorded approximately $168.0 million of goodwill. The most significant other purchase accounting adjustment was the recognition of 56.4% of Multicare’s debt obligations at fair value, resulting in a debt discount of approximately $207.4 million. Subsequent to the Multicare joint venture restructuring transaction, and using the effective interest method, the Company accreted the $568.6 million carrying value of Multicare debt to the $776.0 million contractual obligation of the debt. This accretion was recorded until the Company filed for Chapter 11 bankruptcy protection at which time the Company recognized a charge included in debt restructuring and reorganization costs for the remaining difference between the carrying value and face value of the debt because the face value of the debt was an allowed bankruptcy claim.

Sale of Ohio Operations

On May 31, 2000, Multicare sold 14 eldercare centers with 1,128 beds located in the state of Ohio for $33.0 million. GHC recorded a loss on sale of the Ohio properties of $7.9 million, which is included in other operating expenses in the combined statement of operations.

(8) Restricted Investments in Marketable Securities

Marketable securities (classified as available for sale) are held by the Company’s wholly-owned subsidiary, LHC, incorporated under the laws of Bermuda. LHC provides various insurance coverages to GHC, GHVI and to unrelated entities, most of which are managed by the Company.

The current portion of restricted investments in marketable securities represents an estimate of the level of outstanding losses the Company expects to pay in the succeeding year.

Marketable securities at September 30, 2002 consist of the following (in thousands):

	Amortized cost		Unrealized gains		Unrealized losses			Fair value
	Amortized cost		Unrealized gains		Unrealized losses			Fair value

Fixed interest securities:
U.S. mortgage backed securities	$	5,464	$	774	$	—		$	6,238
Corporate bonds		12,209		633		(42	)		12,800
Government bonds		1,413		22		(95	)		1,340
Term deposits		2,495		—		—			2,495
Equity securities		1,103		—		—			1,103
Money market funds		62,171		—		—			62,171

	$	84,855	$	1,429	$	(137	)	$	86,147

Less: Current portion of restricted investments									(15,074	)

Long-term restricted investments									71,073

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Marketable securities at September 30, 2001 Company consist of the following (in thousands):

	Amortized cost		Unrealized gains		Unrealized losses			Fair value
	Amortized cost		Unrealized gains		Unrealized losses			Fair value

Fixed interest securities:
U.S. mortgage backed securities	$	7,554	$	616	$	—		$	8,170
Corporate bonds		6,600		189		—			6,789
Equity securities		1,580		—		(509	)		1,071
Term deposits		1,497		—		—			1,497
Money market funds		34,098		—		—			34,098

	$	51,329	$	805	$	(509	)	$	51,625

Less: Current portion of restricted investments									(12,932	)

Long-term restricted investments									38,693

Fixed interest securities held at September 30, 2002 mature as follows (in thousands):

	2002

	Amortized cost		Fair value
	Amortized cost		Fair value

Due in one year or less	$	2,365	$	2,381
Due after 1 year through 5 years		12,892		13,792
Due after 5 years through 10 years		3,271		3,578
Over 10 years		558		627

	$	19,086	$	20,378

Actual maturities may differ from stated maturities because borrowers have the right to call or prepay certain obligations with or without prepayment penalties.

In the normal course of business, LHC’s bankers have issued letters of credit totaling $74.9 million in 2002 and $39.7 million in 2001 in favor of insurers. Cash and equivalents in the sum of $2.5 million, term deposits in the sum of $2.5 million and investments with an amortized cost of $81.1 million and a market value of $82.4 million were pledged as security for these letters of credit as of September 30, 2002.

(9) Property and Equipment

Property and equipment at September 30, 2002 and 2001 consist of the following (in thousands):

	2002			2001

Land	$	77,505		$	83,933
Buildings and improvements		587,641			613,139
Equipment, furniture and fixtures		88,682			81,107
Construction in progress		12,823			10,818

		766,651			788,997
Less: accumulated depreciation		(38,204	)		(3,343	)

Net property and equipment	$	728,447		$	785,654

In accordance with the provisions of fresh-start reporting, the Company revalued its property and equipment to estimated fair value at September 30, 2001, with the exception of certain subsidiaries that were not party to the Chapter 11 cases. Such subsidiaries’ property and equipment, and related accumulated depreciation, remain at their historical carrying value.

Property and equipment includes an allocation of equipment with a net carrying value of $9.0 million at September 30, 2002 and 2001 of information systems related equipment that is managed and controlled by GHVI on a centralized basis. The allocation of such equipment was based upon GHC’s proportionate share of revenue.

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(10) Other Long-Term Assets

Other long-term assets at September 30, 2002 and 2001 consist of the following (in thousands):

	2002		2001

Notes receivable and revenue bonds, net	$	15,250	$	12,726
Deferred financing fees, net		5,052		4,904
Cost report receivables, net		3,461		11,223
Property deposits and funds held in escrow		13,836		12,174
Investments in unconsolidated affiliates		13,739		8,614
Other, net		2,431		—

Other long-term assets	$	53,769	$	49,641

Notes receivable and revenue bonds, net at September 30, 2002 and 2001 bear interest at rates ranging from 7.25% to 10.45% and mature at various times ranging from 2003 to 2029. The majority of the mortgage notes and revenue bonds are secured by first or second mortgage liens on underlying facilities and personal property, accounts receivable, inventory and/or gross facility receipts, as defined.

GHC has agreed to provide third parties, including facilities under management contract, with $7.4 million of working capital lines of credit. The unused portion of working capital lines of credit was $5 million at September 30, 2002. See note 19 – “Commitments and Contingencies”.

(11) Goodwill and Identifiable Intangible Assets

The combined statements of operation for the years ended September 30, 2001 and 2000 include $14.3 million and $16.9 million of goodwill amortization, respectively. In connection with the adoption of fresh-start reporting, GHC’s goodwill of approximately $480.3 million was written down to zero. Consequently, there is no goodwill to amortize in the year ended September 30, 2002. The following table adjusts the reported loss from continuing operations for the years ended September 30, 2001 and 2000 on a pro forma basis assuming the provisions of SFAS No. 142 were adopted effective October 1, 1999 (in thousands):

	Predecessor Company
	2001		2000

Income (loss) from continuing operations – as reported	$	146,824	$	(794,218	)
Add: after-tax goodwill amortization		14,342		16,903

Income (loss) from continuing operations – as adjusted	$	161,166	$	(777,315	)

In adopting the requirements of fresh-start reporting, GHC recognized certain identifiable intangible assets, which were established at September 30, 2001 at their estimated fair value and, in accordance with SFAS No. 142, are being amortized on a straight-line basis over their estimated useful lives. Identifiable intangible assets at September 30, 2002 and 2001, consist of the following (in thousands):

	2002		2001

Customer contracts	$	—	$	4,299
Trademarks and tradenames		—		5,000
Non-compete agreements		—		1,500

Identifiable intangible assets	$	—	$	10,799

Identifiable intangible assets were reduced to zero in the year ended September 30, 2002 pursuant to SOP 90-7 as a consequence of the utilization of deferred tax assets. See note 14 — “Income Taxes”.

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(12) Long-Term Debt

Long-term debt at September 30, 2002 and 2001, including debt allocated or directly attributed to GHC, consist of the following (in thousands):

	September 30, 2002					September 30, 2001

	Total GHVI		Allocated to GHC			Total GHVI		Allocated to GHC
	Total GHVI		Allocated to GHC			Total GHVI		Allocated to GHC

Allocated debt of GHVI	$	603,416	$	252,738		$	527,605	$	214,737
Mortgages and other secured debt				73,738					113,420

				326,476					328,157
Less:
Current portion of long-term debt				(45,566	)				(33,818	)

Long-term debt			$	280,910				$	294,339

GHVI and each of its subsidiaries that are named as guarantors under GHVI’s senior credit facility and senior secured notes (“joint and several debt”) have granted the lenders first priority liens and security interests in all unencumbered property, including but not limited to: fee owned property, bank accounts, investment property, accounts receivable, equipment and general intangible assets. GHVI’s senior credit facility and senior secured notes limit, among other things, GHVI’s ability to incur additional indebtedness or contingent obligations, permit additional liens, to make additional acquisitions, to sell or dispose of assets, to create or incur liens on assets, to pay dividends on common stock and to merge or consolidate with any other person or entity.

The joint and several debt instruments require GHVI to maintain compliance with certain financial and non-financial covenants, including minimum EBITDAR (as defined); limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth. GHVI was in compliance with all covenants applicable at September 30, 2002.

Allocated debt of GHVI

Included in GHC’s financial statements is an allocated portion of GHVI’s joint and several debt issued in connection with the Reorganization of GHVI in 2001. For the purpose of preparing the carve-out financial statements at September 30, 2001, GHC’s allocation of joint and several debt was based upon the level of debt estimated to be attributed to the operations of GHC upon emergence from bankruptcy. This allocation is consistent with the capital structure agreed to by creditors and the bankruptcy court. Specifically, the initial debt allocation equals three times fiscal 2001 EBITDA, as adjusted. EBITDA, as adjusted, is calculated by subtracting from revenue all operating expenses and lease expense before certain charges described in note 18 — “Loss on Impairment and Other Charges”. Joint and several debt at September 30, 2002 was derived by rolling forward the joint and several debt balance attributed to GHC at September 30, 2001. During fiscal 2002, joint and several debt of $10 million was borrowed by GHC in order to exercise an option to purchase three eldercare centers. Also during fiscal 2002, approximately $28 million of joint and several debt was borrowed by GHC to refinance several higher rate fixed mortgages. As a result of this allocation approach, joint and several debt of $252.7 million and $214.7 million at September 30, 2002 and 2001, respectively is allocated to GHC. The weighted average interest rate on the allocated debt at September 30, 2002 and 2001 was 6.4% and 8.8%, respectively.

Mortgages and other secured debts

At September 30, 2002 and 2001, GHC had $73.7 million and $113.4 million of other secured debt consisting principally of revenue bonds and secured bank loans, including loans insured by the Department of Housing and Urban Development. These loans are secured by the underlying real and personal property of individual eldercare centers and have fixed rates of interest ranging from 3% to 11%, with a weighted average rate of 8.8% at September 30, 2002.

The maturity of total debt of $326.5 million at September 30, 2002 is as follows: $45.6 million in fiscal 2003, $5.8 million in fiscal 2004, $5.9 million in fiscal 2005, $6.0 million in fiscal 2006, $206.7 million in fiscal 2007 and $56.5 million thereafter.

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(13) Leases and Lease Commitments

The Company leases certain facilities under operating leases. Future minimum payments for the next five years under non-cancelable operating leases at September 30, 2002 are as follows (in thousands):

	Minimum Payment
Year ending September 30,	Minimum Payment

2003	$	33,138
2004		32,806
2005		29,710
2006		25,866
2007		21,774
Thereafter		47,826

For the year ended September 30, 2002, the Company incurred $29.1 million of lease obligation costs. The Company classifies operating lease costs associated with its eldercare centers and corporate office sites as lease expense in the combined statements of operations, while the operating lease costs of other health service sites are included within other operating expenses.

In connection with the adoption of fresh-start reporting, the Company recorded an unfavorable lease credit associated with 40 leased properties which is amortized using the straight-line method over the remaining lives of the leases. The unfavorable component of these lease contracts was estimated using market comparable lease coverage ratios for similar assets. The unfavorable lease liability at September 30, 2002 of $23.4 million will be amortized as a reduction to lease expense over the remaining lease terms, which have a weighted average term of five and one half years.

Eighteen of our eldercare centers are leased from ElderTrust, a real estate investment trust, at an annual cash basis lease cost of $16.7 million.

(14) Income Taxes

Total income tax expense (benefit) for the years ended September 30, 2002, 2001 and 2000 was as follows (in thousands):

	Successor Company			Predecessor Company
	Successor Company			Predecessor Company

	2002			2001		2000

Income from continuing operations before equity in net income
(loss) of unconsolidated affiliates and minority interests	$	26,798		$	—	$	(80,879	)
Loss from discontinued operations		(3,400	)		—		—

Total	$	23,398		$	—	$	(80,879	)

The components of the provision for income taxes on income (loss) from continuing operations for the years ended September 30, 2002, 2001 and 2000 were as follows (in thousands):

	Successor Company		Predecessor Company
	Successor Company		Predecessor Company

	2002		2001		2000

Current:
Federal	$	—	$	—	$	—
State		—		—		—

		—		—		—

Deferred:
Federal		22,388		—		(72,584	)
State		4,410		—		(8,295	)

		26,798		—		(80,879	)

Total	$	26,798	$	—	$	(80,879	)

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Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to net income (loss) from continuing operations before income taxes, equity in net income (loss) of unconsolidated affiliates and minority interests (in thousands):

	Successor Company			Predecessor Company

	2002			2001			2000

Computed “expected” tax	$	24,050		$	54,968		$	(305,407	)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal tax benefits		2,796			—			—
Amortization of goodwill		—			4,357			4,245
Targeted jobs tax credit		(1,301	)		(1,157	)		(1,389	)
Write-off of non deductible goodwill		—			241,984			24,347
Change in valuation allowance		—			(299,538	)		277,595
Accretion of debt discount		—			—			(80,879	)
Other, net		1,253			(614	)		609

Total income tax expense	$	26,798		$	—		$	(80,879	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2002 and 2001 are presented below (in thousands):

	2002			2001

Deferred Tax Assets:
Accounts receivable	$	13,679		$	24,354
Accrued liabilities and reserves		43,456			42,411
Net operating loss carryforwards		117,000			117,000
Net unfavorable leases		8,352			10,517
Other		9,773			4,679

Deferred tax assets		192,260			198,961

Valuation allowance		(130,797	)		(148,657	)

Net deferred tax assets		61,463			50,304

Deferred Tax Liabilities:
Accrued liabilities and reserves		(8,304	)		(7,774	)
Depreciation		(53,159	)		(42,530	)

Total deferred tax liability		(61,463	)		(50,304	)

Net deferred tax liability	$	—		$	—

GHC does not file a separate federal tax return. It is included in the consolidated federal tax return filed by GHVI.

The tax provisions reflected in the combined statements of operations and the deferred and current tax amounts reflected in the combined balance sheets have been computed based on GHC’s separate company book/tax differences to arrive at GHC’s taxable income. GHC’s net operating loss carryforward represents unutilized taxable losses after reduction for cancellation of debt income available for net operating loss (“NOL”) carryforwards.

At September 30, 2002 and 2001, GHC’s deferred tax balances were determined by reference to the differences in book and tax values of assets and liabilities.

Current and deferred taxes calculated under the separate company approach to intercorporate tax allocation followed in preparing the combined financial statements may not necessarily reflect the impact of income taxes on the results of operations, cash flows or financial position of GHC in the future.

For the years ended September 30, 2002, 2001 and 2000, GHC provided $26.8 million, $0, and $(80.9) million, respectively for income taxes from continuing operations, and utilized no NOL carryforwards. At September 30, 2002 and 2001, GHC had deferred tax assets in excess of deferred tax liabilities, inclusive of tax benefits related to net operating loss carryforwards. Because management believes it is more likely

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than not that the net deferred tax assets will not be realized, the net deferred tax assets in their entirety remain subject to a 100% valuation allowance. At September 30, 2002, based on its interpretation of applicable provisions of the Internal Revenue Code, GHC had approximately $300 million of NOL carryforwards, utilization of which is subject to limitation. The actual net operating loss carryforwards available to GHC following the spin-off will be significantly less than the net operating loss carryforwards presented for the purpose of preparing GHC’s carve-out financial statements. The ultimate net operating loss carryforwards available to GHC will not be determinable until the fiscal year ended September 30, 2004. Pursuant to SOP 90-7, future utilization of deferred tax assets existing at the October 2, 2001 bankruptcy emergence date were applied first as a reduction of identifiable intangible assets and, then, as an increase to owner’s equity.

(15) Related Party Transactions

Historically, cash collected by GHC in excess of operating needs has been transferred to GHVI, and GHC’s cash requirements have been funded by GHVI. Other than net income, all capital transactions between GHC and GHVI have been recorded in the intercompany capital account.

GHVI provided certain general and administrative services to GHC, including finance, legal, treasury, information systems and human resources. The cost for these services was allocated to GHC based upon various allocation percentages dependent upon the type of service provided. For instance, certain costs were allocated based upon GHC’s proportionate share of revenues, labor related costs or other operating expenses; as well as other methods which management believes to be reasonable. These cost allocations were $47.1 million, $42.4 million and $38.4 million in fiscal 2002, 2001 and 2000, respectively. As a result of the spin-off, GHC will be required to perform these general and administrative services using its own resources or purchased services and will be responsible for the costs and expenses associated with the management of a public company. GHC and NCI will agree contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, GHC and NCI will agree to certain mutually beneficial commercial arrangements intended to reflect terms similar to those that would be agreed to by parties bargaining at arm’s-length.

NeighborCare provides institutional pharmacy services to GHC. Sales to GHC affiliates totaled $100.5 million, $98.1 million and $99.9 million in fiscal 2002, 2001 and 2000, respectively.

(16) GHVI’s Equity in GHC

	Successor Company						Predecessor Company

	2002			2001			2000

Balance at beginning of year	$	571,955		$	(485,964	)	$	(91,106	)
Net income (loss)		37,551			113,319			(844,185	)
Net transactions with GHVI		(7,581	)		944,600			449,327

Balance at end of year	$	601,925		$	571,955		$	(485,964	)

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(17) Stock Option Plans

GHC’s employees participate in the 2001 Plan. In May 2003, GHVI accepted for exchange and cancellation employee stock options (“Options”) to purchase 1,724,000 shares of its common stock, par value $0.02 per share (“Common Stock”) granted pursuant to the 2001 Plan. These Options were tendered in consideration for either an accelerated vesting of restricted stock grants held by certain key executives and/or cash. Specifically, those holders of Options who had received awards of more than 2,000 restricted shares of GHVI’s Common Stock under the 2001 Plan and properly tendered their Options received the acceleration of vesting of all such restricted shares plus a cash payment of $2.50 per share underlying the Option for Options having an exercise price below $20.00 per share, and those holders of Options who had not received awards of more than 2,000 restricted shares and properly tendered their Options received, for those Options having an exercise price of at least $20.00 per share, a cash payment of $2.00 per share underlying the Option, and, for those Options having an exercise price below $20.00 per share, a cash payment of $2.50 per share subject to the Option.

The information in the following table is based upon an allocation of stock option grants made to employees that provide services to GHC.

	Option Price Per Share		Outstanding		Exercisable		Available for Grant
	Option Price Per Share		Outstanding		Exercisable		Available for Grant

Balance at September 30, 2001		—		—		—		—

Authorized		—		—		—		2,183,726
Granted		$18.75-$20.33		1,251,250		—		(1,251,250	)
Exercisable		—		—		254,587		—

Balance at September 30, 2002		$18.75-$20.33		1,251,250		254,587		932,746

No options were exercised or expired in the fiscal year ended September 30, 2002 under the 2001 Plan. The options granted and exercisable in the previous table represent allocated grants of those current GHVI employees that are expected to provide service to GHC following the spin-off, and as such, no forfeited options of previously terminated employees of GHVI were allocated to GHC.

On October 2, 2001, the Board of Directors of GHVI authorized the issuance of 750,000 restricted shares of GHVI common stock to certain of its senior officers. These shares were to vest quarterly over a five year period. Of these shares, 226,400 unvested shares with a fair value of $4.6 million were allocable to GHC employees at September 30, 2002.

(18) Loss on Impairment of Assets and Other Charges

	Successor Company		Predecessor Company

	2002		2001		2000

Asset impairments	$	1,456	$	—	$	174,231
Uncollectible receivables		—		47,753		32,955
Other charges		—		25,339		38,638

Charges included in operating expenses	$	1,456	$	73,092	$	245,824

Asset impairments

During 2000, in connection with budget preparations for the forthcoming year and in accordance with SFAS No. 121, management reviewed the current and projected undiscounted cash flows of each eldercare center. This review indicated that the assets of certain eldercare centers were impaired. The fair market value of businesses deemed potentially impaired were then estimated and compared to the carrying values of the long-lived assets. Any excess long-lived asset carrying value over the estimated fair value was written-off.

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Fair value was estimated using a per bed value determined by management. The total loss for SFAS No. 121 impairments of $174.7 million was associated with 48 eldercare centers. Of this charge, $28.9 million relates to discontinued businesses and is included in the loss from discontinued operations in the combined statements of operations. Also, during fiscal 2000, management closed or terminated the leases of six underperforming eldercare centers. As a result, a charge of $28.4 million was recorded to account for certain impaired and abandoned assets of these eldercare centers. In 2002, the Company wrote-off $1.5 million of long-lived assets that it deemed impaired related to two eldercare center projects still in the development stages.

Uncollectible receivables

During fiscal 2001 and 2000, the Company performed periodic assessments of the collectibility of amounts due from certain current and former customers in light of the adverse impact of changes to the Medicare reimbursement system on their liquidity and profitability. In certain cases, customers filed for protection under Chapter 11 of the Bankruptcy Code. As a result of the Company’s assessments, the carrying value of notes receivable, advances and trade receivables due from these customers was written down by $27.4 million and $20.5 million in fiscal 2001 and fiscal 2000, respectively.

In fiscal 2001, management performed a re-evaluation of its allowance for doubtful accounts triggered by deterioration in the agings of certain categories of receivables. Management believed that such deterioration in the agings were due to several prolonged negative factors related to the operational effects of the bankruptcy filings such as personnel shortages and the time demands required in normalizing relations with vendors and addressing a multitude of bankruptcy issues. As a result of this re-evaluation, management determined that an increase in the allowance for doubtful accounts of $20.4 million was necessary.

Other charges

In fiscal 2001 and 2000, as a result of adverse claims development management re-evaluated the levels of reserves established for certain self-insured and other programs, including workers’ compensation, health insurance and general liability insurance, resulting in charges of $12.3 million and $20.0 million, respectively.

In fiscal 2001 and 2000, GHC incurred charges of $13.0 million and $18.6 million, respectively, principally related to contract and litigation matters and settlements, and certain other charges.

(19) Commitments and Contingencies

Financial Commitments

GHC has extended $7.4 million in working capital lines of credit to certain jointly owned and managed companies, of which $5.0 million were unused at September 30, 2002. Credit risk represents the accounting loss that would be recognized at the reporting date if the affiliate companies were unable to repay any amounts utilized under the working capital lines of credit. Commitments to extend credit to third parties are conditional agreements generally having fixed expiration or termination dates and specific interest rates and purposes.

GHC is a party to joint venture partnerships whereby its ownership interests are 50% or less of the total capital of the partnerships. GHC accounts for these partnerships using the equity method of accounting and, therefore, the assets, liabilities and operating results of these partnerships are not consolidated with GHC’s. The carrying value of GHC’s investment in joint ventures is $13.7 million and $8.6 million at September 30, 2002 and 2001, respectively.

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Although GHC is not contractually obligated to fund operating losses of these partnerships, in certain cases, GHC has extended credit to such joint venture partnerships in the past and may decide to do so in the future in order to realize economic benefits from our joint venture relationship. Management assesses the creditworthiness of such partnerships in the same manner it does other third-parties. As of September 30, 2002, GHVI has provided $11.5 million of financial guarantees related to loan commitments of four jointly owned and managed companies. GHVI has also provided $11.3 million of financial guarantees related to lease obligations of one jointly-owned and managed company that operates four eldercare centers that are attributed to GHC’s operations. The guarantees are not recorded as liabilities on GHC’s balance sheet unless it is required to perform under the guarantee. Credit risk represents the accounting loss that would be recognized at the reporting date if counter-parties failed to perform completely as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties. Following the spin-off, GHC may continue to be obligated under these guarantee agreements.

Legal Proceedings

GHC is a party to litigation arising in the ordinary course of business. Management does not believe the results of such litigation, even if the outcome is unfavorable, would have a material adverse effect on the financial position of GHC.

(20) Fair Value of Financial Instruments

The carrying amount and fair value of financial instruments at September 30, 2002 and 2001 consist of the following (in thousands):

	2002				2001

	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Cash and equivalents, primarily restricted	$	7,420	$	7,420	$	4,599	$	4,599
Restricted investments in marketable securities		86,147		86,147		51,625		51,625
Accounts receivable, net		200,158		200,158		203,996		203,996
Accounts payable		38,117		38,117		39,165		39,165
Debt		326,476		344,137		328,157		350,585

The carrying value of cash and equivalents, net accounts receivable and accounts payable is equal to its fair value due to their short maturity. The Company’s restricted investments in marketable securities are carried at fair value.

The fair value of debt, is computed using discounted cash flow analysis, based on GHVI’s estimated incremental borrowing rate at the end of each fiscal period presented.

(21) Assets Held for Sale or Closed

In the normal course of business, GHC continually evaluates the performance of its operating units, with an emphasis on selling or closing under-performing or non-strategic assets. On September 30, 2001, GHC adopted the provisions of SFAS 144. Under SFAS 144, discontinued businesses, including assets held for sale, are removed from the results of continuing operations. The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are classified as discontinued operations in the combined statements of operations. Businesses sold or closed prior to our adoption of SFAS 144 continue to be reported in the results of continuing operations.

Since the Company’s adoption of SFAS 144, it has classified several businesses as held for sale or closed. An increasing trend in malpractice litigation claims, rising costs of eldercare malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the state of Florida where, because of higher claim amounts, general liability and professional liability costs have become increasingly expensive. This increase in insurance costs prompted GHC to sell its otherwise profitable operations in the state of Florida.

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Since its inception, GHC has continued to develop its eldercare network in concentrated geographic markets in the eastern United States. The geographic location of the Company’s eldercare centers in the states of Illinois and Wisconsin relative to its strategic markets, combined with the operating performance of those centers, has prompted GHC to identify those assets as held for sale. In addition to these assets, the Company has identified 12 eldercare centers in other states, one rehabilitation services clinic, one physician services practice, and its ambulance business as held for sale or closed due to under-performance.

Consolidated interest expense has been allocated to discontinued operations for all periods presented based on allocated debt expected to be repaid in connection with the sale of the assets, as required under GHVI’s senior credit facility. The amount of after-tax interest expense allocated to discontinued operations in fiscal 2002, fiscal 2001 and fiscal 2000 was $3.7 million, $8.6 million and $10.9 million, respectively.

GHC has separately classified $46.1 million of carrying value associated with assets held for sale in the combined balance sheet at September 30, 2002.

The following table sets forth the components of net revenue and loss from discontinued operations for the fiscal periods presented (in thousands):

	Successor Company			Predecessor Company

	2002			2001			2000

Net revenues	$	232,351		$	229,716		$	210,668

Net operating loss of discontinued businesses	$	(2,233	)	$	(33,505	)	$	(39,555	)
Loss on discontinuation of businesses		(6,487	)		—			—
Income tax benefit		3,400			—			—

Loss from discontinued operations, net of taxes	$	(5,320	)	$	(33,505	)	$	(39,555	)

The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value.

(22) Segment Information

The Company’s principal operating segments are identified by the types of products and services from which revenues are derived and are consistent with the reporting structure of the Company’s internal organization.

The Company includes in inpatient services revenues all room and board charges and ancillary service revenue for its eldercare customers at the eldercare centers which the Company owns or leases.

The Company includes in rehabilitation services all revenue earned from the provisions of speech pathology, physical therapy and occupational therapy.

The accounting policies of the segments are the same as those of the combined organization. All intersegment sales prices are market based.

The Company’s capital costs in the following segment information (depreciation and amortization, lease expense, and interest), as well as minority interests for the year ended September 30, 2002 reflect the provisions of the Plan and the impact of fresh-start reporting. These costs for periods prior to the Company’s emergence from bankruptcy generally were recorded based on historical costs or contractual agreements and do not reflect the provisions of the Plan. Accordingly, capital costs of the Successor Company for the year ended September 30, 2002 are not comparable to those of the Predecessor Company in prior years.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “All other services and corporate functions” category of revenues and EBITDA represents operating information of business units below the prescribed quantitative thresholds that trigger segment reporting requirements, and our corporate support functions. These operating business units in this category derive revenues from the following services: management services, consulting services, homecare services, physician services, diagnostic services, hospitality services, respiratory health services, staffing services and other healthcare related services. The “Other adjustments” category consists of certain expenses that have not been allocated to our reportable segments or the “All other services and corporate functions” category. This approach to segment reporting is consistent with the Company’s internal financial reporting and the information used by the chief operating decision maker regarding the performance of our reportable and non-reportable segments.

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	Successor Company			Predecessor Company

(in thousands)	2002			2001			2000

Revenues:
Inpatient services — external	$	1,204,320		$	1,138,154		$	1,118,672
Rehabilitation services:
External		89,200			74,017			64,247
Intersegment		84,239			79,580			76,706
All other services and corporate functions:
External		68,646			78,992			79,165
Intersegment		86,553			74,618			65,947
Elimination of intersegment revenues		(170,792	)		(154,198	)		(142,653	)

Total net revenues		1,362,166			1,291,163			1,262,084

EBITDA (1):
Inpatient services		139,287			117,803			120,966
Rehabilitation services		28,643			24,993			22,930
All other services and corporate functions		(40,168	)		(31,608	)		(30,877	)
Debt restructuring and reorganization costs		(3,175	)		283,211			(445,876	)
Other adjustments (2)		(1,456	)		(73,092	)		(245,824	)
Net loss on sale of eldercare centers		—			(540	)		(7,922	)

Total EBITDA		123,131			320,767			(586,603	)

Capital and other:
Combined:
Depreciation and amortization		(37,288	)		(65,113	)		(71,439	)
Interest expense		(17,128	)		(98,602	)		(214,550	)
Income tax (expense) benefit		(26,798	)		—			80,879
Equity in net income (loss) of unconsolidated affiliates		1,196			(10,228	)		(2,505	)
Minority interests		(242	)		—			—

Income (loss) from continuing operations		42,871			146,824			(794,218	)
Loss from discontinued operations, net of taxes		(5,320	)		(33,505	)		(39,555	)
Cumulative effect of accounting change, net of taxes		—			—			(10,412	)

Net income (loss)	$	37,551		$	113,319		$	(844,185	)

(1)

EBITDA is defined by GHC as earnings before interest, taxes, depreciation and amortization expense of our continuing operations. EBITDA can be calculated through our combined statements of operations by adding back interest expense, income taxes, depreciation and amortization, equity in net income (loss) of unconsolidated affiliates, minority interest and debt restructuring and reorganization costs to GHC’s income (loss) from continuing operations.


(2)	For a description of other adjustments, see note 18 — “Loss on Impairment of Assets and Other Charges”.

Total assets by segment at September 30, 2002 and 2001 were as follows:


(in thousands)	2002		2001

Inpatient services	$	941,314	$	973,439
Rehabilitation services		29,925		37,093
All other services and corporate functions		183,241		126,309

	$	1,154,480	$	1,136,841

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(23) Comprehensive Income (Loss)

The following table sets forth the computation of comprehensive income (loss) for the years ended September 30, 2002, 2001 and 2000 (in thousands):

	Successor Company		Predecessor Company

	2002		2001		2000

Net income (loss)	$	37,551	$	113,319	$	(844,185	)
Unrealized (loss) gain on marketable securities		647		1,981		(1,361	)

Total comprehensive income (loss)	$	38,198	$	115,300	$	(845,546	)

(24) Quarterly Financial Data (Unaudited)

GHC’s unaudited quarterly financial information is as follows (in thousands):

	Total Net Revenue		Income (Loss) from Continuing Operations

						Net Income (Loss)

(Successor Company)
Quarter ended:
December 31, 2001	$	335,413	$	12,006		$	10,984
March 31, 2002		339,314		9,264			7,127
June 30, 2002		340,465		9,753			9,675
September 30, 2002		346,974		11,848			9,765

(Predecessor Company)	As Restated (1)
Quarter ended:
December 31, 2000	$	316,375	$	(24,014	)	$	(28,039	)
March 31, 2001		315,778		(34,683	)		(39,869	)
June 30, 2001		326,390		(27,361	)		(30,477	)
September 30, 2001		332,620		232,882			211,704

GHC’s unaudited quarterly financial information as previously reported for the year ended September 30, 2001 is as follows (in thousands):

	Total Net Revenue		Income (Loss) from Continuing Operations

						Net Income (Loss)

(Predecessor Company)
Quarter ended:
December 31, 2000	$	316,375	$	(22,789	)	$	(26,815	)
March 31, 2001		315,778		(30,643	)		(35,830	)
June 30, 2001		326,390		(25,627	)		(28,743	)
September 30, 2001		332,620		226,418			205,242


(1)	— See note 3 — “Restatement of 2001 and 2000 Combined Financial Statements.”

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Genesis HealthCare Corporation
Unaudited Condensed Combined Balance Sheet
June 30, 2003 and September 30, 2002


(in thousands)	June 30, 2003			September 30, 2002

Assets
Current assets:
Cash and equivalents, primarily restricted	$	4,876		$	7,420
Restricted investments in marketable securities		16,850			15,074
Accounts receivable, net of allowance for doubtful accounts		184,106			200,158
Prepaid expenses and other current assets		36,174			32,405
Assets held for sale		—			28,634

Total current assets		242,006			283,691

Property and equipment		729,760			766,651
Accumulated depreciation		(61,517	)		(38,204	)

		668,243			728,447
Restricted investments in marketable securities		76,881			71,073
Assets held for sale		18,276			17,500
Other long-term assets		51,648			53,769
Goodwill		4,714			–

Total assets	$	1,061,768		$	1,154,480


Liabilities and Owner’s Equity
Current liabilities:
Current installments of long-term debt	$	30,943		$	45,566
Accounts payable		30,846			38,117
Accrued expenses		22,407			30,189
Accrued compensation		62,991			73,453
Accrued interest		2,164			2,819
Current portion of self-insurance liability reserves		16,350			15,074

Total current liabilities		165,701			205,218

Long-term debt		244,265			280,910
Self-insurance liability reserves		49,862			42,019
Other long-term liabilities		16,169			23,569
Owner’s equity:
GHVI’s equity in GHC		584,720			601,925
Accumulated other comprehensive income		1,051			839

Total owner’s equity		585,771			602,764

Total liabilities and owner’s equity	$	1,061,768		$	1,154,480

See accompanying Notes to Unaudited Condensed Combined Financial Statements

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Genesis HealthCare Corporation
Unaudited Condensed Combined Statements of Operations
For the Nine Months Ended June 30, 2003 and 2002


	Nine months ended June 30, 2003			Nine months ended June 30, 2002
(in thousands)	Nine months ended June 30, 2003			Nine months ended June 30, 2002

Net revenues	$	1,035,047		$	1,015,192

Operating expenses:
Salaries, wages and benefits		641,408			600,012
Other operating expenses		233,842			236,950
General and administrative costs		67,175			66,955
Gain on early extinguishment of debt		(1,123	)		–
Depreciation and amortization expense		29,979			26,552
Lease expense		20,556			19,865
Interest expense		12,851			12,616

Income before debt restructuring and reorganization costs, income tax expense and equity in net income of unconsolidated affiliates		30,359			52,242
Debt restructuring and reorganization costs		–			1,700

Income before income tax expense and equity in net income of unconsolidated affiliates		30,359			50,542
Income tax expense		7,397			19,712

Income before equity in net income of unconsolidated affiliates		22,962			30,830
Equity in net income of unconsolidated affiliates		875			192

Income from continuing operations		23,837			31,022
Loss from discontinued operations, net of taxes		(14,391	)		(3,237	)

Net income	$	9,446		$	27,785

See accompanying Notes to Unaudited Condensed Combined Financial Statements

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Genesis HealthCare Corporation
Unaudited Condensed Combined Statements of Cash Flows
For the Nine Months Ended June 30, 2003 and 2002


	Nine months ended June 30, 2003			Nine months ended June 30, 2002
(in thousands)	Nine months ended June 30, 2003			Nine months ended June 30, 2002

Cash flows from operating activities:
Net income	$	9,446		$	27,785
Net charges included in operations not requiring funds		54,426			58,715
Working capital changes that provided (used) cash:
Accounts receivable		(1,146	)		(16,312	)
Accounts payable and other accrued liabilities		(13,388	)		2,844
Other		400			821

Total adjustments		40,292			46,068

Net cash provided by operations before debt restructuring and reorganization costs		49,738			73,853

Cash paid for debt restructuring and reorganization costs		—			(25,276	)

Net cash provided by operating activities		49,738			48,577

Cash flows from investing activities:
Capital expenditures		(25,015	)		(18,024	)
Net purchases of restricted marketable securities		(7,373	)		(23,532	)
Purchase of eldercare centers		—			(10,453	)
Purchase of rehabilitation services business		(5,918	)		—
Proceeds from sale of eldercare centers		55,977			—
Other, net		10,605			(6,208	)

Net cash provided by (used in) investing activities		28,276			(58,217	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			38,000
Repayment of long-term debt		(51,268	)		(39,682	)
Net transactions with GHVI		(29,290	)		12,026

Net cash provided by (used in) financing activities		(80,558	)		10,344

Net increase (decrease) in cash and equivalents		(2,544	)		704
Cash and equivalents:
Beginning of period		7,420			4,599

End of period	$	4,876		$	5,303

Supplemental disclosure of cash flow information:
Interest paid	$	13,506		$	15,623
Taxes paid	$	—		$	—

See accompanying Notes to Unaudited Condensed Combined Financial Statements

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Genesis HealthCare Corporation
Notes to Unaudited Condensed Combined Financial Statements

(1) Basis of Presentation

The accompanying unaudited condensed combined financial statements have been prepared on a basis which reflects the historical financial statements of Genesis HealthCare Corporation (GHC or the Company) assuming that the operations of Genesis Health Ventures, Inc. (GHVI) expected to be contributed to GHC prior to the spin-off of GHC to GHVI’s shareholders (the spin-off) were organized as a separate legal entity, owning certain net assets of GHVI. All future references to “NeighborCare” in these combined financial statements mean GHVI’s pharmacy services operation, which will be the only significant remaining business operated by GHVI after the spin-off. Generally, only those assets and liabilities of the ongoing GHC business expected to be transferred to GHC prior to the spin-off were included in the combined balance sheets.

These unaudited condensed combined financial statements and accompanying notes should be read in conjunction with the Basis of Presentation and Summary of Significant Accounting Policies as set forth in notes 1 and 2, respectively to the Combined Financial Statements of GHC as of September 30, 2002 and 2001 and for each of the three years ended September 30, 2002.

The accompanying unaudited condensed combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the combined financial statements for the periods presented include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the nine months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year.

(2) Related Party Transactions

GHVI provided certain general and administrative services to GHC, including finance, legal, treasury, information systems and human resources. The cost for these services was allocated to GHC based upon various allocation percentages dependent upon the type of service provided. For instance, certain costs were allocated based upon GHC’s proportionate share of revenue, labor related costs or other operating expenses; as well as other methods which management believes to be reasonable. These cost allocations were $34.2 million and $33.9 million for the nine months ended June 30, 2003 and 2002, respectively. As a result of the spin-off, GHC will be required to perform these general and administrative services using its own resources or purchased services and will be responsible for the costs and expenses associated with the management of a public company. Management believes GHC may incur incremental costs associated with being an independent public company and the loss of synergies and benefits of economies of scale that existed while we were a part of GHVI, but does not believe such incremental costs will be material. GHC and NCI will agree contractually to continue certain transitional arrangements and practices for a limited time after the spin-off. In addition, GHC and NCI will agree to certain mutually beneficial commercial arrangements intended to reflect terms similar to those that would be agreed to by parties bargaining at arm’s-length.

NeighborCare provides institutional pharmacy services to GHC. Sales to GHC affiliates totaled $58.8 million and $79.6 million for the nine months ended June 30, 2003 and 2002, respectively.

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(3) Long-Term Debt

Long-term debt at June 30, 2003 and September 30, 2002 consists of the following (in thousands):

	June 30, 2003					September 30, 2002

	Total GHVI		Allocated to GHC			Total GHVI		Allocated to GHC
	Total GHVI		Allocated to GHC			Total GHVI		Allocated to GHC

Allocated debt of GHVI	$	556,125	$	220,436		$	603,416	$	252,738
Mortgages and other secured debt				54,772					73,738

				275,208					326,476
Less:
Current portion of long-term debt				(30,943	)				(45,566	)

Long-term debt			$	244,265				$	280,910

GHVI and each of its subsidiaries that are named as guarantors under GHVI’s senior credit facility and senior secured notes (“joint and several debt”) have granted the lenders first priority liens and security interests in all unencumbered property, including but not limited to: fee owned property, bank accounts, investment property, accounts receivable, equipment and general intangible assets. GHVI’s senior credit facility and senior secured notes limit, among other things, the GHVI’s ability to incur additional indebtedness or contingent obligations, permit additional liens, to make additional acquisitions, to sell or dispose of assets, to create or incur liens on assets, to pay dividends on common stock and to merge or consolidate with any other person or entity.

The joint and several debt instruments require GHVI to maintain compliance with certain financial and non-financial covenants, including minimum EBITDAR (earnings before interest, taxes, depreciation, amortization and rent), limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth. GHVI was in compliance with all covenants applicable at June 30, 2003.

Allocated debt of GHVI

Included in GHC’s financial statements is an allocated portion of GHVI’s joint and several debt issued in connection with the Reorganization of GHVI in 2001. For the purpose of preparing the carve-out financial statements at September 30, 2001, GHC’s allocation of joint and several debt was based upon the level of debt estimated to be attributed to the operations of GHC upon emergence from bankruptcy. This allocation is consistent with the capital structure agreed to by our senior lenders and the bankruptcy court. Specifically, the initial debt allocation equals three times fiscal 2001 EBITDA, as adjusted. EBITDA, as adjusted, is calculated by subtracting from revenue all operating expenses and lease expense before certain charges. Joint and several debt at September 30, 2002 was derived by rolling forward the joint and several debt balance attributed to GHC at September 30, 2001. During the nine months ended June 30, 2003, joint and several debt of $13.5 million was repaid by GHC in connection with an excess cash flow provision, $1.8 million was repaid in connection with scheduled principal payments and $17.0 million was repaid by GHC from the proceeds on the sale of GHC’s eldercare centers located in the state of Illinois. As a result of this allocation approach, joint and several debt of $220.4 million and $252.7 million at June 30, 2003 and September 30, 2002, respectively is allocated to GHC. The weighted average interest rate on the allocated debt at June 30, 2003 and September 30, 2002 was 6.7% and 6.4%, respectively.

Mortgages and other secured debts

At June 30, 2003 and September 30, 2002, GHC had $54.8 million and $73.7 million of secured debt consisting principally of revenue bonds and secured bank loans, including loans insured by the Department of Housing and Urban Development. These loans are secured by the underlying real and personal property of individual eldercare centers and have fixed rates of interest ranging from 3% to 11%, with a weighted average rate of 9.1% at June 30, 2003 and 8.8% at September 30, 2002.

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(4) Comprehensive Income

The following table sets forth the computation of comprehensive income for the nine months ended June 30, 2003 and 2002 (dollars in thousands):

	2003		2002

Net income	$	9,446	$	27,785
Unrealized gain (loss) on marketable securities		212		(245	)

Total comprehensive income	$	9,658	$	27,540

(5) Assets Held for Sale or Closed

Since the Company’s adoption of SFAS 144, it has classified several businesses as held for sale or closed. The results of operations in the current and prior year periods, along with any cost to exit such businesses in the year of discontinuation, are classified as discontinued operations in the condensed combined statements of operations. An increasing trend in malpractice litigation claims, rising costs of eldercare malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for nursing homes. These problems are particularly acute in the state of Florida where, because of higher claim amounts, general liability and professional liability costs have become increasingly expensive. This increase in insurance costs prompted GHC to sell its otherwise profitable operations in the state of Florida. Since its inception, GHC has continued to develop its eldercare network in concentrated geographic markets in the eastern United States. The geographic location of the Company’s eldercare centers in the states of Illinois and Wisconsin relative to its strategic markets, combined with the operating performance of those centers, has prompted GHC to identify those assets as held for sale. In addition to these assets, the Company has identified 12 eldercare centers in other states, one rehabilitation services clinic, one physician services practice, and its ambulance business as held for sale or closed due to under-performance.

Consolidated interest expense has been allocated to discontinued operations for all periods presented based on allocated debt expected to be repaid in connection with the sale of the assets, as required under GHVI’s senior credit facility. The amount of interest expense allocated to discontinued operations for the nine month periods ended June 30, 2003 and 2002 was $3.5 million and $4.7 million, respectively (after tax, the net impact of these allocations to the loss from discontinued operations is $2.1 million and $2.9 million, respectively).

The assets held for sale at June 30, 2003 of $18.3 million is principally related to properties located in the state of Wisconsin ($14.4 million).

The following table sets forth the components of net revenue and loss from discontinued operations for the nine months ended June 30, 2003 and 2002 (dollars in thousands):

	2003			2002

Net revenues	$	113,103		$	176,197

Net operating income (loss) of discontinued businesses	$	(11,121	)	$	721
Loss on discontinuation of businesses		(12,471	)		(6,028	)
Income tax benefit		9,201			2,070

Loss from discontinued operations, net of taxes	$	(14,391	)	$	(3,237	)

(6) Segment Information

Summarized financial information concerning the Company’s reportable segments is shown in the following table for the current quarter and the same period last year. The “All other services and corporate functions” category of revenues and EBITDA represents operating information of business units below the prescribed quantitative thresholds that trigger segment reporting requirements. These business units derive revenues from the following services: management services, consulting services, homecare services, physician services, diagnostic services, hospitality services, group purchasing fees, respiratory health services, staffing

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services and other healthcare related services. The “Other adjustments” category consists of certain expenses that have not been allocated to our reportable segments or the “All other services and corporate functions”. This approach to segment reporting is consistent with the Company’s internal financial reporting and the information used by the chief operating decision maker regarding the performance of our reportable and non-reportable segments.

	Nine months ended			Nine months ended
	Nine months ended			Nine months ended

(in thousands)	June 30, 2003			June 30, 2002

Revenues:
Inpatient services — external	$	905,178		$	899,306
Rehabilitation services:
External		88,524			64,662
Intersegment		62,690			63,023
All other services and corporate functions:
External		41,345			51,224
Intersegment		48,790			64,546
Elimination of intersegment revenues		(111,480	)		(127,569	)

Total net revenues		1,035,047			1,015,192

EBITDA:
Inpatient services		85,433			106,888
Rehabilitation services		25,153			22,569
All other services and corporate functions		(38,520	)		(38,047	)
Other adjustments		1,123			(1,700	)

Total EBITDA		73,189			89,710

Capital and other:
Combined:
Depreciation and amortization		(29,979	)		(26,552	)
Interest expense		(12,851	)		(12,616	)
Income tax expense		(7,397	)		(19,712	)
Equity in net income of unconsolidated affiliates		875			192

Income from continuing operations		23,837			31,022
Loss from discontinued operations, net of taxes		(14,391	)		(3,237	)

Net income	$	9,446		$	27,785

Total assets by segment at June 30, 2003 and September 30, 2002 were as follows:

	June 30, 2003		September 30, 2002

Inpatient services	$	827,552	$	941,314
Rehabilitation services		42,482		29,925
All other services and corporate functions		191,734		183,241

	$	1,061,768	$	1,154,480

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(7) Combined Statement of Owner’s Equity

(in thousands)	GHVI’s equity in GHC			Accumulated other comprehensive income		Total owner’s equity			Total comprehensive income

Balance at September 30, 2002	$	601,925		$	839	$	602,764

Comprehensive income
Net income		9,446					9,446			9,446
Net unrealized gain on marketable securities					212		212			212

Total comprehensive income									$	9,658

Distributions to GHVI, net of advances		(26,651	)				(26,651	)

Balance at June 30, 2003	$	584,720		$	1,051	$	585,771

(8) Subsequent Events

The Company has entered into agreements with ElderTrust, a Maryland based real estate investment trust from whom it currently leases or subleases 18 of its eldercare facilities and eight managed and jointly-owned facilities. The principle terms of the agreements are as follows:

•

GHC will purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million. GHC currently leases these properties from ElderTrust at an annual cash basis and accrual basis lease cost of $2.4 million and $1.5 million, respectively. On October 29, 2003, we purchased one of the aforementioned eldercare facilities having 183 beds for $10.3 million;


	•	GHC will pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties currently subleased to GHC by ElderTrust. On October 29, 2003, we paid ElderTrust $2.3 Million to reduce the rents of two of the nine aforementioned eldercare facilities; and


	•	GHVI will pay ElderTrust $5.0 million upon consummation of the spin-off in exchange for ElderTrust’s consent to the assignment of all remaining leases and guarantees from GHVI to GHC.

On August 13, 2003, we acquired the remaining ownership interest in an unconsolidated joint-venture partnership that operates four skilled nursing facilities with 600 skilled nursing and 125 assisted living beds. Each of the four eldercare centers had been leased to the partnership from ElderTrust. The Company purchased its joint venture partner’s interest in the unconsolidated partnership for $3.1 million and will subsequently purchase one of the four eldercare properties from ElderTrust for $2.6 million. Additionally, GHC will pay Elder- Trust $2.5 million to reduce the annual cash basis and accrual basis lease expense of one of the three remaining leased facilities by $0.4 million and $0.2 million, respectively. The lease terms of the three facilities that will continue to be leased from ElderTrust are expected to be extended from 2010 to 2015.

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Independent Auditors’ Report

The Board of Directors
Genesis HealthCare Corporation

Under date of September 30, 2003, we reported on the combined balance sheets of Genesis HealthCare Corporation (the Company) as of September 30, 2002 and 2001, and the related combined statements of operations, owner’s equity (deficit) and cash flows for each of the years in the three year period ended September 30, 2002, which are included in the Form 10. In connection with our audits of the aforementioned combined financial statements, we also audited the related financial statement schedule in the Form 10. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the basic combined financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As described in note 5 to the combined financial statements, on October 2, 2001 the Company consummated a Joint Plan of Reorganization (the Plan) which had been confirmed by the United States Bankruptcy Court. The Plan resulted in a change in ownership of the Company and, accordingly, effective September 30, 2001 the Company accounted for the change in ownership through “fresh-start” reporting. As a result, the combined information prior to September 30, 2001 is presented on a different cost basis than that as of and subsequent to September 30, 2001 and, therefore, is not comparable.

As discussed in note 2 to the combined financial statements, the Company changed its method of accounting for the costs of start-up activities effective October 1, 1999.

			/s/ KPMG LLP
Philadelphia, Pennsylvania
September 30, 2003

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Schedule II

Genesis HealthCare Corporation
Valuation and Qualifying Accounts
Years Ended September 30, 2002, 2001 and 2000
(in thousands)

Description	Balance at Beginning of Period		Charged to Operations		Charged to Other Accounts (1)		Deductions (2)		Balance at End of Period

Year Ended September 30, 2002
Allowance for Doubtful Accounts	$	62,445		21,483		—		47,362	$	36,566
Year Ended September 30, 2001
Allowance for Doubtful Accounts	$	54,454		27,780		12,509		32,298	$	62,445
Year Ended September 30, 2000
Allowance for Doubtful Accounts	$	67,489		27,991		16,410		57,436	$	54,454

(1)

In fiscal 2001, represents a reclassification of amounts previously reported as a direct reduction to trade receivables, rather than an allowance for doubtful accounts. In fiscal 2000, amount principally represents the beginning period balance of The Multicare Companies, Inc. Beginning October 1, 2000, Genesis HealthCare Corporation changed its method of accounting for Multicare from the equity method of accounting to the consolidation method of accounting.


(2)	Represents amounts written off as uncollectible.

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