EX-99 3 ex99-1.htm EXHIBITI 99.1 Prepared and filed by St Ives Burrups

FOR IMMEDIATE RELEASE

Genesis HealthCare Contact:
Investor Relations               
610-925-2000

GENESIS HEALTHCARE CORPORATION
REPORTS FISCAL YEAR END 2005 RESULTS

• Revenues Increase 11% to $1.68 billion
     
• Diluted Earnings Per Share from Continuing Operations Increase 39%, to $2.12 Per Share
     
• Capital Expenditures Total $55.2 Million as Facility Renovation Effort Expands
     
• Occupancy Rebounds to 90.6% in Fourth Quarter

KENNETT SQUARE, PA – (December 1, 2005) –Genesis HealthCare Corporation (“GHC”) (NASDAQ:GHCI) today announced income from continuing operations of $42.4 million, or $2.12 per diluted share, and net income of $42.2 million, or $2.11 per diluted share, for the year ended September 30, 2005, up from pro forma income from continuing operations of $30.6 million, or $1.52 per diluted share, and pro forma net income of $27.9 million, or $1.39 per diluted share, in the comparable period in the prior year. Pro forma results in the prior year period assume the December 1, 2003 spin-off of GHC from NeighborCare, Inc. occurred on October 1, 2003. (See attached pro forma financial information beginning on page 15).

For the quarter ended September 30, 2005, income from continuing operations was $9.5 million, or $0.48 per diluted share, and net income was $10.2 million, or $0.51 per diluted share, down from income from continuing operations of $10.5 million, or $0.52 per diluted share, and net income of $10.8 million, or $0.53 per diluted share, in the comparable period in the prior year.

Reported results in the quarter ended September 30, 2005 were reduced by a $1.7 million ($0.05 per diluted share) pre tax impairment charge to write-off the investment related to an abandoned rehabilitation services application system, and $1.3 million ($0.04 per diluted share) of net pre tax adjustments to recognize a correction to the way in which the Company accounts for certain of its leases. In addition, an increase in the Company’s effective tax rate, primarily due to changes in the amount of permanent deductions, reduced results in the current quarter by approximately $0.02 per diluted share. All of these adjustments are non-cash charges. The lease accounting adjustments are more fully described below under the section entitled Lease Accounting Adjustments. Results in the quarter ended September 30, 2004 were reduced by a pre tax charge of $0.4 million ($0.01 per diluted share) related to the early extinguishment of debt.

Revenue for the year ended September 30, 2005 grew 10.9% to $1.683 billion from $1.518 billion in the prior year. Revenue for the quarter ended September 30, 2005 grew 5.9% to $420.8 million from $397.3 million in the comparable period of the prior year. Revenue growth in the quarter and year ended September 30, 2005 is primarily attributed to third party payor rate growth and the recognition of provider assessments implemented in three states since the prior year periods.

EBITDA for the year ended September 30, 2005 grew 19.9% to $148.8 million, up from $124.1 million in the prior year. (See attached reconciliation on page 10). EBITDA for the year ended September 30, 2005 benefited from $8.0 million of net adjustments to lease expense recorded in the fourth quarter and $14.2 million in incremental provider assessments. EBITDA was reduced by $11.8 million and $1.7 million for charges related to the early extinguishment of debt in the years ended September 30, 2005 and 2004, respectively.

1

EBITDA for the quarter ended September 30, 2005 increased 20.1% to $43.4 million, up from $36.2 million of EBITDA for the comparable period in the prior year. (See attached reconciliation on page 10). EBITDA for the quarter ended September 30, 2005 benefited from the $8.0 million of net adjustments to lease expense and was reduced $1.7 million by the impairment charge previously described and by a $2.3 million decline in net provider assessments recognized in the current year quarter compared to the prior year quarter. EBITDA for the quarter ended September 30, 2004 was reduced by $0.4 million for charges related to the early extinguishment of debt.

“I am pleased by the overall performance of our Inpatient services segment this quarter and the strength of our balance sheet,” stated George V. Hager, Jr., Chairman and Chief Executive Officer. “We were successful in rebuilding our census back to historical levels and continue to experience stable occupancy. We were able to achieve consolidated results within our previously provided guidance range despite the disappointing results of our Rehabilitation services segment, and before considering the impairment and lease charges, and the higher than expected effective income tax rate, which were not included in our earnings guidance. The softness in the Rehabilitation services segment was driven by greater than anticipated utilization of higher cost contract labor during the summer vacation months, as well as severance charges relating to organizational changes. We believe that our strategy of improving the recruitment and retention capabilities of that business while also being more aggressive in pricing our services and more selective in our external customer base will restore this business to profitability. During the quarter we moved aggressively to implement a more efficient and integrated billing and time collection system to improve the productivity of our therapist workforce.”

Further commenting on the results, Hager noted, “Our core Inpatient services segment, on an as adjusted basis, produced strong earnings growth in the fourth quarter compared to the same quarter last year. We end fiscal 2005 with impressive year over year earnings growth, significant levels of operating cash flow and a strong balance sheet. We look forward to continuing to execute on our strategy of investment in our core skilled nursing business in fiscal 2006, and believe that the Rehabilitation services operating issues are being aggressively addressed.”

Inpatient Services
Inpatient services net revenue of $375.1 million in the quarter ended September 30, 2005 grew 5.5%, or $19.5 million, from $355.6 million in the prior year. Provider assessments and acquisitions generated approximately $2.3 million and $2.6 million of the revenue growth, respectively. The remaining revenue growth is attributed to other third party payor rate growth and higher patient acuity. Medicare rates in the quarter ended September 30, 2005 grew 4.6% to $370 per patient day as a result of the October 1, 2004 2.8% Medicare rate increase as well as higher Medicare patient acuity. Occupancy this quarter grew 1.2% from the immediately preceding quarter to 90.6%, and exceeded the prior year fourth quarter occupancy of 90.5%.

Inpatient services net revenue in the year ended September 30, 2005 of $1.506 billion grew 11.3% or $152.8 million from $1.353 billion in the prior year. Provider assessments and acquisitions generated approximately $74.4 million and $14.1 million of the revenue growth, respectively. The remaining revenue growth is attributed to other third party payor rate growth and higher patient acuity, offset by lower occupancy. Medicare rates in the current year grew 5.1% per patient day as a result of the October 1, 2004 2.8% Medicare rate increase as well as higher Medicare patient acuity. Occupancy in the year ended September 30, 2005 declined 0.7% to 90.1% from 90.8% in the prior year.

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Inpatient services EBITDA of $59.8 million in the quarter ended September 30, 2005 was up $8.9 million over the prior year quarter. EBITDA was positively impacted by the $8.0 million lease accounting adjustments and $0.5 million from acquisitions, offset by $2.3 million of lower net provider assessments principally due to the retroactive recognition of provider assessments in the State of New Hampshire in the quarter ended September 30, 2004. After adjusting for these items, Inpatient services generated 6.0% EBITDA growth driven by operational improvements and improved payor mix.

Inpatient services EBITDA of $218.2 million in the year ended September 30, 2005 was up $47.1 million over the prior year. EBITDA was positively impacted by the $8.0 million lease accounting adjustments, $2.7 million from acquisitions, $2.0 million of net positive Medicaid cost report settlements and $14.2 million of incremental provider assessments recognized in the current year above those recognized in the prior year. After considering these items, Inpatient services generated 12.1% EBITDA growth driven by operational improvements, lower bad debt expense and third party payor rate growth.

Employed nursing labor and benefit costs on a per patient day basis increased 5.7% for the quarter ended September 30, 2005 from the same quarter last year. By reducing our reliance on agency nurses in favor of employed nurses the Company was able to limit growth in overall nursing labor costs to 4.7% on a per patient day basis.

Rehabilitation Services
Rehabilitation services revenues grew to $53.8 million in the quarter ended September 30, 2005 from $50.2 million in the prior year. Rehabilitation services revenue grew to $211.7 million in the year ended September 30, 2005 from $197.1 million in the prior year.

Rehabilitation services EBITDA decreased to a loss of $2.6 million in the quarter ended September 30, 2005 from a positive $0.9 million in the prior year quarter. EBITDA in the current year quarter was reduced by the $1.7 million impairment charge discussed previously, continued pricing pressure, increased therapist salary costs, severance costs and higher contract labor utilization as a result of a continuing shortage of therapists. Increased utilization of higher cost contract labor resulted in a $1.5 million decline in current quarter EBITDA compared to the prior year quarter.

Rehabilitation services EBITDA decreased to $5.9 million in the year ended September 30, 2005 from $14.2 million in the prior year. EBITDA in the current year was reduced by the $1.7 million impairment charge and each of the pricing and labor related pressures described in the previous paragraph. Increased utilization of higher cost contract labor resulted in a $5.9 million decline in current year EBITDA compared to the prior year.

Balance Sheet and Cash Flow
GHC generated operating cash flow of $14.4 million in the quarter and $125.0 million for the full fiscal year ended September 30, 2005. Fourth quarter operating cash flow was reduced by the timing of payments, including scheduled payments to excess general and professional liability insurance carriers, real estate taxing authorities and the timing of payroll. The Company ended the year with $410.2 million of debt and cash of $109.0 million. Debt increased $33.3 million during the quarter as a result of changes to the classification of five leases from operating to capital leases. “Although our balance sheet debt increased as a result of the reclassification of certain leases as capital leases, our obligations on a cash basis are unchanged,” stated James V. McKeon, Chief Financial Officer. “We also continue to benefit from significant net operating loss carryforwards that result in cash earnings in excess of GAAP earnings.”

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Capital spending in the quarter ended September 30, 2005 increased to $15.2 million, totaling $55.2 million for fiscal 2005. “Our fiscal 2005 capital expenditures were nearly double that of our historical run rate,” noted McKeon. “Investment in information systems and in the renovation of our facility portfolio is at the core of our long-term strategy to generate operating efficiencies and create a stronger competitive position within our markets. Continuing this commitment to core operations, we expect to make capital expenditures between $65 million and $75 million in fiscal 2006, including as many as 33 facility renovation and modernization projects. We also continue to explore fill-in acquisitions in our Inpatient services segment, as well as other opportunities to ensure the most efficient use of our capital.”

During the quarter ended September 30, 2005, the Company repurchased 170,737 shares of its common stock for $6.9 million, and repurchased 787,337 shares of its common stock for $32.1 million for the year ended September 30, 2005.

Lease Accounting Adjustments
During the fourth quarter of fiscal 2005, the Company revised its accounting to record operating lease expense on a straight-line basis, as required by Statement of Financial Accounting Standards No. 13, “Accounting for Leases”, and Financial Accounting Standards Board Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases”. The impact of this correction through September 30, 2005 resulted in a $1.3 million pre tax increase to lease expense, of which $0.7 million relates to prior years.

In addition, the Company reevaluated the classification of certain of its leases and determined that five of its facility leases previously classified as operating leases should have been classified as capital leases beginning in fiscal 2004. The cumulative effect of correcting this accounting is an increase to depreciation expense of $4.7 million, an increase to interest expense of $4.7 million and a decrease to lease expense of $9.3 million, having no impact on pre tax or net income. The capitalization of these leases also had the effect of increasing total assets and total liabilities approximately $34.0 million. These accounting adjustments have no impact on the underlying economics of the leases.

These adjustments were not deemed material to the current fiscal year or prior periods and do not have any impact on prior year or future cash flows. However, as a result of the reclassification of the leases and the straight-line accounting for operating lease costs, the Company expects lease, interest and depreciation and amortization expense to approximate $21.9 million, $22.9 million and $55.6 million, respectively, in fiscal 2006.

Reimbursement Update
In July 2005, the Centers for Medicare and Medicaid Services released the final fiscal 2006 Medicare payment rules, including refinement to the resource utilization group classification system, often referred to as RUGs refinement. Effective October 1, 2005, the Medicare payment rates increased by a 3.1% annual inflation factor, or approximately $11 per Medicare patient day. Starting January 1, 2006, the rules establish nine new RUG payment classifications, alter the case-mix weights for the remaining 44 RUG payment categories and adjust upward the nursing component of each reimbursement schedule. After considering the distribution of our Medicare patient population under the new system, RUGs refinement is expected to reduce GHC’s Medicare payment rates by approximately $9 per Medicare patient day beginning January 1, 2006, thereby reducing fiscal 2006 revenue and EBITDA approximately $7.5 million and reducing net income $4.5 million or $0.23 per diluted share.

The Commonwealth of Pennsylvania has proposed a reduction in the reimbursement allowance under its provider assessment program effective July 1, 2005 through June 30, 2006. If the proposed reduction is made final as expected, the amount the Company must pay the Commonwealth under this program will exceed the amount the Company is reimbursed. In the quarter ended September 30, 2005, the Company’s revenue and EBITDA were reduced $0.6 million, and its net income was reduced $0.4 million or $0.02 per diluted share for the provider assessment reduction.

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The Company is closely monitoring developments on the topics of Medicare Part B therapy caps, the Medicare Modernization Act, reimbursement of uncollectible Medicare co-insurance receivables and final 2005-06 Commonwealth of Pennsylvania Medicaid payor rates. Resolution to any one or all of these matters could have a significant impact on the Company’s future results of operations.

Other Matters
Net Operating Loss Carryforward
As of September 30, 2005, the Company has net operating loss (NOL) carryforward available of $120.9 million, which can be utilized to offset future taxable income subject to an annual limitation of $33.1 million. The Company regularly assesses its ability to realize the tax benefit from its NOL. The filing of fiscal 2004 federal and state income tax returns by NeighborCare, Inc. and the Company in June and July, 2005, and the further evaluation of tax issues related to the spin-off, has significantly reduced the uncertainty that previously caused management to reserve fully the value of the deferred tax benefit of the NOL. Consequently, the Company has eliminated the NOL valuation allowance and, accordingly, the Company’s balance sheet now includes, on an after-tax basis, a $50.8 million deferred tax asset and a corresponding increase of $50.8 million to additional paid-in capital.

Interest Rate Environment
In March 2005, the Company repaid its entire previously held variable rate senior credit facility indebtedness with the proceeds of newly issued 2.5% fixed rate convertible senior subordinated debentures. At September 30, 2005, the Company’s overall debt mix is approximately 98% fixed and 2% variable, effectively eliminating any exposure to rising rates of interest.

Diluted Per Common Share Data
In the quarter ended September 30, 2005, the Company reduced the number of weighted average shares used to determine diluted earnings per share in its previously reported three quarters ended June 30, 2005, reflecting a modification to the Company’s calculation of the dilutive effect of unvested restricted shares and stock options. This change results in an increase of $0.01 to the Company’s diluted earnings per share for each of the first three quarters of fiscal 2005, or $0.03 for the nine months ended June 30, 2005. Page 9 provides a consolidated statement of operations for each of the fiscal 2005 quarters on an as adjusted basis.

Outlook
The Company’s fiscal 2006 GAAP earnings from continuing operations guidance is provided as a range of $2.10 to $2.15 per diluted share. The Company’s earnings guidance considers the impact of RUGs refinement, reduced Commonwealth of Pennsylvania provider assessment revenue and the impact of the Company’s October 1, 2005 adoption of Financial Accounting Standards Board Statement No. 123 (revised 2004), “Share Based Payment” (SFAS 123R). The impact of adopting SFAS 123R is estimated to reduce fiscal 2006 earnings by approximately $0.10 per diluted share. The impact of adopting SFAS 123R could differ from this estimate depending upon the number and timing of options granted during fiscal 2006, as well as their vesting period and vesting criteria.

While the Company does not provide quarterly earnings guidance, the Company notes that its first fiscal quarter ending December 31, 2005 will not be impacted by the adverse affects of RUGs refinement.

The fiscal 2006 guidance represents the Company’s views as of December 1, 2005. Investors are reminded that actual results may differ from these estimates for the reasons, among others, described herein and in the Company’s filings with the Securities and Exchange Commission.

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Basis of Presentation
The accompanying financial information through November 30, 2003 was prepared on a basis which reflects the historical financial information of GHC assuming the operations of NeighborCare, Inc. contributed in the spin-off were organized as a separate legal entity, owning certain net assets of NeighborCare, Inc. Beginning December 1, 2003, the accompanying financial information has been prepared on a basis which reflects the net operations of GHC as a stand alone entity. The allocation methodologies followed in preparing the accompanying financial information prior to the December 1, 2003 spin-off 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 entity for all periods presented.

Conference Call
Genesis HealthCare Corporation will hold a conference call at 10:00 a.m. Eastern Time on Friday, December 2, 2005 to discuss the results. Investors can access the conference call by phone at (888) 798-1823 or live via webcast through the GHC web site at http://www.genesishcc.com, where a replay of the call will also be posted for one year.

About Genesis HealthCare Corporation
Genesis HealthCare Corporation (NASDAQ: GHCI) is one of the nation's largest long term care providers with over 200 skilled nursing centers and assisted living residences in 12 eastern states. Genesis also supplies contract rehabilitation therapy to over 650 healthcare providers in 18 states and the District of Columbia.

Visit our website at www.genesishcc.com.

Statements made in this release, our website 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 containing words such as "anticipate,""believe,""plan,""estimate,""expect,""intend,""may," “target,” “appears” and similar expressions. Such forward looking statements include, without limitation, expected reimbursement rates, including RUGs changes, our net operating loss carryforwards, agency labor utilization, debt repayments, share repurchases, provider tax assessments, changes in state Medicaid rates, our plans to improve the operating performance of our Rehabilitation services segment, levels of lease expense, interest expense, depreciation expense, capital spending, and our anticipated results of operations for fiscal 2006. Factors that could cause actual results to differ materially include, but are not limited to, the following: costs, changes in the reimbursement rates or methods of payment from Medicare or Medicaid, or the implementation of other measures to reduce reimbursement for our services; the expiration of enactments providing for additional government funding; efforts of third party payors to control costs; the impact of federal and state regulations; changes in payor mix and payment methodologies; competition in our business; an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance; competition for and availability of qualified staff in the healthcare industry; our ability to control operating costs, and generate sufficient cash flow to meet operational and financial requirements; and an economic downturn or changes in the laws affecting our business in those markets in which we operate.

The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. We caution investors that any forward-looking statements made by us are not guarantees of future performance. We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

# # #

6

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
TWELVE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004  
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  
                                 
      Twelve months ended        
      September 30, 2005                 September 30, 2004        
   
             
       
Net revenues   $ 1,683,350               $ 1,517,553        
Operating expenses:                                
     Salaries, wages and benefits     1,013,139                 962,138        
     Other operating expenses     491,325                 401,593        
     Loss on early extinguishment of debt     11,765                 1,692        
Lease expense     18,367                 28,073        
Depreciation and amortization expense     55,087                 46,306        
Interest expense     27,879                 26,985        
   
             
       
Income before income tax expense, equity in net                                
     income of unconsolidated affiliates and                                
     minority interests     65,788                 50,766        
Income tax expense     26,032                 20,791        
   
             
       
Income before equity in net income of unconsolidated                                
     affiliates and minority interests     39,756                 29,975        
Equity in net income of unconsolidated affiliates     3,105                 2,235        
Minority interests     (441 )               (462 )      
   
             
       
Income from continuing operations     42,420                 31,748        
Loss from discontinued operations, net of taxes     (251 )               (2,675 )      
   
             
       
Net income   $ 42,169               $ 29,073        
   
             
       
                                 
Per common share data (1):                                
Basic:                                
     Income from continuing operations   $ 2.15               $ 1.59        
     Loss from discontinued operations     (0.01 )               (0.13 )      
     Net income   $ 2.14               $ 1.46        
     Weighted average shares     19,713,478                 19,947,177        
                                 
Diluted:                                
     Income from continuing operations   $ 2.12               $ 1.58        
     Loss from discontinued operations     (0.01 )               (0.13 )      
     Net income   $ 2.11               $ 1.45        
     Weighted average shares     20,021,811                 20,118,292        
                       
(1) – The computation of per common share data in the twelve months ended September 30, 2004 was prepared on        
a pro forma basis assuming that the common shares of GHC distributed on December 1, 2003 in connection with        
the spin-off were outstanding since October 1, 2003.                                

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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004  
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)  
                                 
      Three months ended        
      September 30, 2005                 September 30, 2004        
   
             
       
Net revenues   $ 420,786               $ 397,289        
Operating expenses:                                
     Salaries, wages and benefits     254,839                 244,741        
     Other operating expenses     124,254                 108,911        
     Loss on early extinguishment of debt     —                 439        
Lease expense     (1,752 )               7,037        
Depreciation and amortization expense     17,839                 11,941        
Interest expense     9,890                 6,782        
   
             
       
Income before income tax expense, equity in net                                
     income of unconsolidated affiliates and                                
     minority interests     15,716                 17,438        
Income tax expense     6,878                 7,245        
   
             
       
Income before equity in net income of unconsolidated                                
     affiliates and minority interests     8,838                 10,193        
Equity in net income of unconsolidated affiliates     724                 465        
Minority interests     (89 )               (133 )      
   
             
       
Income from continuing operations     9,473                 10,525        
Income from discontinued operations, net of taxes     740                 246        
   
             
       
Net income   $ 10,213               $ 10,771        
   
             
       
                                 
Per common share data:                                
Basic:                                
     Income from continuing operations   $ 0.48               $ 0.53        
     Income from discontinued operations     0.04                 0.01        
     Net income   $ 0.52               $ 0.54        
     Weighted average shares     19,579,244                 20,002,548        
                                 
Diluted:                                
     Income from continuing operations   $ 0.48               $ 0.52        
     Income from discontinued operations     0.04                 0.01        
     Net income   $ 0.51               $ 0.53        
     Weighted average shares     19,877,384                 20,332,810        
                       
                                 

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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES        
UNAUDITED STATEMENTS OF OPERATIONS        
THREE MONTHS ENDED DECEMBER 31, 2004, MARCH 31, 2005, JUNE 30, 2005 AND SEPTEMBER 30, 2005        
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)        
                                                   
      Three months ended        
      December
2004		           March
2005		           June
2005		           September
2005		        
   
       
       
       
       
Net revenues   $ 399,027         $ 454,566         $ 408,971         $ 420,786        
Operating expenses:                                                  
     Salaries, wages and benefits     251,776           254,579           251,945           254,839        
     Other operating expenses     105,819           148,619           112,633           124,254        
     Loss on early extinguishment                                                  
          of debt     543           4,289           6,933           —        
Lease expense     6,971           6,610           6,538           (1,752 )      
Depreciation and amortization expense     11,319           13,206           12,723           17,839        
Interest expense     6,632           6,261           5,096           9,890        
   
       
       
       
       
Income before income tax expense,                                                  
     equity in net income of unconsolidated                                                  
     affiliates and minority interests     15,967           21,002           13,103           15,716        
Income tax expense     6,482           7,897           4,775           6,878        
   
       
       
       
       
Income before equity in net income of                                                  
     unconsolidated affiliates and                                                  
     minority interests     9,485           13,105           8,328           8,838        
                                                   
Equity in net income of unconsolidated                                                  
     affiliates     1,111           679           591           724        
Minority interests     (271 )         (153 )         72           (89 )      
   
       
       
       
       
Income from continuing operations     10,325           13,631           8,991           9,473        
Income (loss) from discontinued                                                  
     operations, net of taxes     523           (164 )         (1,350 )         740        
   
       
       
       
       
Net income   $ 10,848         $ 13,467         $ 7,641         $ 10,213        
   
       
       
       
       
                                                   
Per common share data:                                                  
Basic:                                                  
     Income from continuing operations   $ 0.52         $ 0.68         $ 0.46         $ 0.48        
     Income (loss) from discontinued                                                  
          operations     0.03           (0.01 )         (0.07 )         0.04        
     Net income   $ 0.54         $ 0.67         $ 0.39         $ 0.52        
     Weighted average shares     20,022,643           19,985,375           19,619,845           19,579,244        
                                                   
Diluted:                                                  
     Income from continuing operations   $ 0.51         $ 0.67         $ 0.45         $ 0.48        
     Income (loss) from discontinued                                                  
          operations     0.03           (0.01 )         (0.07 )         0.04        
     Net income   $ 0.54         $ 0.66         $ 0.38         $ 0.51        
     Weighted average shares     20,275,164           20,316,822           19,937,181           19,877,384        
                                                   
                                                   
                                                   

9

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET INCOME TO EBITDA
(IN THOUSANDS)

  Three months ended   Twelve months ended  
  September 30, 2005   September 30, 2004   September 30, 2005   September 30, 2004  
 
 
 
 
 
Net income $ 10,213   $ 10,771   $ 42,169   $ 29,073  
Add back:                        
     (Income) loss from discontinued                        
          operations, net of taxes   (740 )   (246 )   251     2,675  
     Equity in net income of                        
          unconsolidated affiliates   (724 )   (465 )   (3,105 )   (2,235 )
     Minority interests   89     133     441     462  
     Income tax expense   6,878     7,245     26,032     20,791  
     Interest expense   9,890     6,782     27,879     26,985  
     Depreciation and amortization expense   17,839     11,941     55,087     46,306  
 
 
 
 
 
EBITDA $ 43,445   $ 36,161   $ 148,754   $ 124,057  
 
 
 
 
 
                         

10



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS  
(IN THOUSANDS)  
                                 
            September 30, 2005           September 30, 2004        
         
       
       
Assets:                                
Current assets:                                
     Cash and equivalents         $ 109,041         $ 126,071        
     Current portion of restricted investments                                
          in marketable securities           39,875           29,887        
     Accounts receivable, net           184,616           175,292        
     Prepaid expenses and other current assets           36,143           33,526        
     Deferred income taxes           45,053           32,916        
     Current portion of assets held for sale           1,400           6,267        
         
       
       
               Total current assets           416,128           403,959        
         
       
       
Property and equipment, net           783,359           695,511        
Assets held for sale           2,511           2,511        
Restricted investments in marketable securities           56,197           65,121        
Other long-term assets           100,917           110,758        
         
       
       
               Total assets         $ 1,359,112         $ 1,277,860        
         
       
       
                                 
Liabilities and Shareholders’ Equity:                                
Current liabilities:                                
     Current installments of long-term debt         $ 4,537         $ 27,230        
     Accounts payable and accrued expenses           153,875           157,006        
     Current portion of self-insurance liability reserves           39,875           29,887        
         
       
       
               Total current liabilities           198,287           214,123        
         
       
       
Long-term debt           405,633           375,841        
Deferred income taxes           —           31,145        
Self-insurance liability reserves           58,995           62,920        
Other long-term liabilities           39,548           28,858        
Commitments and contingencies                                
                                 
Shareholders' equity:                                
     Common stock           204           200        
     Additional paid-in-capital           632,199           547,841        
     Retained earnings           62,673           20,504        
     Accumulated other comprehensive (loss) income           (603 )         221        
     Treasury stock, at cost           (32,096 )         —        
     Common stock held in deferred compensation plan           (5,728 )         (3,793 )      
         
       
       
Total shareholders’ equity           656,649           564,973        
         
       
       
               Total liabilities and shareholders’ equity         $ 1,359,112         $ 1,277,860        
         
       
       
                                 
Note: Certain balances have been reclassified to conform with current presentation.                    
                                 

11

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES                
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                    
TWELVE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004                    
(IN THOUSANDS)                    

             
    Twelve months ended  
           
   
September 30, 2005
September 30, 2004
  
 
 
 
Cash flows from operating activities:            
     Net income $ 42,169   $ 29,073  
     Net charges included in operations not requiring funds   105,191     88,779  
     Changes in assets and liabilities:          
          Accounts receivable   (24,135 )   4,477  
          Accounts payable and accrued expenses   2,353     29,948  
          Other, net   (600 )   (3,881 )
 
 
 
     Total adjustments   82,809     119,323  
 
 
 
     Net cash provided by operating activities   124,978     148,396  
 
 
 
Cash flows from investing activities:            
     Capital expenditures   (55,227 )   (31,183 )
     Net purchases of restricted marketable securities   (1,970 )   (5,297 )
     Purchases of eldercare centers and lease amendments   (7,208 )   (48,641 )
     Proceeds from sales of eldercare assets   6,664     17,956  
     Other, net   607     (2,535 )
 
 
 
     Net cash used in investing activities   (57,134 )   (69,700 )
 
 
 
Cash flows from financing activities:            
     Proceeds from issuance of long-term debt   180,000     410,000  
     Repayment of long-term debt   (225,714 )   (306,531 )
     Debt issuance costs and debt prepayment premium   (14,303 )   (9,337 )
     Purchase of common stock for treasury   (32,096 )   —  
     Proceeds from exercise of stock options   7,239     —  
     Net transactions with NCI, prior to the spin-off   —     (55,548 )
 
 
 
     Net cash (used in) provided by financing activities   (84,874 )   38,584  
 
 
 
Net (decrease) increase in cash and equivalents $ (17,030 ) $ 117,280  
Cash and equivalents:            
     Beginning of period   126,071     8,791  
 
 
 
     End of period $ 109,041   $ 126,071  
 
 
 

12



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(IN THOUSANDS)
  Three months ended  
September 30, 2005   September 30, 2004  
 
 
 
Cash flows from operating activities:            
     Net income $ 10,213   $ 10,771  
     Net charges included in operations not            
          requiring funds   24,075     29,297  
     Changes in assets and liabilities:            
          Accounts receivable   (1,401 )   5,839  
          Accounts payable and accrued expenses   (10,619 )   9,230  
          Other, net   (7,877 )   (6,905 )
 
 
 
     Total adjustments   4,178     37,461  
 
 
 
     Net cash provided by operating activities   14,391     48,232  
 
 
 
Cash flows from investing activities:            
     Capital expenditures   (15,182 )   (10,153 )
     Net sales of restricted marketable securities   3,506     964  
     Proceeds from sales of eldercare assets   —     3,217  
     Other, net   540     (5,106 )
 
 
 
     Net cash used in investing activities   (11,136 )   (11,078 )
 
 
 
Cash flows from financing activities:            
     Repayment of long-term debt   (1,139 )   (26,227 )
     Purchase of common stock for treasury   (6,938 )   —  
     Proceeds from exercise of stock options   610     —  
 
 
 
     Net cash used in financing activities   (7,467 )   (26,227 )
 
 
 
             
Net (decrease) increase in cash and equivalents $ (4,212 ) $ 10,927  
Cash and equivalents:            
     Beginning of period   113,253     115,144  
 
 
 
     End of period $ 109,041   $ 126,071  
 
 
 
             

13



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (UNAUDITED)
                         
   Three months ended    Twelve months ended  
Segment Data   September 30,     September 30,     September 30,     September 30,  
     (dollars in thousands)   2005     2004     2005     2004  
Inpatient services
 
 
 
 
Revenue $ 375,103   $ 355,614   $ 1,505,985   $ 1,353,163  
EBITDA – $   59,769     50,830     218,175     171,086  
EBITDA – %   15.9 %   14.3 %   14.5 %   12.6 %
Rehabilitation therapy services                        
     (including intersegment amounts)                        
Revenue $ 53,831   $ 50,169   $ 211,725   $ 197,078  
EBITDA – $   (2,568 )   908     5,927     14,193  
EBITDA – %   -4.8 %   1.8 %   2.8 %   7.2 %
                         
                         
   Three months ended    Twelve months ended  
Selected Operating Statistics   September 30, 2005     September 30, 2004     September 30, 2005     September 30, 2004  
 
 
 
 
 
Occupancy – Licensed Beds   90.6 %   90.5 %   90.1 %   90.8 %
                         
Patient Days:                            
     Private and other   333,815     329,617     1,312,681     1,320,076  
     Medicare   261,433     256,428     1,061,134     1,050,175  
     Medicaid   1,099,625     1,100,534     4,317,872     4,319,011  
 
 
 
 
 
Total Days   1,694,873     1,686,579     6,691,687     6,689,262  
 
 
 
 
 
Per Diems:                        
     Private and other $ 212.26   $ 202.91   $ 209.29   $ 202.22  
     Medicare   370.40     354.21     367.98     350.04  
     Medicaid (1)   180.56     171.83     179.20     167.01  
                         
Nursing labor costs per                        
     patient day:                        
     Employed labor $ 83.32   $ 78.80   $ 82.15   $ 77.49  
     Agency labor   3.78     4.36     3.45     4.49  
 
 
 
 
 
     Total $ 87.10   $ 83.16   $ 85.60   $ 81.98  
 
 
 
 
 
End of period:   Inpatient
Licensed Beds		     Inpatient
Facility Count		              
     Owned
 
             
          - Skilled Nursing   15,209     120              
          - Assisted Living   832     7              
 
 
             
          Total Owned   16,041     127              
                         
     Leased                        
          - Skilled Nursing   3,663     25              
          - Assisted Living   557     6              
 
 
             
          Total Leased   4,220     31              
 
 
             
     Total Owned and Leased                        
          (Consolidated)   20,261     158              
 
 
             
     Jointly Owned                        
          - Skilled Nursing   953     7              
          - Assisted Living   586     5              
                         
     Managed                        
          - Skilled Nursing   3,510     27              
          - Assisted Living   741     5              
          - Transitional Care Units   331     13              
 
 
             
     Total Jointly Owned and                        
          Managed– (Unconsolidated)   6,121     57              
 
 
             
                         
(1) – Medicaid per diems exclude any retroactive provider assessments that do not relate to the period presented.       
                         

14

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
           
  The following unaudited pro forma condensed financial statement presented below        
  should be read in conjunction with “Mangement’s Discussion and Analysis of  
  Financial Condition and Results of Operation” in GHC’s annual report of Form 10-K  
  filed on December 14, 2004.  
   
  The following unaudited pro forma condensed statement of operations for the  
  twelve months ended September 30, 2004 is presented as if the spin-off of GHC  
  occurred on October 1, 2003.  
   
  The unaudited pro forma condensed financial statement is presented for  
  informational purposes only and is not necessarily indicative of what our financial  
  position and results of operations actually would have been for the period presented  
  if the spin-off occurred on October 1, 2003, nor does such financial statement  
  purport to represent the results of future periods. The pro forma adjustments are  
  based upon available information and certain assumptions that we consider  
  reasonable and are discribed in the notes accompanying the unaudited pro forma  
  condensed financial statement. 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 of GHC been completed on the aforesaid effective  
  date for purposes of the pro forma results.  
   
   
   

15



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES    
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS    
TWELVE MONTHS ENDED SEPTEMBER 30, 2004    
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)    
                                                           
                        Historical           Pro Forma    
                     
       
   
                        GHC           Adjustments                 GHC    
                     
       
             
   
Net revenues         $ 1,517,553         $ —               $ 1,517,553    
                                                           
Expenses:                                              
      Operating expenses     1,365,423           —                 1,365,423    
      Lease expense           28,073           —                 28,073    
      Depreciation and amortization expense     46,306           88     (1 )         46,394    
      Interest expense     26,985           1,864     (2 )         28,849    
                     
       
             
   
                                                           
Income before income tax expense                                        
     equity in net income of unconsolidated                                        
     affiliates and minority interests     50,766           (1,952 )               48,814    
                                                           
Income tax expense           20,791           (773 )   (3 )         20,018    
                     
       
             
   
Income before equity in net income                                        
     of unconsolidated affiliates and minority                                        
     interests           29,975           (1,179 )               28,796    
                                                           
Equity in net income of unconsolidated affiliates     2,235           —                 2,235    
                                                           
Minority interests           (462 )         —                 (462 )  
                     
       
             
   
Income from continuing operations     31,748           (1,179 )               30,569    
Loss from discontinued operations, net of taxes     (2,675 )         —                 (2,675 )  
                     
       
             
   
Net income         $ 29,073         $ (1,179 )             $ 27,894    
                     
       
             
   
                                                           
Per common share data:                                        
      Basic:                                              
           Income from continuing operations   $ 1.59                           $ 1.53    
           Loss from discontinued operations     (0.13 )                           (0.13 )  
           Net income         $ 1.46                           $ 1.40    
           Weighted average shares     19,947,177                             19,947,177    
                                                           
      Diluted:                                              
           Income from continuing operations   $ 1.58                           $ 1.52    
           Loss from discontinued operations     (0.13 )                           (0.13 )  
           Net income         $ 1.45                           $ 1.39    
           Weighted average shares     20,118,292                             20,118,292    
                                                           
See accompanying Notes to the Unaudited Pro Forma Condensed Statement of Operations.    
                                                           
                                                           

16



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
                                                         
General note:                                                        
                                                                                 
      The unaudited pro forma condensed statement of operations reflects all adjustments that, in the opinion of  
      management, are necessary to present fairly the pro forma results of operations for the twelve months  
      ended September 30, 2004, assuming the spin-off occurred on October 1, 2003.              
                                                                                 
(1)     Represents the amortization of estimated deferred financing fees and expenses related to our post spin-off  
      financing arrangements offset by reduced historical amortization of deferred financing fees written-off  
      following the repayment of the then existing indebtedness.                                      
                                                                   
 Twelve
  
                                                                   
  months ended
  
                                                                   
 September 30,
  
                                                                   
 2004
  
       
 
                                                                   
 (in thousands)
  
      Historical financing fee amortization $    (54 )
      New financing fee amortization     142  
                                                                   
 
                                                                    $    88  
                                                                     
 
(2)     Reflects the increase in estimated interest expense for the months of October and November 2003 based upon the  
      incurrence of incremental debt following the spin-off and an estimated weighted borrowing average rate of 6.8%  
      following the spin-off.                                                        
                                                                                 
                                                                                 
      Debt service under our post spin-off senior credit facility is based upon a variable interest rate that may 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 approximately $218 thousand for the twelve months ended September 30, 2004.  
                                                                                 
(3)     Income tax expense is reported at an estimated effective tax rate of 39.6%.                          
                                                                                 
                                                                                 
                                                                                 
                                                                                 

17



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET INCOME EBITDA
(IN THOUSANDS)
The following reconciliation of net income to EBITDA supports the calculation of debt to EBITDA, which has and will be included in certain presentations made to the investment community. The calculation of the ratio of debt to EBITDA includes EBITDA, which is a non-GAAP financial measure. 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.        
                                                   
                                       
            Three months ended  
            March 31,     June 30,     September 30,     December 31,     March 31,     June 30,     September 30,  
            2004     2004     2004     2004     2005     2005     2005  
         
 
 
 
 
 
 
 
Net income         $ 5,574   $ 6,722   $ 10,771   $ 10,848   $ 13,467   $ 7,641   $ 10,213  
Add back:                                                  
     Loss (income) from discontinued                                                  
          operations, net of taxes           577     919     (246 )   (523 )   164     1,350     (740 )
     Equity in net income of                                                  
          unconsolidated affiliates           (466 )   (746 )   (465 )   (1,111 )   (679 )   (591 )   (724 )
     Minority interests           84     170     133     271     153     (72 )   89  
     Income tax expense           3,929     4,873     7,245     6,482     7,897     4,775     6,878  
     Interest expense           7,528     6,854     6,782     6,632     6,261     5,096     9,890  
     Depreciation and amortization           11,464     11,336     11,941     11,319     13,206     12,723     17,839  
         
 
 
 
 
 
 
 
EBITDA         $ 28,690   $ 30,128   $ 36,161   $ 33,918   $ 40,469   $ 30,922   $ 43,445  
         
 
 
 
 
 
 
 
     Loss on early extinguishment of debt (1)         $ 655   $ 425   $ 439   $ 543   $ 4,289   $ 6,933   $ —  
                                       
CALCULATION OF DEBT TO EBITDA
(IN THOUSANDS, EXCEPT DEBT RATIO)
                                 
                              December 31,     March 31,     June 30,     September 30,  
                              2004     2005     2005     2005  
                           
 
 
 
 
12 months trailing EBITDA (A)                           $ 128,897   $ 140,676   $ 141,470   $ 148,754  
Total debt at end of period (B)                             378,321     423,862     377,666     410,170  
                                                   
Ratio of debt to EBITDA (B) / (A)                             2.94     3.01     2.67     2.76  
                                                   
CALCULATION OF DEBT TO NET INCOME 
(IN THOUSANDS, EXCEPT DEBT RATIO) 
                                 
                              December 31,     March 31,     June 30,     September 30,  
                              2004     2005     2005     2005  
                           
 
 
 
 
12 months trailing net income (C)                           $ 33,915   $ 41,808   $ 42,727   $ 42,169  
Total debt at end of period (D)                             378,321     423,862     377,666     410,170  
                                                   
Ratio of debt to net income (D) / (C)                             11.15     10.14     8.84     9.73  
                                                   
(1) Loss on extinguishment of debt is included for informational purposes only.                                
                                                   

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