8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) February 28, 2011

HEALTH CARE REIT, INC.

(Exact name of registrant as specified in its charter)

Delaware	1-8923	34-1096634
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

4500 Dorr Street, Toledo, Ohio	43615
(Address of principal executive office)	(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01 Other Events.

     As reported on Item 1.01 of its Current Report on Form 8-K filed on February 28, 2011, Health Care REIT, Inc. (the “Company”) entered into a definitive purchase agreement (the “Purchase Agreement”) with FC-GEN Investment, LLC (“FC-GEN”) and FC-GEN Operations Investment, LLC (“OpCo”) to acquire (the “Acquisition”) 100% of the equity interests of FC-GEN Acquisition Holding, LLC (“Acquisition Holding”).

     The Company is filing this Current Report on Form 8-K to provide certain financial information with respect to the proposed Acquisition. Specifically, this Current Report on Form 8-K provides: (1) the Company’s unaudited pro forma condensed consolidated financial statements as of and for the year ended December 31, 2010 relating to the proposed Acquisition, attached hereto as Exhibit 99.1; (2) FC-GEN Acquisition Holding, LLC’s audited consolidated financial statements as of December 31, 2009 and 2008 (Successor periods) and for the years ended December 31, 2009 and 2008 and for the period July 14, 2007 through December 31, 2007 (Successor periods) and for the period January 1, 2007 through July 13, 2007 (Predecessor period), attached hereto as Exhibit 99.2; and (3) FC-GEN Acquisition Holding, LLC’s unaudited condensed consolidated financial statements as of September 30, 2010 and December 31, 2009 and for the nine months ended September 30, 2010 and 2009, attached hereto as Exhibit 99.3. The information in Exhibits 99.2 and 99.3 was provided by FC-GEN Acquisition Holding, LLC.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits. The following exhibits are being filed herewith:

No.	Description
23.1	Consent of KPMG LLP
99.1	Health Care REIT, Inc. Unaudited Pro Forma Condensed Consolidated Financial Statements as of and for the year ended December 31, 2010
99.2	FC-GEN Acquisition Holding, LLC Consolidated Financial Statements as of December 31, 2009 and 2008 (Successor periods) and for the years ended December 31, 2009 and 2008 and for the period July 14, 2007 through December 31, 2007 (Successor periods) and for the period January 1, 2007 through July 13, 2007 (Predecessor period)
99.3	FC-GEN Acquisition Holding, LLC Condensed Consolidated Financial Statements as of September 30, 2010 and December 31, 2009 and for the nine months ended September 30, 2010 and 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	HEALTH CARE REIT, INC.
Date: February 28, 2011	By:	/s/ GEORGE L. CHAPMAN
		George L. Chapman,
		Chairman, Chief Executive Officer and President

2

EXHIBIT INDEX

No.	Description
23.1	Consent of KPMG LLP
99.1	Health Care REIT, Inc. Unaudited Pro Forma Condensed Consolidated Financial Statements as of and for the year ended December 31, 2010
99.2	FC-GEN Acquisition Holding, LLC Consolidated Financial Statements as of December 31, 2009 and 2008 (Successor periods) and for the years ended December 31, 2009 and 2008 and for the period July 14, 2007 through December 31, 2007 (Successor periods) and for the period January 1, 2007 through July 13, 2007 (Predecessor period)
99.3	FC-GEN Acquisition Holding, LLC Condensed Consolidated Financial Statements as of September 30, 2010 and December 31, 2009 and for the nine months ended September 30, 2010 and 2009

3

EX-23.1

EXHIBIT 23.1

Consent of Independent Auditors

The Board of Managers
FC-GEN Acquisition Holding, LLC

We consent to the incorporation by reference in the registration statements (No. 333-107280, 333-110877, 333-110902, 333-120917, 333-134082, 333-142987, 333-159040 and 333-166705) on Form S-3, (No. 333-138006) on Form S-4 and (No. 333-01239, 333-40769, 333-40771, 333-73916, 333-120915, 333-126195 and 333-161131) on Form S-8 of Health Care REIT, Inc. of our report dated March 26, 2010, with respect to the consolidated balance sheets of FC-GEN Acquisition Holding, LLC and subsidiaries (the Company) (formerly FC-GEN Acquisition, Inc. and subsidiaries) (Successor) as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity and other comprehensive income (loss), and cash flows for the years ended December 31, 2009 and 2008 and for the period from July 14, 2007 to December 31, 2007 (Successor periods), and the Genesis HealthCare Corporation and subsidiaries (Predecessor) consolidated statements of operations, equity and other comprehensive income (loss), and cash flows for the period from January 1, 2007 to July 13, 2007 (Predecessor periods), which report appears in Form 8-K of Health Care REIT, Inc. dated February 28, 2011.

Our report on the consolidated financial statements contains explanatory paragraphs that state: effective July 14, 2007, FC-GEN Acquisition, Inc. acquired all of the outstanding stock of Genesis HealthCare Corporation in a business combination accounted for as a purchase (the Merger). As a result of the Merger, the consolidated financial information for the periods after the Merger is presented on a different cost basis than that for the periods before the Merger and, therefore, is not comparable; the Company has changed its method of accounting for uncertainty in income taxes on January 1, 2009 due to the adoption of Accounting Standard Codification Topic 740, Income Taxes; the Company has changed its method of accounting for noncontrolling interests on January 1, 2009 due to the adoption of Accounting Standard Codification Topic 810, Consolidation; and the Company has changed its method of accounting for fair value measurements for recurring financial assets and liabilities on January 1, 2008 and for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis on January 1, 2009 due to the adoption of Accounting Standard Codification Topic 820, Fair Value Measurements.

/s/ KPMG LLP

Philadelphia, Pennsylvania
February 25, 2011

EX-99.1

EXHIBIT 99.1

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2010

	Page
Unaudited Pro Forma Condensed Consolidated Balance Sheets as of December 31, 2010		3
Unaudited Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 2010		4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements		5

1

UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

     The accompanying unaudited pro forma condensed consolidated financial statements presented below have been prepared based on certain pro forma adjustments to the historical consolidated financial statements of Health Care REIT, Inc. (the “Company”) as of and for the year ended December 31, 2010 and FC-GEN Acquisition Holding, LLC (“Acquisition Holding”) as of September 30, 2010 and the twelve months ended September 30, 2010. The historical consolidated financial statements of the Company are contained in its Annual Report on Form 10-K for the year ended December 31, 2010. The historical consolidated financial statements of Acquisition Holding are included as Exhibits 99.2 and 99.3 to this Current Report on Form 8-K.

     The accompanying unaudited pro forma condensed consolidated financial statements give effect to (i) the proposed acquisition by the Company of 100% of the equity interests in Acquisition Holding, which indirectly owns (1) 140 senior housing and care facilities (137 of fee simple and three pursuant to ground leases) and (2) the leasehold interests in and options to purchase seven senior housing and care facilities, for approximately $2.4 billion (collectively, the “Acquisition”) and (ii) the proposed lease by the Company to Genesis Operations, LLC (“Tenant”) under which the Tenant will operate the acquired facilities (the “Master Lease”). Prior to closing, FC-GEN Operations Investment, LLC (“OpCo”) will be a direct subsidiary of Acquisition Holding. Prior to the closing date, Acquisition Holding will contribute the assets, liabilities and equity interests relating to (i) the business of operating and managing senior housing and care facilities, (ii) joint venture entities and (iii) other ancillary businesses to OpCo and then distribute all of the equity interests in OpCo to FC-GEN Investment, LLC (“FC-GEN”). Tenant is a wholly-owned subsidiary of OpCo. All obligations under the Master Lease will be guaranteed by OpCo. In addition, in conjunction with the Acquisition, Company will have the option to acquire a 9.9% ownership interest in OpCo for a fixed price equal to $47 million at any time during the initial term of the Master Lease. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2010 has been prepared as if the Acquisition had occurred as of that date. The unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2010 has been prepared as if the Acquisition had occurred as of January 1, 2010. Such statements also give effect to certain capital transactions undertaken by the Company in order to finance part of the Acquisition.

     The allocation of the purchase price of Acquisition Holding reflected in these unaudited pro forma condensed consolidated financial statements has been based upon preliminary estimates of the fair value of assets ultimately acquired and liabilities ultimately assumed. A final determination of the fair values of Acquisition Holding’s assets and liabilities, which cannot be made prior to the completion of the Acquisition, will be based on the actual valuation of the tangible and intangible assets and liabilities of Acquisition Holding that exist as of the date of completion of the Acquisition. Consequently, amounts preliminarily allocated to identifiable tangible and intangible assets and liabilities could change significantly from those used in the pro forma condensed consolidated financial statements presented below and could result in a material change in amortization of tangible and intangible assets and liabilities. Additionally, the common and preferred stock proceeds assumed in the pro forma as adjusted columns are predicated on anticipated sales of equity securities by the Company. There can be no assurance that such sales will occur on the terms estimated or at all.

     In the opinion of the Company’s management, the pro forma condensed consolidated financial statements include all significant necessary adjustments that can be factually supported to reflect the effects of the Acquisition. The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only. The unaudited pro forma condensed consolidated financial statements are not necessarily and should not be assumed to be an indication of the results that would have been achieved had the Acquisition been completed as of the dates indicated or that may be achieved in the future. The completion of the valuation, the allocation of the purchase price, the impact of ongoing integration activities, the timing of completion of the Acquisition and other changes in Acquisition Holding tangible and intangible assets and liabilities that occur prior to completion of the Acquisition could cause material differences in the information presented. Furthermore, following consummation of the Acquisition, the Company expects to apply its own methodologies and judgments in accounting for the assets and liabilities acquired in the Acquisition, which may differ from those reflected in Acquisition Holding’s historical consolidated financial statements and the pro forma condensed consolidated financial statements.

2

Health Care REIT, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 2010
(In thousands)

				Acquisition
	Company			Holding		Pro Forma			Company			Pro Forma
	Historical			Historical (A)		Adjustments (B)			Pro Forma			As Adjusted (N)
Assets
Real property, net	$	8,155,529		$	1,753,406	$	723,405	(D)	$	10,632,340		$	10,632,340
Real estate loans receivable, net		435,304			—		—			435,304			435,304
Net real estate investments		8,590,833			1,753,406		723,405			11,067,644			11,067,644
Goodwill		51,207			119,090		(119,090)	(C)		51,207			51,207
Deferred loan expenses		32,960			12,545		(467)	(C)		67,760			54,073	(N)
							22,722	(E)
Cash and cash equivalents		131,570			113,152		(113,152)	(C)		60,770			74,457	(N)
							(70,800)	(B)
Other assets		645,164			629,848		(587,855)	(C)		645,164			645,164
							(41,993)	(F)
Total assets	$	9,451,734		$	2,628,041	$	(187,230	)	$	11,892,545		$	11,892,545
Liabilities and equity
Liabilities:
Borrowings under unsecured line of credit arrangement	$	300,000		$	—	$	—		$	300,000		$	300,000
Bridge loan		—			—		2,400,000	(G)		2,400,000			575,000	(N)
Senior unsecured notes		3,034,949			—		—			3,034,949			3,034,949
Secured debt		1,125,906			1,713,920		(43,357)	(C)		1,125,906			1,125,906
							(1,670,563)	(G)
Capital lease obligations		8,881			160,820		(84,454)	(C)		85,692			85,692
							445	(H)
Accrued expenses and other liabilities		244,345			735,827		(487,868)	(C)		244,345			244,345
							(247,959)	(F)
Total liabilities		4,714,081			2,610,567		(133,756	)		7,190,892			5,365,892
Redeemable noncontrolling interests		4,553			—		—			4,553			4,553
Equity:
Preferred stock		291,667			—		—			291,667			916,667	(N)
Common stock		147,155			—		—			147,155			172,155	(N)
Capital in excess of par value		4,932,468			—		—			4,932,468			6,107,468	(N)
Other equity		(768,439	)		—		(36,000)	(B)		(804,439	)		(804,439	)
Total members’ equity (deficit)		—			10,613		(10,613)	(I)		—			—
Total Company stockholders’ equity		4,602,851			10,613		(46,613	)		4,566,851			6,391,851
Noncontrolling interests		130,249			6,861		(6,861)	(C)		130,249			130,249
Total equity		4,733,100			17,474		(53,474	)		4,697,100			6,522,100
Total liabilities and equity	$	9,451,734		$	2,628,041	$	(187,230	)	$	11,892,545		$	11,892,545

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

3

Health Care REIT, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 2010
(In thousands, except per share data)

				Acquisition
	Company			Holding			Pro Forma			Company			Pro Forma
	Historical			Historical (J)			Adjustments (B)			Pro Forma			As Adjusted (N)
Revenues:
Rental income	$	581,424		$	—		$	222,429	(K)	$	803,853		$	803,853
Resident fees and services		51,006			2,460,737			(2,460,737)	(C)		51,006			51,006
Interest income		40,855			—			—			40,855			40,855
Other income		7,245			2,340			(2,340)	(C)		7,245			7,245
Total revenues		680,530			2,463,077			(2,240,648	)		902,959			902,959
Expenses:
Interest expense		157,108			142,296			(11,555)	(C)		341,404			217,063	(O)
								53,555	(L)
Property operating expenses		83,120			2,080,426			(2,080,426)	(C)		83,120			83,120
Depreciation and amortization		197,118			86,668			(24,844)	(C)		260,651			260,651
								1,709	(M)
General and administrative		54,626			118,543			(118,543)	(C)		54,626			54,626
Transaction costs		46,660			—			—			46,660			46,660
Impairment of assets		—			14,492			(14,492)	(C)		—			—
Loss (gain) on extinguishment of debt		34,171			(1,057	)		1,057	(C)		34,171			34,171
Provision for loan losses		29,684			—			—			29,684			29,684
Total expenses		602,487			2,441,368			(2,193,539	)		850,316			725,975
Income from continuing operations before income taxes and income from unconsolidated joint ventures		78,043			21,709			(47,109	)		52,643			176,984
Income tax (expense) benefit		(364	)		(8,113	)		8,113	(F)		(364	)		(364	)
Income from unconsolidated joint ventures		6,673			(219	)		219	(C)		6,673			6,673
Income from continuing operations		84,352			13,377			(38,777	)		58,952			183,293
Less: Preferred stock dividends		21,645			—			—			21,645			63,833	(P)
Net income (loss) attributable to noncontrolling interests		357			3,066			(3,066)	(C)		357			357
Income from continuing operations attributable to common stockholders	$	62,350		$	10,311		$	(35,711	)	$	36,950		$	119,103
Average number of common shares outstanding:
Basic		127,656									127,656			152,656	(Q)
Diluted		128,208									128,208			153,208	(Q)
Income from continuing operations attributable to common stockholders per share:
Basic	$	0.49								$	0.29		$	0.78	(Q)
Diluted		0.49									0.29			0.78	(Q)

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

4

HEALTH CARE REIT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements and the notes thereto of the Company for the year ended December 31, 2010 and of Acquisition Holding as of September 30, 2010 and for the nine months ended September 30, 2010 and September 30, 2009 included herein.

(A)	As of the date of this Current Report on Form 8-K, Acquisition Holding, a private company, has not completed its audit for the year ended December 31, 2010. As such, the Company has elected to use the historical unaudited condensed consolidated financial statements of Acquisition Holding as of September 30, 2010 which have been presented based on the financial statement classifications utilized by the Company.
(B)	On February 28, 2011, the Company entered into a definitive agreement to acquire Acquisition Holding for a total cash purchase price of $2,400,000,000. The total purchase price of $2,476,811,000 is comprised of the cash consideration and the fair value of capital lease obligations totaling $76,811,000 (see Note H). Immediately after the Acquisition, Tenant will lease the facilities acquired from Acquisition Holding from the Company pursuant to the Master Lease (see Note K). All obligations under the lease will be guaranteed by OpCo. In connection with the Acquisition, the Company estimates it will pay approximately $70,800,000 of fees and costs including advisory fees ($6,000,000), legal fees ($2,000,000), due diligence and other closing costs ($28,000,000) and fees associated with bridge loan financing ($34,800,000). Fees associated with bridge loan financing will be deferred and amortized over the term of the loan. The other $36,000,000 of costs are directly attributable to the Acquisition and represent non-recurring costs; therefore, the anticipated impact on the results of operations was excluded from the pro forma condensed consolidated statement of income.
(C)	Prior to closing, OpCo will be a direct subsidiary of Acquisition Holding. Immediately before the closing date, certain subsidiaries of Acquisition Holding will transfer the assets, liabilities and equity interests relating to (i) the business of operating and managing senior housing and care facilities, (ii) joint venture entities and (iii) other ancillary businesses to OpCo and then distribute all of the equity interests in OpCo to FC-GEN. The parties intend that under no circumstances shall the Company be deemed the owner of, or otherwise have control over, OpCo, its subsidiaries or the assets, liabilities and equity thereof for any period of time. As such, all relevant amounts relating to OpCo have been eliminated from Acquisition Holding. Adjustments identified represent assets, liabilities, revenues and expenses of OpCo that were not retained in the Acquisition. Subsequent to the Acquisition, the Company will have primarily acquired 140 senior housing and care facilities and the leasehold interests in and options to purchase seven other senior housing and care facilities.
(D)	Adjustments to real property follow (in thousands):

Real property not acquired:(1)
Land and land improvements	$	(16,342	)
Buildings and improvements		(275,830	)
Construction in progress		(2,565	)
Accumulated depreciation and amortization		72,684
Total real property not acquired		(222,053	)
Fair value adjustments:(2)
Land and land improvements		(97,578	)
Buildings and improvements		859,810
Construction in progress		(2,409	)
Accumulated depreciation and amortization		185,635
Total real property fair value adjustments		945,458
Net real property asset adjustments	$	723,405

(1)	See Note C.
(2)	Acquisition Holding’s real property assets have been adjusted to their preliminary estimated fair values and the related historical balances of accumulated depreciation and construction in progress are eliminated when in-service real property assets are recorded at fair value.
(E)	Adjustments represent the deferral of $34,800,000 of fees associated with bridge financing (see Note B) offset by the elimination of Acquisition Holding’s deferred loan costs of $12,078,000.
(F)	Adjustments represent elimination of deferred tax assets and liabilities of Acquisition Holding. As a result of the Acquisition, we are subject to corporate level taxes for any asset acquired in the Acquisition and subsequently sold for a period of 10 years subsequent to closing (“built-in gains tax”). The amount of income potentially subject to this special corporate level tax is

5

HEALTH CARE REIT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	generally equal to (i) the excess of the fair value of the asset as of the date of closing over its adjusted tax basis as of the date of closing, or (ii) the actual amount of gain, whichever of (i) and (ii) is lower. We have not recorded a deferred tax liability as a result of the potential built-in gains tax based on our intentions with respect to such assets and available tax planning strategies. Additionally, at the closing of the Acquisition, 100% of the real estate of Acquisition Holding will be acquired by a subsidiary of the Company; accordingly, assuming the Acquisition was effective January 1, 2010, all of the amounts of the income tax expense would then be eliminated.
(G)	The Company expects to fund $2,400,000,000 of cash consideration and other associated costs of the Acquisition primarily with short-term financing and available cash. The Company has obtained a commitment for a 364-day bridge loan of $2,400,000,000. Although the Company intends to finance the Acquisition through the current offerings of common and preferred stock, cash on hand and future capital raising activities or refinancings, for purposes of these unaudited pro forma consolidated financial statements we have initially assumed a drawdown of $2,400,000,000 under the bridge loan at the closing of the Acquisition. Any draw downs under the bridge loan are expected to be repaid after the Acquisition with proceeds from the issuance of new securities (see Note N). Approximately $1,670,563,000 of Acquisition Holding’s long-term debt is expected to be settled or repaid at closing.
(H)	At closing, Company will assume existing leases at seven properties. Acquisition Holding has historically recognized these leases as capital leases due to bargain purchase options. Company has adjusted the capital lease obligations to estimated fair values.
(I)	Adjustment to the total members’ equity represents the elimination of such balance of Acquisition Holding.
(J)	As discussed in Note A, Acquisition Holding has not completed its audit for the year ended December 31, 2010. As such, the following represents Acquisition Holding’s unaudited condensed consolidated results from continuing operations for the twelve months ended September 30, 2010 as derived from the audited and unaudited condensed consolidated financial statements of Acquisition Holding (in thousands):

				Deduct:			Add:
	Year Ended			Nine Months Ended			Nine Months Ended			Twelve Months Ended
	December 31, 2009			September 30, 2009			September 30, 2010			September 30, 2010
Revenues:
Resident fees and services	$	2,376,967		$	1,766,127		$	1,849,897		$	2,460,737
Other income		2,145			2,026			2,221			2,340
Total revenues		2,379,112			1,768,153			1,852,118			2,463,077
Expenses:
Interest expense		138,008			99,973			104,261			142,296
Property operating expenses		2,003,989			1,478,145			1,554,582			2,080,426
Depreciation and amortization		85,151			63,488			65,005			86,668
General and administrative		117,742			88,959			89,760			118,543
Impairment of assets		17,358			17,358			14,492			14,492
Loss (gain) on extinguishment of debt		12,306			12,956			(407	)		(1,057	)
Total expenses		2,374,554			1,760,879			1,827,693			2,441,368
Income from continuing operations before income taxes and income from unconsolidated joint ventures		4,558			7,274			24,425			21,709
Income tax expense		(17,105	)		(18,469	)		(9,477	)		(8,113	)
Income from unconsolidated joint ventures		435			332			(322	)		(219	)
Income (loss) from continuing operations		(12,112	)		(10,863	)		14,626			13,377
Less: Net income attributable to noncontrolling interests		1,367			1,100			2,799			3,066
Income (loss) from continuing operations attributable to common stockholders	$	(13,479	)	$	(11,963	)	$	11,827		$	10,311

(K) Immediately after the closing of the Acquisition, a subsidiary of the Company will lease the acquired facilities to Tenant pursuant to the Master Lease. In addition to rent, the triple net Master Lease requires Tenant to pay all operating costs, utilities, real estate taxes, insurance, building repairs, maintenance costs and all obligations under the ground leases. All obligations under the Master

6

HEALTH CARE REIT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Lease will be guaranteed by OpCo. The initial term will be fifteen years. Tenant will have one option to renew for an additional term of fifteen years. The Master Lease will provide that the base rent for the first year will be $198,000,000 and will increase at least 1.75% but no more than 3.50% (subject to CPI changes) for each of the years two through six during the initial term and at least 1.50% but no more than 3.00% per year thereafter (subject to CPI changes). The adjustment to rental income represents the estimated straight-line rent the Company expects to recognize based on the minimum rent escalators during the initial term.

(L)

The pro forma increase in interest expense as a result of the bridge loan financing in the Acquisition is calculated using market rates management believes would have been available to the Company for the borrowings assumed to have been issued as of February 25, 2011 (the last business date before the date that the definitive agreement was executed to acquire Acquisition Holding) pursuant to the bridge loan commitment. The all-in cost of bridge financing is estimated to be 7.51%. Each 1/8 of 1% increase in the annual interest rate assumed with respect to the debt would increase pro forma interest expense by $3,000,000 for the year ended December 31, 2010. Adjustments to interest expense are as follows (in thousands):

Elimination of Acquisition Holding’s interest expense	$	(130,741	)
Interest expense and fees associated with bridge loan		145,518
Amortization of deferred fees associated with bridge loan (Note B)		34,800
Interest expense on capital lease obligations (Note H)		3,978
Total	$	53,555

(M)

Adjustments to depreciation and amortization represent the elimination of Acquisition Holding’s historical depreciation ($61,824,000) offset by depreciation expense as a result of the recording of Acquisition Holding’s real property at its estimated fair value ($63,533,000). Estimated useful lives of 40 years and 15 years were assumed to compute depreciation for buildings and improvements, respectively, on a straight-line basis.

(N)

Adjustments represent the anticipated issuance of 25,000,000 shares of Company common stock and 12,500,000 shares of Company cumulative convertible perpetual preferred stock with an assumed dividend rate of 6.75% and the application of the estimated proceeds therefrom of $1,825,000,000 to reduce the funds necessary to draw under the bridge loan. Further, as a result of reduced bridge financing, the Company would only pay bridge fees of $21,113,000 rather than $34,800,000. The common and preferred stock proceeds assumed are predicated on anticipated sales of equity securities by the Company. There can be no assurance that such sales will occur on the terms estimated herein or at all. The shares of Company common and preferred stock assumed to be issued are valued as follows (in thousands, except per share data):

	Common			Preferred
Number of shares issued		25,000			12,500
Assumed price(1)	$	50.86		$	50.00
Gross value of shares issued		1,271,500			625,000
Less: Underwriting discounts		(50,860	)		(18,750	)
Less: Share registration and issuance costs		(1,140	)		(750	)
Total value of shares issued	$	1,219,500		$	605,500
The total value of the shares issued is presented as follows:
Common Stock: Par value, $1.00 per share	$	25,000
Preferred Stock: Liquidation preference				$	625,000
Capital in excess of par value		1,194,500			(19,500	)
Total	$	1,219,500		$	605,500

(1)

Common stock price based on the last reported sale price of the Company’s common stock on February 25, 2011. Preferred stock price represents liquidation value per share.

(O)

Adjustments to interest expense represent $124,341,000 reduction in interest and fees associated with the bridge loan resulting from the use of proceeds as discussed in Note N. See Note L for a discussion of the interest rate assumptions. Assuming a bridge loan balance of $575,000,000, the all-in rate is approximately 9.74% and each 1/8 of 1% increase in the annual interest rate assumed with respect to the debt would increase adjusted pro forma interest expense by $719,000 for the year ended December 31, 2010.

7

HEALTH CARE REIT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(P)	Adjustment represents the dividend on the issuance of 12,500,000 shares of the Company’s cumulative convertible perpetual preferred stock (see Note N) with an assumed dividend rate of 6.75%.
(Q)	The calculations of basic and diluted earnings per share are as follows (in thousands, except per share data):

							Pro Forma
	Historical			Pro Forma			As Adjusted
Income from continuing operations	$	84,352		$	58,952		$	183,293
Preferred stock dividends		(21,645	)		(21,645	)		(63,833	)
Net income attributable to noncontrolling interests		(357	)		(357	)		(357	)
Income from continuing operations attributable to common stockholders	$	62,350		$	36,950		$	119,103
Weighted-average shares used to calculate earnings per common share — Basic(1)		127,656			127,656			152,656
Effect of dilutive securities		552			552			552
Adjusted weighted-average shares used to calculate earnings per common share — Diluted		128,208			128,208			153,208
Income from continuing operations attributable to common stockholders per share:
Basic	$	0.49		$	0.29		$	0.78
Diluted		0.49			0.29			0.78

(1) The pro forma as adjusted weighted-average shares outstanding are the historical weighted-average shares of the Company adjusted for the assumed issuance of 25,000,000 shares of Company common stock (see Note N). The convertible preferred stock discussed in Note N were excluded as the effect of the conversion would be anti-dilutive.

8

EX-99.2

Exhibit 99.2

FC-GEN Acquisition Holding, LLC and Subsidiaries

Consolidated Financial Statements

Index to Consolidated Financial Statements

On January 1, 2008, FC-GEN Investment, LLC (the Parent) contributed 100% of the capital stock of FC-GEN Acquisition, Inc. (Acquisition Corp.) to a related entity, FC-GEN Acquisition Holding, LLC (the Company). On July 13, 2007, FC-GEN Acquisition, Inc., through its wholly owned subsidiary GEN Acquisition, Corp., (Merger Corp) merged with and into Genesis HealthCare Corporation (the Predecessor Company or GHC), with GHC and its subsidiaries continuing as the surviving corporation and assuming all of the debt obligations of Merger Corp. The term “Successor” refers to Acquisition Corp. and the Company after giving effect to the consummation of the merger. The term “Predecessor” refers to GHC prior to giving effect to the consummation of the merger. See note 1 — “General Information — The Merger.”

	Page
Independent Auditors’ Report		2
Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008 (Successor)		3
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008 and for the period from July 14, 2007 through December 31, 2007 (Successor); and the period January 1, 2007 through July 13, 2007 (Predecessor)		4
Consolidated Statements of Equity and Other Comprehensive Income (Loss) for the years ended December 31, 2009 and 2008 and for the period from July 14, 2007 through December 31, 2007 (Successor); and the period January 1, 2007 through July 13, 2007 (Predecessor)		5
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008 and for the period from July 14, 2007 through December 31, 2007 (Successor); and the period January 1, 2007 through July 13, 2007 (Predecessor)		6
Notes to Consolidated Financial Statements		7

1

Independent Auditors’ Report

The Board of Managers
FC-GEN Acquisition Holding, LLC

We have audited the accompanying consolidated balance sheets of FC-GEN Acquisition Holding, LLC and subsidiaries (the Company) (formerly FC-GEN Acquisition, Inc. and subsidiaries) (Successor) as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity and other comprehensive income (loss), and cash flows for the years ended December 31, 2009 and 2008 and for the period from July 14, 2007 to December 31, 2007 (Successor periods), and the Genesis HealthCare Corporation and subsidiaries (Predecessor) consolidated statements of operations, equity and other comprehensive income (loss), and cash flows for the period from January 1, 2007 to July 13, 2007 (Predecessor periods). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Successor consolidated financial statements referred to above present fairly, in all material respects, the financial position of FC-GEN Acquisition Holding, LLC and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the Successor periods, in conformity with U.S. generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Genesis HealthCare Corporation and its subsidiaries for the Predecessor periods, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective July 14, 2007, FC-GEN Acquisition, Inc. acquired all of the outstanding stock of Genesis HealthCare Corporation in a business combination accounted for as a purchase (the Merger). As a result of the Merger, the consolidated financial information for the periods after the Merger is presented on a different cost basis than that for the periods before the Merger and, therefore, is not comparable.

As discussed in Note 11 to the consolidated financial statements, the Company has changed its method of accounting for uncertainty in income taxes on January 1, 2009 due to the adoption of Accounting Standard Codification Topic 740, Income Taxes. As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for noncontrolling interests on January 1, 2009 due to the adoption of Accounting Standard Codification Topic 810, Consolidation. As discussed in Note 16 to the consolidated financial statements, the Company has changed its method of accounting for fair value measurements for recurring financial assets and liabilities on January 1, 2008 and for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis on January 1, 2009 due to the adoption of Accounting Standard Codification Topic 820, Fair Value Measurements.

/s/ KPMG LLP  

Philadelphia, Pennsylvania

March 26, 2010 

2

FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

	Successor
	December 31, 2009			December 31, 2008
Assets:
Current assets:
Cash and equivalents	$	109,573		$	72,842
Current portion of restricted cash and investments in marketable securities		41,376			36,584
Accounts receivable, net of allowances for doubtful accounts of $41,467 in 2009 and $35,046 in 2008		287,551			285,826
Prepaid expenses and other current assets		79,993			69,067
Current portion of deferred income taxes		40,832			42,150
Total current assets		559,325			506,469
Property and equipment, net of accumulated depreciation of $197,068 in 2009 and $115,114 in 2008		1,787,483			1,774,707
Restricted cash and investments in marketable securities		59,337			64,857
Other long-term assets		65,114			80,244
Identifiable intangible assets, net of accumulated amortization of $17,521 in 2009 and $11,897 in 2008		66,871			87,699
Goodwill		119,090			119,090
Total assets	$	2,657,220		$	2,633,066
Liabilities and Equity:
Current liabilities:
Current installments of long-term debt	$	10,432		$	12,384
Accounts payable		72,315			63,970
Accrued expenses		57,038			51,384
Accrued compensation		98,545			93,291
Accrued interest		22,189			10,481
Current portion of self-insurance liability reserves		57,350			44,777
Total current liabilities		317,869			276,287
Long-term debt		1,864,977			1,841,163
Deferred income taxes		252,424			244,345
Self-insurance liability reserves		105,878			100,609
Other long-term liabilities		84,682			96,918
Commitments and contingencies
FC-Gen Acquisition Holding, LLC members’ equity:
Capital stock, no par value, 1,500 shares authorized, 1,500 shares issued and outstanding		—			—
Additional paid-in capital		242,179			274,784
Accumulated deficit		(220,962	)		(208,140	)
Accumulated other comprehensive income		1,645			714
Total FC-GEN Acquisition Holding, LLC members’ equity		22,862			67,358
Noncontrolling interests		8,528			6,386
Total equity		31,390			73,744
Total liabilities and equity	$	2,657,220		$	2,633,066

See accompanying notes to the consolidated financial statements.

3

FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

	Successor									Predecessor
										Period from
							Period from July 14,			January 1, 2007
	Year ended			Year ended			2007 through			through July 13,
	December 31, 2009			December 31, 2008			December 31, 2007			2007
Net revenues	$	2,376,967		$	2,237,590		$	956,291		$	1,068,978
Salaries, wages and benefits		1,464,757			1,364,004			588,743			645,244
Other operating expenses		493,655			496,950			201,533			229,995
General and administrative costs		115,212			127,154			50,814			69,415
Provision for losses on accounts receivable and notes receivable		21,578			20,862			8,557			9,222
Merger related costs		—			—			—			57,567
Lease expense		23,999			27,952			13,913			12,046
Depreciation and amortization expense		85,151			83,232			37,458			39,086
Accretion expense		292			293			113			148
Interest expense		138,008			195,199			121,585			16,318
Loss on early extinguishment of debt		12,306			661			—			—
Investment income		(2,145	)		(1,238	)		(4,155	)		(6,123	)
Other loss (income)		2,238			(4,543	)		—			(2,974	)
Goodwill impairment		—			125,951			—			—
Long-lived asset impairment		17,358			10,787			—			—
Equity in net income of unconsolidated affiliates		(435	)		(237	)		(479	)		(403	)
Income (loss) before income tax expense (benefit)		4,993			(209,437	)		(61,791	)		(563	)
Income tax expense (benefit)		17,105			(37,618	)		(25,425	)		6,763
Loss from continuing operations		(12,112	)		(171,819	)		(36,366	)		(7,326	)
Income (loss) from discontinued operations, net of taxes		657			649			1,051			(173	)
Net loss		(11,455	)		(171,170	)		(35,315	)		(7,499	)
Less net income attributable to noncontrolling interests		(1,367	)		(1,369	)		(286	)		(489	)
Net loss attributable to FC-GEN Acquisition Holding, LLC	$	(12,822	)	$	(172,539	)	$	(35,601	)	$	(7,988	)

See accompanying notes to the consolidated financial statements.

4

FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)

																	Common stock
																	held in
								(Accumulated			Accumulated other						deferred			Deferred
	Capital		Common		Additional			deficit) retained			comprehensive			Treasury			compensation			compensation		Total shareholders’/			Noncontrolling
	stock		stock		paid-in capital			earnings			income (loss)			stock			plan			liability		members’ equity			interests			Total equity
Predecessor:
Balance at December 31, 2006 (Predecessor)	$	—	$	208	$	649,355		$	114,743		$	(130	)	$	(42,787	)	$	(11,003	)	$	6,388	$	716,774		$	3,862		$	720,636
Comprehensive loss:
Net loss		—		—		—			(7,988	)		—			—			—			—
Net unrealized gain on marketable securities, net of tax		—		—		—			—			426			—			—			—
Net decrease to minimum pension liability, net of tax		—		—		—			—			(84	)		—			—			—
Unrealized gain on VIE interest rate swap		—		—		—			—			36			—			—			—
Total comprehensive (loss) income																							(7,610	)		489			(7,121	)
Tax benefits under SOP 90-7		—		—		3,542			—			—			—			—			—		3,542			—			3,542
Issuance of common stock under stock option plan and stock incentive plan		—		2		4,680			—			—			—			—			—		4,682			—			4,682
Stock-based compensation expense for stock options		—		—		1,786			—			—			—			—			—		1,786			—			1,786
Purchases and sales, net, of common stock in deferred compensation plan		—		—		127			—			—			—			(5,790	)		2,477		(3,186	)		—			(3,186	)
Disposition of noncontrolling interests		—		—		—			—			—			—			—			—		—			670			670
Distributions to noncontrolling interests		—		—		—			—			—			—			—			—		—			(172	)		(172	)
Balance at July 13, 2007 (Predecessor)	$	—	$	210	$	659,490		$	106,755		$	248		$	(42,787	)	$	(16,793	)	$	8,865	$	715,988		$	4,849		$	720,837
Successor:
Balance at July 14, 2007 (Successor)	$	—	$	—	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	—		$	—
Capital contributed by parent		—		—		300,000			—			—			—			—			—		300,000						300,000
Comprehensive loss:
Net loss		—		—		—			(35,601	)		—			—			—			—
Net unrealized gain on marketable securities, net of tax		—		—		—			—			652			—			—			—
Unrealized loss on VIE interest rate swap		—		—		—			—			(45	)		—			—			—
Total comprehensive (loss) income																							(34,994	)		286			(34,708	)
Tax benefits under SOP 90-7		—		—		2,574			—			—			—			—			—		2,574			—			2,574
Distributions to parent		—		—		(8,000	)		—			—			—			—			—		(8,000	)		—			(8,000	)
Acquisition of noncontrolling interests		—		—		—			—			—			—			—			—		—			4,849			4,849
Disposition of noncontrolling interests		—		—		—			—			—			—			—			—		—			5,223			5,223
Distributions to noncontrolling interests		—		—		—			—			—			—			—			—		—			(807	)		(807	)
Balance at December 31, 2007 (Successor)	$	—	$	—	$	294,574		$	(35,601	)	$	607		$	—		$	—		$	—	$	259,580		$	9,551		$	269,131
Comprehensive loss:
Net loss		—		—		—			(172,539	)		—			—			—			—
Net unrealized gain on marketable securities, net of tax		—		—		—			—			584			—			—			—
Net decrease to minimum pension liability, net of tax		—		—		—			—			(308	)		—			—			—
Unrealized loss on VIE interest rate swap		—		—		—			—			(169	)		—			—			—
Total comprehensive (loss) income																							(172,432	)		1,369			(171,063	)
Tax expense under SOP 90-7		—		—		(1,390	)		—			—			—			—			—		(1,390	)		—			(1,390	)
Capital contributed by parent		—		—		8,000			—			—			—			—			—		8,000			—			8,000
Distributions to parent		—		—		(26,400	)		—			—			—			—			—		(26,400	)		—			(26,400	)
Disposition of noncontrolling interests		—		—		—			—			—			—			—			—		—			(3,357	)		(3,357	)
Distributions to noncontrolling interests		—		—		—			—			—			—			—			—		—			(1,177	)		(1,177	)
Balance at December 31, 2008 (Successor)	$	—	$	—	$	274,784		$	(208,140	)	$	714		$	—		$	—		$	—	$	67,358		$	6,386		$	73,744
Comprehensive loss:
Net loss		—		—		—			(12,822	)		—			—			—			—
Net unrealized gain on marketable securities, net of tax		—		—		—			—			478			—			—			—
Net increase to minimum pension liability, net of tax		—		—		—			—			308			—			—			—
Unrealized gain on VIE interest rate swap		—		—		—			—			145			—			—			—
Total comprehensive (loss) income																							(11,891	)		1,367			(10,524	)
Tax benefit under SOP 90-7		—		—		3,395			—			—			—			—			—		3,395			—			3,395
Distributions to parent		—		—		(36,000	)		—			—			—			—			—		(36,000	)		—			(36,000	)
Acquisition of noncontrolling interests		—		—		—			—			—			—			—			—		—			2,411			2,411
Disposition of noncontrolling interests		—		—		—			—			—			—			—			—		—			(340	)		(340	)
Distributions to noncontrolling interests		—		—		—			—			—			—			—			—		—			(1,296	)		(1,296	)
Balance at December 31, 2009 (Successor)	$	—	$	—	$	242,179		$	(220,962	)	$	1,645		$	—		$	—		$	—	$	22,862		$	8,528		$	31,390

See accompanying notes to the consolidated financial statements.

5

FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

	Successor									Predecessor
										Period from
							Period from July			January 1, 2007
	Year ended			Year ended			14, 2007 through			through July 13,
	December 31, 2009			December 31, 2008			December 31, 2007			2007
Cash flows from operating activities:
Net loss	$	(11,455	)	$	(171,170	)	$	(35,315	)	$	(7,499	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Merger related expenses		—			—			—			57,567
Non-cash interest expenses		4,488			46,115			48,216			946
Non-cash compensation expenses		—			—			—			8,086
Other non-cash charges and (gains)		294			(913	)		—			312
Depreciation and amortization		85,151			83,232			37,586			39,237
Provision for losses on accounts receivable and notes receivable		21,578			20,862			8,552			9,225
Equity in net income of unconsolidated affiliates		(435	)		(237	)		(346	)		(271	)
Provision for deferred taxes		13,564			(38,115	)		(20,371	)		13,651
Excess tax benefits from share-based payment arrangements		—			—			—			(477	)
Amortization of deferred rents		6,409			7,951			4,385			1,441
Other loss on purchase of joint venture		2,760			—			—			—
Gain on sale of discontinued operations		—			(1,374	)		—			—
Goodwill impairment		—			125,951			—			—
Long-lived asset impairment		17,358			10,787			—			—
Loss on early extinguishment of debt		12,306			661			—			—
Changes in assets and liabilities:
Accounts receivable		(17,757	)		(57,092	)		(7,033	)		(16,410	)
Accounts payable and other accrued expenses and other		34,609			55,097			(19,246	)		2,791
Total adjustments		180,325			252,925			51,743			116,098
Net cash provided by operating activities		168,870			81,755			16,428			108,599
Cash flows from investing activities:
Capital expenditures		(53,446	)		(47,780	)		(51,260	)		(56,888	)
Purchases of restricted cash and marketable securities		(412,996	)		(1,008,306	)		(23,152	)		(23,596	)
Proceeds on maturity or sale of restricted cash and marketable securities		412,683			984,428			33,233			27,846
Net change in restricted cash and equivalents		(3,704	)		25,348			(12,282	)		(9,089	)
Purchases of inpatient centers and lease amendments		—			—			—			(22,138	)
Proceeds from sale of inpatient assets		1,972			18,576			11,509			—
Purchase of GHC common stock, net of cash acquired		—			—			(1,388,496	)		—
Investment in joint venture		(5,600	)		—			—			—
Proceeds from notes receivable		—			7,851			4,054			—
Other, net		2,390			833			1,029			1,808
Net cash used in investing activities		(58,701	)		(19,050	)		(1,425,365	)		(82,057	)
Cash flows from financing activities:
Borrowings under revolving credit facility		—			25,000			—			—
Repayments under revolving credit facility		—			(25,000	)		(6,000	)		(33,000	)
Proceeds from issuance of long-term debt		36,500			11,500			1,679,140			—
Repayment of long-term debt		(54,292	)		(15,076	)		(344,529	)		(10,808	)
Debt issuance costs		(17,928	)		—			—			—
Merger financing and other fees		—			(8,000	)		(158,255	)		—
Distributions by noncontrolling interests		(1,718	)		(13,306	)		—			—
Proceeds from exercise of stock options		—			—			—			917
Capital contributed by parent		—			8,000			300,000			—
Distributions to parent		(36,000	)		(26,400	)		(8,000	)		—
Excess tax benefits from share-based payment arrangements		—			—			—			477
Net cash (used in) provided by financing activities		(73,438	)		(43,282	)		1,462,356			(42,414	)
Net increase (decrease) in cash and equivalents		36,731			19,423			53,419			(15,872	)
Cash and equivalents:
Beginning of period		72,842			53,419			—			66,270
End of period	$	109,573		$	72,842		$	53,419		$	50,398
Supplemental disclosure of cash flow information:
Interest paid	$	133,132		$	151,088		$	68,258		$	15,677
Taxes paid (refunded)		2,756			(5,716	)		(1,612	)		3,210
Non-cash financing activities:
Capital leases	$	31,589		$	52,982		$	13,822		$	40,013
Assumption of long-term debt		12,667			—			—			—

See accompanying notes to the consolidated financial statements.

6

FC-GEN Acquisition Holding, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(1) General Information

     The Merger

     FC-GEN Acquisition Holding, LLC (the Company) was formed in 2007 to hold the shares of the Company. The Company shall continue indefinitely unless terminated in accordance with its Second Amended and Restated Limited Liability Company Agreement and its members have no individual liability.

     On July 13, 2007, Acquisition Corp, through its wholly owned subsidiary GEN Acquisition Corp., (Merger Corp) merged with and into Genesis HealthCare Corporation (GHC or the Predecessor Company), with GHC and its subsidiaries continuing as the surviving corporation and assuming all of the debt obligations of Merger Corp (the Merger). Private equity funds managed by affiliates of Formation Capital, LLC and JER Partners (collectively the “Sponsors”) wholly own the Company’s Parent. Acquisition Corp was incorporated in January 2007 for the purpose of acquiring GHC and did not have any operations prior to July 13, 2007 other than in connection with the Merger. Unless the context otherwise requires, references in this report to the “Company” refers to the operations of GHC prior to the Merger, Acquisition Corp from July 13, 2007 through December 31, 2007 and FC-GEN Acquisition Holding, LLC subsequent to January 1, 2008.

     The Merger transaction, including the redemption of previous debt and the payment of related fees and expenses, was financed by equity contributions of $300 million, the issuance of $1.3 billion of aggregate principal amount of a variable rate senior term loan and the issuance of $379 million of aggregate principal amount of a variable rate unsecured senior subordinated mezzanine term loan.

     The transaction was treated as a purchase and thus the assets and liabilities were recorded at their respective fair value at July 14, 2007. This resulted in a significant increase to the value of the Company’s property and equipment, identifiable intangible assets, deferred tax liabilities and goodwill.

     Description of Business

     The Company provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. The Company has 233 owned, leased, managed and jointly owned eldercare centers as of December 31, 2009. Revenues of the Company’s owned, leased and otherwise consolidated centers constitute approximately 86% of its revenues.

     The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 12% of the Company’s revenues.

     The Company provides an array of other specialty medical services, including respiratory health services, management services, physician services, hospitality services, staffing services and other healthcare related services.

     Basis of Presentation

     The Merger has been reflected as of July 14, 2007 and the consolidated financial statements reflecting the financial position of the Company at December 31, 2009 and 2008 and the results of operations and cash flows for the years ended December 31, 2009 and 2008 and for the period from July 14, 2007 to December 31, 2007 (after giving effect to the Merger) are designated as “Successor” financial statements. The consolidated financial statements reflecting the results of operations and cash flows of the Company through the close of business on July 13, 2007 (prior to giving effect to the Merger) are designated “Predecessor” financial statements.

7

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

     Recently Adopted Accounting Standards

     In accordance with recently adopted accounting guidance, net loss attributable to FC-Gen Acquisition Holding, LLC and Subsidiaries and net income attributable to noncontrolling interests are disclosed separately on the face of the accompanying consolidated statements of operations. In addition, noncontrolling interests are reported as a separate component of equity in the consolidated balance sheets. Except as otherwise indicated, references to net income or components of members’ equity in the notes to consolidated financial statements represent amounts attributable to FC-Gen Acquisition Holding, LLC and Subsidiaries. Accordingly, certain amounts in the consolidated financial statements of prior periods have been reclassified to conform to current period presentation.

     In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification (ASC) as the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP). The ASC did not change GAAP but reorganizes the literature. The ASC became effective for the Company in 2009 and had no impact on the consolidated financial statements.

     ASC Topic 805, Business Combinations, revised accounting practices related to business combinations. For the Company, it was applied to business combinations subsequent to January 1, 2009 and when accounting for valuation allowances on deferred taxes and acquired tax contingencies for prior business combinations. There was no material financial statement impact upon adoption of the provisions of ASC Topic 805.

     In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 26, 2010, the date the consolidated financial statements were issued.

     Factors Affecting Comparability of Financial Information

     As a result of the Merger, the consolidated financial statements for the periods after the Merger are presented on a different cost basis than that for periods before the Merger, and therefore, are not comparable. The Company believes the Merger has affected the consolidated statements of operations of the Successor as compared to the Predecessor primarily in interest expense, accretion expense, lease expense and depreciation and amortization expense. This lack of comparability is due to differing capital structures and the application of purchase accounting resulting in a differing cost basis.

     Adjustments and Reclassifications

     The Company recorded an $8.0 million loan termination fee to interest expense in 2009, which represents an immaterial correction of an error. Management believes that the effect of the adjustment is not material to the consolidated financial position, results of operation or liquidity for any prior period. See note 9 — “Long-Term Debt — Mezzanine Term Loan.”

     Principles of Consolidation and Variable Interest Entities

     The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, its consolidated variable interest entities (VIEs) and certain other partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation for all periods presented.

     The Company’s investments in VIEs in which it is the primary beneficiary are consolidated, while the investment in other VIEs in which it is not the primary beneficiary are accounted for under other accounting principles. Investments in and the operating results of 20% to 50% owned companies, which are not VIEs, are included in the consolidated financial statements using the equity method of accounting.

8

FC-GEN Acquisition Holding, LLC and Subsidiaries

Notes to Consolidated Financial Statements

     Consolidated VIEs and Other Consolidated Partnerships

     At December 31, 2009 and 2008, the Company consolidated four and five VIEs, respectively. The total assets of the VIEs principally consist of property and equipment that serves as collateral for the VIEs’ non-recourse debt and is not available to satisfy any of the Company’s other obligations. Creditors of the VIEs, including senior lenders, have no recourse against the general credit of the Company. The consolidated VIEs at December 31, 2009 own and operate skilled nursing and assisted living facilities. The Company’s ownership interests in the consolidated VIEs range from 25% to 50% and the Company manages the day-to-day operations of the consolidated VIEs under management agreements. The Company’s involvement with the VIEs began in years prior to 2000. During 2008, the Company sold its interest in one of its previously consolidated VIEs, which is accounted for as a discontinued operation. See note 18 — “Other — Assets Held for Sale and Discontinued Operations.”

     The Company consolidates two partnerships as it is the general partner in those entities and may exercise considerable control over the businesses without substantive kick out rights afforded to the limited partners. One of the partnerships is a jointly owned and managed skilled nursing facility. The second partnership owns the real estate of a skilled nursing facility leased to the Company. The total assets of these consolidated partnerships consist of property and equipment that serves as collateral for the partnerships’ non-recourse debt and is not available to satisfy any of the Company’s other obligations. Creditors of these consolidated partnerships, including senior lenders, have no recourse against the general credit of the Company.

     At December 31, 2009, total assets and non-recourse debt of the consolidated VIEs and other consolidated partnerships were $37.3 million and $27.3 million, respectively. At December 31, 2008, total assets and non-recourse debt of these consolidated partnerships were $37.7 million and $28.3 million, respectively.

     VIEs Not Consolidated

     Separate from the VIEs previously described, at December 31, 2009 and 2008, the Company is not the primary beneficiary of several additional VIEs and, therefore, those VIEs are not consolidated into its financial statements. The unconsolidated VIEs own and operate skilled nursing and assisted living facilities. The Company manages the day-to-day operations of these unconsolidated VIEs under management agreements. The Company’s involvement with 14 unconsolidated VIE’s began in 2008 followed by another two unconsolidated VIEs in 2009. The Company has determined that it is not the primary beneficiary of these VIEs. See note 12 — “Related Party Transactions.” The Company has not made an equity investment in these VIEs and, therefore, does not have equity at risk.

(2) Summary of Significant Accounting Policies

     The following accounting policies apply to both the Predecessor and Successor unless otherwise specified.

     Net Revenues and Accounts Receivable

     The Company receives payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), third-party insurers and long-term care facilities.

     Inpatient services record revenue and the related receivables in the accounting records 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 reimbursement rates, is deducted from gross revenue to determine net revenue. Retroactive adjustments that are likely to result from future examinations by third party payors are accrued on an estimated basis in the period the related services are rendered and adjusted as necessary in future periods based upon new information or final settlements.

     Rehabilitation therapy services and other ancillary services record revenue and the related receivables 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.

9

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Use of Estimates

     The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; allowances for doubtful accounts and provisions for contractual adjustments; the valuation of derivatives, deferred tax assets, fixed assets, goodwill, intangible assets, investments and notes receivable; and reserves for employee benefit obligations, income tax uncertainties, asset retirement obligations and other contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

     Cash and Equivalents

     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.

     Restricted Cash and Investments in Marketable Securities

     Restricted cash includes cash and money market funds principally held by the Company’s wholly owned captive insurance subsidiary, which is substantially restricted to securing the outstanding claims losses. The restricted cash and investments in marketable securities balances at December 31, 2009 and 2008 were $100.7 million and $101.4 million, respectively.

     Restricted investments in marketable securities, comprised of fixed interest rate securities, 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), a separate component of equity. Fair values for fixed interest rate securities are based on quoted market prices. Premiums and discounts on fixed interest rate securities are amortized or accreted over the life of the related security as an adjustment to yield.

     A decline in the market value of any security below cost that is deemed other-than-temporary is charged to income, resulting in the establishment of a new cost basis for the security. 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. Impairment charges of $0.2 million and $3.9 million were recorded in the year ended December 31, 2009 and 2008, respectively, in connection with the impairment tests. See note 5 — “Restricted Cash and Investments in Marketable Securities.”

     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 also considers 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.

10

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Prepaid Expenses and Other Current Assets

     Prepaid expenses and other current assets principally consist of expenses paid in advance of the provision of services, inventories of nursing center food and supplies, non-trade receivables and $16.8 million and $13.8 million of escrowed funds held by third parties at December 31, 2009 and 2008, respectively, in accordance with loan and other contractual agreements.

     Property and Equipment

     Property and equipment are recorded at cost. Depreciation is calculated using 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. Depreciation expense on leasehold improvements and assets held under capital leases is calculated using the straight-line method over the lesser of the lease term or the estimated useful life of the asset. 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 major construction projects are capitalized in the period in which they are incurred.

     Total depreciation expense from continuing operations for the Successor periods for the years ended December 31, 2009 and 2008, and, from July 14, 2007 through December 31, 2007, and the Predecessor period from January 1, 2007 through July 13, 2007 was $83.9 million, $82.0 million, $36.9 million, and $38.8 million respectively.

     Allowance for Notes Receivable

     The Company classifies its notes receivable balances, net of allowances, in other long-term assets in its consolidated balance sheets. These long-term receivables represent the net realizable value of the Company’s loans receivable resulting principally from the conversion of trade accounts receivable and consideration received for certain enterprise sales transactions. The notes include varying payment terms, rates of interest and maturity dates based upon circumstances specific to each agreement. At least annually, the Company reviews the collectibility of its notes receivable on an individual basis to determine possible impairments and/or non-accrual status for interest terms. Impairments or write-downs to net realizable value are recorded in the consolidated statements of operations as a component of the provision for losses on accounts receivable and notes receivable. Subsequent recoveries of reserved notes receivable are recorded as a reduction to the provision for losses on accounts receivable and notes receivable in the period of such recovery.

     Long-Lived Assets

     The Company’s long-lived assets are 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. Long-lived impairment charges of $17.4 million and $10.8 million were recorded in the year ended December 31, 2009 and 2008, respectively, in connection with the impairment tests. See note 17 — “Asset Impairment Charges — Long-Lived Assets with a Definite Useful Life.”

     The Company performs an impairment test for goodwill with an indefinite useful life annually or more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. The Company performs its annual impairment test as of September 30, of each year. As a result of escalating unfavorable market conditions during the fourth quarter of 2008, the Company performed an interim update of an annual impairment test. Goodwill impairment charges of $126.0 million were recorded in the year ended December 31, 2008 in connection with the impairment tests. See note 17 — “Asset Impairment Charges — Goodwill.”

11

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Self-Insurance Risks

     The Company provides for self-insurance risks for both general and professional liability and workers’ compensation claims based on estimates of the ultimate costs for both reported claims and claims incurred but not reported. Estimated losses from asserted and incurred but not reported claims are accrued based on the Company’s estimates of the ultimate costs of the claims, which includes costs associated with litigating or settling claims, and the relationship of past reported incidents to eventual claims payments. All relevant information, including the Company’s own historical experience, the nature and extent of existing asserted claims and reported incidents, and independent actuarial analyses of this information is used in estimating the expected amount of claims. The Company also considers amounts that may be recovered from excess insurance carriers in estimating the ultimate net liability for such risks.

     Income Taxes

     Deferred income taxes arise from the recognition of the tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating loss (NOL) carryforwards. A valuation allowance is provided for these deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

     Comprehensive Income (Loss)

     Comprehensive income (loss) includes changes to equity during a period, except those resulting from investments by and distributions to members/shareholders. The components of comprehensive income (loss) are shown in the consolidated statements of equity.

     Leases

     Lease arrangements are capitalized when such leases convey substantially all the risks and benefits incidental to ownership. Capital leases are amortized over either the lease term or the life of the related assets, depending upon available purchase options and lease renewal features. Amortization related to capital leases is included in the consolidated statements of operations within depreciation and amortization expense.

     For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as lease expense on a straight-line basis over the applicable lease terms and any periods during which the Company has use of the property but is not charged rent by a landlord. Lease terms, in most cases, provide for rent escalations and renewal options.

     Favorable and unfavorable lease amounts are recorded as components of other identifiable intangible assets and other long-term liabilities, respectively, when the Company purchases businesses that have lease agreements. Favorable and unfavorable leases are amortized to lease expense on a straight-line basis over the remaining term of the leases. Upon early termination of a lease, due to non-renewal, the favorable or unfavorable lease contract balance associated with the lease contract is recognized as a loss or gain in the consolidated statement of operations.

     Reimbursement of Managed Property Labor Costs

     The Company manages the operations of 52 independently and jointly owned eldercare centers, including consolidated VIEs, and four transitional care units as of December 31, 2009. Under most of these arrangements, the Company employs the operational staff of the managed center 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 Successor

12

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

periods for the years ended December 31, 2009 and 2008, and from July 14, 2007 through December 31, 2007, and the Predecessor period from January 1, 2007 through July 13, 2007, the Company billed its managed clients $120.7 million, $112.9 million, $51.9 million and $60.0 million, respectively, for such labor related costs.

     Stock-Based Benefit Plans

     The Predecessor Company recognized compensation costs related to stock-based benefit plans in the consolidated financial statements. The cost was measured at the grant date, based on the estimated fair value of the award, and was recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). The Successor Company does not have any stock-based benefit plans.

     Derivative Financial Instruments

     The Company recognizes all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. The fair value adjustments will affect either equity or net income, depending on whether the derivative instrument is designated as or qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. The Company uses interest rate swap and interest rate cap agreements for the specific purpose of hedging the exposure to variability in market rates of interest.

     Asset Retirement Obligations

     The fair value of a liability for an asset retirement obligation is recognized in the period when the asset is placed in service. The fair value of the liability is estimated using discounted cash flows. In subsequent periods, the retirement obligation is accreted to its future value or the estimate of the obligation at the asset retirement date. The accretion charge is reflected separately on the consolidated statement of operations. A corresponding retirement asset equal to the fair value of the retirement obligation is also recorded as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life.

     Recently Issued Accounting Standards

     Variable Interest Entities

     In June 2009, the FASB amended ASC 810, Consolidation, to provide additional guidance on determining whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE based on the power to direct the activities of the VIE and the obligation to absorb losses of the VIE. The guidance requires an entity to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance. Additionally, the guidance requires an entity to assess, on an ongoing basis, whether or not it continues to be the primary beneficiary of a VIE. The guidance is effective for annual reporting periods beginning after November 15, 2009. This guidance is not effective for the Company until its fiscal year beginning January 1, 2010. The Company does not expect the guidance to have any impact on its financial position, cash flows or results of operations.

(3) Significant Transactions and Events

     Successor

     Investment in Joint Ventures

     In December 2009, the Company made an investment of $5.0 million and received a one-third interest in an unconsolidated joint venture. The Company will account for its interest under the equity method.

     On August 1, 2009, the Company completed a transaction in which it purchased an additional one-third ownership interest in a skilled nursing facility in Massachusetts for cash consideration of $1.1 million. The Company had owned a one-third interest in the joint venture prior to the transaction. The facility is now consolidated into the Company’s

13

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

financial statements with the remaining partner’s one-third ownership interest record as a noncontrolling interest. The transaction added property and equipment of $18.2 million and non-recourse debt of $14.1 million.

     Lease Transactions

     Effective August 1, 2009, the Company amended a lease for four facilities. The amended lease has a term that expires on November 30, 2015 and allows for one 5-year extension. Annual cash base rent will be $2.2 million with an annual rent escalator of 3%. The amended lease will continue to be accounted for as an operating lease.

     On May 26, 2009, the Company amended and restated a master lease agreement (Master Lease) for eleven centers leased through an independent real estate investment trust (Landlord). The Master Lease resulted in the following:

• Collective annual cash lease payments increased by $2.0 million effective February 1, 2009;

• The incremental minimum rent is charged annually based upon the minimum rent for the prior fiscal year multiplied by the greater of one plus one-half the percentage increase in the Consumer Price Index or 102.5%;

• Renovation funds were established for three of the facilities totaling $2.1 million provided by the Landlord for capital improvements and renovations. The minimum rent paid to the Landlord will be increased by 10% for any amount disbursed from the renovation funds in periods subsequent to those disbursements;

• Two of the leased facilities had their initial lease terms extended by approximately three years;

• The leases were reevaluated for accounting classification and the Company concluded three of the remaining nine leases previously accounted for as operating leases would now be accounted for as capital leases. The three capital leases had obligations of $29.8 million at December 31, 2009.

     On September 30, 2008, the term of a long-term lease of seven facilities expired. Effective October 1, 2008, the Company entered into an amended lease of the seven facilities. The amended lease has a 10-year term and annual cash basis rent of $7.0 million, compared to approximately $5.3 million of annual cash basis rent in the last year of the previous lease. The amended lease includes a $66.5 million fixed price purchase option on all seven facilities exercisable in 2014. The transaction was recorded as a capital lease resulting in an initial $77.1 million of capital lease obligation, or approximately $47.4 million of capital lease obligation in excess of the obligation recorded under the previous lease.

     Effective July 1, 2008, the Company entered into a lease, which was incorporated into the Master Lease, of a facility with annual revenues of approximately $11.5 million. The facility was previously managed by the Company under a management agreement that earned annual management fee revenue of $0.6 million. The lease has an initial term of seven years with two 5-year renewal options. The lease was recorded as a capital lease resulting in $5.6 million of capital lease obligation.

     Amendments to Debt Agreements

     On September 25, 2009, the senior secured credit agreement and the mezzanine term loan agreement were amended. The amendments extended the terms of both of the agreements for five years with a maturity date of September 25, 2014. $40.0 million of senior secured term loan principal was repaid. The senior secured term loan interest rate was initially increased from LIBOR plus 2.00% to LIBOR plus 3.07%. The revolving credit facility was increased from $50.0 million to $75.0 million. The Company incurred $17.1 million of fees associated with the senior secured credit agreement, $13.0 million of which were expensed as a debt extinguishment cost and the remaining $4.1 million is deferred and amortized over the term of the debt.

     On March 27, 2008, the senior secured credit agreement and the mezzanine term loan agreement were amended. The amendments provided that if a predefined restructuring transaction did not occur on or before December 31, 2008, the senior secured credit facility lenders would receive an $8.0 million contingent interest payment and the interest rate on the mezzanine term loan would be increased and deferred with the outstanding balance of the mezzanine term loan. Also, the maximum available borrowing under the delayed draw term loan was reduced from $100.0 million to $37.5 million and the revolving credit facility was reduced from $100.0 million to $50.0 million.

14

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     On December 11, 2008, the senior secured credit agreement and the mezzanine term loan agreement were amended. The amendments acknowledged that the previously described restructuring transaction would not occur on or before December 31, 2008, and the Company was released from any obligation to pursue the restructuring transaction. The increase to the interest rate on the mezzanine term loan was not levied against the Company; however, the $8.0 million contingent interest payment was paid to the senior lender in December 2008 and recognized as interest expense in the year ended December 31, 2008. See Note 9 — “Long-Term Debt.”

     The Merger

     The Merger was completed as of the close of business on July 13, 2007 and was financed with equity contributions of $300 million and the issuance of $1,679.1 million of debt.

     The Merger sources and uses of funds are summarized below (in thousands):

Sources
Senior term loan	$	1,300,000
Mezzanine term loan		379,140
Equity contributions		300,000
Total Sources	$	1,979,140

Uses
Purchase of predecessor company common stock and equivalents	$	1,438,894
Repayment of predecessor company debt and accrued interest		347,189
Fees and expenses		158,255
Cash held for operating activities		34,802
Total Uses	$	1,979,140

     The net assets acquired of $1,944.3 million is net of $34.8 million of cash in excess of the financing sources of $1,979.1 million. The total purchase price of the transaction was allocated to the Company’s net tangible and identifiable intangible assets based upon the estimated fair values at July 14, 2007. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The allocation of the purchase price to property and equipment, identifiable intangible assets and deferred income taxes was based upon valuation data and estimates. The purchase price allocation made in the accompanying consolidated financial statements is complete as of December 31, 2008.

     The following table summarizes the allocation of the purchase price as of July 14, 2007:

(in thousands)
Net current assets	$	216,687
Property and equipment		1,768,837
Other assets		199,829
Identifiable intangible assets		118,939
Goodwill		265,678
Debt assumed		(124,626	)
Non-current liabilities		(142,207	)
Deferred income tax liabilities		(358,799	)
Net assets acquired	$	1,944,338

15

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     The goodwill recognized from the transaction is a result of the expected (i) cost savings from the elimination of stock-based benefits and compliance costs associated with being a publicly held company, (ii) implementation of certain organizational and legal structure modifications that better protect assets from liability risks, (iii) the Company’s cash flows supported by high occupancy and quality mix, and (iv) the growth opportunity the investors anticipate in the Company’s core businesses.

     Transaction consideration on the consolidated statement of cash flows of $1,388.5 million excludes cash and equivalents acquired of $50.4 million. Included in the transaction consideration are pre-payment penalties and conversion premiums of $83.0 million related to debt obligations of the Predecessor Company that were redeemed in connection with the transaction.

     During the period from January 1, 2007 through July 13, 2007, the Predecessor recorded costs of approximately $57.6 million related to the transaction. These costs, which are included in Merger related costs in the consolidated statements of operations, consist of approximately $26.0 million of accounting, investment banking, legal and other costs associated with the transaction, a compensation charge of approximately $22.3 million related to the accelerated vesting of employee stock options and restricted stock, an $8.3 million charge related to the write-off of unamortized deferred financing fees related to the Predecessor debt and a charge of approximately $1.0 million for transaction related payments to certain executives.

     Predecessor

     Lease and Purchase Option Agreements

     In January 2007, the Predecessor completed a transaction involving a lease and purchase option agreement for 11 facilities in Maine. The transaction was effective January 1, 2007. Under the agreement, the Predecessor leased 11 nursing and residential care facilities for 25 years with an annual lease payment of approximately $5 million. Additionally, the Predecessor paid approximately $16.5 million in cash in exchange for tangible operating assets and entered into a $53 million fixed price purchase option exercisable in 2026. The transaction was recorded as a capital lease resulting in $40.0 million of capital lease obligations and added $56.4 million of property and equipment.

     Acquisition of ElderCare Center

     Effective May 1, 2007, the Predecessor purchased a skilled nursing facility in Pennsylvania. The purchase price of $3.1 million was financed with cash. The results of operations of this acquisition was included from the acquisition date.

(4) Certain Significant Risks and Uncertainties

     Revenue Sources

     The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services. The Company’s inpatient services derives approximately 78% of its revenue from the Medicare and various state Medicaid programs.

     The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of its eldercare centers, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including services provided by the Company’s 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 the Company’s profitability.

     It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business. The potential impact of healthcare reform, which would initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services

16

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time. Accordingly, there can be no assurance that the impact of any future healthcare legislation or regulation will not adversely affect the Company’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations will 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.

     Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in material compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving material allegations of potential wrongdoing. While no such regulatory inquiries have been made, noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs.

(5) Restricted Cash and Investments in Marketable Securities

     The current portion of restricted cash and investments in marketable securities principally represents an estimate of the level of outstanding self-insured losses the Company expects to pay in the succeeding year through its wholly owned captive insurance company. See note 15 — “Commitments and Contingencies — Loss Reserves For Certain Self-Insured Programs.” Restricted cash includes proceeds from the sale of three of the Company’s consolidated facilities and a parcel of land from one of the Company’s consolidated facilities totaling $5.2 million. The cash is restricted by the senior secured credit agreement and must be used either (i) to reinvest in assets of like-kind within 180 days of the date of transfer, (ii) to pay down the senior secured term loan, or (iii) to pay for certain permitted capital projects; provided that the aggregate value does not exceed $10.0 million over the term of the senior secured credit agreement and such transfers shall be made for cash in an amount not less than fair market value of the facility so transferred. The Company expects to use the restricted cash to pay for certain permitted capital projects.

     Restricted cash and equivalents and investments in marketable securities at December 31, 2009 consist of the following (in thousands):

					Unrealized losses
	Amortized		Unrealized		Less than		Greater than
	cost		gains		12 months		12 months			Fair value
Restricted cash and equivalents:
Cash	$	9,457	$	—	$	—	$	—		$	9,457
Money market funds		7,678		2		—		—			7,680
Restricted investments in marketable securities:
Mortgage/government backed securities		21,177		314		—		(98	)		21,393
Corporate bonds		16,506		470		—		—			16,976
Government bonds		43,433		2,073		—		(299	)		45,207
	$	98,251	$	2,859	$	—	$	(397	)		100,713
Less: Current portion of restricted investments											(41,376	)
Long-term restricted investments										$	59,337

17

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Restricted cash and equivalents and investments in marketable securities at December 31, 2008 consist of the following (in thousands):

					Unrealized losses
	Amortized		Unrealized		Less than 12			Greater than
	cost		gains		months			12 months			Fair value
Restricted cash and equivalents:
Cash	$	3,808	$	—	$	—		$	—		$	3,808
Money market funds		6,674		—		—			—			6,674
Restricted investments in marketable securities:
Mortgage/government backed securities		20,157		517		—			(20	)		20,654
Corporate bonds		23,449		226		(172	)		(35	)		23,468
Government bonds		45,698		1,139		—			—			46,837
	$	99,786	$	1,882	$	(172	)	$	(55	)		101,441
Less: Current portion of restricted investments												(36,584	)
Long-term restricted investments											$	64,857

     Maturities of restricted investments yielded proceeds of $363.2 million, $940.9 million, $23.0 million and $12.0 million for the Successor periods for the years ended December 31, 2009 and 2008, from July 14, 2007 through December 31, 2007, and the Predecessor period from January 1, 2007 through July 13, 2007, respectively.

     Sales of investments yielded proceeds of $49.5 million, $43.5 million, $10.2 million and $15.8 million for the Successor periods for the years ended December 31, 2009 and 2008, from July 14, 2007 through December 31, 2007, and the Predecessor period from January 1, 2007 through July 13, 2007, respectively. Associated gross realized gain and (loss) for the year ended December 31, 2009 were $0.3 million and $(0.3), respectively. Associated gross realized gain and (loss) for the year ended December 31, 2008 were $0.3 million and $(4.0), respectively. Associated gross realized gain and (loss) for the other presented periods were not significant.

     During the Successor period for the year ended December 31, 2009, the Company determined that the decline in the estimated value of one corporate bond, with an aggregate carrying value of $1.1 million prior to the impairment, was other-than-temporarily impaired. The Company recognized a non-cash, pre-tax impairment charge in investment income of $0.2 million in the year ended December 31, 2009 period.

     During the Successor period for the year ended December 31, 2008, the Company determined that the decline in the estimated value of four corporate bonds, with an aggregate carrying value of $8.2 million prior to the impairment, were other-than-temporarily impaired. The Company recognized a non-cash, pre-tax impairment charge in investment income of $3.9 million in the year ended December 31, 2008 period.

     During the Successor period from July 14, 2007 through December 31, 2007, the Company determined that the decline in the estimated value of a corporate bond, with an aggregate carrying value of $2.0 million prior to the impairment, was other-than-temporarily impaired. The Company recognized a non-cash, pre-tax impairment charge in investment income of $0.4 million in the July 14, 2007 through December 31, 2007 period.

     The majority of the Company’s investments are investment grade government and corporate debt securities that have maturities of five years or less, and the Company has both the ability and intent to hold the investments until maturity.

18

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Restricted investments in marketable securities held at December 31, 2009 mature as follows (in thousands):

	Amortized		Fair
	cost		value
Due in one year or less	$	14,254	$	14,630
Due after 1 year through 5 years		52,344		54,176
Due after 5 years through 10 years		10,356		10,246
Due after 10 years		4,162		4,524
	$	81,116	$	83,576

     Actual maturities may differ from stated maturities because borrowers may have the right to call or prepay certain obligations and may exercise that right with or without prepayment penalties.

     The Company has issued letters of credit totaling $69.2 million at December 31, 2009 to its third party administrators and the Company’s excess insurance carriers. Restricted cash of $4.3 million and restricted investments with an amortized cost of $81.1 million and a market value of $83.6 million are pledged as security for these letters of credit as of December 31, 2009.

(6) Property and Equipment

     Property and equipment at December 31, 2009 and 2008 consist of the following (in thousands):

	2009			2008
Land and improvements	$	255,185		$	234,522
Buildings and improvements		1,549,598			1,495,075
Equipment, furniture and fixtures		174,615			152,735
Construction in progress		5,153			7,489
Gross property and equipment		1,984,551			1,889,821
Less: accumulated depreciation		(197,068	)		(115,114	)
Net property and equipment	$	1,787,483		$	1,774,707

     Assets held under capital leases, which are principally carried in building and improvements above, were $258.3 million and $219.7 million at December 31, 2009 and 2008, respectively. Accumulated depreciation on assets held under capital leases was $20.2 million and $8.8 million at December 31, 2009 and 2008, respectively.

     Asset impairment charges of $9.8 million were recognized in the year ended December 31, 2009 associated with the write-down of seven underperforming properties and one closed and held for sale center in which the carrying value was in excess of the sale price. Asset impairment charges of $6.8 million were recognized in the year ended December 31, 2008 associated with the write-down of three underperforming properties. See note 17 — “Asset Impairment Charges — Long-Lived Assets with a Definite Useful Life.”

19

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

(7) Other Long-Term Assets

     Other long-term assets at December 31, 2009 and 2008 consist of the following (in thousands):

	2009		2008
Insurance claims recoverable	$	13,932	$	15,747
Deferred financing fees, net		8,779		17,129
Deposits and funds held in escrow		27,129		28,743
Investments in unconsolidated affiliates		9,601		10,738
Cost report receivables		2,888		4,415
Other, net		2,785		3,472
Other long-term assets	$	65,114	$	80,244

     Deferred financing fees are recorded net of accumulated amortization of $4.4 million and $30.1 million at December 31, 2009 and 2008, respectively. Accumulated amortization of $38.2 was adjusted and $4.1 million in deferred financing fees were incurred in connection with the senior secured debt amendment dated September 25, 2009. See note 3 — “Significant Transactions and Events — Successor — Amendments to Debt Agreements.”

(8) Goodwill and Identifiable Intangible Assets

     The changes in the carrying value of goodwill are as follows (in thousands):

	Total
Balance at January 1, 2008	$	265,678
Adjustments to Merger allocation		(20,637	)
Goodwill impairment		(125,951	)
Balance at December 31, 2008	$	119,090
Goodwill		245,041
Accumulated impairment losses		(125,951	)
	$	119,090
Balance at December 31, 2009
Goodwill	$	245,041
Accumulated impairment losses		(125,951	)
	$	119,090

     The adjustment to GHC Merger allocation represents the fair value true up of certain property and equipment sold shortly after the date of acquisition and an adjustment of certain state net operating loss valuation allowances.

20

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Identifiable intangible assets consist of the following at December 31, 2009 and 2008 (in thousands):

			Weighted
			Average Life
	2009		(Years)
Customer relationship assets, net of accumulated amortization of $3,153	$	16,705		14
Favorable leases, net of accumulated amortization of $14,368		50,166		15
Indentifiable intangible assets, net	$	66,871		15

			Weighted
			Average Life
	2008		(Years)
Customer relationship assets, net of accumulated amortization of $1,873	$	17,985		15
Favorable leases, net of accumulated amortization of $10,024		69,714		15
Indentifiable intangible assets, net	$	87,699		15

     Acquisition-related identified intangible assets consist of customer relationship assets and favorable lease contracts. Customer relationship assets are being amortized on a straight-line basis over the expected period of benefit. Favorable lease contracts are amortized on a straight-line basis over the lease terms.

     Amortization expense related to identifiable intangible assets in the Successor periods for the years ended December 31, 2009 and 2008 and from July 14, 2007 through December 31, 2007, the Predecessor period of January 1, 2007 through July 13, 2007 was $7.3 million, $8.5 million, $4.7 million, and $0.7 million, respectively.

     In 2009, there were adjustments made to favorable lease contracts:

• Two favorable operating leases were amended and determined to be capital leases under the revised terms. A balance of $5.9 million in favorable leases was reclassified to the capital lease building asset; and

• An asset impairment of $7.6 million was recorded for three underperforming favorable operating leases.

     Based upon amounts recorded at December 31, 2009, total estimated amortization expense of identifiable intangible assets will be $6.7 million in 2010 through 2012, $6.3 million in 2013, and $6.0 million in 2014.

21

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

(9) Long-Term Debt

     Long-term debt at December 31, 2009 and 2008 consists of the following (in thousands):

	2009			2008
Senior secured term loan	$	1,295,563		$	1,298,084
Delayed draw term loan		—			11,500
Mezzanine term loan		375,000			375,000
Mortgages and other secured debt (recourse)		—			5,266
Capital lease obligations		163,731			135,423
Mortgages and other secured debt (non recourse)		39,875			27,696
Unamortized debt premium on mortgages and other secured debt (non recourse)		1,240			578
		1,875,409			1,853,547
Less:
Current installments of long-term debt		(10,432	)		(12,384	)
Long-term debt	$	1,864,977		$	1,841,163

     In connection with the completion of the Merger on July 13, 2007, the Company entered into a senior secured credit facility and a mezzanine term loan. The senior credit facility and the mezzanine term loan required the Company to enter into certain interest rate hedge agreements to mitigate the risk of rising variable rates of interest. See note 16 — “Fair Value of Financial Instruments — Derivative Instruments and Hedging Activities.”

     Senior Secured Credit Facility

     The senior secured credit facility consists of the following subfacilities, as amended: (i) a $1.3 billion senior secured term loan, and (ii) a $75 million revolving credit facility. The Company pays interest monthly on the outstanding loans under the senior secured credit facility.

     Borrowings bear interest at a rate equal to, at the Company’s option, either a base rate or at the one-month London Interbank Offered Rate (LIBOR) plus an applicable margin. The base rate is determined by reference to the highest of (i) a lender-defined prime rate, (ii) the federal funds rate plus 3.0%, and (iii) the sum of LIBOR, not to be less than 2.5%, plus an applicable margin. The applicable margin with respect to LIBOR borrowings is 3.07% at December 31, 2009. This applicable margin increases every anniversary beginning September 25, 2010 through year five with the rate equal to LIBOR plus 5.75%. LIBOR borrowings under the senior secured credit facility bore interest of approximately 3.30% at December 31, 2009.

     Principal amounts outstanding under each of the two subfacilities are due and payable in full at maturity, September 25, 2014.

     The senior secured term loan, as amended, can be voluntarily prepaid on or before September 25, 2013 but will be subject to a prepayment penalty. Any prepayment that occurs after September 25, 2013 is not subject to a prepayment penalty. The senior secured term loan is subject to partial mandatory prepayment under certain circumstances, including the Company’s receipt of insurance proceeds received following damage to properties or the receipt of certain proceeds upon the sale of real property. In these circumstances, the proceeds received must be used to prepay the senior secured term loan.

22

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     The senior secured credit agreement requires funds be placed in escrow for property tax and property insurance obligations. In addition, the senior secured credit agreement requires that cash be placed in escrow on a monthly basis (approximately $7.5 million annually) to fund routine maintenance and the replacement of property and equipment. The lender releases funds from this escrow when the Company presents evidence that operating funds have been expended for such routine maintenance and replacement activities. At December 31, 2009, $0.6 million is held in escrow for routine maintenance, which is included in prepaid expenses and other current assets.

     All obligations under the senior secured credit facility are secured by a security interest in substantially all of the assets of the Company.

     The senior secured credit agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional indebtedness; provide guarantees; create liens on assets; engage in mergers, acquisitions or consolidations; sell assets; make distributions; make investments, loans or advances; repay indebtedness, except as scheduled or at maturity; engage in certain transactions with affiliates; amend material agreements governing the Company’s outstanding indebtedness; and fundamentally change the Company’s business. The senior secured credit facility agreement requires the Company to meet defined financial covenants, including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, a minimum consolidated project yield and certain customary affirmative covenants, such as financial and other reporting, and certain events of default. At December 31, 2009, the Company is in compliance with all of these covenants.

     Senior secured term loan. The senior secured term loan of $1.3 billion was fully drawn on July 13, 2007 to fund the Merger. Through the year ended December 31, 2009, the Company has prepaid $1.9 million of the senior secured term loan from proceeds upon the sale of real property. In connection with the amendment dated September 25, 2009, the Company paid down $40.0 million of the senior secured term loan balance.

     Delayed draw term loan. The $37.5 million delayed draw term loan, as amended, was established to provide the Company a source of financing to make certain qualifying capital improvements or acquisitions. Amounts repaid under the delayed draw term loan may not be reborrowed. As of December 31, 2009, the Company had drawn the full $37.5 million of outstanding borrowings. In connection with the amendment dated September 25, 2009, this amount is now included in the senior secured term loan balance as of December 31, 2009 with no further borrowing capacity.

     Revolving credit facility. The $75 million revolving credit facility, as amended, was established to provide the Company a source of financing to fund general working capital requirements. Borrowings under the revolving credit facility may be in the form of revolving loans or swing line loans. Aggregate outstanding swing line loans have a sub-limit of $10 million. The revolving credit facility also provides a sub-limit of $35 million for letters of credit. Borrowing levels under the revolving credit facility are limited to a borrowing base that is computed based upon the level of Company eligible accounts receivable, as defined. In addition to paying interest on the outstanding principal borrowed under the revolving credit facility, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate is 0.5% per annum when the unused commitment is greater than $37.5 million and 0.75% per annum when the unused commitment is less than $37.5 million. As of December 31, 2009, the Company had no outstanding borrowings under the revolving credit facility and had $27.3 million of undrawn letters of credit and other encumbrances, leaving the Company with approximately $47.0 million of borrowing capacity under the revolving credit facility. The revolving credit facility expires on September 25, 2014.

Mezzanine Term Loan

     The mezzanine term loan of $375 million was outstanding at December 31, 2009. Borrowings bear interest at a rate equal to LIBOR plus 7.5%. Borrowings under the mezzanine term loan bore interest at approximately 7.73% at December 31, 2009. The principal amount is due and payable in full at maturity, September 25, 2014.

     The mezzanine term loan agreement contains both voluntary and mandatory prepayment restrictions subject to prepayment penalties set forth in the agreement. Mandatory termination fees equal to 1% of the $375 million borrowing plus a monthly rate that increases annually from 0.088% in the initial year of the loan to 0.116% in the final year of the loan. During 2009, the Company accrued $13.6 million for termination fees payable when the loan matures or is prepaid. Of that amount, $5.6 million, $5.5 million and $2.5 million pertain to the Successor periods for the years ended

23

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

December 31, 2009 and 2008, and from July 14, 2007 through December 31, 2007, respectively. See note 1 — “General Information — Adjustments and Reclassifications.” The Company must maintain a debt service reserve held by the lender without interest equal to $4.1 million. The balance is included in prepaid expenses and other current assets.

     All obligations under the mezzanine term loan are secured by a security interest in substantially all of the assets of the Company, subject to subordination to the senior secured credit facility.

     The mezzanine term loan contains covenants similar to, and no more restrictive than, those required under the senior secured credit agreement. At December 31, 2009, the Company was in compliance with all of these covenants.

     Other Debt

     Mortgages and other secured debt (recourse). At December 31, 2008, the Company had $5.3 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 were repaid in full by December 31, 2009.

     Capital lease obligations. The capital lease obligations represent the present value of minimum lease payments under such capital lease arrangements and bear imputed interest at rates ranging from 7.0% to 21.0% at December 31, 2009, and mature at dates ranging primarily from 2012 to 2031.

     Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures. The loans consist principally of revenue bonds and secured bank loans. Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest ranging from 4.5% to 19.6% at December 31, 2009, with maturity dates ranging from 2010 to 2034. Loans are labeled “non-recourse” because neither the Company nor a wholly owned subsidiary is obligated to perform under the respective loan agreements.

     The maturity of total debt, excluding capital lease obligations, of $1,711.7 million at December 31, 2009 is as follows: $7.2 million in fiscal 2010, $0.8 million in fiscal 2011, $0.9 million in fiscal 2012, $0.9 million in fiscal 2013, $1,683.9 million in fiscal 2014 and $18.0 million thereafter.

(10) Leases and Lease Commitments

     The Company leases certain facilities under capital and operating leases. Future minimum payments for the next five years and thereafter under such leases at December 31, 2009 are as follows (in thousands):

Year ending December 31,	Capital Leases			Operating Leases
2010	$	18,175		$	19,344
2011		18,614			19,417
2012		18,386			18,399
2013		17,782			14,102
2014		82,601			12,890
Thereafter		154,932			27,476
Total future minimum lease payments		310,490		$	111,628
Less amount representing interest		(146,759	)
Present value of net minimum lease payments		163,731
Less current portion		(3,239	)
Long-term capital lease obligation	$	160,492

     The Company holds fixed price purchase options to acquire the land and buildings of 18 facilities for $119.5 million with expirations ranging from 2014 to 2025. Seven of these options are deemed to be bargain purchases and,

24

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

consequently, these leases have been classified as capital leases contributing $75.3 million in capital lease obligations of the total $163.7 million at December 31, 2009. The Company also classifies 17 other center leases as capital leases contributing $88.4 million to the capital lease obligation at December 31, 2009.

     The Company and subsidiaries of a real estate investment trust are party to a master lease involving eleven facilities. The master lease does not impact the individual terms and conditions of the six separate operating leases and the five separate capital leases, but establishes cross default and cure provisions if one or more of the eleven individual facilities have an event of default. In addition to facility / tenant level financial, reporting and other covenants contained in the individual operating and capital leases, the master lease establishes certain Company level financial, reporting and other covenants. Pursuant to the master lease, the Company posted $10.8 million of letters of credit as security, principally representing 12 months rent under the six individual operating leases and five individual capital leases. See note 3 — “Significant Transactions and Events — Successor — Lease Transactions.”

     Deferred lease balances carried on the consolidated balance sheets represent future differences between accrual basis and cash basis lease costs. Differences between lease expense on an accrual basis and the amount of cash disbursed for lease obligations is caused by unfavorable or favorable lease balances established in connection with the Merger are amortized on a straight-line basis over the lease term and lease balances established to account for operating lease costs on a straight-line basis.

     At December 31, 2009 and 2008, the Company had $50.2 million and $69.7 million, respectively, of favorable leases net of accumulated amortization, included in other identifiable intangible assets and $2.0 million and $4.2 million, respectively, of unfavorable leases net of accumulated amortization included in other long-term liabilities on the consolidated balance sheet. The favorable leases will be amortized as an increase to lease expense over the remaining lease terms, which have a weighted average term of 15 years. The unfavorable leases will be amortized as a decrease to lease expense over the remaining lease terms, which have a weighted average term of 5 years.

     Impairment on three favorable lease balances of $7.6 million were recognized in 2009 and an impairment, on a favorable lease balance, of $4.0 million was recognized in 2008 associated with the write-down of an underperforming properties. See note 17 — “Asset Impairment Charges — Long-Lived Assets with a Definite Useful Life.”

     The net balance of the straight-line lease adjustment at December 31, 2009 and 2008 of $1.9 million and $1.5 million, respectively, is included in other long-term liabilities on the consolidated balance sheets.

(11) Income Taxes

     Income Tax Provision (Benefit)

     Total income tax expense (benefit) was as follows (in thousands):

	Successor									Predecessor
							Period from July			Period from
	Year ended			Year ended			14, 2007 through			January 1, 2007
	December 31,			December 31,			December 31,			through July 13,
	2009			2008			2007			2007
Continuing operations	$	17,105		$	(37,618	)	$	(25,425	)	$	6,763
Discontinued operations		(764	)		444			720			(119	)
Noncontrolling interests		(935	)		(937	)		(195	)		(334	)
Shareholders’/members’ equity		(3,222	)		1,401			(2,129	)		(3,307	)
Total	$	12,184		$	(36,710	)	$	(27,029	)	$	3,003

25

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     The components of the provision for income taxes on income (loss) from continuing operations for the periods presented were as follows (in thousands):

	Successor									Predecessor
							Period from July			Period from January
	Year ended December			Year ended December			14, 2007 through			1, 2007 through
	31, 2009			31, 2008			December 31, 2007			July 13, 2007
Current:
Federal	$	—		$	—		$	(5,024	)	$	(5,439	)
State		1,842			741			20			(1,394	)
		1,842			741			(5,004	)		(6,833	)
Deferred:
Federal		17,748			(29,491	)		(14,980	)		10,919
State		(2,485	)		(8,868	)		(5,441	)		2,677
		15,263			(38,359	)		(20,421	)		13,596
Total	$	17,105		$	(37,618	)	$	(25,425	)	$	6,763

     Total income tax expense (benefit) for the periods presented differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income (loss) before income taxes as illustrated below (in thousands):

	Successor									Predecessor
							Period from July			Period from January
	Year ended December			Year ended December			14, 2007 through			1, 2007 through
	31, 2009			31, 2008			December 31, 2007			July 13, 2007
Computed “expected” tax	$	1,744		$	(72,449	)	$	(21,599	)	$	(4	)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal tax benefit		(418	)		(5,368	)		(3,541	)		804
Targeted jobs tax credit		(1,374	)		(1,082	)		(697	)		(322	)
Non deductible transaction costs		—			—			—			6,021
Goodwill impairment		—			42,739			—			—
Adjustment to net operating loss deferred tax asset, net		15,901			—			—			—
Other, net		1,252			(1,458	)		412			264
Total income tax expense (benefit)	$	17,105		$	(37,618	)	$	(25,425	)	$	6,763

26

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below (in thousands):

	2009			2008
Deferred Tax Assets:
Accounts receivable	$	25,169		$	22,408
Accrued liabilities and reserves		39,970			35,984
Net operating loss carryforwards		51,826			64,683
Derivative financial instrument, with recourse		9,275			26,351
Discounted unpaid loss reserve		8,363			6,011
Dual consolidated loss		10,703			9,488
General business credits		7,472			9,732
Other		22,923			10,778
Total deferred tax assets		175,701			185,435
Valuation allowance		(28,221	)		(22,157	)
Deferred tax assets, net of valuation allowance		147,480			163,278
Deferred Tax Liabilities:
Accrued liabilities and reserves		(1,034	)		—
Net unfavorable leases		(27,434	)		(33,432	)
Long-lived assets		(330,604	)		(332,041	)
Total deferred tax liabilities		(359,072	)		(365,473	)
Net deferred tax liability	$	(211,592	)	$	(202,195	)

     Management believes the deferred tax assets at December 31, 2009 and 2008 are more likely than not to be realized. As of December 31, 2009, the Company expects it will have sufficient taxable income in future periods from the reversal of existing taxable temporary differences and expected profitability such that the remaining NOL would be utilized within the carryforward period. Most of the significant NOLs arose in fiscal 2007 and have a carryforward period of 20 years. The Company reduced its federal NOL carryforward by $51.8 million based on information that came to its attention in 2009 regarding the allocation of the NOL at the date of spin-off from a former affiliated company in 2003.

     The Company’s NOL carryforwards for state purposes have a tax value of $44.5 million and expire from 2010 to 2029. These deferred tax assets are subject to a valuation allowance of $28.2 million.

     Utilization of deferred tax assets (liability) existing at the Predecessor Company’s October 2, 2001 bankruptcy emergence date must be applied first as a reduction of any Predecessor Company identifiable intangible assets and, then, as an increase to members’/shareholders’ equity. The Company recorded an increase (decrease) to members’/shareholders’ equity in the Successor periods for the years ended December 31, 2009 and 2008 and from July 14, 2007 through December 31, 2007, and the Predecessor period of January 1, 2007 through July 13, 2007 of $3.4 million, $(1.4) million, $2.6 million, and $3.5 million, respectively. The deferred tax liability at December 31, 2008 includes the tax impact of the recognition of the book basis goodwill impairment.

     Uncertain Tax Positions

     The Company adopted the provisions of ASC Subtopic 740-10 on January 1, 2009. As a result of the implementation of ASC Subtopic 740-10 (Interpretation 48), the Company did not recognize any change in the liability for unrecognized tax benefits.

27

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     As of January 1, 2009 and December 31, 2009, the liability for unrecognized tax benefits amounted to $3.1 million and $0.5 million, respectively. During 2009, the Company recognized a $2.6 million decrease in the liability as a result of additional information that came to the Company’s attention and statute of limitations expirations.

     The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state and local income tax examinations by tax authorities for years prior to 2005.

     The Company believes that it is reasonably possible that approximately $0.2 million of its currently remaining unrecognized tax positions, each of which are individually insignificant, may be recognized by the end of 2010 as a result of a lapse of the statute of limitations. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. Total accrued interest and penalties as of January 1, 2009 and December 31, 2009 was $0.4 million.

(12) Related Party Transactions

     In December 2009, the Company made an investment of $5.0 million and received a one-third interest in an unconsolidated joint venture affiliated with one of the Company’s Sponsors.

     In September 2008, the Company entered into agreements to manage 14 facilities. In January 2009, the Company entered into agreements to manage two additional facilities. Certain of the 16 facilities are leased and operated by an affiliate of one of the Company’s Sponsors. The affiliate of the Sponsor leases the buildings from an unrelated publicly held real estate investment trust. There are two remaining facilities in Vermont that are expected to be leased and operated following receipt of pending change of ownership approvals in certain states. A management agreement provided $5.6 million of annual fee revenue in year ended December 31, 2009. Payment of 25% of the management fee is subordinated to the payment of facility rent on certain of the facilities and has been reserved at December 31, 2009. The Company entered into agreements with the 16 facilities to provide rehabilitation therapy services. The rehabilitation therapy contracts resulted in $10.7 million of revenue in the year ended December 31, 2009.

     In January 2008, an affiliate of one of the Company’s Sponsors that was in the business of providing rehabilitation therapy services offered assignment of certain rehabilitation therapy service contracts to the Company. The contracts were unrelated third party operators of nursing and assisted living facilities. Approximately 78 contracts were assigned to the Company, 65 of which remain, resulting in $27.7 million and $26.3 million of revenue in years ended December 31, 2009 and 2008. No consideration was exchanged between the Company and the Sponsor affiliate for assignment of the rehabilitation therapy service agreements. The Company agreed to assist the Sponsor affiliate with the collection of receivable carried by it prior to January 2008. Fees earned under this collection service arrangement were approximately $0.3 million in the year ended December 31, 2008. No fees were earned for the year ended December 31, 2009 and no fees are expected to be earned going forward. The Company provides and receives certain ancillary services to and from affiliates of one of the Company’s Sponsors. Management believes the service fees have been negotiated at arms-length.

     In connection with the Merger, the Company paid affiliates of the Sponsors $2.3 million of transaction, acquisition advisory services and similar fees. This amount is included in the total purchase price of the Merger.

     Following the July 13, 2007 transaction, the Company is billed by an affiliate of one of the Company’s Sponsors a monthly fee for the provision of administrative services. Half of the fee earned is paid. Payment of the remaining fee earned is deferred until such time as a predefined minimum return on the investors’ capital contributions is distributed. The cumulative deferred portion of the administrative fee of $3.6 million and $2.1 million is recorded in other long-term liabilities on the consolidated balance sheet at December 31, 2009 and 2008, respectively. The fee is based upon the number of licensed owned, leased and managed beds operated by the Company. Based upon the Company’s current bed count, the fee approximates $3.0 million per annum.

28

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

(13) Shareholders’ Equity

     Capital stock

     Total authorized capital stock consists of 1,500 shares, no par value, all of which is issued and outstanding as of December 31, 2009 and 2008 and are held by the Parent. Each share of capital stock is entitled, on all matters for a vote or the consent of holders of the capital stock, to one vote.

     Capital Transaction with the Parent

     During 2009, the Company made $36.0 million of cash distributions to the Parent. During 2008, the Company recorded a capital contribution of $8.0 million for fees paid by the Parent in association with the amendment dated March 27, 2008 to the senior secured credit agreement and made $26.4 million of cash distributions to the Parent. The Company received $300.0 million from the Parent to fund the Merger. During the period from July 14, 2007 to December 31, 2007, the Company made $8.0 million of cash distributions to the Parent.

(14) Stock-Based Benefit Plans

     Successor

     The Successor Company does not have any stock-based benefit plans. Accordingly, no stock-based compensation expense is recognized in the Successor periods.

     Predecessor

     Prior to the Merger, the Company had two stock-based benefit plans involving stock options and restricted stock awards. Pursuant to the Merger, all outstanding stock options and restricted stock awards became fully vested and the holders became entitled to receive cash consideration equal to the difference between the exercise price and $69.35 per share for stock options and $69.35 for each share of restricted stock. The Predecessor Company stock-based benefit plans were discontinued in connection with the Merger. Under the terms of the stock option and restricted stock agreements, the terms of the awards were fixed at the grant date.

     For the period January 1, 2007 to July 13, 2007, compensation cost charged to expense for stock-based benefit plans and the impact of changes in the fair value of the common stock held in the rabbi trust was approximately $7.9 million (before taxes of $3.2 million). The compensation cost recognized is classified as general and administrative expenses in the consolidated statements of operations. No cost was capitalized.

     Stock Options

     Compensation cost for stock options was recognized in the Predecessor period based upon the estimated fair value on the date of grant computed using a lattice-based binomial option pricing model over the vesting period during which employees performed the related services. For the period January 1, 2007 to July 13, 2007, compensation cost charged to expense for stock options was approximately $1.8 million. There were no stock options granted beyond September 30, 2006.

     In connection with the Merger, and pursuant to certain change in control provisions of the stock option plan, all nonvested stock options vested immediately, which resulted in a charge of $4.9 million during the Predecessor period from January 1, 2007 to July 13, 2007 for the recognition of all unrecognized compensation costs. The charge is recorded in Merger related costs in the consolidated statements of operations.

29

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Restricted stock

     Compensation cost for restricted stock was recognized in the Predecessor period ratably over the service period at the market value of the Predecessor common stock on the date of the grant. For the period January 1, 2007 to July 13, 2007, compensation cost charged to expense for restricted stock was approximately $3.1 million. Pursuant to the Merger agreement, all restrictions placed on nonvested restricted stock automatically lapsed on July 13, 2007, which resulted in a charge of $17.4 million during the Predecessor period from January 1, 2007 to July 13, 2007 for the fair value of the unvested restricted stock awards at July 13, 2007.

(15) Commitments and Contingencies

     Loss Reserves For Certain Self-Insured Programs

     General and Professional Liability and Workers’ Compensation

     The Company uses a combination of insurance and self-insurance mechanisms, including a wholly owned captive insurance subsidiary that is domiciled in Bermuda, to provide for potential liabilities for general and professional liability claims and workers’ compensation claims. Policies are typically written for a duration of twelve months and are measured on a “claims made” basis.

     Excess coverage above self-insured retention limits is provided through third party insurance policies generally in the form of per incident limits and aggregate policy limits for both general and professional liability and workers’ compensation claims.

     As of December 31, 2009, the Company’s estimated range of outstanding losses for these liabilities on an undiscounted basis is $141.8 million to $177.3 million ($128.8 million to $160.9 million net of amounts recoverable from third-party insurance carriers). The Company recorded reserves for these liabilities were $163.3 million as of December 31, 2009. The Company has recorded a $13.9 million insurance claims recoverable from third-party insurance carriers, which is included in other long-term assets in the consolidated balance sheets. The Company includes in current liabilities the estimated loss and loss expense payments that are projected to be satisfied within one year of the balance sheet date.

     The Company, through its wholly owned captive insurance subsidiary has restricted cash and investments in marketable securities of $95.5 million at December 31, 2009, which are substantially restricted to securing the outstanding claim losses of insured through the captive.

     Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

     Health Insurance

     The Company offers employees an option to participate in self-insured health plans. Health claims under these plans are self-insured with a stop-loss umbrella policy in place to limit maximum potential liability for individual claims for a plan year. Health insurance claims are paid as they are submitted to the plans’ administrators. The Company maintains an accrual for claims that have been incurred but not yet reported to the plans’ administrators and therefore have not been paid. The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets. Although management believes that the amounts provided in the Company’s consolidated financial statements are adequate and reasonable, there can be no assurances that the ultimate liability for such self-insured risks will not exceed management’s estimates.

30

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Financial Commitments

     Requests for providing commitments to extend financial guarantees and extend credit are reviewed and approved by senior management subject to obligational authority limitations. Management regularly reviews 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.

     The Company has extended $3.1 million in working capital lines of credit to certain jointly owned and managed companies, including certain consolidated VIEs, of which $1.4 million was unused at December 31, 2009. 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.

     The Company has posted $27.3 million of outstanding letters of credit. The letters of credit guarantee performance to third parties of various trade activities. The letters of credit are not recorded as liabilities on the Company’s consolidated balance sheet unless they are probable of being utilized by the third party. The financial risk approximates the amount of outstanding letters of credit.

     The Company is a party to joint venture partnerships whereby its ownership interests are 50% or less of the total capital of the partnerships. The Company accounts for certain of these partnerships using either the cost or equity method of accounting depending on the percentage of ownership interest, and therefore, the assets, liabilities and operating results of these partnerships are not consolidated with the Company’s. Certain other of the Company’s joint venture partnerships qualify as VIEs, and where the Company is determined to be the primary beneficiary of such arrangements, are consolidated. The carrying value of the Company’s investment in unconsolidated joint venture partnerships is $9.6 million and $10.7 million at December 31, 2009 and 2008, respectively. Although the Company is not contractually obligated to fund operating losses of these partnerships, in certain cases it 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 its joint venture relationship. Management assesses the creditworthiness of such partnerships in the same manner it does other third parties. The underlying debt obligations of the Company’s consolidated VIEs are non-recourse to it. Guarantees are not recorded as liabilities on the Company’s consolidated 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 the counterparties 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.

     Legal Proceedings

     The Company is a party to litigation and regulatory investigations arising in the ordinary course of business. Management does not believe the results of such litigation and regulatory investigations, even if the outcome is unfavorable, would have a material adverse effect on the results of operations, financial position or cash flows of the Company.

     Conditional Asset Retirement Obligations

     Certain of the Company’s real estate assets contain asbestos. The asbestos is believed to be appropriately contained in accordance with environmental regulations. If these properties were demolished or subject to renovation activities that disturb the asbestos, certain environmental regulations are in place, which specify the manner in which the asbestos must be handled and disposed.

     At December 31, 2009, the Company has a liability for the fair value of the asset retirement obligation associated primarily with the cost of asbestos removal aggregating approximately $4.2 million, which is included in other long-term liabilities. The liability for each facility will be accreted to its present value, which is estimated to approximate $16.4 million through the estimated settlement dates extending from 2010 through 2042. Due to the time over which these obligations could be settled and the judgment used to determine the liability, the ultimate obligation may differ from the

31

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

estimate. Upon settlement, any difference between actual cost and the estimate is recognized as a gain or loss in that period.

     Annual accretion of the liability and depreciation expense is recorded each year for the impacted assets until the obligation year is reached, either by sale of the property, demolition or some other future event such as a government action.

     The changes in the carrying amounts of the Company’s asset retirement obligations for the Successor periods for the year ended December 31,2009 and 2008 are as follows (in thousands):

Asset retirement obligations, January 1, 2008	$	4,221
Asset retirement obligations settled		(216	)
Accretion expense		293
Asset retirement obligations incurred		224
Asset retirement obligations, December 31, 2008	$	4,522
Asset retirement obligations settled		(565	)
Accretion expense		292
Asset retirement obligations, December 31, 2009	$	4,249

     Employment Agreements

     The Company has employment agreements and arrangements with its executive officers and certain members of management. The agreements generally continue until terminated by the executive or the Company, and provide for severance payments under certain circumstances.

(16) Fair Value of Financial Instruments

     ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and provides for disclosure of fair value measurements. The Company adopted the provisions of ASC Topic 820 with respect to its financial assets and liabilities measured at fair value on a recurring basis on January 1, 2008. The Company adopted the provisions of ASC Topic 820 with respect to its nonfinancial assets and nonfinancial liabilities that are not required or permitted to be measured at fair value on a recurring basis on January 1, 2009. Nonfinancial assets and nonfinancial liabilities, recorded on a non-recurring basis, include those measured at fair value for indefinite-lived intangible asset and goodwill impairment testing, asset retirement obligations initially measured at fair value and those initially measured at fair value in a business combination.

     The Company’s financial instruments consist primarily of cash and equivalents, restricted cash, trade accounts receivable, investments in marketable securities, accounts payable, short and long-term debt and derivative financial instruments.

     The Company’s financial instruments, other than its trade accounts receivable and accounts payable, are spread across a number of large financial institutions whose credit ratings the Company monitors and believes do not currently carry a material risk of non-performance. Certain of the Company’s financial instruments, including its interest rate swap arrangements, contain an off-balance-sheet risk.

     Recurring Fair Value Measures

     Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below. An

32

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Level 1 —	Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 —	Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3 —	Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability).

         The tables below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2009		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and equivalents	$	109,573	$	109,573	$	—	$	—
Restricted cash		17,137		17,137		—		—
Restricted investments in marketable securities
Mortgage/government backed securities		21,393		21,393		—		—
Corporate bonds		16,976		16,976		—		—
Government bonds		45,207		45,207		—		—
Total	$	210,286	$	210,286	$	—	$	—
Liabilities:
Derivative financial instruments
Interest rate swap and cap on loans with recourse	$	30,953	$	—	$	30,953	$	—
Interest rate swap on non-recourse VIE loan		86		—		86		—
Total	$	31,038	$	—	$	31,038	$	—

33

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	December 31,		Identical Assets		Observable Inputs		Inputs
	2008		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and equivalents	$	72,842	$	72,842	$	—	$	—
Restricted cash		10,482		10,482		—		—
Restricted investments in marketable securities
Mortgage/government backed securities		20,654		20,654		—		—
Corporate bonds		23,468		13,307		10,161		—
Government bonds		46,837		46,837		—		—
Total	$	174,283	$	164,122	$	10,161	$	—
Liabilities:
Derivative financial instruments
Interest rate swap and cap on loans with recourse	$	64,843	$	—	$	64,843	$	—
Interest rate swap on non-recourse VIE loan		165		—		165		—
Total	$	65,008	$	—	$	65,008	$	—

     The Company uses a swap and a cap to manage its interest rate risk. The fair value of the interest rate swap and cap is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the swap and cap. The variable interest rates used in the calculation of projected receipts on the swap and cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The Company incorporates credit valuation adjustments to reflect appropriately both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, and guarantees. The discounted cash flow model does not involve significant management judgment and does not incorporate significant unobservable inputs. Accordingly, the Company classifies its interest rate swap valuations within Level 2 of the valuation hierarchy.

     The Company places its cash and equivalents and restricted investments in marketable securities in quality financial instruments and limits the amount invested in any one institution or in any one type of instrument. The Company has not experienced any significant losses on its cash. For the years ended December 31, 2009 and 2008 and from July 14, 2007 through December 31, 2007, the Company determined that the decline in the estimated value of certain corporate bonds were other-than-temporarily impaired. The Company recognized a non-cash, pre-tax impairment charge in investment income of $0.2 million, $3.9 million and $0.4 million, respectively, based on quoted prices, which the Company believes qualify as a Level 1 measurement.

34

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Debt Instruments

     The table below shows the carrying amounts and estimated fair values of the Company’s primary long-term debt instruments:

	2009				2008
	Carrying Value		Fair Value		Carrying Value		Fair Value
Senior secured term loan	$	1,295,563	$	1,295,563	$	1,298,084	$	1,239,817
Delayed draw term loan		—		—		11,500		10,984
Mezzanine term loan		375,000		375,000		375,000		358,167
Other		39,875		43,949		32,962		33,541
	$	1,710,438	$	1,714,512	$	1,717,546	$	1,642,509

     The fair value of debt is based upon market prices or is computed using discounted cash flow analysis, based on the Company’s estimated borrowing rate at the end of each fiscal period presented. The Company believes that the inputs to the pricing models qualify as Level 2 measurements.

     Derivative Instruments and Hedging Activities

     The senior secured credit facility agreement and the mezzanine term loan agreement require the Company to enter into financial instruments to protect against fluctuations in interest rates for a notional amount equal to the combined outstanding principal balance of the senior secured credit facility and the mezzanine term loan such that LIBOR does not exceed 6.5%.

     These contracts are not designated for hedge accounting treatment, and therefore, the Company records the fair value (estimated unrealized gain or loss) of the agreements as an asset or liability and the change in any period as an adjustment to interest expense in the consolidated statements of operations. Realized gains and losses associated with these contracts are recorded as adjustments to interest expense each reporting period. The counterparties to the derivative financial instruments are major financial institutions. The Company does not use derivative financial instruments for any trading or speculative purposes.

     The interest rate swap agreement has a notional amount of $1 billion. The Company is required to make payments to the counterparty at the fixed rate of 5.34% and in return, the Company receives payments at a variable rate based on the one month LIBOR, which was 0.23% at December 31, 2009. The fair value of the interest rate swap agreement at December 31, 2009 and 2008 is recorded as a liability of $31.0 million and $64.8 million, respectively, in other long- term liabilities in the consolidated balance sheet with changes in the fair value recorded to interest expense in the consolidated statement of operations of the Successor. The interest rate swap agreement expires on July 13, 2010.

     The interest rate cap agreement has a notional amount of $712.5 million. Under this agreement, the Company receives variable interest rate payments when the one-month LIBOR rises above 2.0%. The Company paid a fee of $0.6 million at the inception of the interest rate cap agreement, which is being amortized to interest expense over the term of the agreement. The interest rate cap agreement expires on July 13, 2010.

     The Company is exposed to credit loss, in the event of nonperformance by the counterparties to the interest rate swap and interest rate cap agreements. As of December 31, 2009, the Company does not anticipate nonperformance by the counterparties to these agreements and no material loss would be expected from any such nonperformance.

     The Company consolidates one VIE that entered into an interest rate swap agreement. The VIE is exposed to the impact of interest rate changes because its long-term debt bears interest at a variable rate. The VIE’s obligation under

35

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

the interest rate swap agreement is non-recourse to the Company. The interest rate swap agreement effectively converts approximately $6.4 million and $6.6 million at December 31, 2009 and 2008, respectively, of variable-rate debt (one month LIBOR) into fixed-rate debt (4.38%). The interest rate swap agreement matures on July 29, 2010. The counterparty to the interest rate swap agreement is a major institutional bank.

     The VIE’s objective in managing exposure to interest rate changes is to limit the impact of such changes on its earnings and cash flows and to lower its overall borrowing costs. The VIE’s debt and obligation under the interest rate swap agreement are non-recourse to the Company. The VIE does not enter into such arrangements for trading purposes. Such instruments are recognized on the consolidated balance sheet at fair value. Changes in the fair value of a derivative that is designated as and meets all of the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified as an adjustment to interest expense as the underlying hedged item affects earnings.

     The following tables reflect the balance sheet classification and fair value of derivative instruments on a gross basis as of December 31, 2009 and 2008 (dollars in thousands):

		Liability Derivatives
	Year Ended December 31,
	2009			2008
	Balance Sheet	Fair		Balance Sheet	Fair
	Classification	Value		Classification	Value
Derivatives designated as hedging instruments
Interest rate swap on non-recourse VIE loan	Other long-term liabilities	$	86	Other long-term liabilities	$	165
Derivatives not designated as hedging instruments
Interest rate swap and cap on loans with recourse	Other long-term liabilities	$	30,953	Other long-term liabilities	$	64,843

     During the year ended December 31, 2009 and 2008 and from July 14, 2007 through December 31, 2007, the Company recognized non-cash interest (income) expense of $(33.9) million, $24.6 million and $40.3 million, respectively, on its interest rate swap derivatives.

     Non-Recurring Fair Value Measures

     The Company recently applied the fair value measurement principles of GAAP to certain of its non-recurring nonfinancial assets as follows:

• On September 30, 2009, the Company determined the fair value of its long-lived assets in connection with an impairment test required under GAAP

• On September 30, 2009, the Company determined the fair value of its reporting units in connection with an annual impairment test required under GAAP;

     The following table presents the Company’s hierarchy for nonfinancial assets measured at fair value on a non-recurring basis (dollars in thousands):

					Impairment
	Carrying Value		Significant		Charges - Year
	December 31,		Unobservable		Ended December
	2009		Inputs (Level 3)		31, 2009
Assets:
Goodwill	$	119,090	$	119,090	$	—
Intangible assets		66,871		66,871		7,612

     The fair value of intangible assets is determined using a discounted cash flow approach. The Company estimates the fair value using the income approach (which is a discounted cash flow technique). These valuation methods required management to make various assumptions, including, but not limited to, assumptions related to future profitability, cash

36

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

flows and discount rates. The Company’s estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential.

     Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to longer-term strategies, including, but not limited to, estimates about revenue growth, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially impact the present value of future cash flows.

     The Company estimated the fair value of acquired intangible assets using discounted cash flow techniques which included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflects the relative risk of the cash flows.

     The Company believes the estimates and assumptions used in the valuation methods are reasonable.

(17) Asset Impairment Charges

     Long-Lived Assets with a Definite Useful Life

     In the fourth quarter of 2009 and 2008, the Company’s long-lived assets with a definite useful life were tested for impairment at the lowest levels for which there are identifiable cash flows. The Company estimated the future net undiscounted cash flows expected to be generated from the use of the long-lived assets and then compared the estimated undiscounted cash flows to the carrying amount of the long-lived assets. The cash flow period was based on the remaining useful lives of the primary asset in each long-lived asset group, principally a building in the inpatient segment and customer relationship assets in the rehabilitation therapy services segment. The result of the analyses indicated that the estimated undiscounted cash flows exceeded the carrying amount of the long-lived assets in all but eight and four facilities in the inpatient segment for 2009 and 2008, respectively. No impairment was noted in carrying value of long-lived assets in the rehabilitation therapy services segment. For 2009, the Company estimated the fair value of each of the seven facilities and one closed and held for sale facility and recognized impairment charges totaling $17.4 million for four owned and four leased facilities for which the estimated fair value was less than the carrying value. For 2008, the Company estimated the fair value of each of the four facilities and recognized impairment charges totaling $10.8 million for three facilities and one favorable lease for which the estimated fair value was less than the carrying value.

     Goodwill

     The Company attributes all of its goodwill to the inpatient services segment. The Company performs a test for impairment of its goodwill when factors indicating the potential for impairment are present, but under no condition less than annually. The test consists of two steps for determining goodwill impairment. In step one of the impairment analyses; the Company determines the fair value of the inpatient services segment. Step two is only necessary if test one is deemed failed. In step two of the impairment analysis, the Company allocates the fair value of the inpatient services reporting units to all tangible and intangible assets and liabilities in a hypothetical sale transaction to determine the implied fair value of the respective reporting unit’s goodwill.

     The Company performed its annual goodwill impairment test as of September 30, 2009 and 2008. As a result of escalating unfavorable market conditions during the fourth quarter of 2008, the Company performed an interim update of the annual impairment test.

     In its September 30, 2009 test, the Company determined the fair value of the inpatient services segment in step one using the income approach, which estimates the fair value based on the future discounted cash flows. Significant assumptions used in the income approach analysis included: expected future revenue growth rates ranging from 2.8% to 3.2%; operating profit margins ranging from 10.7% to 12.1%; working capital levels of 6% of revenues; asset lives used to generate future cash flows; weighted average cost of capital represented by a discount rate of 11%; and a terminal growth rate of 8%. The fair value of the reporting unit was then compared to the carrying value. The results indicated

37

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

the fair value of the inpatient services reporting unit was less than its carrying value, which required the Company to perform step two of the annual impairment analysis.

     In step two of the impairment analysis, the Company allocated the fair value of the inpatient services reporting units to all tangible and intangible assets and liabilities in a hypothetical sale transaction to determine the implied fair value of the respective reporting unit’s goodwill. The Company concluded through step two of the impairment test that the carrying value of its goodwill at September 30, 2009 was below its fair value, resulting in no impairment in 2009.

     In its September 30, 2008 test, the Company determined the fair value of the inpatient services segment in step one using the income approach, which estimates the fair value based on the future discounted cash flows. Significant assumptions used in the income approach analysis included: expected future revenue growth rates ranging from 2.7% to 3.2%; operating profit margins ranging from 10.9% to 11.2%; working capital levels of 6% of revenues; asset lives used to generate future cash flows; weighted average cost of capital represented by a discount rate of 10%; and a terminal growth rate of 7%. The fair value of the reporting unit was then compared to the carrying value. The results indicated the fair value of the inpatient services reporting unit was less than its carrying value, which required the Company to perform step two of the annual impairment analysis.

     In step two of the impairment analysis, the Company allocated the fair value of the inpatient services reporting units to all tangible and intangible assets and liabilities in a hypothetical sale transaction to determine the implied fair value of the respective reporting unit’s goodwill. As a result of the step two analysis, the Company concluded that $65.2 million of goodwill was impaired resulting in a non-cash goodwill impairment charge.

     The goodwill charge is primarily driven by adverse market conditions across all industries, including healthcare and the resulting decrease in current market multiples.

     During fourth quarter of 2008, the worsening of the economic conditions began to directly impact state Medicaid reimbursement programs in nearly all of the states in which the Company operates. Several key states in which the Company operates either cut or indicated that they may need to cut their reimbursement rates to providers of skilled nursing care. The Company determined that it had a triggering event that required it to perform an interim goodwill impairment review as of December 31, 2008.

     In step one of the interim impairment analysis, the Company determined, with the assistance of a valuation specialist, the fair value of the inpatient services segment using the income approach. Significant assumptions used in the income approach at December 31, 2008 were identical to those used at September 30, 2008 with the exception of the discount rate which increased to 11% at December 31, 2008. The fair value of the reporting unit was then compared to the carrying value. The results indicated the fair value of the inpatient services reporting unit was less than its carrying value, which required the Company to perform step two of the interim impairment analysis. As a result of the step two analysis, the Company concluded that $60.8 million of goodwill was impaired resulting in a non-cash goodwill impairment charge.

     The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company’s best estimates. Changes in the Company’s long-term forecasts and industry growth rates could require additional impairment charges to be recorded in future periods for the remaining goodwill.

(18) Other

     Investment Income

     Investment income is earned principally on short-term investments of cash on hand, restricted cash and investments of marketable securities held by the Company’s wholly owned captive insurance company and assets held in a rabbi trust of the Predecessor Company’s deferred compensation plan.

38

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     The following table sets forth the components of investment income (in thousands):

	Successor							Predecessor
						Period from
						July 14, 2007		Period from
	Year ended		Year ended			through		January 1,
	December 31,		December 31,			December 31,		2007 through
	2009		2008			2007		July 13, 2007
Income on cash and short-term investments	$	276	$	1,896		$	1,974	$	1,566
Income (loss) on restricted cash and investments		1,746		(979	)		1,885		2,250
Income on assets held in rabbi trust		—		—			—		1,866
Interest income on notes receivable		123		321			296		441
Total investment income	$	2,145	$	1,238		$	4,155	$	6,123

     Income (loss) on restricted cash and investments for the years ended December 31, 2009 and 2008 and from July 14, 2007 through December 31, 2007, includes $0.2 million, $3.9 million and $0.4 million, respectively, of impairment charges on investments held by the Company’s wholly owned captive insurance company that were determined to be other-than-temporarily impaired.

     Assets Held for Sale and Discontinued Operations

     In the normal course of business, the Company continually evaluates the performance of its operating units, with an emphasis on selling or closing underperforming or non-strategic assets. Discontinued businesses 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 consolidated statements of operations.

     The following table sets forth net revenues and the components of income (loss) from discontinued operations (in thousands):

	Successor									Predecessor
							Period from
							July 14, 2007			Period from
	Year ended			Year ended			through			January 1,
	December 31,			December 31,			December 31,			2007 through
	2009			2008			2007			July 13, 2007
Net revenues	$	—		$	3,829		$	8,797		$	4,653
Net operating income (loss) of discontinued businesses	$	—		$	(39	)	$	1,771		$	(292	)
Early extinguishment of debt		—			(293	)		—			—
(Loss) gain on discontinuation of business		(107	)		9,812			—			—
Minority interests		—			(8,387	)		—			—
Income tax benefit (expense)		764			(444	)		(720	)		119
Income (loss) from discontinued operations, net of taxes	$	657		$	649		$	1,051		$	(173	)

     In January 2009, the Company sold one facility located in New Jersey. The facility had been closed since 2002. The facility was sold for $1.9 million and the Company recognized a $(0.1) million loss on the sale.

     In October 2008, the Company sold one of its consolidated VIE facilities located in Massachusetts. The facility was classified as a discontinued operation and its results from operations in the current and prior year periods presented have been adjusted to reflect this classification accordingly. The facility was sold for $18.3 million, debt of $8.2 was assumed by the buyer. The net impact of the sale to the Company is a non-cash pre-tax gain of $1.4 million.

39

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Consolidated Financial Statements

     Other Loss (Income)

     In the year ended December 31, 2009, the Company recognized a $2.2 million loss primarily on the purchase of an additional one-third interest of a previously unconsolidated VIE. In the year ended December 31, 2008, the Company recognized a $4.5 million settlement gain of notes receivable. The Predecessor realized a $3.0 million gain on the sale of a cost method investment in the period from January 1, 2007 through July 13, 2007.

(19) Subsequent Events

     On March 19, 2010, the Company sold one facility located in Connecticut for $1.4 million. The facility had been closed since 2004.

     On March 8, 2010, the Company’s Sponsors declared and the Company made a cash distribution of $9.0 million to the Parent.

40

EX-99.3

Exhibit 99.3

FC-GEN Acquisition Holding, LLC and Subsidiaries

Condensed Consolidated Financial Statements

Index to Condensed Consolidated Financial Statements

	Page
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		2
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010 and 2009		3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009		4
Notes to Condensed Consolidated Financial Statements		5

1

FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

	September 30, 2010
	Unaudited			December 31, 2009
| |
Assets:
Current assets:
Cash and equivalents	$	113,152		$	109,573
Current portion of restricted cash and investments in marketable securities		39,344			41,376
Accounts receivable, net of allowances for doubtful accounts of $42,817 in 2010 and $41,467 in 2009		281,700			287,551
Prepaid expenses and other current assets		99,903			79,993
Current portion of deferred income taxes		41,993			40,832
Total current assets		576,092			559,325
Property and equipment, net of accumulated depreciation of $258,319 in 2010 and $197,068 in 2009		1,753,406			1,787,483
Restricted cash and investments in marketable securities		56,537			59,337
Other long-term assets		64,544			65,114
Identifiable intangible assets, net of accumulated amortization of $20,285 in 2010 and $17,521 in 2009		58,372			66,871
Goodwill		119,090			119,090
Total assets	$	2,628,041		$	2,657,220
Liabilities and Equity:
Current liabilities:
Current installments of long-term debt	$	5,048		$	10,432
Accounts payable		51,643			72,315
Other accrued expenses		275,953			235,122
Total current liabilities		332,644			317,869
Long-term debt		1,869,692			1,864,977
Deferred income taxes		247,959			252,424
Self-insurance liability reserves		102,191			105,878
Other long-term liabilities		58,081			84,682
Commitments and contingencies
FC-Gen Acquisition Holding, LLC members’ equity:
Capital stock, no par value, 1,500 shares authorized, 1,500 shares issued and outstanding		—			—
Additional paid-in capital		216,712			242,179
Accumulated deficit		(209,135	)		(220,962	)
Accumulated other comprehensive income		3,036			1,645
Total FC-GEN Acquisition Holding, LLC members’ equity		10,613			22,862
Noncontrolling interests		6,861			8,528
Total equity		17,474			31,390
Total liabilities and equity	$	2,628,041		$	2,657,220

See accompanying notes to unaudited condensed consolidated financial statements.

2

FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
UNAUDITED

	Nine months ended			Nine months ended
	September 30, 2010			September 30, 2009
Net revenues	$	1,849,897		$	1,766,127
Salaries, wages and benefits		1,154,277			1,084,867
Other operating expenses		364,993			359,471
General and administrative costs		88,358			86,699
Provision for losses on accounts receivable and notes receivable		16,996			15,800
Lease expense		18,316			18,007
Depreciation and amortization expense		65,005			63,488
Accretion expense		220			219
Interest expense		104,261			99,973
(Gain) loss on early extinguishment of debt		(407	)		12,956
Investment income		(2,221	)		(2,026	)
Other loss		1,182			2,041
Long-lived asset impairment		14,492			17,358
Equity in net income of unconsolidated affiliates		322			(332	)
Income before income tax expense		24,103			7,606
Income tax expense		9,477			18,469
Income (loss) from continuing operations		14,626			(10,863	)
Loss from discontinued operations, net of taxes		—			(64	)
Net income (loss)		14,626			(10,927	)
Less net income attributable to noncontrolling interests		(2,799	)		(1,100	)
Net income (loss) attributable to FC-GEN Acquisition Holding, LLC	$	11,827		$	(12,027	)

See accompanying notes to unaudited condensed consolidated financial statements.

3

FC-GEN ACQUISITION HOLDING, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED

	Nine months ended			Nine months ended
	September 30, 2010			September 30, 2009
Cash flows from operating activities:
Net cash provided by operating activities	$	80,730		$	121,825
Cash flows from investing activities:
Capital expenditures		(33,605	)		(39,544	)
Sale (purchases) of restricted cash and marketable securities		6,142			(4,390	)
Net change in restricted cash and equivalents		1,347			173
Purchases of inpatient centers		(12,179	)		—
Proceeds from sale of inpatient assets		2,352			1,832
Consolidation of joint venture		—			1,284
Other, net		1,785			637
Net cash used in investing activities		(34,158	)		(40,008	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		7,478			26,000
Repayment of long-term debt		(15,611	)		(43,516	)
Debt issuance costs		(6,493	)		(17,402	)
Distributions by noncontrolling interests		(1,367	)		(1,076	)
Distributions to parent		(27,000	)		(27,000	)
Net cash used in financing activities		(42,993	)		(62,994	)
Net increase in cash and equivalents		3,579			18,823
Cash and equivalents:
Beginning of period		109,573			72,842
End of period	$	113,152		$	91,665
Supplemental disclosure of cash flow information:
Interest paid	$	100,805		$	97,437
Taxes paid		6,429			1,228
Non-cash financing activities:
Capital leases	$	—		$	31,377
Assumption of long-term debt		8,302			12,667

See accompanying notes to unaudited condensed consolidated financial statements.

4

FC-GEN Acquisition Holding, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(1) General Information

     Description of Business

     FC-GEN Acquisition Holding, LLC, (the Company) provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States. The Company has 233 owned, leased, managed and jointly owned eldercare centers as of September 30, 2010. Revenues of the Company’s owned, leased and otherwise consolidated centers constitute approximately 84% of its revenues.

     The Company provides a range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. These services are provided by rehabilitation therapists and assistants employed or contracted at substantially all of the centers operated by the Company, as well as by contract to healthcare facilities operated by others. After the elimination of intercompany revenues, the rehabilitation therapy services business constitutes approximately 14% of the Company’s revenues.

     The Company provides an array of other specialty medical services, including respiratory health services, management services, physician services, hospitality services, staffing services and other healthcare related services.

     Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles which require the use of management’s estimates. In the opinion of management, the condensed consolidated financial statements for the periods presented include all necessary adjustments for a fair presentation of the financial position and results of operations and all adjustments are of a normal recurring nature.

     In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through February 28, 2011, the date the unaudited condensed consolidated financial statements were issued.

     Adjustments and Reclassifications

     The Company recorded an $8.0 million loan termination fee to interest expense in the nine months ended September 30, 2009, which represents an immaterial correction of an error. Management believes that the effect of the adjustment is not material to the consolidated financial position, results of operations or liquidity for any prior period.

     Goodwill Impairment Testing

     The Company attributes all of its goodwill to the inpatient services segment. The Company performs a test for impairment of its goodwill when factors indicating the potential for impairment are present, but under no condition less than annually. The test consists of two steps for determining goodwill impairment. In step one of the impairment analyses; the Company determines the fair value of the inpatient services segment. Step two is only necessary if test one is deemed failed. In step two of the impairment analysis, the Company allocates the fair value of the inpatient services reporting units to all tangible and intangible assets and liabilities in a hypothetical sale transaction to determine the implied fair value of the respective reporting unit’s goodwill.

     The Company is in the process of completing its annual goodwill impairment test as of September 30, 2010.

     The Company performed its annual goodwill impairment test as of September 30, 2009. In step one of that test the Company determined the fair value of the inpatient services reporting unit was less than its carrying value, requiring it to complete test two. In step two of the impairment analysis, the Company allocated the fair value of the inpatient services reporting unit to all tangible and intangible assets and liabilities in a hypothetical sale transaction to determine the implied fair value of the respective reporting unit’s goodwill. The Company concluded through step two of the

5

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

impairment test that the carrying value of its goodwill at September 30, 2009 was below its fair value, resulting in no impairment in 2009.

     Principles of Consolidation and Variable Interest Entities

     The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, its consolidated variable interest entities (VIEs) and certain other partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation for all periods presented.

     The Company’s investments in VIEs in which it is the primary beneficiary are consolidated, while the investment in other VIEs in which it is not the primary beneficiary are accounted for under other accounting principles. Investments in and the operating results of 20% to 50% owned companies, which are not VIEs, are included in the unaudited condensed consolidated financial statements using the equity method of accounting.

     Consolidated VIEs and Other Consolidated Partnerships

     At September 30, 2010 and December 31, 2009, the Company consolidated five and four VIEs, respectively. The total assets of the VIEs principally consist of property and equipment that serves as collateral for the VIEs’ non-recourse debt and is not available to satisfy any of the Company’s other obligations. Creditors of the VIEs, including senior lenders, have no recourse against the general credit of the Company. The consolidated VIEs at September 30, 2010 own and operate skilled nursing and assisted living facilities. The Company’s ownership interests in the consolidated VIEs range from 0% to 50% and the Company manages the day-to-day operations of the consolidated VIEs under management agreements. The Company’s involvement with the VIEs began in years prior to 2000.

     The Company consolidates two partnerships as it is the general partner in those entities and may exercise considerable control over the businesses without substantive kick out rights afforded to the limited partners. One of the partnerships is a jointly owned and managed skilled nursing facility. The second partnership owns the real estate of a skilled nursing facility leased to the Company. The assets of these consolidated partnerships consist of property and equipment that serves as collateral for the partnerships’ non-recourse debt and are not available to satisfy any of the Company’s other obligations. Creditors of these consolidated partnerships, including senior lenders, have no recourse against the general credit of the Company.

     At September 30, 2010, total assets and non-recourse debt of the consolidated VIEs and other consolidated partnerships were $40.4 million and $29.7 million, respectively. At December 31, 2009, total assets and non-recourse debt of these consolidated partnerships were $37.8 million and $27.2 million, respectively.

     VIEs Not Consolidated

     Separate from the VIEs previously described, at September 30, 2010 and December 31, 2009, the Company is not the primary beneficiary of 14 additional VIEs and, therefore, those VIEs are not consolidated into its financial statements. The unconsolidated VIEs own and operate skilled nursing and assisted living facilities. The Company manages the day-to-day operations of these unconsolidated VIEs under management agreements. The Company’s involvement with the unconsolidated VIE’s began in 2008 followed by another two unconsolidated VIEs in 2009. The Company had determined that it was not the primary beneficiary of these VIEs in those periods. The Company has not made an equity investment in these VIEs and, therefore, does not have equity at risk. Through a reassessment on January 1, 2010, the Company concluded these entities continued to be VIEs, it reaffirmed its conclusion that it is not the primary beneficiary of these entities, and that its involvement in management activities of these VIEs were not significant to its accompanying condensed consolidated financial statements.

6

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

(2) Significant Transactions and Events

     Asset Purchases and Dispositions

     In March 2010, the Company sold one facility for $1.4 million. The facility had been closed since 2004.

     In May 2010, the Company completed the acquisition of the real estate of a previously leased 190 bed skilled nursing facility for $8.3 million. Prior to the acquisition, the lease was classified as an operating lease for accounting purposes. The asset purchase resulted in the addition of $11.5 million for building and land and a reduction of identifiable intangible assets of $3.2 million for the reclassification a favorable lease asset.

     In August 2010, the Company completed the disposition of commercial property for $1.1 million and recognized a loss on the transaction of $1.1 million.

     Consolidation of a VIE

     In May 2010, the Company entered into a series of agreements with an unaffiliated third party that resulted in the Company determining that it was the primary beneficiary and therefore consolidated the VIE as of June 1, 2010. Prior to these agreements, the Company managed the operations of the skilled nursing and assisted living facility, the VIE, as well as three other skilled nursing facilities having the same parent organization. Through the agreements, the Company extended to the VIE a line of credit for construction and working capital needs up to $9.0 million ($3.2 million was drawn as of September 30, 2010). In addition, the Company received an extension of its contract to manage the VIE for 15 years, and was granted a fixed price purchase option of substantially all the assets exercisable at any time at a base price of $16.9 million. The purchase option expires March 31, 2020. The effect of consolidating the VIE was an increase to total assets of $7.0 million and an increase to debt of $8.3 million.

     Investment in Joint Ventures

     In December 2009, the Company made an investment of $5.0 million and received a one-third interest in an unconsolidated joint venture. The Company accounts for its interest under the equity method.

     On August 1, 2009, the Company completed a transaction in which it purchased an additional one-third ownership interest in a skilled nursing facility in Massachusetts for cash consideration of $1.1 million. The Company had owned a one-third interest in the joint venture prior to the transaction. The facility is now consolidated into the Company’s financial statements with the remaining partner’s one-third ownership interest record as a noncontrolling interest. The transaction added property and equipment of $18.2 million and non-recourse debt of $14.1 million. In connection with the consolidation, the Company recognized a $2.2 million loss on the transaction.

     Lease Transactions

     Effective August 1, 2009, the Company amended a lease for four facilities. The amended lease has a term that expires on November 30, 2015 and allows for one 5-year extension. Annual cash base rent will be $2.2 million with an annual rent escalator of 3%. The amended lease will continue to be accounted for as an operating lease.

     On May 26, 2009, the Company amended and restated a master lease agreement (Master Lease) for eleven centers leased through an independent real estate investment trust (Landlord). The Master Lease resulted in the following:

• Collective annual cash lease payments increased by $2.0 million effective February 1, 2009;

• The incremental minimum rent is charged annually based upon the minimum rent for the prior fiscal year multiplied by the greater of one plus one-half the percentage increase in the Consumer Price Index or 102.5%;

• Renovation funds were established for three of the facilities totaling $2.1 million provided by the Landlord for capital improvements and renovations. The minimum rent paid to the Landlord will be increased by 10% for any amount disbursed from the renovation funds in periods subsequent to those disbursements;

• Two of the leased facilities had their initial lease terms extended by approximately three years;

7

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

• The leases were reevaluated for accounting classification and the Company concluded three of the remaining nine leases previously accounted for as operating leases would now be accounted for as capital leases. The three capital leases had obligations of $29.2 million at September 30, 2010.

     Amendments to Debt Agreements

     On September 25, 2009, the senior secured credit agreement and the mezzanine term loan agreement were amended. The amendments extended the terms of the agreements for five years with a maturity date of September 25, 2014. $40.0 million of senior secured term loan principal was repaid. The senior secured term loan interest rate was initially increased from LIBOR plus 2.00% to LIBOR plus 3.07%. The revolving credit facility was increased from $50.0 million to $75.0 million. The Company incurred $17.1 million of fees associated with the senior secured credit agreement, $13.0 million of which were expensed as a debt extinguishment cost and the remaining $4.1 million is deferred and amortized over the term of the debt.

(3) Certain Significant Risks and Uncertainties

     Revenue Sources

     The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third-party payors and long-term care facilities that utilize its rehabilitation therapy and other services. The Company’s inpatient services derive approximately 78% of its revenue from the Medicare and various state Medicaid programs.

     The sources and amounts of the Company’s revenues are determined by a number of factors, including licensed bed capacity and occupancy rates of its eldercare centers, the mix of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including services provided by the Company’s 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 the Company’s profitability.

     It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or other governmental initiatives on the Company’s business and the business of the customers served by the Company’s rehabilitation therapy business. The potential impact of healthcare reform, which would initiate significant reforms to the United States healthcare system, including potential material changes to the delivery of healthcare services and the reimbursement paid for such services by the government or other third party payors, is uncertain at this time. Accordingly, there can be no assurance that the impact of any future healthcare legislation or regulation will not adversely affect the Company’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. The Company’s financial condition and results of operations will 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.

     Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in material compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving material allegations of potential wrongdoing. While no such regulatory inquiries have been made, noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs.

     Use of Estimates

     The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets;

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FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

allowances for doubtful accounts and provisions for contractual adjustments; the valuation of derivatives, deferred tax assets, fixed assets, goodwill, intangible assets, investments and notes receivable; and reserves for employee benefit obligations, income tax uncertainties, asset retirement obligations and other contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

(4) Property and Equipment

     Property and equipment at September 30, 2010 and December 31, 2009 consist of the following (in thousands):

	September 30, 2010			December 31, 2009
Land and improvements	$	258,031		$	255,185
Buildings and improvements		1,556,940			1,549,598
Equipment, furniture and fixtures		191,780			174,615
Construction in progress		4,974			5,153
Gross property and equipment		2,011,725			1,984,551
Less: accumulated depreciation		(258,319	)		(197,068	)
Net property and equipment	$	1,753,406		$	1,787,483

     Assets held under capital leases, which are principally carried in building and improvements above, were $254.7 million and $255.6 million at September 30, 2010 and December 31, 2009, respectively. Accumulated depreciation on assets held under capital leases was $28.5 million and $19.9 million at September 30, 2010 and December 31, 2009, respectively.

     Asset impairment charges of $14.0 million were recognized in the nine months ended September 30, 2010 associated with the write-down of three underperforming properties. Asset impairment charges of $9.8 million were recognized in the in the nine months ended September 30, 2009, and reflected in the balance sheet at December 31, 2009, associated with the write-down of seven underperforming properties and one closed and held for sale center in which the carrying value was in excess of the sale price.

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FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

(5) Long-Term Debt

     Long-term debt at September 30, 2010 and December 31, 2009 consists of the following (in thousands):

	September 30, 2010			December 31, 2009
Senior secured term loan	$	1,295,563		$	1,295,563
Mezzanine term loan		375,000			375,000
Capital lease obligations		160,820			163,731
Mortgages and other secured debt (non recourse)		42,985			39,875
Unamortized debt premium on mortgages and other secured debt (non recourse)		372			1,240
		1,874,740			1,875,409
Less:
Current installments of long-term debt		(5,048	)		(10,432	)
Long-term debt	$	1,869,692		$	1,864,977

     Senior Secured Credit Facility

     The senior secured credit facility consists of the following subfacilities, as amended: (i) a $1.3 billion senior secured term loan, and (ii) a $75 million revolving credit facility. The Company pays interest monthly on the outstanding loans under the senior secured credit facility.

     Borrowings bear interest at a rate equal to, at the Company’s option, either a base rate or at the one-month London Interbank Offered Rate (LIBOR) plus an applicable margin. The base rate is determined by reference to the highest of (i) a lender-defined prime rate, (ii) the federal funds rate plus 3.0%, and (iii) the sum of LIBOR, not to be less than 2.5%, plus an applicable margin. The applicable margin with respect to LIBOR borrowings is 4.75% at September 30, 2010. This applicable margin increases every anniversary beginning September 25, 2010 through year five with the rate equal to LIBOR plus 5.75%. LIBOR shall have an applicable floor of 1.5% beginning September 25, 2010 through September 25, 2012, and 2.5% thereafter. LIBOR borrowings under the senior secured credit facility bore interest of 6.25% at September 30, 2010.

     Principal amounts outstanding under each of the two subfacilities are due and payable in full at maturity, September 25, 2014.

     The senior secured term loan, as amended, can be voluntarily prepaid at any time. The senior secured term loan is subject to partial mandatory prepayment under certain circumstances, including the Company’s receipt of insurance proceeds received following damage to properties or the receipt of certain proceeds upon the sale of real property. In these circumstances, the proceeds received must be used to prepay the senior secured term loan.

     The senior secured credit agreement requires funds be placed in escrow for property tax and property insurance obligations. In addition, the senior secured credit agreement requires that cash be placed in escrow on a monthly basis (approximately $7.5 million annually) to fund routine maintenance and the replacement of property and equipment. The lender releases funds from this escrow when the Company presents evidence that operating funds have been expended for such routine maintenance and replacement activities. At September 30, 2010 and December 31, 2009, $0.6 million is held in escrow for routine maintenance, which is included in prepaid expenses and other current assets.

     All obligations under the senior secured credit facility are secured by a security interest in substantially all of the assets of the Company.

10

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

     The senior secured credit agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional indebtedness; provide guarantees; create liens on assets; engage in mergers, acquisitions or consolidations; sell assets; make distributions; make investments, loans or advances; repay indebtedness, except as scheduled or at maturity; engage in certain transactions with affiliates; amend material agreements governing the Company’s outstanding indebtedness; and fundamentally change the Company’s business. The senior secured credit facility agreement requires the Company to meet defined financial covenants, including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, a minimum consolidated project yield and certain customary affirmative covenants, such as financial and other reporting, and certain events of default. At September 30, 2010, the Company is in compliance with all of these covenants.

     Senior secured term loan. The senior secured term loan of $1.3 billion has been fully drawn since its inception on July 13, 2007. Through September 30, 2010, the Company has prepaid $1.9 million of the senior secured term loan from proceeds upon the sale of real property. In connection with that September 25, 2009 amendment the Company prepaid $40.0 million of the senior secured term loan and the balance of $37.5 million on the fully drawn delayed draw term loan component has been combined with the senior secured term loan balance.

     Revolving credit facility. The $75 million revolving credit facility, as amended, was established to provide the Company a source of financing to fund general working capital requirements. Borrowings under the revolving credit facility may be in the form of revolving loans or swing line loans. Aggregate outstanding swing line loans have a sub-limit of $10 million. The revolving credit facility also provides a sub-limit of $35 million for letters of credit. Borrowing levels under the revolving credit facility are limited to a borrowing base that is computed based upon the level of Company eligible accounts receivable, as defined. In addition to paying interest on the outstanding principal borrowed under the revolving credit facility, the Company is required to pay a commitment fee to the lenders for any unutilized commitments. The commitment fee rate is 0.5% per annum when the unused commitment is greater than $37.5 million and 0.75% per annum when the unused commitment is less than $37.5 million. As of September 30, 2010, the Company had no outstanding borrowings under the revolving credit facility and had $28.8 million of undrawn letters of credit and other encumbrances, leaving the Company with approximately $46.2 million of borrowing capacity under the revolving credit facility. The revolving credit facility is pre-payable prior to September 25, 2013 but will be subject to a prepayment penalty. A prepayment penalty of 1% of the commitment would apply prior to that date. Any prepayment that occurs after September 25, 2013 is not subject to a prepayment penalty. The revolving credit facility expires on September 25, 2014.

     Mezzanine Term Loan

     The mezzanine term loan of $375 million was outstanding at September 30, 2010. Borrowings bear interest at a rate equal to LIBOR plus 7.5%. The Company borrowings under the mezzanine term loan bore interest at approximately 7.76% at September 30, 2010. The principal amount is due and payable in full at maturity, September 25, 2014.

     The mezzanine term loan agreement contains both voluntary and mandatory prepayment restrictions subject to prepayment penalties set forth in the agreement. Mandatory termination fees equal to 1% of the $375 million borrowing plus a monthly rate that increases annually from 0.088% in the initial year of the loan to 0.116% in the final year of the loan. As of September 30, 2010 we have accrued net termination fees of $18.0 million. For the nine months ended September 30, 2010 and 2009, the Company accrued $4.4 million and $4.1 million, respectively, for termination fees payable when the loan matures or is prepaid. In addition, during the nine months ended September 30, 2009, the Company accrued $8.0 million pertaining to periods prior to 2009. The Company must maintain a debt service reserve held by the lender without interest equal to $4.1 million. The balance is included in prepaid expenses and other current assets.

     All obligations under the mezzanine term loan are secured by a security interest in substantially all of the assets of the Company, subject to subordination to the senior secured credit facility.

     The mezzanine term loan contains covenants similar to, and no more restrictive than, those required under the senior secured credit agreement. At September 30, 2010, the Company was in compliance with all of these covenants.

11

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

     Other Debt

     Capital lease obligations. The capital lease obligations represent the present value of minimum lease payments under such capital lease arrangements and bear imputed interest at rates ranging from 7.0% to 19.0% at September 30, 2010, and mature at dates ranging primarily from 2012 to 2031.

     Mortgages and other secured debt (non-recourse). Loans are carried by certain of the Company’s consolidated joint ventures. The loans consist principally of revenue bonds and secured bank loans. Loans are secured by the underlying real and personal property of individual facilities and have fixed or variable rates of interest ranging from 2.5% to 19.6% at September 30, 2010, with maturity dates ranging from 2012 to 2036. Loans are labeled “non-recourse” because neither the Company nor a wholly owned subsidiary is obligated to perform under the respective loan agreements.

     In July 2010, the Company retired $6.6 million of revenue bonds for $5.6 million. Net of $0.6 million of deferred financing fees and discount, the Company recognized a $0.4 million gain on extinguish of debt.

     The maturity of total debt, excluding capital lease obligations, of $1,713.9 million at September 30, 2010 is as follows: $1.1 million in fiscal 2011, $1.1 million in fiscal 2012, $1.1 million in fiscal 2013, $1,674.8 million in fiscal 2014, $15.3 million in fiscal 2015 and $20.5 million thereafter.

     Derivative Instruments and Hedging Activities

     The senior secured credit facility agreement and the mezzanine term loan agreement require the Company to enter into financial instruments to protect against fluctuations in interest rates for a notional amount equal to the combined outstanding principal balance of the senior secured credit facility and the mezzanine term loan such that LIBOR does not exceed 6.5%.

     These contracts are not designated for hedge accounting treatment, and therefore, the Company records the fair value (estimated unrealized gain or loss) of the agreements as an asset or liability and the change in any period as an adjustment to interest expense in the unaudited condensed consolidated statements of operations. Realized gains and losses associated with these contracts are recorded as adjustments to interest expense each reporting period. The counterparties to the derivative financial instruments are major financial institutions. The Company does not use derivative financial instruments for any trading or speculative purposes.

     The Company satisfied its requirement to hedge its exposure to interest rate volatility with an interest rate swap and an interest rate cap arrangement.

• The interest rate swap agreement had a notional amount of $1 billion. The Company was required to make payments to the counterparty at the fixed rate of 5.34% and in return, the Company received payments at a variable rate based on the one month LIBOR. The fair value of the interest rate swap agreement at December 31, 2009 is recorded as a liability of $31.0 million in other long-term liabilities in the consolidated balance sheet with changes in the fair value recorded to interest expense. The interest rate swap agreement expired on July 13, 2010.

• The interest rate cap agreement had a notional amount of $712.5 million. Under this agreement, the Company received variable interest rate payments when the one-month LIBOR rose above 2.0%. The Company paid a fee of $0.6 million at the inception of the interest rate cap agreement, which has been amortized to interest expense over the term of the agreement. The interest rate cap agreement expired on July 13, 2010.

     Upon expiration of the previous derivative arrangements in July 2010, the Company entered into a new interest rate cap agreement. The interest rate cap has a notional of approximately $1.7 billion. The Company is exposed to the impact of interest rate changes because its long-term debt bears interest at a variable rate. Under this cap agreement, the Company receives variable interest rate payments when the one-month LIBOR rises above 3.0%. The interest rate cap

12

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

agreement effectively limits the exposure to rising interest rates to 3% on approximately $1.7 billion of variable rate debt at September 30, 2010. The Company paid fees of $6.2 million at the inception of the interest rate cap agreement, which will be amortized to interest expense over the term of the agreement. The fair value of the interest rate cap agreement at September 30, 2010 is recorded as an asset of $0.3 million with changes in fair value recorded to interest expense. The interest rate cap agreement expires on July 14, 2012.

     The Company is exposed to credit loss, in the event of nonperformance by the counterparty to the interest rate cap agreement. As of September 30, 2010, the Company does not anticipate nonperformance by the counterparty to this agreement and no material loss would be expected from any such nonperformance.

     The Company consolidates one VIE having an interest rate swap agreement that expired in July 2010 upon the refinancing of that VIE’s mortgage debt. In connection with the refinancing of its debt, the VIE entered into an interest rate cap agreement. The VIE is exposed to the impact of interest rate changes because its long-term debt bears interest at a variable rate. The VIE’s obligation under the interest rate cap agreement is non-recourse to the Company. The interest rate cap agreement effectively limits the exposure to rising interest rates to 7.0% on approximately $6.3 million of variable rate mortgage debt at September 30, 2010. The fair value of the VIE’s interest rate cap agreement at September 30, 2010 is recorded as an asset of less than $0.1 million with changes in fair value recorded to interest expense. The interest rate cap agreement expires in July 2015. The counterparty to the interest rate swap agreement is a major institutional bank.

(6) Lease Commitments

     The Company leases certain facilities under capital and operating leases. Future minimum payments for the next five years and thereafter under such leases at September 30, 2010 are as follows (in thousands):

Year ending September 30,	Capital Leases			Operating Leases
2011	$	18,079		$	19,773
2012		18,073			19,629
2013		17,234			14,859
2014		83,803			13,108
2015		10,314			12,104
Thereafter		137,587			15,508
Total future minimum lease payments		285,090		$	94,981
Less amount representing interest		(124,270	)
Present value of net minimum lease payments		160,820
Less current portion		(3,961	)
Long-term capital lease obligation	$	156,859

     The Company holds fixed price purchase options to acquire the land and buildings of 18 facilities for $119.5 million with expirations ranging from 2014 to 2025. Seven of these options are deemed to be bargain purchases and, consequently, these leases have been classified as capital leases contributing $74.1 million in capital lease obligations of the total $160.8 million at September 30, 2010. The Company also classifies 17 other center leases as capital leases contributing $86.7 million to the capital lease obligation at September 30, 2010.

     The Company and subsidiaries of a real estate investment trust are party to a master lease involving eleven facilities. The master lease does not impact the individual terms and conditions of the six separate operating leases and the five separate capital leases, but establishes cross default and cure provisions if one or more of the eleven individual facilities have an event of default. In addition to facility / tenant level financial, reporting and other covenants contained in the individual operating and capital leases, the master lease establishes certain Company level financial, reporting and other

13

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

covenants. Pursuant to the master lease, the Company posted $10.7 million of letters of credit as security, principally representing 12 months rent under the six individual operating leases and five individual capital leases.

     Impairment on one favorable lease balance of $0.5 million was recognized in the nine months ended September 30, 2010 and an impairment on three favorable lease balances of $7.6 million was recognized in the nine months ended September 30, 2009 associated with the write-down of underperforming properties.

(7) Income Taxes

     The Company’s effective tax rate approximated 39.3% and 242.8% for the nine months ended September 30, 2010 and September 30, 2009, respectively. The effective tax rate for the nine months ended September 30, 2009 reflects a $51.8 million reduction in net operating loss (NOL) carryforwards as a result of information that came to the Company’s attention in 2009 regarding the allocation of the NOL at the date of its spin-off from a former affiliated company in 2003. Absent this reduction, which increased income tax expense by $15.6 million net of a related reserve, the effective tax rate for the nine months ended September 30, 2009 would have been approximately 38.4%.

     Management believes the deferred tax assets at September 30, 2010 and December 31, 2009 are more likely than not to be realized. As of September 30, 2010, the Company expects to have sufficient taxable income in future periods from the reversal of existing taxable temporary differences and expected profitability such that the remaining NOL would be utilized within the carryforward period. Most of the NOLs arose in fiscal 2007 and have a carryforward period of 20 years.

(8) Commitments and Contingencies

     Financial Commitments

     Requests for providing commitments to extend financial guarantees and extend credit are reviewed and approved by senior management subject to obligational authority limitations. Management regularly reviews 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.

     The Company has extended $11.5 million in working capital lines of credit to certain jointly owned and managed companies, including certain consolidated VIEs, of which $7.2 million was unused at September 30, 2010. 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.

     Legal Proceedings

     The Company is a party to litigation and regulatory investigations arising in the ordinary course of business. The nature of the litigation and regulatory investigations are such that we cannot predict the outcomes of these matters. However, based on information currently available, management does not believe the results of such litigation and regulatory investigations, even if the outcome is unfavorable, would have a material adverse effect on the results of operations, financial position or cash flows of the Company.

(9) Subsequent Events

     On November 17, 2010, the Company’s Sponsors declared and the Company made a cash distribution of $9.0 million to the Parent.

     On November 30, 2010, the Company entered into agreements to lease six skilled nursing facilities and purchase a renal dialysis business, each located in Maryland. The landlord of the properties is a related party affiliate of the Company’s Parent. Initial rent will be $7.5 million per year with 2.5% annual escalation. In addition to an annual lease

14

FC-GEN Acquisition Holding, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

payment, the Company paid $10.3 million in the transaction to acquire the operations of the leased facilities and the dialysis business.

     On January 1, 2011, the Company acquired the remaining 50% ownership interest in a joint venture partnership which operates an assisted living facility in Delaware through assumption of the noncontrolling interest’s portion of the facility’s debt and working capital obligations. The Company had previously owned 50% of the joint venture that is accounted for at September 30, 2010 and December 31, 2009 as a consolidated VIE. Accordingly, the acquisition will not have a material impact on the Company’s results of operations, financial position or cash flows from operations.

Transactions with a Real Estate Investment Trust (REIT)

     The Company’s parent has entered into a definitive purchase agreement with a REIT pursuant to which the Company’s parent will sell 100% of the equity interests of the Company to the REIT for a purchase price of $2.4 billion (the Sale Transaction). Of the skilled nursing and assisted living centers the Company currently operates, it indirectly owns (1) 140 senior housing and care facilities (137 in fee simple and three pursuant to ground leases) and (2) the leasehold interests in and option to purchase seven senior housing and care facilities which are to be included with assets acquired under the Sale Transaction. Prior to closing, the Company will (a) contribute the assets, liabilities and equity interests relating to (i) the business of operating and managing senior housing and care facilities, (ii) joint venture entities and (iii) other ancillary businesses to a newly formed subsidiary of the Company (OpCo), and then (b) distribute all of the equity interests of OpCo to Parent in a taxable spin-off. Closing is expected to occur in the second quarter of 2011, subject to various closing conditions.

     Immediately after the closing of the Sale Transaction, an indirect subsidiary of the Company’s parent (Tenant) will enter into a master lease (the Master Lease) with a subsidiary of the REIT. Tenant will operate the 140 owned or ground leased facilities under the Master Lease and an affiliate of Tenant will enter into a pass through master sub-sublease under which such affiliate will operate the seven leased facilities. The Master Lease is supported by a guaranty from OpCo.

15