##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the Quarter Ended March 31, 2006
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 For the Period From ______ to ______.
 Commission File Number: 000-32499
 SELECT MEDICAL CORPORATION
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    23-2872718
(I.R.S. employer identification 
number)
 4716 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
 
  þ o
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TABLE OF CONTENTS
 PART I FINANCIAL INFORMATION
    
    
    3ITEM 1. CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    3Consolidated statements of operations
    
    
    4Consolidated statement of changes in stockholders equity and comprehensive income
    
    
    5Consolidated statements of cash flows
    
    
    6Notes to consolidated financial statements
    
    
    7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    22ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    34ITEM 4. CONTROLS AND PROCEDURES
    
    
    34PART II OTHER INFORMATION
    
    
    35ITEM 1. LEGAL PROCEEDINGS
    
    
    35ITEM 1A. RISK FACTORS
    
    
    36ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    37ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    37ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    37ITEM 5. OTHER INFORMATION
    
    
    37ITEM 6. EXHIBITS
    
    
    37SIGNATURES
    
    
    37CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906
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##### Table of Contents



PART I            FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 Select Medical Corporation
 
 Consolidated Balance Sheets
 (Unaudited)
 (In thousands, except share and per share amounts)
 December 31,
    
    
    March 31,2005
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    35,861
    
    
    $
    13,851Restricted cash
    
    
    6,345
    
    
    
    5,908Accounts receivable, net of allowance for doubtful accounts
of $74,891 and $70,202 in 2005 and 2006,
respectively
    
    
    256,798
    
    
    
    285,138Prepaid income taxes
    
    
    4,110
    
    
    
    Current deferred tax asset
    
    
    59,135
    
    
    
    56,550Current assets held for sale
    
    
    13,876
    
    
    
    Other current assets
    
    
    19,725
    
    
    
    19,447Total Current Assets
    
    
    395,850
    
    
    
    380,894Property and equipment, net
    
    
    248,541
    
    
    
    277,888Goodwill
    
    
    1,305,210
    
    
    
    1,318,111Other identifiable intangibles
    
    
    86,789
    
    
    
    85,259Other assets held for sale
    
    
    61,388
    
    
    
    Other assets
    
    
    65,591
    
    
    
    68,250Total Assets
    
    $
    2,163,369
    
    
    $
    2,130,402LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    19,355
    
    
    $
    25,906Current portion of long-term debt and notes payable
    
    
    6,516
    
    
    
    6,425Accounts payable
    
    
    60,528
    
    
    
    64,243Accrued payroll
    
    
    61,531
    
    
    
    49,312Accrued vacation
    
    
    26,983
    
    
    
    28,717Accrued interest
    
    
    25,230
    
    
    
    12,246Accrued professional liability
    
    
    21,527
    
    
    
    22,332Accrued restructuring
    
    
    390
    
    
    
    340Accrued other
    
    
    69,046
    
    
    
    70,897Income taxes payable
    
    
    
    
    
    
    18,570Due to third party payors
    
    
    12,175
    
    
    
    12,834Current liabilities held for sale
    
    
    4,215
    
    
    
    Total Current Liabilities
    
    
    307,496
    
    
    
    311,822Long-term debt, net of current portion
    
    
    1,315,764
    
    
    
    1,257,013Non-current deferred tax liability
    
    
    25,771
    
    
    
    32,256Non-current liabilities held for sale
    
    
    3,817
    
    
    
    Total Liabilities
    
    
    1,652,848
    
    
    
    1,601,091Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    4,356
    
    
    
    2,781Stockholders Equity:Common stock, $0.01 par value, 100 shares issued and outstanding
    
    
    
    
    
    
    Capital in excess of par
    
    
    440,799
    
    
    
    441,745Retained earnings
    
    
    61,134
    
    
    
    80,768Accumulated other comprehensive income
    
    
    4,232
    
    
    
    4,017Total Stockholders Equity
    
    
    506,165
    
    
    
    526,530Total Liabilities and Stockholders Equity
    
    $
    2,163,369
    
    
    $
    2,130,402
 The accompanying notes are an integral part of this statement.
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##### Table of Contents



Select Medical Corporation
 
 Consolidated Statements of Operations
 (Unaudited)
 (In thousands)
 Predecessor
    
    
    
    SuccessorPeriodPeriod from
    
    
    
    fromJanuary 1
    
    
    
    February
    
    
    Three Monthsthrough
    
    
    
    25 through
    
    
    EndedFebruary 24,
    
    
    
    March 31,
    
    
    March 31,2005
    
    
    
    2005
    
    
    2006Net operating revenues
    
    $
    277,736
    
    
    
    $
    188,386
    
    
    $
    479,743Costs and expenses:Cost of services
    
    
    217,133
    
    
    
    
    140,509
    
    
    
    385,139Stock compensation expense
    
    
    142,213
    
    
    
    
    4,326
    
    
    
    946General and administrative
    
    
    7,484
    
    
    
    
    4,356
    
    
    
    11,312Bad debt expense
    
    
    6,588
    
    
    
    
    4,558
    
    
    
    5,000Depreciation and amortization
    
    
    5,933
    
    
    
    
    4,126
    
    
    
    10,895Total costs and expenses
    
    
    379,351
    
    
    
    
    157,875
    
    
    
    413,292Income (loss) from operations
    
    
    (101,615
    )
    
    
    
    30,511
    
    
    
    66,451Other income and expense:Loss on early retirement of debt
    
    
    (42,736
    )
    
    
    
    
    
    
    
    Merger related charges
    
    
    (12,025
    )
    
    
    
    
    
    
    
    Other income
    
    
    267
    
    
    
    
    103
    
    
    
    2,434Interest income
    
    
    523
    
    
    
    
    77
    
    
    
    222Interest expense
    
    
    (4,651
    )
    
    
    
    (9,600
    )
    
    
    (24,272
    )Income (loss) from continuing operations before
minority interests and income taxes
    
    
    (160,237
    )
    
    
    
    21,091
    
    
    
    44,835Minority interest in consolidated subsidiary companies
    
    
    330
    
    
    
    
    302
    
    
    
    391Income (loss) from continuing operations before income taxes
    
    
    (160,567
    )
    
    
    
    20,789
    
    
    
    44,444Income tax expense (benefit)
    
    
    (59,794
    )
    
    
    
    8,388
    
    
    
    19,095Income (loss) from continuing operations
    
    
    (100,773
    )
    
    
    
    12,401
    
    
    
    25,349Income from discontinued operations, net of tax (includes
pre-tax gain of $13,950 in 2006)
    
    
    522
    
    
    
    
    672
    
    
    
    10,018Net income (loss)
    
    $
    (100,251
    )
    
    
    $
    13,073
    
    
    $
    35,367
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income
 (Unaudited)
 (In thousands)
 Common
    
    
    Capital
    
    
    
    
    
    
    AccumulatedCommon
    
    
    Stock
    
    
    in
    
    
    
    
    
    
    OtherStock
    
    
    Par
    
    
    Excess
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveIssued
    
    Value
        
    of Par
        
    Earnings
        
    Income
        
    IncomeBalance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    $
    440,799
    
    
    $
    61,134
    
    
    $
    4,232Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,367
    
    
    
    
    
    
    $
    35,367Unrealized gain on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,603
    
    
    
    1,603Changes in foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,013
    
    
    
    1,013Sale of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,831
    )
    
    
    (2,831
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,152Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,733
    )Contribution related to restricted stock award
issuances by Holdings
    
    
    
    
    
    
    
    
    
    
    946Balance at March 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    441,745
    
    
    $
    80,768
    
    
    $
    4,017
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (In thousands)
 Predecessor
    
    
    
    SuccessorPeriod from
    
    
    
    Period fromJanuary 1
    
    
    
    February 25
    
    
    Three Monthsthrough
    
    
    
    through
    
    
    EndedFebruary 24,
    
    
    
    March 31,
    
    
    March 31,2005
    
    
    
    2005
    
    
    2006Operating activitiesNet income (loss)
    
    $
    (100,251
    )
    
    
    $
    13,073
    
    
    $
    35,367Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    6,177
    
    
    
    
    4,248
    
    
    
    11,071Provision for bad debts
    
    
    6,661
    
    
    
    
    4,609
    
    
    
    5,087Gain from sale of business
    
    
    
    
    
    
    
    
    
    
    
    (13,950
    )Non-cash income from hedge
    
    
    
    
    
    
    
    
    
    
    
    (2,434
    )Loss on early retirement of debt
    
    
    7,977
    
    
    
    
    
    
    
    
    Non cash compensation expense
    
    
    
    
    
    
    
    4,326
    
    
    
    946Minority interests
    
    
    469
    
    
    
    
    462
    
    
    
    731Changes in operating assets and
liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (48,976
    )
    
    
    
    (35,716
    )
    
    
    (34,211
    )Other current assets
    
    
    1,816
    
    
    
    
    (590
    )
    
    
    (105
    )Other assets
    
    
    (622
    )
    
    
    
    (1,250
    )
    
    
    1,667Accounts payable
    
    
    5,250
    
    
    
    
    3,769
    
    
    
    3,569Due to third-party payors
    
    
    667
    
    
    
    
    (209
    )
    
    
    659Accrued interest
    
    
    (4,839
    )
    
    
    
    7,027
    
    
    
    (12,984
    )Accrued expenses
    
    
    204,748
    
    
    
    
    (198,074
    )
    
    
    (8,465
    )Income and deferred taxes
    
    
    (60,021
    )
    
    
    
    6,354
    
    
    
    23,207Net cash provided by (used in) operating activities
    
    
    19,056
    
    
    
    
    (191,971
    )
    
    
    10,155Investing activitiesPurchases of property and equipment
    
    
    (2,586
    )
    
    
    
    (1,112
    )
    
    
    (38,386
    )Proceeds
from sale of business, net
    
    
    
    
    
    
    
    
    
    
    
    76,806Earnout payments
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Restricted cash
    
    
    108
    
    
    
    
    (12
    )
    
    
    437Acquisition of businesses, net of cash acquired
    
    
    (108,279
    )
    
    
    
    (2,215
    )
    
    
    (2,023
    )Net cash provided by (used in) investing activities
    
    
    (110,757
    )
    
    
    
    (3,339
    )
    
    
    36,734Financing activitiesEquity investment by Holdings
    
    
    
    
    
    
    
    720,000
    
    
    
    Proceeds from credit facility
    
    
    
    
    
    
    
    780,000
    
    
    
    Proceeds from senior subordinated notes
    
    
    
    
    
    
    
    660,000
    
    
    
    Repayment of senior subordinated notes
    
    
    
    
    
    
    
    (344,250
    )
    
    
    Deferred financing costs
    
    
    
    
    
    
    
    (57,198
    )
    
    
    Net repayment on credit facility
    
    
    
    
    
    
    
    
    
    
    
    (58,450
    )Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    (15,733
    )Costs associated with equity investment of Holdings
    
    
    
    
    
    
    
    (8,686
    )
    
    
    Principal payments on seller and other debt
    
    
    (528
    )
    
    
    
    (2,578
    )
    
    
    (425
    )Repurchases of common stock and options
    
    
    
    
    
    
    
    (1,687,994
    )
    
    
    Proceeds from issuance of common stock
    
    
    1,023
    
    
    
    
    
    
    
    
    Proceeds from bank overdrafts
    
    
    
    
    
    
    
    
    
    
    
    6,551Distributions to minority interests
    
    
    (401
    )
    
    
    
    (466
    )
    
    
    (877
    )Net cash provided by (used in) financing activities
    
    
    94
    
    
    
    
    58,828
    
    
    
    (68,934
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    (149
    )
    
    
    
    105
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (91,756
    )
    
    
    
    (136,377
    )
    
    
    (22,010
    )Cash and cash equivalents at beginning of period
    
    
    247,476
    
    
    
    
    155,720
    
    
    
    35,861Cash and cash equivalents at end of period
    
    $
    155,720
    
    
    
    $
    19,343
    
    
    $
    13,851Supplemental Cash Flow Information:Cash paid for interest
    
    $
    10,630
    
    
    
    $
    380
    
    
    $
    36,099Cash paid for income taxes
    
    $
    1,502
    
    
    
    $
    2,305
    
    
    $
    489
 The accompanying notes are an integral part of this statement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Basis of Presentation
    2. Accounting Policies
 Use of Estimates
  Reclassifications
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Recent Accounting Pronouncements
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3. Intangible Assets
  SuccessorAs of March 31, 2006Gross Carrying
    
    
    AccumulatedAmount
    

    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (4,432
    )Non-compete agreements
    
    
    20,809
    
    
    
    (4,030
    )Total
    
    $
    41,265
    
    
    $
    (8,462
    )Indefinite-lived intangible assetsGoodwill
    
    $
    1,318,111Trademarks
    
    
    47,058Certificates of need
    
    
    3,506Accreditations
    
    
    1,892Total
    
    $
    1,370,567
  Predecessor
    
    
    SuccessorPeriodPeriod from
    
    
    fromJanuary 1
    
    
    Februarythrough
    
    
    25 through
    
    For the ThreeFebruary
    
    
    March 31,
    
    Months Ended24, 2005
    
    
    2005
    
    March 31, 2006(in thousands)Amortization expense
    
    $
    576
    
    
    
    $
    904
    
    
    $
    1,953
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##### Table of Contents



Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    Total(in thousands)Balance as of December 31, 2005
    
    $
    1,221,776
    
    
    $
    83,434
    
    
    $
    1,305,210Tax adjustments related to merger
    
    
    112
    
    
    
    10,800
    
    
    
    10,912Goodwill acquired during year
    
    
    
    
    
    
    593
    
    
    
    593Earnouts
    
    
    
    
    
    
    100
    
    
    
    100Other
    
    
    
    
    
    
    1,296
    
    
    
    1,296Balance as of March 31, 2006
    
    $
    1,221,888
    
    
    $
    96,223
    
    
    $
    1,318,111
  4. Accumulated Other Comprehensive Income
  5. Segment Information
   PredecessorPeriod from January 1 through February 24, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net revenue
    
    $
    202,781
    
    
    $
    73,344
    
    
    $
    1,611
    
    
    $
    277,736Adjusted EBITDA
    
    
    44,384
    
    
    
    9,848
    
    
    
    (7,701
    )
    
    
    46,531Total assets
    
    
    904,754
    
    
    
    239,019
    
    
    
    87,640
    
    
    
    1,231,413Capital expenditures
    
    
    1,165
    
    
    
    408
    
    
    
    1,013
    
    
    
    2,586
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##### Table of Contents



SuccessorPeriod from February 25 through March 31, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net revenue
    
    $
    139,263
    
    
    $
    48,111
    
    
    $
    1,012
    
    
    $
    188,386Adjusted EBITDA
    
    
    34,743
    
    
    
    8,716
    
    
    
    (4,496
    )
    
    
    38,963Total assets
    
    
    1,553,606
    
    
    
    530,855
    
    
    
    84,963
    
    
    
    2,169,424Capital expenditures
    
    
    780
    
    
    
    274
    
    
    
    58
    
    
    
    1,112
 SuccessorFor the Three Months Ended March 31, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net revenue
    
    $
    359,672
    
    
    $
    119,290
    
    
    $
    781
    
    
    $
    479,743Adjusted EBITDA
    
    
    74,718
    
    
    
    14,760
    
    
    
    (11,186
    )
    
    
    78,292Total assets
    
    
    1,746,744
    
    
    
    269,295
    
    
    
    114,363
    
    
    
    2,130,402Capital expenditures
    
    
    36,505
    
    
    
    1,641
    
    
    
    240
    
    
    
    38,386
  Predecessor
    
    
    SuccessorPeriod fromJanuary 1
    
    
    Period from
    
    For the Threethrough
    
    
    February 25
    
    MonthsFebruary 24,
    
    
    through March
    
    Ended March2005
    
    
    31, 2005
    
    31, 2006(in thousands)Net income (loss)
    
    $
    (100,251
    )
    
    
    $
    13,073
    
    
    $
    35,367Income from discontinued operations
    
    
    (522
    )
    
    
    
    (672
    )
    
    
    (10,018
    )Income tax expense (benefit)
    
    
    (59,794
    )
    
    
    
    8,388
    
    
    
    19,095Minority interest
    
    
    330
    
    
    
    
    302
    
    
    
    391Interest expense, net
    
    
    4,128
    
    
    
    
    9,523
    
    
    
    24,050Other income
    
    
    (267
    )
    
    
    
    (103
    )
    
    
    (2,434
    )Merger-related charges
    
    
    12,025
    
    
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    42,736
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    5,933
    
    
    
    
    4,126
    
    
    
    10,895Stock compensation expense
    
    
    142,213
    
    
    
    
    4,326
    
    
    
    946Adjusted EBITDA
    
    $
    46,531
    
    
    
    $
    38,963
    
    
    $
    78,292
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##### Table of Contents



6. Discontinued Operations
  Predecessor
    
    
    SuccessorPeriod fromJanuary 1
    
    
    Period from
    
    For the Twothrough
    
    
    February 25
    
    Months EndedFebruary 24,
    
    
    through March
    
    February 28,2005
    
    
    31, 2005
    
    2006(in thousands)Net revenue
    
    $
    10,051
    
    
    
    $
    6,726
    
    
    $
    12,902Income from discontinued
operations before income
tax expense, including
gain of $13,950
    
    
    950
    
    
    
    
    1,155
    
    
    
    15,547Income tax expense
    
    
    428
    
    
    
    
    483
    
    
    
    5,529Income from discontinued
operations, net of tax
    
    $
    522
    
    
    
    $
    672
    
    
    $
    10,018
 7. Commitments and Contingencies
 Litigation
   - 12 -




---



##### Table of Contents



Other
  - 13 -




---



##### Table of Contents



8. Financial Information for Subsidiary Guarantors and Non-Guarantor
Subsidiaries
 5 8 5 8
    Caritas Rehab Services, LLC
    
    North Andover Physical Therapy, Inc.Cupertino Medical Center, P.C.
    
    OccuMed East, P.C.Elizabethtown Physical Therapy
    
    Ohio Occupational Health, P.C., Inc.Jeff Ayres, PT Therapy Center, Inc.
    
    Partners in Physical Therapy, PLLCJeffersontown Physical Therapy, LLC
    
    Philadelphia Occupational Health, P.C.Kentucky Orthopedic Rehabilitation, LLC
    
    Rehabilitation Physician Services, P.CKessler Core PT, OT and Speech Therapy at
    
    Robinson & Associates, P.C.New York, LLC
    
    Select Specialty Hospital  Central Pennsylvania, L.P.Langhorne, P.C.
    
    Select Specialty Hospital  Houston, L.P.Lester OSM, P.C.
    
    Select Specialty Hospital  Mississippi Gulf Coast,
Inc.Louisville Physical Therapy, P.S.C.
    
    Sprint Physical Therapy, P.C.Medical Information Management Systems, LLC
    
    Therex, P.C.Metropolitan West Physical Therapy and
    
    TJ Corporation I, LLCSports Medicine Services Inc.
    
    U.S. Regional Occupational Health II, P.C.MKJ Physical Therapy, Inc.
    
    U.S. Regional Occupational Health II of New Jersey,New York Physician Services, P.C.
    
    P.C.
 - 14 -




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetMarch 31, 2006Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated( in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    10,529
    
    
    $
    1,812
    
    
    $
    1,510
    
    
    $
    
    
    
    $
    13,851Restricted cash
    
    
    5,908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,908Accounts receivable, net
    
    
    28
    
    
    
    274,623
    
    
    
    10,487
    
    
    
    
    
    
    
    285,138Current deferred tax asset
    
    
    25,412
    
    
    
    28,339
    
    
    
    2,799
    
    
    
    
    
    
    
    56,550Other current assets
    
    
    1,380
    
    
    
    14,305
    
    
    
    3,762
    
    
    
    
    
    
    
    19,447Total Current Assets
    
    
    43,257
    
    
    
    319,079
    
    
    
    18,558
    
    
    
    
    
    
    
    380,894Property and equipment, net
    
    
    10,995
    
    
    
    243,275
    
    
    
    23,618
    
    
    
    
    
    
    
    277,888Investment in affiliates
    
    
    1,703,967
    
    
    
    63,466
    
    
    
    
    
    
    
    (1,767,433
    ) (a)
    
    
    Goodwill
    
    
    
    
    
    
    1,318,111
    
    
    
    
    
    
    
    
    
    
    
    1,318,111Other identifiable intangibles
    
    
    
    
    
    
    85,259
    
    
    
    
    
    
    
    
    
    
    
    85,259Other assets
    
    
    64,655
    
    
    
    2,795
    
    
    
    800
    
    
    
    
    
    
    
    68,250Total Assets
    
    $
    1,822,874
    
    
    $
    2,031,985
    
    
    $
    42,976
    
    
    $
    (1,767,433
    )
    
    $
    2,130,402Liabilities and Stockholders EquityCurrent Liabilities:Bank overdrafts
    
    $
    23,392
    
    
    $
    2,514
    
    
    $
    
    
    
    $
    
    
    
    $
    25,906Current portion of long-term debt and
notes payable
    
    
    120
    
    
    
    6,305
    
    
    
    
    
    
    
    
    
    
    
    6,425Accounts payable
    
    
    3,490
    
    
    
    54,986
    
    
    
    5,767
    
    
    
    
    
    
    
    64,243Intercompany accounts
    
    
    212,457
    
    
    
    (179,657
    )
    
    
    (32,800
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    1,438
    
    
    
    47,645
    
    
    
    229
    
    
    
    
    
    
    
    49,312Accrued vacation
    
    
    3,009
    
    
    
    23,404
    
    
    
    2,304
    
    
    
    
    
    
    
    28,717Accrued interest
    
    
    12,242
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    12,246Accrued professional liability
    
    
    22,332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,332Accrued restructuring
    
    
    
    
    
    
    340
    
    
    
    
    
    
    
    
    
    
    
    340Accrued other
    
    
    34,624
    
    
    
    35,293
    
    
    
    980
    
    
    
    
    
    
    
    70,897Due to third party payors
    
    
    6,099
    
    
    
    15,793
    
    
    
    (9,058
    )
    
    
    
    
    
    
    12,834Income Taxes
    
    
    11,487
    
    
    
    8,024
    
    
    
    (941
    )
    
    
    
    
    
    
    18,570Total Current Liabilities
    
    
    330,690
    
    
    
    14,651
    
    
    
    (33,519
    )
    
    
    
    
    
    
    311,822Long-term debt, net of current portion
    
    
    960,612
    
    
    
    272,904
    
    
    
    23,497
    
    
    
    
    
    
    
    1,257,013Noncurrent deferred tax liability
    
    
    5,042
    
    
    
    27,632
    
    
    
    (418
    )
    
    
    
    
    
    
    32,256Total liabilities
    
    
    1,296,344
    
    
    
    315,187
    
    
    
    (10,440
    )
    
    
    
    
    
    
    1,601,091Commitments and ContingenciesMinority interest in consolidated subsidiary
companies
    
    
    
    
    
    
    788
    
    
    
    1,993
    
    
    
    
    
    
    
    2,781Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    441,745
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441,745Retained earnings
    
    
    80,768
    
    
    
    151,989
    
    
    
    33,264
    
    
    
    (185,253
    ) (b)
    
    
    80,768Subsidiary investment
    
    
    
    
    
    
    1,564,021
    
    
    
    18,159
    
    
    
    (1,582,180
    ) (a)(b)
    
    
    Accumulated other comprehensive income
    
    
    4,017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,017Total Stockholders Equity
    
    
    526,530
    
    
    
    1,716,010
    
    
    
    51,423
    
    
    
    (1,767,433
    )
    
    
    526,530Total Liabilities and Stockholders Equity
    
    $
    1,822,874
    
    
    $
    2,031,985
    
    
    $
    42,976
    
    
    $
    (1,767,433
    )
    
    $
    2,130,402
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in
subsidiaries earnings.
 - 15 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor
the Three Months Ended March 31, 2006SuccessorSelect MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    62
    
    
    $
    440,481
    
    
    $
    39,200
    
    
    $
    
    
    
    $
    479,743Costs and expenses:Cost of services
    
    
    
    
    
    
    352,074
    
    
    
    33,065
    
    
    
    
    
    
    
    385,139Stock compensation expense
    
    
    946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    946General and administrative
    
    
    11,293
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    11,312Bad debt expense
    
    
    
    
    
    
    5,306
    
    
    
    (306
    )
    
    
    
    
    
    
    5,000Depreciation and amortization
    
    
    604
    
    
    
    9,551
    
    
    
    740
    
    
    
    
    
    
    
    10,895Total costs and expenses
    
    
    12,843
    
    
    
    366,950
    
    
    
    33,499
    
    
    
    
    
    
    
    413,292Income (loss) from operations
    
    
    (12,781
    )
    
    
    73,531
    
    
    
    5,701
    
    
    
    
    
    
    
    66,451Other income and expense:Intercompany interest and royalty fees
    
    
    (13,818
    )
    
    
    13,685
    
    
    
    133
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    40,182
    
    
    
    (39,466
    )
    
    
    (716
    )
    
    
    
    
    
    
    Other income
    
    
    2,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,434Interest income
    
    
    209
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    222Interest expense
    
    
    (18,973
    )
    
    
    (4,916
    )
    
    
    (383
    )
    
    
    
    
    
    
    (24,272
    )Income (loss) before minority interests and income taxes
    
    
    (2,747
    )
    
    
    42,847
    
    
    
    4,735
    
    
    
    
    
    
    
    44,835Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    31
    
    
    
    360
    
    
    
    
    
    
    
    391Income (loss) from continuing operations before income
taxes
    
    
    (2,747
    )
    
    
    42,816
    
    
    
    4,375
    
    
    
    
    
    
    
    44,444Income tax expense (benefit)
    
    
    (6
    )
    
    
    18,916
    
    
    
    185
    
    
    
    
    
    
    
    19,095Income (loss) from continuing operations
    
    
    (2,741
    )
    
    
    23,900
    
    
    
    4,190
    
    
    
    
    
    
    
    25,349Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    10,018
    
    
    
    
    
    
    
    10,018Equity in earnings of subsidiaries
    
    
    38,108
    
    
    
    4,190
    
    
    
    
    
    
    
    (42,298
    )(a)
    
    
    Net income
    
    $
    35,367
    
    
    $
    28,090
    
    
    $
    14,208
    
    
    $
    (42,298
    )
    
    $
    35,367
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries.
 - 16 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor
the Three Months Ended March 31, 2006Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    35,367
    
    
    $
    28,090
    
    
    $
    14,208
    
    
    $
    (42,298
    ) (a)
    
    $
    35,367Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    604
    
    
    
    9,551
    
    
    
    916
    
    
    
    
    
    
    
    11,071Provision for bad debts
    
    
    
    
    
    
    5,306
    
    
    
    (219
    )
    
    
    
    
    
    
    5,087Gain from sale of business
    
    
    (13,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,950
    )Non-cash income from hedge
    
    
    (2,434
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,434
    )Non-cash compensation expense
    
    
    946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    946Minority interests
    
    
    
    
    
    
    31
    
    
    
    700
    
    
    
    
    
    
    
    731Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (38,108
    )
    
    
    (4,190
    )
    
    
    
    
    
    
    42,298
    (a)
    
    
    Intercompany
    
    
    (5,446
    )
    
    
    46,625
    
    
    
    (41,179
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (28
    )
    
    
    (47,044
    )
    
    
    12,861
    
    
    
    
    
    
    
    (34,211
    )Other current assets
    
    
    531
    
    
    
    (1,664
    )
    
    
    1,028
    
    
    
    
    
    
    
    (105
    )Other assets
    
    
    (7,266
    )
    
    
    7,922
    
    
    
    1,011
    
    
    
    
    
    
    
    1,667Accounts payable
    
    
    1,499
    
    
    
    4,006
    
    
    
    (1,936
    )
    
    
    
    
    
    
    3,569Due to third-party payors
    
    
    
    
    
    
    1,640
    
    
    
    (981
    )
    
    
    
    
    
    
    659Accrued
interest
    
    
    (12,984
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,984
    )Accrued expenses
    
    
    (4,864
    )
    
    
    (1,441
    )
    
    
    (2,160
    )
    
    
    
    
    
    
    (8,465
    )Income and deferred taxes
    
    
    23,207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,207Net cash provided by (used in) operating activities
    
    
    (22,926
    )
    
    
    48,832
    
    
    
    (15,751
    )
    
    
    
    
    
    
    10,155Investing activitiesPurchases of property and equipment
    
    
    (231
    )
    
    
    (35,177
    )
    
    
    (2,978
    )
    
    
    
    
    
    
    (38,386
    )Proceeds
from sale of business, net
    
    
    76,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,806Earnout payments
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )Restricted cash
    
    
    437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (1,699
    )
    
    
    (324
    )
    
    
    
    
    
    
    (2,023
    )Net cash provided by (used in) investing activities
    
    
    77,012
    
    
    
    (36,976
    )
    
    
    (3,302
    )
    
    
    
    
    
    
    36,734Financing activitiesNet repayments on credit facility
    
    
    (58,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,450
    )Dividends to Holdings
    
    
    (15,733
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,733
    )Intercompany debt reallocation
    
    
    7,302
    
    
    
    (13,287
    )
    
    
    5,985
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (388
    )
    
    
    (37
    )
    
    
    
    
    
    
    (425
    )Proceeds from bank overdrafts
    
    
    6,551
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,551Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (877
    )
    
    
    
    
    
    
    (877
    )Net cash provided by (used in) financing activities
    
    
    (60,330
    )
    
    
    (13,675
    )
    
    
    5,071
    
    
    
    
    
    
    
    (68,934
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (6,209
    )
    
    
    (1,819
    )
    
    
    (13,982
    )
    
    
    
    
    
    
    (22,010
    )Cash and cash equivalents at beginning of period
    
    
    16,738
    
    
    
    3,631
    
    
    
    15,492
    
    
    
    
    
    
    
    35,861Cash and cash equivalents at end of period
    
    $
    10,529
    
    
    $
    1,812
    
    
    $
    1,510
    
    
    $
    
    
    
    $
    13,851
 
 (a) Elimination of equity in earnings of subsidiary.
 - 17 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Period January 1 through February 24, 2005PredecessorSelect MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    28
    
    
    $
    248,857
    
    
    $
    28,851
    
    
    $
    
    
    
    $
    277,736Costs and expenses:Cost of services
    
    
    
    
    
    
    193,323
    
    
    
    23,810
    
    
    
    
    
    
    
    217,133Stock compensation expense
    
    
    142,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,213General and administrative
    
    
    6,931
    
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    7,484Bad debt expense
    
    
    
    
    
    
    6,223
    
    
    
    365
    
    
    
    
    
    
    
    6,588Depreciation and amortization
    
    
    371
    
    
    
    5,025
    
    
    
    537
    
    
    
    
    
    
    
    5,933Total costs and expenses
    
    
    149,515
    
    
    
    205,124
    
    
    
    24,712
    
    
    
    
    
    
    
    379,351Income (loss) from operations
    
    
    (149,487
    )
    
    
    43,733
    
    
    
    4,139
    
    
    
    
    
    
    
    (101,615
    )Other income and expense:Intercompany interest and royalty fees
    
    
    (6,261
    )
    
    
    6,221
    
    
    
    40
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    213,822
    
    
    
    (213,436
    )
    
    
    (386
    )
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    (42,736
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,736
    )Merger related charges
    
    
    (12,025
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,025
    )Other income
    
    
    267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267Interest income
    
    
    294
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    523Interest expense
    
    
    (1,433
    )
    
    
    (2,953
    )
    
    
    (265
    )
    
    
    
    
    
    
    (4,651
    )Income (loss) before minority interests and income taxes
    
    
    2,441
    
    
    
    (166,206
    )
    
    
    3,528
    
    
    
    
    
    
    
    (160,237
    )Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    7
    
    
    
    323
    
    
    
    
    
    
    
    330Income (loss) from continuing operations before income
taxes
    
    
    2,441
    
    
    
    (166,213
    )
    
    
    3,205
    
    
    
    
    
    
    
    (160,567
    )Income tax expense (benefit)
    
    
    130
    
    
    
    (59,937
    )
    
    
    13
    
    
    
    
    
    
    
    (59,794
    )Income (loss) from continuing operations
    
    
    2,311
    
    
    
    (106,276
    )
    
    
    3,192
    
    
    
    
    
    
    
    (100,773
    )Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    
    
    
    
    522Equity in earnings of subsidiaries
    
    
    (102,562
    )
    
    
    3,192
    
    
    
    
    
    
    
    99,370
    (a)
    
    
    Net income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,714
    
    
    $
    99,370
    
    
    $
    (100,251
    )
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries.
 - 18 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Period February 25 through March 31, 2005SuccessorSelect MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    3
    
    
    $
    173,417
    
    
    $
    14,966
    
    
    $
    
    
    
    $
    188,386Costs and expenses:Cost of services
    
    
    
    
    
    
    128,338
    
    
    
    12,171
    
    
    
    
    
    
    
    140,509Stock compensation expense
    
    
    4,326
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,326General and administrative
    
    
    4,060
    
    
    
    296
    
    
    
    
    
    
    
    
    
    
    
    4,356Bad debt expense
    
    
    
    
    
    
    4,443
    
    
    
    115
    
    
    
    
    
    
    
    4,558Depreciation and amortization
    
    
    213
    
    
    
    3,657
    
    
    
    256
    
    
    
    
    
    
    
    4,126Total costs and expenses
    
    
    8,599
    
    
    
    136,734
    
    
    
    12,542
    
    
    
    
    
    
    
    157,875Income (loss) from operations
    
    
    (8,596
    )
    
    
    36,683
    
    
    
    2,424
    
    
    
    
    
    
    
    30,511Other income and expense:Intercompany interest and royalty fees
    
    
    (4,259
    )
    
    
    4,238
    
    
    
    21
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    16,522
    
    
    
    (15,967
    )
    
    
    (555
    )
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103Interest income
    
    
    64
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    77Interest expense
    
    
    (7,649
    )
    
    
    (1,833
    )
    
    
    (118
    )
    
    
    
    
    
    
    (9,600
    )Income (loss) from continuing operations before minority interests and income
taxes
    
    
    (3,918
    )
    
    
    23,134
    
    
    
    1,875
    
    
    
    
    
    
    
    21,091Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    64
    
    
    
    238
    
    
    
    
    
    
    
    302Income (loss) from continuing operations before income taxes
    
    
    (3,918
    )
    
    
    23,070
    
    
    
    1,637
    
    
    
    
    
    
    
    20,789Income tax expense (benefit)
    
    
    (372
    )
    
    
    8,609
    
    
    
    151
    
    
    
    
    
    
    
    8,388Income (loss) from continuing operations
    
    
    (3,546
    )
    
    
    14,461
    
    
    
    1,486
    
    
    
    
    
    
    
    12,401Income from discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    672
    
    
    
    
    
    
    
    672Equity in earnings of subsidiaries
    
    
    16,619
    
    
    
    1,486
    
    
    
    
    
    
    
    (18,105
    ) (a)
    
    
    Net income
    
    $
    13,073
    
    
    $
    15,947
    
    
    $
    2,158
    
    
    $
    (18,105
    )
    
    $
    13,073
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries.
 - 19 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Period January 1 through February 24, 2005PredecessorSelect MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,714
    
    
    $
    99,370
    (a)
    
    $
    (100,251
    )Adjustments to reconcile net income (loss) to net
cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    371
    
    
    
    5,025
    
    
    
    781
    
    
    
    
    
    
    
    6,177Provision for bad debts
    
    
    
    
    
    
    6,223
    
    
    
    438
    
    
    
    
    
    
    
    6,661Loss on early retirement of debt (non-cash)
    
    
    7,977
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,977Minority interests
    
    
    
    
    
    
    7
    
    
    
    462
    
    
    
    
    
    
    
    469Changes in operating assets and
liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    102,562
    
    
    
    (3,192
    )
    
    
    
    
    
    
    (99,370
    ) (a)
    
    
    Intercompany
    
    
    (9,581
    )
    
    
    12,090
    
    
    
    (2,509
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (133
    )
    
    
    (47,567
    )
    
    
    (1,276
    )
    
    
    
    
    
    
    (48,976
    )Other current assets
    
    
    1,899
    
    
    
    (374
    )
    
    
    291
    
    
    
    
    
    
    
    1,816Other assets
    
    
    8,375
    
    
    
    (9,045
    )
    
    
    48
    
    
    
    
    
    
    
    (622
    )Accounts payable
    
    
    (296
    )
    
    
    6,128
    
    
    
    (582
    )
    
    
    
    
    
    
    5,250Due to third-party payors
    
    
    
    
    
    
    3,953
    
    
    
    (3,286
    )
    
    
    
    
    
    
    667Accrued
interest
    
    
    (4,839
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,839
    )Accrued expenses
    
    
    52,042
    
    
    
    152,793
    
    
    
    (87
    )
    
    
    
    
    
    
    204,748Income and deferred taxes
    
    
    (59,190
    )
    
    
    
    
    
    
    (831
    )
    
    
    
    
    
    
    (60,021
    )Net cash provided by (used in) operating activities
    
    
    (1,064
    )
    
    
    22,957
    
    
    
    (2,837
    )
    
    
    
    
    
    
    19,056Investing activitiesPurchases of property and equipment
    
    
    (305
    )
    
    
    (2,045
    )
    
    
    (236
    )
    
    
    
    
    
    
    (2,586
    )Restricted cash
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (105,092
    )
    
    
    (3,187
    )
    
    
    
    
    
    
    (108,279
    )Net cash used in investing activities
    
    
    (197
    )
    
    
    (107,137
    )
    
    
    (3,423
    )
    
    
    
    
    
    
    (110,757
    )Financing activitiesIntercompany debt reallocation
    
    
    (2,964
    )
    
    
    63
    
    
    
    2,901
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (528
    )
    
    
    
    
    
    
    
    
    
    
    (528
    )Proceeds from issuance of common stock
    
    
    1,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,023Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (401
    )
    
    
    
    
    
    
    (401
    )Net cash provided by (used in) financing activities
    
    
    (1,941
    )
    
    
    (465
    )
    
    
    2,500
    
    
    
    
    
    
    
    94Effect of exchange rate changes on cash
and cash equivalents
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149
    )Net decrease in cash and cash equivalents
    
    
    (3,351
    )
    
    
    (84,645
    )
    
    
    (3,760
    )
    
    
    
    
    
    
    (91,756
    )Cash and cash equivalents at beginning of period
    
    
    161,704
    
    
    
    74,641
    
    
    
    11,131
    
    
    
    
    
    
    
    247,476Cash and cash equivalents at end of period
    
    $
    158,353
    
    
    $
    (10,004
    )
    
    $
    7,371
    
    
    $
    
    
    
    $
    155,720
 
 (a)
    
    Elimination of equity in earnings of
subsidiary.
 - 20 -




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Period February 25 through March 31, 2005SuccessorSelect MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    13,073
    
    
    $
    15,947
    
    
    $
    2,158
    
    
    $
    (18,105
    ) (a)
    
    $
    13,073Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    213
    
    
    
    3,657
    
    
    
    378
    
    
    
    
    
    
    
    4,248Provision for bad debts
    
    
    
    
    
    
    4,443
    
    
    
    166
    
    
    
    
    
    
    
    4,609Noncash compensation expense
    
    
    4,326
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,326Minority interests
    
    
    
    
    
    
    64
    
    
    
    398
    
    
    
    
    
    
    
    462Changes in operating assets and liabilities, net of
effects from acquisition
of businesses:Equity in earnings
of subsidiaries
    
    
    (16,619
    )
    
    
    (1,486
    )
    
    
    
    
    
    
    18,105
    (a)
    
    
    Intercompany
    
    
    (118,035
    )
    
    
    114,494
    
    
    
    3,541
    
    
    
    
    
    
    
    Accounts receivable
    
    
    28
    
    
    
    (35,882
    )
    
    
    138
    
    
    
    
    
    
    
    (35,716
    )Other current assets
    
    
    (917
    )
    
    
    266
    
    
    
    61
    
    
    
    
    
    
    
    (590
    )Other assets
    
    
    (57,447
    )
    
    
    56,278
    
    
    
    (81
    )
    
    
    
    
    
    
    (1,250
    )Accounts payable
    
    
    668
    
    
    
    2,883
    
    
    
    218
    
    
    
    
    
    
    
    3,769Due to third-party
payors
    
    
    
    
    
    
    2,751
    
    
    
    (2,960
    )
    
    
    
    
    
    
    (209
    )Accrued
interest
    
    
    7,027
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,027Accrued expenses
    
    
    (53,090
    )
    
    
    (144,767
    )
    
    
    (217
    )
    
    
    
    
    
    
    (198,074
    )Income and deferred
taxes
    
    
    6,935
    
    
    
    
    
    
    
    (581
    )
    
    
    
    
    
    
    6,354Net cash provided by (used in)
operating activities
    
    
    (213,838
    )
    
    
    18,648
    
    
    
    3,219
    
    
    
    
    
    
    
    (191,971
    )Investing activitiesPurchases of property and equipment
    
    
    (313
    )
    
    
    (230
    )
    
    
    (569
    )
    
    
    
    
    
    
    (1,112
    )Restricted cash
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Acquisition of businesses, net of
cash acquired
    
    
    
    
    
    
    (2,215
    )
    
    
    
    
    
    
    
    
    
    
    (2,215
    )Net cash used in investing activities
    
    
    (325
    )
    
    
    (2,445
    )
    
    
    (569
    )
    
    
    
    
    
    
    (3,339
    )Financing activitiesEquity investment by Holdings
    
    
    720,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    720,000Proceeds from credit facility
    
    
    780,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780,000Proceeds from senior subordinated
notes
    
    
    660,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660,000Repayment of senior subordinated
notes
    
    
    (344,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344,250
    )Deferred financing costs
    
    
    (57,198
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,198
    )Costs associated with equity
investment of Holdings
    
    
    (8,686
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,686
    )Intercompany debt reallocation
    
    
    2,545
    
    
    
    (845
    )
    
    
    (1,700
    )
    
    
    
    
    
    
    Principal payments on seller and
other debt
    
    
    
    
    
    
    (2,539
    )
    
    
    (39
    )
    
    
    
    
    
    
    (2,578
    )Repurchases of common stock and
options
    
    
    (1,687,994
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,687,994
    )Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (466
    )
    
    
    
    
    
    
    (466
    )Net cash provided by (used in)
financing activities
    
    
    64,417
    
    
    
    (3,384
    )
    
    
    (2,205
    )
    
    
    
    
    
    
    58,828Effect of exchange rate changes on
cash
and cash equivalents
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Net increase (decrease) in cash and
cash equivalents
    
    
    (149,641
    )
    
    
    12,819
    
    
    
    445
    
    
    
    
    
    
    
    (136,377
    )Cash and cash equivalents at
beginning of period
    
    
    158,353
    
    
    
    (10,004
    )
    
    
    7,371
    
    
    
    
    
    
    
    155,720Cash and cash equivalents at end of
period
    
    $
    8,712
    
    
    $
    2,815
    
    
    $
    7,816
    
    
    $
    
    
    
    $
    19,343
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 21 -




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read this discussion together with our unaudited consolidated financial statements
and the accompanying notes.
 Forward Looking Statements
  
    
    compliance with the Medicare hospital within a hospital regulation changes will
require increased capital expenditures and may have an adverse effect on our future
net operating revenues and profitability;
    
    additional changes in government reimbursement for our services may have an
adverse effect on our future net operating revenues and profitability, such as the
regulations adopted by the Centers for Medicare & Medicaid
Services on May 2, 2006;
    
    the failure of our long term acute care hospitals to maintain their status as
such may cause our net operating revenues and profitability to decline;
    
    the failure of our facilities operated as hospitals within hospitals to qualify
as hospitals separate from their host hospitals may cause our net operating revenues
and profitability to decline;
    
    implementation of modifications to the admissions policies for our inpatient
rehabilitation facilities, as required to achieve compliance with Medicare
guidelines, may result in a loss of patient volume at these hospitals and, as a
result, may reduce our future net operating revenues and profitability;
    
    implementation of annual caps that limit the amounts that can be paid for
outpatient therapy services rendered to any Medicare beneficiary may reduce our
future net operating revenues and profitability;
    
    changes in applicable regulations or a government investigation or assertion that
we have violated applicable regulations may result in increased costs or sanctions
that reduce our net operating revenues and profitability;
    
    integration of recently acquired operations and future acquisitions may prove
difficult or unsuccessful, use significant resources or expose us to unforeseen
liabilities;
    
    private third party payors for our services may undertake cost containment
initiatives that limit our future net operating revenues and profitability;
    
    the failure to maintain established relationships with the physicians in our
markets could reduce our net operating revenues and profitability;
    
    shortages in qualified nurses or therapists could increase our operating costs
significantly;
    
    competition may limit our ability to grow and result in a decrease in our net
operating revenues and profitability;
    
    the loss of key members of our management team could significantly disrupt our
operations; and
    
    the effect of claims asserted against us or lack of adequate available insurance
could subject us to substantial uninsured liabilities.
 Overview
  22




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##### Table of Contents



Recent Trends and Events
 CBIL Sale
  First Quarter Ended March 31, 2006
   Regulatory Changes
   23




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##### Table of Contents



24




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##### Table of Contents



Development of New Specialty Hospitals and Clinics
  Operating Statistics
  Three Months EndedMarch 31,2005
    
    
    2006Specialty hospital data(1):Number of hospitals  start of period
    
    
    86
    
    
    
    101Number of hospitals acquired
    
    
    17
    
    
    
    Number of hospitals  end of period
    
    
    103
    
    
    
    101Available licensed beds
    
    
    3,907
    
    
    
    3,852Admissions
    
    
    10,336
    
    
    
    10,483Patient days
    
    
    250,839
    
    
    
    251,701Average length of stay (days)
    
    
    25
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,330
    
    
    $
    1,405Occupancy rate
    
    
    71
    %
    
    
    73
    %Percent patient days  Medicare
    
    
    77
    %
    
    
    73
    %Outpatient rehabilitation data (3):Number of clinics owned  start of period
    
    
    589
    
    
    
    553Number of clinics acquired
    
    
    
    
    
    
    Number of clinic start-ups
    
    
    9
    
    
    
    1Number of clinics closed/sold
    
    
    (6
    )
    
    
    (1
    )Number of clinics owned  end of period
    
    
    592
    
    
    
    553Number of clinics managed  end of period
    
    
    53
    
    
    
    60Total number of clinics (all)  end of period
    
    
    645
    
    
    
    613Number of visits
    
    
    863,173
    
    
    
    784,839Net revenue per visit (4)
    
    $
    90
    
    
    $
    91
 
 (1)
    
    Specialty hospitals consist of long-term acute care hospitals and inpatient rehabilitation
facilities.(2)
    
    Net revenue per patient day is calculated by dividing specialty hospital patient service
revenues by the total number of patient days.(3)
    
    Clinic data has been restated to remove the clinics operated by CBIL, which is being reported
as a discontinued operation. Occupational health clinics have been reclassified as managed
clinics.(4)
    
    Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by
the total number of visits. For purposes of this computation, outpatient rehabilitation clinic
revenue does not include contract services revenue. 25




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##### Table of Contents



Results of Operations
  Three Months EndedMarch 31, 2005(in thousands)Predecessor
    
    
    Successor
    
    
    CombinedNet operating revenues
    
    $
    277,736
    
    
    $
    188,386
    
    
    $
    466,122Costs and expenses:Cost of services
    
    
    217,133
    
    
    
    140,509
    
    
    
    357,642Stock compensation expense
    
    
    142,213
    
    
    
    4,326
    
    
    
    146,539General and administrative
    
    
    7,484
    
    
    
    4,356
    
    
    
    11,840Bad debt expense
    
    
    6,588
    
    
    
    4,558
    
    
    
    11,146Depreciation and amortization
    
    
    5,933
    
    
    
    4,126
    
    
    
    10,059Total costs and expenses
    
    
    379,351
    
    
    
    157,875
    
    
    
    537,226Income (loss) from operations
    
    
    (101,615
    )
    
    
    30,511
    
    
    
    (71,104
    )Other income and expense:Loss on early retirement of debt
    
    
    (42,736
    )
    
    
    
    
    
    
    (42,736
    )Merger related charges
    
    
    (12,025
    )
    
    
    
    
    
    
    (12,025
    )Other income
    
    
    267
    
    
    
    103
    
    
    
    370Interest income
    
    
    523
    
    
    
    77
    
    
    
    600Interest expense
    
    
    (4,651
    )
    
    
    (9,600
    )
    
    
    (14,251
    )Income (loss) from continuing operations
before minority interests and income taxes
    
    
    (160,237
    )
    
    
    21,091
    
    
    
    (139,146
    )Minority interest in consolidated subsidiary
companies
    
    
    330
    
    
    
    302
    
    
    
    632Income (loss) from continuing operations
before income taxes
    
    
    (160,567
    )
    
    
    20,789
    
    
    
    (139,778
    )Income tax expense (benefit)
    
    
    (59,794
    )
    
    
    8,388
    
    
    
    (51,406
    )Income (loss) from continuing operations
    
    
    (100,773
    )
    
    
    12,401
    
    
    
    (88,372
    )Income from discontinued operations, net of tax
    
    
    522
    
    
    
    672
    
    
    
    1,194Net income (loss)
    
    $
    (100,251
    )
    
    $
    13,073
    
    
    $
    (87,178
    )
 26




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##### Table of Contents



Three MonthsEndedMarch 31,2005 (1)
    
    
    2006Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(2)
    
    
    76.7
    
    
    
    80.3Stock compensation expense
    
    
    31.5
    
    
    
    0.2General and administrative
    
    
    2.5
    
    
    
    2.4Bad debt expense
    
    
    2.4
    
    
    
    1.0Depreciation and amortization
    
    
    2.2
    
    
    
    2.3Income (loss) from operations
    
    
    (15.3
    )
    
    
    13.8Loss on early retirement of debt
    
    
    (9.2
    )
    
    
    Merger related charges
    
    
    (2.6
    )
    
    
    Other income
    
    
    0.1
    
    
    
    0.5Interest expense, net
    
    
    (2.9
    )
    
    
    (4.9
    )Income (loss) from continuing operations before minority
interests and income taxes
    
    
    (29.9
    )
    
    
    9.4Minority interests
    
    
    0.1
    
    
    
    0.1Income (loss) from continuing operations before income taxes
    
    
    (30.0
    )
    
    
    9.3Income tax (benefit)
    
    
    (11.0
    )
    
    
    4.0Income (loss) from continuing operations
    
    
    (19.0
    )
    
    
    5.3Income from discontinued operations, net of tax
    
    
    0.3
    
    
    
    2.1Net income (loss)
    
    
    (18.7
    )%
    
    
    7.4
    %
 27




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##### Table of Contents



Three Months EndedMarch 31,2005 (1)
    
    
    2006
    
    
    % Change(in thousands)Net operating revenues:Specialty hospitals
    
    $
    342,044
    
    
    $
    359,672
    
    
    
    5.2
    %Outpatient rehabilitation
    
    
    121,455
    
    
    
    119,290
    
    
    
    (1.8
    )Other
    
    
    2,623
    
    
    
    781
    
    
    
    (70.2
    )Total company
    
    $
    466,122
    
    
    $
    479,743
    
    
    
    2.9
    %Income (loss) from operations:Specialty hospitals
    
    $
    72,750
    
    
    $
    67,889
    
    
    
    (6.7
    )%Outpatient rehabilitation
    
    
    15,730
    
    
    
    11,468
    
    
    
    (27.1
    )Other
    
    
    (159,584
    )
    
    
    (12,906
    )
    
    
    N/MTotal company
    
    $
    (71,104
    )
    
    $
    66,451
    
    
    
    N/MAdjusted EBITDA:(3)Specialty hospitals
    
    $
    79,127
    
    
    $
    74,718
    
    
    
    (5.6
    )%Outpatient rehabilitation
    
    
    18,564
    
    
    
    14,760
    
    
    
    (20.5
    )Other
    
    
    (12,197
    )
    
    
    (11,186
    )
    
    
    (8.3
    )Adjusted EBITDA margins:(3)Specialty hospitals
    
    
    23.1
    %
    
    
    20.8
    %
    
    
    (10.0
    )%Outpatient rehabilitation
    
    
    15.3
    
    
    
    12.4
    
    
    
    (19.0
    )Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,553,606
    
    
    $
    1,746,744Outpatient rehabilitation
    
    
    530,855
    
    
    
    269,295Other
    
    
    84,963
    
    
    
    114,363Total company
    
    $
    2,169,424
    
    
    $
    2,130,402Purchases of property and equipment, net:Specialty hospitals
    
    $
    1,945
    
    
    $
    36,505Outpatient rehabilitation
    
    
    682
    
    
    
    1,641Other
    
    
    1,071
    
    
    
    240Total company
    
    $
    3,698
    
    
    $
    38,386
  Three Months EndedMarch 31,2005 (1)
    
    
    2006(in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    342,044
    
    
    $
    359,672Less: Specialty hospitals in development or closed after 1/1/05
    
    
    6,028
    
    
    
    204Specialty hospitals same store net operating revenue
    
    $
    336,016
    
    
    $
    359,468Adjusted EBITDA(3)Specialty hospitals Adjusted EBITDA(3)
    
    $
    79,127
    
    
    $
    74,718Less: Specialty hospitals in development or closed after 1/1/05
    
    
    1,334
    
    
    
    (377
    )Specialty hospitals same store Adjusted EBITDA(3)
    
    $
    77,793
    
    
    $
    75,095All specialty hospitals Adjusted EBITDA margin(3)
    
    
    23.1
    %
    
    
    20.8
    %Specialty hospitals same store Adjusted EBITDA margin(3)
    
    
    23.2
    %
    
    
    20.9
    %
 
 N/M  Not Meaningful. 28




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(1)
    
    The financial data for the period after the merger, February 25, 2005 through March 31,
2005 (Successor period), has been added to the financial data for the period from January
1, 2005 through February 24, 2005 (Predecessor period), to arrive at the combined three
months ended March 31, 2005.(2)
    
    Cost of services include salaries, wages and benefits, operating supplies, lease and
rent expense and other operating costs.(3)
    
    We define Adjusted EBITDA as net income before interest, income taxes, depreciation and
amortization, other income, income from discontinued operations, loss on early retirement
of debt, merger related charges, stock compensation expense, and minority interest. We
believe that the presentation of Adjusted EBITDA is important to investors because Adjusted
EBITDA is used by management to evaluate financial performance and determine resource
allocation for each of our operating units. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles. Items excluded from Adjusted
EBITDA are significant components in understanding and assessing financial performance.
Adjusted EBITDA should not be considered in isolation or as an alternative to, or
substitute for, net income, cash flows generated by operations, investing or financing
activities, or other financial statement data presented in the consolidated financial
statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is
not a measurement determined in accordance with generally accepted accounting principles
and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be
comparable to other similarly titled measures of other companies. See footnote 5 to our
interim unaudited consolidated financial statements for the period ended March 31, 2006 for
a reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our
segment performance in accordance with SFAS No. 131.
 Three Months Ended March 31, 2006 Compared to Combined Three Months Ended March 31, 2005
 Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  29




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Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Stock Compensation Expense
  Income (Loss) from Operations
  30




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Loss on early retirement of debt
 1 2 7 1/2% 1 2 1 2
 Merger related charges
  Interest Expense
  Minority Interests
  Income Taxes
  Income from discontinued operation, net of tax
  Liquidity and Capital Resources
  31




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Capital Resources
       32




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Inflation
  Recent Accounting Pronouncements
    33




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   34




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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
      35




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ITEM 1A. RISK FACTORS.
 Our business involves a number of risks, some of which are beyond our control. The
risks and uncertainties described in Item 1A of our Form 10-K for the year ended December 31, 2005
and described below are not the only ones we face. Additional risks and uncertainties that we do
not currently know or that we currently believe to be immaterial may also adversely affect our
business. There are no material changes to the risk factors identified in Item 1A of our Form 10-K
for the year ended December 31, 2005 other than a change to the risk factor below entitled  Government implementation of recently final changes to Medicares method of reimbursing our
long-term acute care hospitals may have an adverse effect on our future net operating revenues and
profitability. 
 Government implementation of recently final changes to Medicares method of reimbursing our
long-term acute care hospitals may have an adverse effect on our future net operating revenues and
profitability.
     36




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  
 SIGNATURES
  SELECT MEDICAL CORPORATIONBy:
    
    /s/            Martin F. JacksonMartin F. JacksonSenior Vice President and Chief Financial Officer(Duly Authorized Officer)By:
    
    /s/           Scott A. RombergerScott A. RombergerVice President, Chief Accounting Officer and Controller(Principal Accounting Officer)
 Dated:
May 15, 2006
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Exhibit
    
    Description10.1
    
    Amendment to Acquisition Agreement among Select Medical
Corporation, SLMC Finance Corporation, Callisto Capital, L.P. and
Canadian Back Institute Limited dated February 9, 2006,
incorporated by reference to Exhibit 10.1 of Select Medical
Corporations Form 8-K filed February 10, 2006.31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 38