##### 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 September 30, 2005
 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
    
    23-2872718(State or other jurisdiction of
    
    (I.R.S. employer identificationincorporation or organization)
    
    number)
 4716 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
  
  þ o
  o þ
 o þ




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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 stockholders equity and comprehensive income
    
    
    6Consolidated statements of cash flows
    
    
    7Notes to consolidated financial statements
    
    
    8ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    33ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    54ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    54PART II
    
    OTHER INFORMATION
    
    
    54ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    54ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    56ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    56ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    56ITEM 5.
    
    OTHER INFORMATION
    
    
    56ITEM 6.
    
    EXHIBITS
    
    
    56SIGNATURES
    
    
    56Amendment No. 1 dated as of September 26, 2005 to certain Credit Agreement, dated as of February 24, 2005Certification of the CEO pursuant to Rules 13a-15(e)/15d-15(e)Certification of the CFO pursuant to Rules 13a-15(e)/15d-15(e)Certification of the CEO pursuant to Section 906Certification of the CFO pursuant to Section 906
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##### Table of Contents



Select Medical Corporation
 
 Consolidated Balance Sheets
 (unaudited)
 (in thousands, except share and per share amounts)
 Predecessor
    
    
    
    SuccessorDecember 31,
    
    
    
    September 30,2004
    
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    247,476
    
    
    
    $
    9,364Restricted cash
    
    
    7,031
    
    
    
    
    6,706Accounts receivable, net of allowance for doubtful accounts
of $94,622 and $96,175 in 2004 and 2005, respectively
    
    
    216,852
    
    
    
    
    290,836Current deferred tax asset
    
    
    59,239
    
    
    
    
    70,718Other current assets
    
    
    18,737
    
    
    
    
    23,220Total Current Assets
    
    
    549,335
    
    
    
    
    400,844Property and equipment, net
    
    
    165,336
    
    
    
    
    224,790Goodwill
    
    
    302,069
    
    
    
    
    1,362,757Other identifiable intangibles
    
    
    78,304
    
    
    
    
    87,278Non-current deferred tax asset
    
    
    
    
    
    
    
    172Other assets
    
    
    18,677
    
    
    
    
    63,551Total Assets
    
    $
    1,113,721
    
    
    
    $
    2,139,392LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    
    
    
    
    $
    689Current portion of long-term debt and notes payable
    
    
    3,557
    
    
    
    
    7,949Accounts payable
    
    
    48,632
    
    
    
    
    62,528Accrued payroll
    
    
    56,554
    
    
    
    
    57,047Accrued vacation
    
    
    23,102
    
    
    
    
    25,533Accrued professional liability
    
    
    14,627
    
    
    
    
    20,624Accrued restructuring
    
    
    4,924
    
    
    
    
    2,222Accrued other
    
    
    66,484
    
    
    
    
    85,355Income taxes payable
    
    
    4,474
    
    
    
    
    5,914Due to third party payors
    
    
    13,266
    
    
    
    
    11,334Total Current Liabilities
    
    
    235,620
    
    
    
    
    279,195Long-term debt, net of current portion
    
    
    351,033
    
    
    
    
    1,372,091Non-current deferred tax liability
    
    
    4,458
    
    
    
    
    Total Liabilities
    
    
    591,111
    
    
    
    
    1,651,286Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    6,667
    
    
    
    
    7,458Stockholders Equity:Common stock, $0.01par value, 200,000,000 shares
authorized, 101,954,000 issued and outstanding (Predecessor)
and $0.01 par value, 100 shares issued and outstanding (Successor)
    
    
    1,020
    
    
    
    
    Capital in excess of par
    
    
    275,281
    
    
    
    
    438,053Retained earnings
    
    
    230,535
    
    
    
    
    36,461Accumulated other comprehensive income
    
    
    9,107
    
    
    
    
    6,134Total Stockholders Equity
    
    
    515,943
    
    
    
    
    480,648Total Liabilities and Stockholders Equity
    
    $
    1,113,721
    
    
    
    $
    2,139,392
 The
accompanying notes are an integral part of this statement.
 3




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##### Table of Contents



Select Medical Corporation
 
 Consolidated Statements of Operations
 (unaudited)
 (in thousands)
 Predecessor
    
    
    
    SuccessorFor the Quarter Ended September 30,2004
    
    
    
    2005Net operating revenues
    
    $
    407,570
    
    
    
    $
    477,698Costs and expenses:Cost of services
    
    
    318,541
    
    
    
    
    377,711Stock compensation expense
    
    
    
    
    
    
    
    1,424Long-term incentive compensation
    
    
    
    
    
    
    
    14,453General and administrative
    
    
    10,945
    
    
    
    
    11,402Bad debt expense
    
    
    12,857
    
    
    
    
    4,401Depreciation and amortization
    
    
    10,264
    
    
    
    
    12,161Total costs and expenses
    
    
    352,607
    
    
    
    
    421,552Income from operations
    
    
    54,963
    
    
    
    
    56,146Other income and expense:Interest income
    
    
    (634
    )
    
    
    
    (287
    )Interest expense
    
    
    8,632
    
    
    
    
    25,604Income from continuing operations before
minority interests and income taxes
    
    
    46,965
    
    
    
    
    30,829Minority interest in consolidated subsidiary companies
    
    
    620
    
    
    
    
    843Income from continuing operations before income taxes
    
    
    46,345
    
    
    
    
    29,986Income tax expense
    
    
    18,674
    
    
    
    
    12,170Income from continuing operations
    
    
    27,671
    
    
    
    
    17,816Income from discontinued operations, net of tax
    
    
    146
    
    
    
    
    Net income
    
    $
    27,817
    
    
    
    $
    17,816
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 Consolidated Statements of Operations
(unaudited)
(in thousands)
 Predecessor
    
    
    SuccessorPeriod from
    
    
    
    Period fromFor the Nine
    
    
    January 1
    
    
    
    February 25Months Ended
    
    
    through
    
    
    
    throughSeptember 30,
    
    
    February 24,
    
    
    
    September 30,2004
    
    
    2005
    
    
    
    2005Net operating revenues
    
    $
    1,241,276
    
    
    $
    287,787
    
    
    
    $
    1,164,450Costs and expenses:Cost of services
    
    
    965,848
    
    
    
    225,428
    
    
    
    
    908,736Stock compensation expense
    
    
    
    
    
    
    142,213
    
    
    
    
    7,567Long-term incentive compensation
    
    
    
    
    
    
    
    
    
    
    
    14,453General and administrative
    
    
    36,490
    
    
    
    7,484
    
    
    
    
    27,069Bad debt expense
    
    
    36,056
    
    
    
    6,661
    
    
    
    
    14,425Depreciation and amortization
    
    
    29,533
    
    
    
    6,177
    
    
    
    
    28,898Total costs and expenses
    
    
    1,067,927
    
    
    
    387,963
    
    
    
    
    1,001,148Income (loss) from operations
    
    
    173,349
    
    
    
    (100,176
    )
    
    
    
    163,302Other income and expense:Loss on early retirement of debt
    
    
    
    
    
    
    42,736
    
    
    
    
    Merger related charges
    
    
    
    
    
    
    12,025
    
    
    
    
    Interest income
    
    
    (1,485
    )
    
    
    (523
    )
    
    
    
    (568
    )Interest expense
    
    
    25,385
    
    
    
    4,734
    
    
    
    
    60,406Income (loss) from continuing operations before
minority interests and income taxes
    
    
    149,449
    
    
    
    (159,148
    )
    
    
    
    103,464Minority interest in consolidated subsidiary companies
    
    
    2,772
    
    
    
    469
    
    
    
    
    2,335Income (loss) from continuing operations before income taxes
    
    
    146,677
    
    
    
    (159,617
    )
    
    
    
    101,129Income tax expense (benefit)
    
    
    59,121
    
    
    
    (59,366
    )
    
    
    
    40,819Income (loss) from continuing operations
    
    
    87,556
    
    
    
    (100,251
    )
    
    
    
    60,310Income from discontinued operations, net of tax
    
    
    802
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    88,358
    
    
    $
    (100,251
    )
    
    
    $
    60,310
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income
 (unaudited)
 (in thousands)
 AccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    OtherStock
    
    
    Stock Par
    
    
    Excess of
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveIssued
    
    
    Value
    
    
    Par
    
    
    Earnings
    
    
    Income
    
    
    LossPredecessor:Balance at December 31, 2004
    
    
    101,954
    
    
    $
    1,020
    
    
    $
    275,281
    
    
    $
    230,535
    
    
    $
    9,107Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,251
    )
    
    
    
    
    
    $
    (100,251
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,019
    )
    
    
    (1,019
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (101,270
    )Issuance of common stock
    
    
    267
    
    
    
    3
    
    
    
    1,020Repurchase of non-employee options
    
    
    
    
    
    
    
    
    
    
    (1,617
    )Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    1,507Balance at February 24, 2005
    
    
    102,221
    
    
    $
    1,023
    
    
    $
    276,191
    
    
    $
    130,284
    
    
    $
    8,088
 AccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    OtherStock
    
    
    Stock Par
    
    
    Excess of
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveIssued
    
    
    Value
    
    
    Par
    
    
    Earnings
    
    
    Income
    
    
    IncomeSuccessor:Capitalization of Successor Company at February 25, 2005
    
    
    
    
    
    
    
    
    
    $
    431,167Expenses paid on behalf of Holdings at February 25, 2005
    
    
    
    
    
    
    
    
    
    
    (10,490
    )Adjustment to initial capitalization
    
    
    
    
    
    
    
    
    
    
    (8,686
    )Additional investment by Holdings
    
    
    
    
    
    
    
    
    
    
    18,495Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (23,849
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,310
    
    
    
    
    
    
    $
    60,310Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,134
    
    
    
    6,134Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    66,444Contribution related to restricted stock award issuances by Holdings
    
    
    
    
    
    
    
    
    
    
    7,567Balance at September 30, 2005
    
    
    
    
    
    $
    
    
    
    $
    438,053
    
    
    $
    36,461
    
    
    $
    6,134
 The
accompanying notes are an integral part of this statement.
 6




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##### Table of Contents



Select Medical Corporation
 
 Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Predecessor
    
    
    
    SuccessorFor the Nine
    
    
    
    
    
    
    
    Period fromMonths Ended
    
    
    Period from
    
    
    
    February 25September 30,
    
    
    January 1 through
    
    
    
    through September2004
    
    
    February 24, 2005
    
    
    
    30, 2005Operating activitiesNet income (loss)
    
    $
    88,358
    
    
    $
    (100,251
    )
    
    
    $
    60,310Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    29,467
    
    
    
    6,177
    
    
    
    
    28,898Provision for bad debts
    
    
    36,520
    
    
    
    6,661
    
    
    
    
    14,425Loss on early retirement of debt (non-cash)
    
    
    
    
    
    
    7,977
    
    
    
    
    Non cash compensation expense
    
    
    
    
    
    
    
    
    
    
    
    7,567Other non cash expenses
    
    
    
    
    
    
    
    
    
    
    
    715Minority interests
    
    
    2,772
    
    
    
    469
    
    
    
    
    2,335Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (31,814
    )
    
    
    (48,976
    )
    
    
    
    (23,516
    )Other current assets
    
    
    5,556
    
    
    
    1,816
    
    
    
    
    (1,250
    )Other assets
    
    
    3,241
    
    
    
    (622
    )
    
    
    
    1,163Accounts payable
    
    
    (13,831
    )
    
    
    5,250
    
    
    
    
    2,484Due to third-party payors
    
    
    (20,112
    )
    
    
    667
    
    
    
    
    (2,598
    )Accrued expenses
    
    
    8,384
    
    
    
    199,909
    
    
    
    
    (179,238
    )Income taxes
    
    
    20,908
    
    
    
    (60,021
    )
    
    
    
    31,441Net cash provided by (used in) operating activities
    
    
    129,449
    
    
    
    19,056
    
    
    
    
    (57,264
    )Investing activitiesPurchases of property and equipment
    
    
    (26,092
    )
    
    
    (2,586
    )
    
    
    
    (70,459
    )Earnout payments
    
    
    (2,983
    )
    
    
    
    
    
    
    
    Proceeds from sale of business
    
    
    11,554
    
    
    
    
    
    
    
    
    Proceeds from sale of membership interests
    
    
    4,768
    
    
    
    
    
    
    
    
    Acquisition of businesses, net of cash acquired
    
    
    (325
    )
    
    
    (108,279
    )
    
    
    
    (2,747
    )Net cash used in investing activities
    
    
    (13,078
    )
    
    
    (110,865
    )
    
    
    
    (73,206
    )Financing activitiesEquity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    
    724,042Proceeds from credit facility
    
    
    
    
    
    
    
    
    
    
    
    780,000Proceeds from senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    660,000Repayment of senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    (350,000
    )Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    
    (57,198
    )Costs associated with equity investment of Holdings
    
    
    
    
    
    
    
    
    
    
    
    (8,686
    )Net repayments on credit facility debt
    
    
    (8,483
    )
    
    
    
    
    
    
    
    (62,900
    )Principal payments on seller and other debt
    
    
    (2,961
    )
    
    
    (528
    )
    
    
    
    (4,004
    )Repurchases of common stock and options
    
    
    (48,058
    )
    
    
    
    
    
    
    
    (1,687,994
    )Proceeds from issuance of common stock
    
    
    17,994
    
    
    
    1,023
    
    
    
    
    Payment of common stock dividends
    
    
    (9,209
    )
    
    
    
    
    
    
    
    Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    (9,396
    )Proceeds from (repayment) of bank overdrafts
    
    
    (2,879
    )
    
    
    
    
    
    
    
    689Restricted cash
    
    
    (7,500
    )
    
    
    108
    
    
    
    
    217Distributions to minority interests
    
    
    (996
    )
    
    
    (401
    )
    
    
    
    (1,240
    )Net cash provided by (used in) financing activities
    
    
    (62,092
    )
    
    
    202
    
    
    
    
    (16,470
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    129
    
    
    
    (149
    )
    
    
    
    584Net increase (decrease) in cash and cash equivalents
    
    
    54,408
    
    
    
    (91,756
    )
    
    
    
    (146,356
    )Cash and cash equivalents at beginning of period
    
    
    165,507
    
    
    
    247,476
    
    
    
    
    155,720Cash and cash equivalents at end of period
    
    $
    219,915
    
    
    $
    155,720
    
    
    
    $
    9,364Supplemental Cash Flow InformationCash paid for interest
    
    $
    21,837
    
    
    $
    10,630
    
    
    
    $
    41,803Cash paid for taxes
    
    $
    40,832
    
    
    $
    1,502
    
    
    
    $
    8,931
 The
accompanying notes are an integral part of this statement.
 7




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED
 1. Basis of Presentation
    2. Merger and Related Transactions
   - 8 -




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
    
    a cash common and preferred equity investment in Holdings by
Welsh, Carson, Anderson & Stowe IX, L.P. and other equity
investors of $570.0 million, which funds were contributed to the
Company;
    
    a senior subordinated notes offering by Holdings of $150.0
million, which funds were contributed to the Company;
    
    borrowing by the Company of $580.0 million in term loans and
$200.0 million on the revolving loan facility under its new senior
secured credit facility;
    
    the issuance by the Company of $660.0 million in aggregate
principle amount of 7 5/8% senior subordinated notes; and
    
    $131.1 million of cash on hand at the closing date.
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##### Table of Contents



Cash contributions from Holdings
    
    $
    720,000Exchange of shares of predecessor company for shares of
Holdings at $18.00 per share
    
    
    151,992Aggregate equity contribution
    
    
    871,992Continuing
shareholders basis adjustment (including initial capitalization adjustment of $8,686)
    
    
    (449,510
    )Equity contribution, net
    
    
    422,482Expenses paid on behalf of Holdings
    
    
    (10,491
    )Proceeds from borrowings
    
    
    1,440,000Purchase price allocated
    
    $
    1,851,991Fair value of net tangible assets acquired:Cash
    
    $
    34,484Accounts receivable
    
    
    280,891Current deferred tax asset
    
    
    69,858Other current assets
    
    
    20,955Property and equipment
    
    
    177,634Non-current deferred tax asset
    
    
    31,879Other assets
    
    
    11,165Current liabilities
    
    
    (267,831
    )Long-term debt
    
    
    (7,052
    )Minority interest in consolidated subsidiary companies
    
    
    (6,661
    )Net tangible assets acquired
    
    
    345,322Capitalized debt issuance costs
    
    
    55,392Intangible assets acquired
    
    
    92,988Goodwill
    
    
    1,358,289$
    1,851,991
  For the ThreeMonths Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2004
    
    2005Net revenue
    
    $
    407,570
    
    
    $
    1,241,276
    
    
    $
    1,452,237Net income (loss)
    
    
    16,686
    
    
    
    55,996
    
    
    
    (33,016
    )
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3. Accounting Policies
 Use of Estimates
  Financial Instruments and Hedging
   Recent Accounting Pronouncements
   - 11 -




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4. Stock Option Plans
  - 12 -




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2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterCompensation expense
    
    $
    8,282
    
    
    $
    2,884
    
    
    $
    2,884
    
    
    $
    1,443
    
    
    $
    1,155
    
    
    $
    193
    PredecessorPeriod from
    
    
    For the NineFor the Three
    
    
    January 1
    
    
    MonthsMonths Ended
    
    
    through
    
    
    EndedSeptember 30,
    
    
    February 24,
    
    
    September2004
    
    
    2005
    
    
    30, 2004(in thousands)Net income
(loss)  as reported
    
    $
    27,817
    
    
    $
    (100,251
    )
    
    $
    88,358Deduct: Total stock based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
    
    
    5,292
    
    
    
    1,760
    
    
    
    15,336Net income
(loss)  pro forma
    
    $
    22,525
    
    
    $
    (102,011
    )
    
    $
    73,022Weighted average grant-date fair value
    
    $
    4.37
    
    
    $
    4.48
    
    
    $
    4.25
 - 13 -




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##### Table of Contents



5. Accumulated Other Comprehensive Income (Loss)
  Predecessor
    
    
    Successor
    
    
    Predecessor
    
    
    SuccessorPeriod
    
    
    PeriodThree
    
    
    Three
    
    
    Nine
    
    
    from
    
    
    fromMonths
    
    
    Months
    
    
    Months
    
    
    January 1
    
    
    FebruaryEnded
    
    
    Ended
    
    
    Ended
    
    
    through
    
    
    25 throughSeptember
    
    
    September
    
    
    September
    
    
    February
    
    
    September30, 2004
    
    
    30, 2005
    
    
    30, 2004
    
    
    24, 2005
    
    
    30, 2005(in thousands)Net income (loss)
    
    $
    27,817
    
    
    $
    17,816
    
    
    $
    88,358
    
    
    $
    (100,251
    )
    
    $
    60,310Gain on interest
rate swap, net of
tax
    
    
    
    
    
    
    1,386
    
    
    
    
    
    
    
    
    
    
    
    1,386Unrealized losses
on available for
sale securities
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Realized losses on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    Changes in foreign
currency
translation
    
    
    2,706
    
    
    
    2,633
    
    
    
    109
    
    
    
    (1,019
    )
    
    
    4,748Total comprehensive
income (loss)
    
    $
    30,523
    
    
    $
    21,835
    
    
    $
    88,516
    
    
    $
    (101,270
    )
    
    $
    66,444
 6. Real Estate Purchases
  7. Intangible Assets
  - 14 -




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##### Table of Contents



Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorPeriod
    
    PeriodThree
    
    Three
    
    Nine
    
    from
    
    fromMonths
    
    Months
    
    Months
    
    January 1
    
    FebruaryEnded
    
    Ended
    
    Ended
    
    through
    
    25 throughSeptember
    
    September
    
    September
    
    February
    
    September30, 2004
    
    30, 2005
    
    30, 2004
    
    24, 2005
    
    30, 2005(in thousands)Amortization expense
    
    $
    857
    
    
    $
    2,580
    
    
    $
    2,571
    
    
    $
    576
    
    
    $
    6,019
   SuccessorAs of September 30, 2005Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (3,850
    )Non-compete agreements
    
    
    20,808
    
    
    
    (2,169
    )Total
    
    $
    41,264
    
    
    $
    (6,019
    )Unamortized intangible assetsGoodwill
    
    $
    1,362,757Trademarks
    
    
    47,058Certificates of need
    
    
    3,083Accreditation
    
    
    1,892Total
    
    $
    1,414,790
 - 15 -




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##### Table of Contents



8. Restructuring Charges
  LeaseTerminationCosts
    
    
    Severance
    
    
    Total(in thousands)January 1,
2005Predecessor
    
    $
    3,225
    
    
    $
    1,699
    
    
    $
    4,924Amounts paid in 2005
    
    
    (1,347
    )
    
    
    (1,355
    )
    
    
    (2,702
    )September 30, 2005-Successor
    
    $
    1,878
    
    
    $
    344
    
    
    $
    2,222
  9. Debt
  September 30, 2005(in thousands)Senior secured credit facility
    
    $
    717,1007 5/8% senior subordinated notes
    
    
    660,000Seller notes
    
    
    1,625Other
    
    
    1,315Total debt
    
    
    1,380,040Less: current maturities
    
    
    7,949Total long-term debt
    
    $
    1,372,091
 Senior Secured Credit Facility
  §
    
    A $300.0 million revolving credit facility that will terminate on February 24, 2011
including both a letter of credit sub facility and a swing line loan sub facility and;§
    
    A $580.0 million term loan facility that matures on February 24, 2012 that was drawn at
the closing of the Merger.
  - 16 -




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Senior Subordinated Notes
  - 17 -




---



##### Table of Contents



Year
    
    Redemption Price2010
    
    
    103.813
    %2011
    
    
    102.542
    %2012
    
    
    101.271
    %2013 and thereafter
    
    
    100.000
    %
    9 1/2% Senior Subordinated Notes
  - 18 -




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##### Table of Contents



Future Principle Obligations
  2006
    
    $
    6,4962007
    
    
    5,9842008
    
    
    5,8352009
    
    
    5,8002010 and beyond
    
    
    1,352,450
 10. Stockholders Equity
  11. Long-Term Incentive Compensation
  12. Segment Information
   PredecessorThree Months Ended September 30, 2004Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    270,647
    
    
    $
    133,522
    
    
    $
    3,401
    
    
    $
    407,570Adjusted EBITDA
    
    
    58,945
    
    
    
    17,349
    
    
    
    (11,067
    )
    
    
    65,227Total assets
    
    
    509,050
    
    
    
    367,578
    
    
    
    229,430
    
    
    
    1,106,058Capital expenditures
    
    
    5,397
    
    
    
    1,219
    
    
    
    344
    
    
    
    6,960
 - 19 -




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##### Table of Contents



SuccessorThree Months Ended September 30, 2005Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    340,898
    
    
    $
    135,302
    
    
    $
    1,498
    
    
    $
    477,698Adjusted EBITDA
    
    
    77,642
    
    
    
    18,032
    
    
    
    (11,490
    )
    
    
    84,184Total assets
    
    
    1,585,792
    
    
    
    516,697
    
    
    
    36,903
    
    
    
    2,139,392Capital expenditures
    
    
    13,814
    
    
    
    324
    
    
    
    113
    
    
    
    14,251PredecessorNine Months Ended September 30, 2004Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    807,944
    
    
    $
    423,465
    
    
    $
    9,867
    
    
    $
    1,241,276Adjusted EBITDA
    
    
    174,966
    
    
    
    64,427
    
    
    
    (36,511
    )
    
    
    202,882Total assets
    
    
    509,050
    
    
    
    367,578
    
    
    
    229,430
    
    
    
    1,106,058Capital expenditures
    
    
    18,422
    
    
    
    4,370
    
    
    
    3,300
    
    
    
    26,092PredecessorPeriod from January 1 through February 24, 2005Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    202,465
    
    
    $
    83,395
    
    
    $
    1,927
    
    
    $
    287,787Adjusted EBITDA
    
    
    44,343
    
    
    
    11,531
    
    
    
    (7,660
    )
    
    
    48,214Total assets
    
    
    903,208
    
    
    
    239,019
    
    
    
    89,186
    
    
    
    1,231,413Capital expenditures
    
    
    1,163
    
    
    
    408
    
    
    
    1,015
    
    
    
    2,586SuccessorPeriod from February 25 through September 30, 2005Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    826,818
    
    
    $
    332,721
    
    
    $
    4,911
    
    
    $
    1,164,450Adjusted EBITDA
    
    
    190,847
    
    
    
    50,790
    
    
    
    (27,417
    )
    
    
    214,220Total assets
    
    
    1,585,792
    
    
    
    516,697
    
    
    
    36,903
    
    
    
    2,139,392Capital expenditures
    
    
    66,943
    
    
    
    937
    
    
    
    2,579
    
    
    
    70,459
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##### Table of Contents



Predecessor
    
    
    Successor
    
    
    Predecessor
    
    
    SuccessorPeriod
    
    
    PeriodThree
    
    
    Three
    
    
    Nine
    
    
    from
    
    
    fromMonths
    
    
    Months
    
    
    Months
    
    
    January 1
    
    
    FebruaryEnded
    
    
    Ended
    
    
    Ended
    
    
    through
    
    
    25 throughSeptember
    
    
    September
    
    
    September
    
    
    February
    
    
    September30, 2004
    
    
    30, 2005
    
    
    30, 2004
    
    
    24, 2005
    
    
    30, 2005(in thousands)Net income (loss)
    
    $
    27,817
    
    
    $
    17,816
    
    
    $
    88,358
    
    
    $
    (100,251
    )
    
    $
    60,310Income tax expense
(benefit)
    
    
    18,674
    
    
    
    12,170
    
    
    
    59,121
    
    
    
    (59,366
    )
    
    
    40,819Minority interest
    
    
    620
    
    
    
    843
    
    
    
    2,772
    
    
    
    469
    
    
    
    2,335Interest expense, net
    
    
    7,998
    
    
    
    25,317
    
    
    
    23,900
    
    
    
    4,211
    
    
    
    59,838Merger related charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,025
    
    
    
    Loss on early
retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,736
    
    
    
    Income from
discontinued
operations
    
    
    (146
    )
    
    
    
    
    
    
    (802
    )
    
    
    
    
    
    
    Depreciation and
amortization
    
    
    10,264
    
    
    
    12,161
    
    
    
    29,533
    
    
    
    6,177
    
    
    
    28,898Long-term incentive
compensation
    
    
    
    
    
    
    14,453
    
    
    
    
    
    
    
    
    
    
    
    14,453Stock compensation
expense
    
    
    
    
    
    
    1,424
    
    
    
    
    
    
    
    142,213
    
    
    
    7,567Adjusted EBITDA
    
    $
    65,227
    
    
    $
    84,184
    
    
    $
    202,882
    
    
    $
    48,214
    
    
    $
    214,220
 13. Acquisition
   Cash paid, net of cash acquired
    
    $
    105,085Fair value of net tangible assets acquired:Accounts receivable
    
    
    22,143Other current assets
    
    
    4,718Property and equipment
    
    
    9,265Other assets
    
    
    242Current liabilities
    
    
    (14,150
    )Long-term debt
    
    
    (1,203
    )Net tangible assets acquired
    
    
    21,015Intangible assets acquired
    
    
    2,000Goodwill
    
    
    82,070$
    105,085
 - 21 -




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##### Table of Contents



For the Three Months Ended
    
    For the Nine Months EndedSeptember 30, 2004
    
    September 30, 2004(in thousands)Net revenue
    
    $
    448,565
    
    
    $
    1,351,879Net income
    
    $
    32,074
    
    
    $
    94,180
 14. Discontinued Operations
  PredecessorNine MonthsThree Months Ended
    
    
    EndedSeptember 30,
    
    
    September 30,2004
    
    
    2004(in thousands)Net revenue
    
    $
    3,467
    
    
    $
    10,426Income from discontinued operations
before income tax expense
    
    $
    249
    
    
    $
    1,343Income tax expense
    
    
    103
    
    
    
    541Income from discontinued operations
    
    $
    146
    
    
    $
    802
 - 22 -




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##### Table of Contents



15. Commitments and Contingencies
 Litigation
      - 23 -




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##### Table of Contents



Patient Care Obligation
  Other
  - 24 -




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##### Table of Contents



16. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries
     Caritas Rehab Services, LLC
    
    North Andover Physical Therapy, Inc.Canadian Back Institute Limited and its
subsidiaries
    
    OccuMed East, P.C.Cupertino Medical Center, P.C.
    
    Ohio Occupational Health, P.C., Inc.Elizabethtown Physical Therapy
    
    Partners in Physical Therapy, PLLCJeff Ayres, PT Therapy Center, Inc.
    
    Philadelphia Occupational Health, P.C.Jeffersontown Physical Therapy, LLC
    
    Rehabilitation Physician Services, P.CKentucky Orthopedic Rehabilitation, LLC
    
    Robinson & Associates, P.C.Kessler Core PT, OT and Speech Therapy at
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  MississippiLouisville Physical Therapy, P.S.C.
    

Gulf
Coast, Inc.Medical Information Management Systems, LLC
    
    Sprint Physical Therapy, P.C.Metropolitan West Physical Therapy and
Sports
    
    Therex, P.C.Medicine Services Inc.
    
    TJ Corporation I, LLCMetro Therapy, Inc.
    
    U.S. Regional Occupational Health II, P.C.MKJ Physical Therapy, Inc.
    
    U.S. Regional Occupational Health II ofNew York Physician Services, P.C.
    

New Jersey, P.C.
 - 25 -




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##### Table of Contents



Select Medical Corporation
 Condensed Consolidating Balance Sheet
September 30, 2005
Successor
 Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(In thousands)AssetsCurrent Assets:Cash and cash
equivalents
    
    $
    2,608
    
    
    $
    (6,776
    )
    
    $
    13,532
    
    
    $
    
    
    
    $
    9,364Restricted cash
    
    
    6,706
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,706Accounts receivable,
net
    
    
    333
    
    
    
    271,707
    
    
    
    18,796
    
    
    
    
    
    
    
    290,836Current deferred tax
asset
    
    
    15,180
    
    
    
    51,639
    
    
    
    3,899
    
    
    
    
    
    
    
    70,718Other current assets
    
    
    1,551
    
    
    
    15,638
    
    
    
    6,031
    
    
    
    
    
    
    
    23,220Total Current Assets
    
    
    26,378
    
    
    
    332,208
    
    
    
    42,258
    
    
    
    
    
    
    
    400,844Property and
equipment, net
    
    
    8,620
    
    
    
    193,738
    
    
    
    22,432
    
    
    
    
    
    
    
    224,790Investment in
affiliates
    
    
    665,133
    
    
    
    61,353
    
    
    
    
    
    
    
    (726,486
    ) (a)
    
    
    Goodwill
    
    
    
    
    
    
    1,314,730
    
    
    
    48,027
    
    
    
    
    
    
    
    1,362,757Other identifiable
intangibles
    
    
    
    
    
    
    87,259
    
    
    
    19
    
    
    
    
    
    
    
    87,278Non-current deferred
tax asset
    
    
    36,087
    
    
    
    (34,395
    )
    
    
    (1,520
    )
    
    
    
    
    
    
    172Other assets
    
    
    58,664
    
    
    
    3,102
    
    
    
    1,785
    
    
    
    
    
    
    
    63,551Total Assets
    
    $
    794,882
    
    
    $
    1,957,995
    
    
    $
    113,001
    
    
    $
    (726,486
    )
    
    $
    2,139,392Liabilities and
Stockholders
EquityCurrent Liabilities:Bank overdrafts
    
    $
    689
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    689Current portion of
long-term debt and
notes payable
    
    
    1,040
    
    
    
    6,420
    
    
    
    489
    
    
    
    
    
    
    
    7,949Accounts payable
    
    
    1,168
    
    
    
    53,951
    
    
    
    7,409
    
    
    
    
    
    
    
    62,528Intercompany accounts
    
    
    (863,495
    )
    
    
    820,281
    
    
    
    43,214
    
    
    
    
    
    
    
    Accrued payroll
    
    
    1,100
    
    
    
    55,716
    
    
    
    231
    
    
    
    
    
    
    
    57,047Accrued vacation
    
    
    2,623
    
    
    
    20,772
    
    
    
    2,138
    
    
    
    
    
    
    
    25,533Accrued professional
liability
    
    
    17,160
    
    
    
    3,464
    
    
    
    
    
    
    
    
    
    
    
    20,624Accrued restructuring
    
    
    
    
    
    
    2,222
    
    
    
    
    
    
    
    
    
    
    
    2,222Accrued other
    
    
    3,947
    
    
    
    78,152
    
    
    
    3,256
    
    
    
    
    
    
    
    85,355Income taxes payable
    
    
    15,515
    
    
    
    (2,866
    )
    
    
    (6,735
    )
    
    
    
    
    
    
    5,914Due to third party
payors
    
    
    6,099
    
    
    
    10,319
    
    
    
    (5,084
    )
    
    
    
    
    
    
    11,334Total Current
Liabilities
    
    
    (814,154
    )
    
    
    1,048,431
    
    
    
    44,918
    
    
    
    
    
    
    
    279,195Long-term debt,
netof
current portion
    
    
    1,128,388
    
    
    
    228,789
    
    
    
    14,914
    
    
    
    
    
    
    
    1,372,091Total liabilities
    
    
    314,234
    
    
    
    1,277,220
    
    
    
    59,832
    
    
    
    
    
    
    
    1,651,286Commitments and
ContingenciesMinority interest in
consolidated
subsidiary companies
    
    
    
    
    
    
    388
    
    
    
    7,070
    
    
    
    
    
    
    
    7,458Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of
par
    
    
    438,053
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438,053Retained earnings
    
    
    36,461
    
    
    
    86,479
    
    
    
    15,537
    
    
    
    (102,016
    ) (b)
    
    
    36,46lSubsidiary investment
    
    
    
    
    
    
    593,908
    
    
    
    30,562
    
    
    
    (624,470
    ) (a)
    
    
    Accumulated other
comprehensive income
    
    
    6,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,134Total Stockholders
Equity
    
    
    480,648
    
    
    
    680,387
    
    
    
    46,099
    
    
    
    (726,486
    )
    
    
    480,648Total Liabilities and
Stockholders Equity
    
    $
    794,882
    
    
    $
    1,957,995
    
    
    $
    113,001
    
    
    $
    (726,486
    )
    
    $
    2,139,392
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings. 26




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##### Table of Contents



Select Medical Corporation
 Condensed Consolidated Statement of Operations
For the Period January 1 through February 24, 2005
Predecessor
 Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    

Eliminations
    
    
    Consolidated(In thousands)Net operating
revenues
    
    $
    28
    
    
    $
    248,857
    
    
    $
    38,902
    
    
    $
    
    
    
    $
    287,787Costs and expenses:Cost of services
    
    
    
    
    
    
    193,323
    
    
    
    32,105
    
    
    
    
    
    
    
    225,428Stock compensation
expense
    
    
    142,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,213General and administrative
    
    
    6,931
    
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    7,484Bad debt expense
    
    
    
    
    
    
    6,223
    
    
    
    438
    
    
    
    
    
    
    
    6,661Depreciation
and amortization
    
    
    371
    
    
    
    5,025
    
    
    
    781
    
    
    
    
    
    
    
    6,177Total costs and expenses
    
    
    149,515
    
    
    
    205,124
    
    
    
    33,324
    
    
    
    
    
    
    
    387,963Income (loss) from operations
    
    
    (149,487
    )
    
    
    43,733
    
    
    
    5,578
    
    
    
    
    
    
    
    (100,176
    )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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,736Merger related
charges
    
    
    12,025
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,025Interest income
    
    
    (294
    )
    
    
    (229
    )
    
    
    
    
    
    
    
    
    
    
    (523
    )Interest expense
    
    
    1,433
    
    
    
    2,953
    
    
    
    348
    
    
    
    
    
    
    
    4,734Income (loss)
before minority
interests and
income taxes
    
    
    2,174
    
    
    
    (166,206
    )
    
    
    4,884
    
    
    
    
    
    
    
    (159,148
    )Minority interest
in consolidated
subsidiary
companies
    
    
    
    
    
    
    7
    
    
    
    462
    
    
    
    
    
    
    
    469Income (loss)
before income taxes
    
    
    2,174
    
    
    
    (166,213
    )
    
    
    4,422
    
    
    
    
    
    
    
    (159,617
    )Income tax expense
(benefit)
    
    
    130
    
    
    
    (59,937
    )
    
    
    441
    
    
    
    
    
    
    
    (59,366
    )Equity in
earnings
of subsidiaries
    
    
    (102,295
    )
    
    
    3,192
    
    
    
    
    
    
    
    99,103
    (a)
    
    
    Net income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,981
    
    
    $
    99,103
    
    
    $
    (100,251
    )
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries. 27




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Period February 25 through September 30, 2005SuccessorSelect Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    10
    
    
    $
    1,017,218
    
    
    $
    147,222
    
    
    $
    
    
    
    $
    1,164,450Costs and expenses:Cost of services
    
    
    
    
    
    
    789,232
    
    
    
    119,504
    
    
    
    
    
    
    
    908,736Stock compensation expense
    
    
    7,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,567Long-term incentive compensation
    
    
    14,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,453General and administrative
    
    
    25,059
    
    
    
    2,010
    
    
    
    
    
    
    
    
    
    
    
    27,069Bad debt expense
    
    
    
    
    
    
    13,264
    
    
    
    1,161
    
    
    
    
    
    
    
    14,425Depreciation and amortization
    
    
    5,299
    
    
    
    20,790
    
    
    
    2,809
    
    
    
    
    
    
    
    28,898Total costs and expenses
    
    
    52,378
    
    
    
    825,296
    
    
    
    123,474
    
    
    
    
    
    
    
    1,001,148Income (loss) from operations
    
    
    (52,368
    )
    
    
    191,922
    
    
    
    23,748
    
    
    
    
    
    
    
    163,302Other income and expense:Intercompany interest and royalty fees
    
    
    18,387
    
    
    
    (18,210
    )
    
    
    (177
    )
    
    
    
    
    
    
    Intercompany management fees
    
    
    (112,202
    )
    
    
    109,833
    
    
    
    2,369
    
    
    
    
    
    
    
    Interest income
    
    
    (446
    )
    
    
    (65
    )
    
    
    (57
    )
    
    
    
    
    
    
    (568
    )Interest expense
    
    
    48,007
    
    
    
    11,326
    
    
    
    1,073
    
    
    
    
    
    
    
    60,406Income (loss) before minority
interests and income taxes
    
    
    (6,114
    )
    
    
    89,038
    
    
    
    20,540
    
    
    
    
    
    
    
    103,464Minority interest in consolidated
subsidiary companies
    
    
    
    
    
    
    121
    
    
    
    2,214
    
    
    
    
    
    
    
    2,335Income (loss) before income taxes
    
    
    (6,114
    )
    
    
    88,917
    
    
    
    18,326
    
    
    
    
    
    
    
    101,129Income tax expense
    
    
    25,296
    
    
    
    12,734
    
    
    
    2,789
    
    
    
    
    
    
    
    40,819Equity in earnings of subsidiaries
    
    
    91,720
    
    
    
    10,296
    
    
    
    
    
    
    
    (102,016
    )(a)
    
    
    Net income
    
    $
    60,310
    
    
    $
    86,479
    
    
    $
    15,537
    
    
    $
    (102,016
    )
    
    $
    60,310
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated
subsidiaries. 28




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Period January 1 through February 24, 2005PredecessorSelect MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,981
    
    
    $
    99,103
    (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
    
    
    102,295
    
    
    
    (3,192
    )
    
    
    
    
    
    
    (99,103
    )(a)
    
    
    Intercompany
    
    
    (9,314
    )
    
    
    12,090
    
    
    
    (2,776
    )
    
    
    
    
    
    
    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 expenses
    
    
    47,203
    
    
    
    152,793
    
    
    
    (87
    )
    
    
    
    
    
    
    199,909Income 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
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (105,092
    )
    
    
    (3,187
    )
    
    
    
    
    
    
    (108,279
    )Net cash used in investing activities
    
    
    (305
    )
    
    
    (107,137
    )
    
    
    (3,423
    )
    
    
    
    
    
    
    (110,865
    )Financing activitiesIntercompany debt reallocation
    
    
    (2,964
    )
    
    
    63
    
    
    
    2,901
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (528
    )
    
    
    
    
    
    
    
    
    
    
    (528
    )Restricted cash
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Proceeds from issuance of common stock
    
    
    1,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,023Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (401
    )
    
    
    
    
    
    
    (401
    )Net cash provided by (used in) financing activities
    
    
    (1,833
    )
    
    
    (465
    )
    
    
    2,500
    
    
    
    
    
    
    
    202Effect 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. 29




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the period February 25 through September 30, 2005SuccessorSelect MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    60,310
    
    
    $
    68,415
    
    
    $
    15,537
    
    
    $
    (83,952
    )
    
    $
    60,310Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    5,299
    
    
    
    20,790
    
    
    
    2,809
    
    
    
    
    
    
    
    28,898Provision for bad debts
    
    
    
    
    
    
    13,264
    
    
    
    1,161
    
    
    
    
    
    
    
    14,425Non cash compensation expense
    
    
    7,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,567Other non cash expenses
    
    
    
    
    
    
    715
    
    
    
    
    
    
    
    
    
    
    
    715Minority interests
    
    
    
    
    
    
    121
    
    
    
    2,214
    
    
    
    
    
    
    
    2,335Changes in operating assets and liabilities,
net of effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (91,720
    )
    
    
    7,768
    
    
    
    
    
    
    
    83,952
    
    
    
    Intercompany
    
    
    (92,149
    )
    
    
    93,076
    
    
    
    (927
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (171
    )
    
    
    (19,433
    )
    
    
    (3,912
    )
    
    
    
    
    
    
    (23,516
    )Other current assets
    
    
    (554
    )
    
    
    1,007
    
    
    
    (1,703
    )
    
    
    
    
    
    
    (1,250
    )Other assets
    
    
    2,598
    
    
    
    (837
    )
    
    
    (598
    )
    
    
    
    
    
    
    1,163Accounts payable
    
    
    (182
    )
    
    
    2,018
    
    
    
    648
    
    
    
    
    
    
    
    2,484Due to third-party payors
    
    
    49
    
    
    
    (2,023
    )
    
    
    (624
    )
    
    
    
    
    
    
    (2,598
    )Accrued expenses
    
    
    (52,493
    )
    
    
    (127,293
    )
    
    
    548
    
    
    
    
    
    
    
    (179,238
    )Income taxes
    
    
    25,684
    
    
    
    
    
    
    
    5,757
    
    
    
    
    
    
    
    31,441Net cash provided by (used in) operating activities
    
    
    (135,762
    )
    
    
    57,588
    
    
    
    20,910
    
    
    
    
    
    
    
    (57,264
    )Investing activitiesPurchases of property and equipment, net
    
    
    (1,065
    )
    
    
    (60,413
    )
    
    
    (8,981
    )
    
    
    
    
    
    
    (70,459
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (2,747
    )
    
    
    
    
    
    
    
    
    
    
    (2,747
    )Net cash used in investing activities
    
    
    (1,065
    )
    
    
    (63,160
    )
    
    
    (8,981
    )
    
    
    
    
    
    
    (73,206
    )Financing activitiesEquity investment by Holdings
    
    
    724,042
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    724,042Proceeds from credit facility
    
    
    780,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780,000Proceeds from senior subordinated notes
    
    
    660,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660,000Repayments on credit facility debt
    
    
    (62,900
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,900
    )Dividends to Holdings
    
    
    (9,396
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,396
    )Repayment of senior subordinated notes
    
    
    (350,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350,000
    )Deferred financing costs
    
    
    (57,198
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,198
    )Repurchases of common stock and options
    
    
    (1,687,994
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,687,994
    )Costs associated with equity investment of Holdings
    
    
    (8,686
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,686
    )Intercompany debt reallocation
    
    
    (7,936
    )
    
    
    12,415
    
    
    
    (4,479
    )
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    (340
    )
    
    
    (3,615
    )
    
    
    (49
    )
    
    
    
    
    
    
    (4,004
    )Restricted cash
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217Proceeds from bank overdrafts
    
    
    689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    689Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (1,240
    )
    
    
    
    
    
    
    (1,240
    )Net cash provided by (used in) financing activities
    
    
    (19,502
    )
    
    
    8,800
    
    
    
    (5,768
    )
    
    
    
    
    
    
    (16,470
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    584
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    584Net increase (decrease) in cash and cash equivalents
    
    
    (155,745
    )
    
    
    3,228
    
    
    
    6,161
    
    
    
    
    
    
    
    (146,356
    )Cash and cash equivalents at beginning of period
    
    
    158,353
    
    
    
    (10,004
    )
    
    
    7,371
    
    
    
    
    
    
    
    155,720Cash and cash equivalents at end of period
    
    $
    2,608
    
    
    $
    (6,776
    )
    
    $
    13,532
    
    
    $
    
    
    
    $
    9,364
 
 (a)
    
    Elimination of equity in earnings of subsidiary. 30




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Nine Months Ended September 30, 2004PredecessorSelect Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    25
    
    
    $
    1,063,780
    
    
    $
    177,471
    
    
    $
    
    
    
    $
    1,241,276Costs and expenses:Cost of services
    
    
    
    
    
    
    820,305
    
    
    
    145,543
    
    
    
    
    
    
    
    965,848General and administrative
    
    
    35,280
    
    
    
    1,210
    
    
    
    
    
    
    
    
    
    
    
    36,490Bad debt expense
    
    
    
    
    
    
    34,154
    
    
    
    1,902
    
    
    
    
    
    
    
    36,056Depreciation and amortization
    
    
    1,813
    
    
    
    24,135
    
    
    
    3,585
    
    
    
    
    
    
    
    29,533Total costs and expenses
    
    
    37,093
    
    
    
    879,804
    
    
    
    151,030
    
    
    
    
    
    
    
    1,067,927Income (loss) from operations
    
    
    (37,068
    )
    
    
    183,976
    
    
    
    26,441
    
    
    
    
    
    
    
    173,349Other income and expense:Intercompany interest and royalty fees
    
    
    22,060
    
    
    
    (22,015
    )
    
    
    (45
    )
    
    
    
    
    
    
    Intercompany management fees
    
    
    (79,073
    )
    
    
    76,173
    
    
    
    2,900
    
    
    
    
    
    
    
    Interest income
    
    
    (967
    )
    
    
    (513
    )
    
    
    (5
    )
    
    
    
    
    
    
    (1,485
    )Interest expense
    
    
    7,870
    
    
    
    15,662
    
    
    
    1,853
    
    
    
    
    
    
    
    25,385Income from continuing operations before minority
interests and income taxes
    
    
    13,042
    
    
    
    114,669
    
    
    
    21,738
    
    
    
    
    
    
    
    149,449Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    212
    
    
    
    2,560
    
    
    
    
    
    
    
    2,772Income from continuing operations before income taxes
    
    
    13,042
    
    
    
    114,457
    
    
    
    19,178
    
    
    
    
    
    
    
    146,677Income tax expense
    
    
    8,151
    
    
    
    47,001
    
    
    
    3,969
    
    
    
    
    
    
    
    59,121Income from continuing operations
    
    
    4,891
    
    
    
    67,456
    
    
    
    15,209
    
    
    
    
    
    
    
    87,556Income from discontinued operations, net of tax
    
    
    
    
    
    
    802
    
    
    
    
    
    
    
    
    
    
    
    802Equity in earnings of subsidiaries
    
    
    83,467
    
    
    
    9,409
    
    
    
    
    
    
    
    (92,876
    )(a)
    
    
    Net income
    
    $
    88,358
    
    
    $
    77,667
    
    
    $
    15,209
    
    
    $
    (92,876
    )
    
    $
    88,358
 
 (a)
    
    Elimination of equity in net income (loss) from
consolidated subsidiaries. 31




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Nine Months Ended September 30, 2004PredecessorSelect MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    88,358
    
    
    $
    77,667
    
    
    $
    15,209
    
    
    $
    (92,876
    )(a)
    
    $
    88,358Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,813
    
    
    
    24,069
    
    
    
    3,585
    
    
    
    
    
    
    
    29,467Provision for bad debts
    
    
    
    
    
    
    34,618
    
    
    
    1,902
    
    
    
    
    
    
    
    36,520Minority interests
    
    
    
    
    
    
    212
    
    
    
    2,560
    
    
    
    
    
    
    
    2,772Changes in operating assets and liabilities, net
of effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (83,467
    )
    
    
    (9,409
    )
    
    
    
    
    
    
    92,876
    (a)
    
    
    Intercompany
    
    
    26,856
    
    
    
    (14,920
    )
    
    
    (11,936
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (146
    )
    
    
    (44,176
    )
    
    
    12,508
    
    
    
    
    
    
    
    (31,814
    )Other current assets
    
    
    341
    
    
    
    1,270
    
    
    
    3,945
    
    
    
    
    
    
    
    5,556Other assets
    
    
    1,978
    
    
    
    1,454
    
    
    
    (191
    )
    
    
    
    
    
    
    3,241Accounts payable
    
    
    (7,259
    )
    
    
    (7,366
    )
    
    
    794
    
    
    
    
    
    
    
    (13,831
    )Due to third-party payors
    
    
    
    
    
    
    (18,102
    )
    
    
    (2,010
    )
    
    
    
    
    
    
    (20,112
    )Accrued expenses
    
    
    1,321
    
    
    
    6,525
    
    
    
    538
    
    
    
    
    
    
    
    8,384Income taxes
    
    
    22,098
    
    
    
    
    
    
    
    (1,190
    )
    
    
    
    
    
    
    20,908Net cash provided by operating activities
    
    
    51,893
    
    
    
    51,842
    
    
    
    25,714
    
    
    
    
    
    
    
    129,449Investing activitiesPurchases of property and equipment, net
    
    
    (3,126
    )
    
    
    (21,153
    )
    
    
    (1,813
    )
    
    
    
    
    
    
    (26,092
    )Proceeds from sale of business
    
    
    
    
    
    
    11,554
    
    
    
    
    
    
    
    
    
    
    
    11,554Earnout payments
    
    
    
    
    
    
    (2,983
    )
    
    
    
    
    
    
    
    
    
    
    (2,983
    )Proceeds from sale of membership interests
    
    
    
    
    
    
    4,768
    
    
    
    
    
    
    
    
    
    
    
    4,768Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    
    
    
    
    (325
    )Net cash used in investing activities
    
    
    (3,126
    )
    
    
    (7,814
    )
    
    
    (2,138
    )
    
    
    
    
    
    
    (13,078
    )Financing activitiesIntercompany debt reallocation
    
    
    9,920
    
    
    
    (2,983
    )
    
    
    (6,937
    )
    
    
    
    
    
    
    Net repayments on credit facility debt
    
    
    
    
    
    
    
    
    
    
    (8,483
    )
    
    
    
    
    
    
    (8,483
    )Principal payments on seller and other debt
    
    
    
    
    
    
    (2,721
    )
    
    
    (240
    )
    
    
    
    
    
    
    (2,961
    )Restricted cash
    
    
    (7,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,500
    )Repurchases of common stock
    
    
    (48,058
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,058
    )Proceeds from issuance of common stock
    
    
    17,994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,994Payment of common stock dividends
    
    
    (9,209
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,209
    )Repayment of bank overdrafts
    
    
    (2,879
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,879
    )Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (996
    )
    
    
    
    
    
    
    (996
    )Net cash used in financing activities
    
    
    (39,732
    )
    
    
    (5,704
    )
    
    
    (16,656
    )
    
    
    
    
    
    
    (62,092
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129Net increase in cash and cash equivalents
    
    
    9,164
    
    
    
    38,324
    
    
    
    6,920
    
    
    
    
    
    
    
    54,408Cash and cash equivalents at beginning of period
    
    
    101,989
    
    
    
    60,878
    
    
    
    2,640
    
    
    
    
    
    
    
    165,507Cash and cash equivalents at end of period
    
    $
    111,153
    
    
    $
    99,202
    
    
    $
    9,560
    
    
    $
    
    
    
    $
    219,915
 
 (a)
    
    Elimination of equity in earnings of subsidiary. 32




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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 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;
    
    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;
    
    additional changes in government reimbursement for our services may have an
adverse effect on 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;
    
    the failure to generate sufficient cash flow to service the
increased level of indebtedness that resulted from the Merger
transactions;
    
    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 future 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.
 - 33 -




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##### Table of Contents



Overview
      - 34 -




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##### Table of Contents



Third Quarter Ended and Combined Nine Months Ended September 30, 2005
       - 35 -




---



##### Table of Contents



SemperCare Acquisition
  Merger and Related Transactions
    
    
    $1,827.7 million to pay our then existing stockholders (other than rollover stockholders)
and option holders all amounts due under the merger agreement;
    
    $152.0 million of rollover equity from our continuing investors;
    
    $344.2 million to repay existing indebtedness; and
    
    $119.2 million to pay related fees and expenses, including premiums, consent fees and
interest payable in connection with the tender offers and consent solicitations for our
existing senior subordinated notes.
  
    
    a cash equity investment in Holdings of $570.0 million by an investor group led by Welsh
Carson and Thoma Cressey (the net proceeds of which were contributed by Holdings to us) and
a rollover equity investment in Holdings of $152.0 million by our continuing investors;
    
    Holdings issuance and sale of senior subordinated notes, preferred stock and common
stock to WCAS Capital Partners IV, L.P., an investment fund affiliated with Welsh Carson,
Rocco A. Ortenzio, Robert A. Ortenzio and certain other investors who are members of or
affiliated with the Ortenzio family, for an aggregate purchase price of $150.0 million (the
net proceeds of which were contributed by Holdings to us);
 - 36 -




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##### Table of Contents




    
    borrowings by us of $580.0 million in term loans and $200.0 million in revolving loans
under our new senior secured credit facility;
    
    existing cash on hand of $131.1 million; and
    
    the issuance of $660.0 million in aggregate principal
amount of the 7 5/8% senior subordinated notes.
  Regulatory Changes
   - 37 -




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##### Table of Contents



Development of New Specialty Hospitals and Clinics
  - 38 -




---



##### Table of Contents



Operating Statistics
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Specialty hospital data(1):Number of hospitals  start of
period
    
    
    86
    
    
    
    102
    
    
    
    83
    
    
    
    86Number of hospital start-ups
    
    
    1
    
    
    
    
    
    
    
    4
    
    
    
    Number of hospitals closed
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )Number of hospitals acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Number of hospitals  end of
period
    
    
    87
    
    
    
    101
    
    
    
    87
    
    
    
    101Available licensed beds
    
    
    3,403
    
    
    
    3,814
    
    
    
    3,403
    
    
    
    3,814Admissions
    
    
    8,197
    
    
    
    9,725
    
    
    
    25,241
    
    
    
    30,056Patient days
    
    
    198,052
    
    
    
    242,850
    
    
    
    615,304
    
    
    
    739,860Average length of stay (days)
    
    
    24
    
    
    
    25
    
    
    
    24
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,338
    
    
    $
    1,371
    
    
    $
    1,287
    
    
    $
    1,358Occupancy rate
    
    
    63
    %
    
    
    69
    %
    
    
    68
    %
    
    
    70
    %Percent patient days  Medicare
    
    
    74
    %
    
    
    75
    %
    
    
    74
    %
    
    
    76
    %Outpatient rehabilitation data:Number of clinics owned 
start of period
    
    
    728
    
    
    
    696
    
    
    
    758
    
    
    
    705Number of clinics acquired
    
    
    2
    
    
    
    1
    
    
    
    4
    
    
    
    8Number of clinic start-ups
    
    
    3
    
    
    
    2
    
    
    
    16
    
    
    
    17Number of clinics closed/sold
    
    
    (20
    )
    
    
    (10
    )
    
    
    (65
    )
    
    
    (41
    )Number of clinics owned  end
of period
    
    
    713
    
    
    
    689
    
    
    
    713
    
    
    
    689Number of clinics managed 
end of period
    
    
    37
    
    
    
    41
    
    
    
    37
    
    
    
    41Total number of clinics (all)
 end of period
    
    
    750
    
    
    
    730
    
    
    
    750
    
    
    
    730Number of visits (U.S.)
    
    
    935,763
    
    
    
    858,974
    
    
    
    2,933,106
    
    
    
    2,692,369Net revenue per visit (U.S.)(3)
    
    $
    88
    
    
    $
    90
    
    
    $
    89
    
    
    $
    90
 
 (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)
    
    Net revenue per visit (U.S.) 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 our Canadian subsidiary and contract services
revenue. - 39 -




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##### Table of Contents



Results of Operations
  Nine Months EndedSeptember 30, 2005(in thousands)Predecessor
    
    
    Successor
    
    
    CombinedNet operating revenues
    
    $
    287,787
    
    
    $
    1,164,450
    
    
    $
    1,452,237Costs and expenses:Cost of services
    
    
    225,428
    
    
    
    908,736
    
    
    
    1,134,164Stock compensation expense
    
    
    142,213
    
    
    
    7,567
    
    
    
    149,780Long-term incentive compensation
    
    
    
    
    
    
    14,453
    
    
    
    14,453General and administrative
    
    
    7,484
    
    
    
    27,069
    
    
    
    34,553Bad debt expense
    
    
    6,661
    
    
    
    14,425
    
    
    
    21,086Depreciation and amortization
    
    
    6,177
    
    
    
    28,898
    
    
    
    35,075Total costs and expenses
    
    
    387,963
    
    
    
    1,001,148
    
    
    
    1,389,111Income (loss) from operations
    
    
    (100,176
    )
    
    
    163,302
    
    
    
    63,126Other income and expense:Loss on early retirement of debt
    
    
    42,736
    
    
    
    
    
    
    
    42,736Merger related charges
    
    
    12,025
    
    
    
    
    
    
    
    12,025Interest income
    
    
    (523
    )
    
    
    (568
    )
    
    
    (1,091
    )Interest expense
    
    
    4,734
    
    
    
    60,406
    
    
    
    65,140Income (loss) before minority
interests and income taxes
    
    
    (159,148
    )
    
    
    103,464
    
    
    
    (55,684
    )Minority interest in
consolidated subsidiary
companies
    
    
    469
    
    
    
    2,335
    
    
    
    2,804Income (loss) before income taxes
    
    
    (159,617
    )
    
    
    101,129
    
    
    
    (58,488
    )Income tax expense (benefit)
    
    
    (59,366
    )
    
    
    40,819
    
    
    
    (18,547
    )Net income (loss)
    
    $
    (100,251
    )
    
    $
    60,310
    
    
    $
    (39,941
    )
 - 40 -




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(2)
    
    
    78.2
    
    
    
    79.1
    
    
    
    77.8
    
    
    
    78.1Stock compensation expense
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    10.3Long-term incentive compensation
    
    
    
    
    
    
    3.0
    
    
    
    
    
    
    
    1.0General and administrative
    
    
    2.7
    
    
    
    2.4
    
    
    
    2.9
    
    
    
    2.4Bad debt expense
    
    
    3.2
    
    
    
    0.9
    
    
    
    2.9
    
    
    
    1.4Depreciation and amortization
    
    
    2.5
    
    
    
    2.6
    
    
    
    2.4
    
    
    
    2.4Income from operations
    
    
    13.4
    
    
    
    11.7
    
    
    
    14.0
    
    
    
    4.4Loss on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.9Merger related charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Interest expense, net
    
    
    1.9
    
    
    
    5.3
    
    
    
    2.0
    
    
    
    4.5Income (loss) from continuing
operations before minority interests
and income taxes
    
    
    11.5
    
    
    
    6.4
    
    
    
    12.0
    
    
    
    (3.8
    )Minority interests
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Income (loss) from continuing
operations before income taxes
    
    
    11.4
    
    
    
    6.2
    
    
    
    11.8
    
    
    
    (4.0
    )Income tax expense (benefit)
    
    
    4.6
    
    
    
    2.5
    
    
    
    4.7
    
    
    
    (1.3
    )Income (loss) from continuing operations
    
    
    6.8
    
    
    
    3.7
    
    
    
    7.1
    
    
    
    (2.7
    )Income from discontinued operations,
net of tax
    
    
    N/M
    
    
    
    
    
    
    
    N/M
    
    
    
    Net income (loss)
    
    
    6.8
    %
    
    
    3.7
    %
    
    
    7.1
    %
    
    
    (2.7
    )%
 - 41 -




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    % Change
    
    
    2004
    
    
    2005 (1)
    
    
    % Change(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    270,647
    
    
    $
    340,898
    
    
    
    26.0
    %
    
    $
    807,944
    
    
    $
    1,029,283
    
    
    
    27.4
    %Outpatient rehabilitation
    
    
    133,522
    
    
    
    135,302
    
    
    
    1.3
    
    
    
    423,465
    
    
    
    416,116
    
    
    
    (1.7
    )Other (4)
    
    
    3,401
    
    
    
    1,498
    
    
    
    (56.0
    )
    
    
    9,867
    
    
    
    6,838
    
    
    
    (30.7
    )Total company
    
    $
    407,570
    
    
    $
    477,698
    
    
    
    17.2
    %
    
    $
    1,241,276
    
    
    $
    1,452,237
    
    
    
    17.0
    %Income (loss) from operations:Specialty hospitals
    
    $
    54,014
    
    
    $
    70,759
    
    
    
    31.0
    %
    
    $
    160,610
    
    
    $
    214,875
    
    
    
    33.8
    %Outpatient rehabilitation
    
    
    13,414
    
    
    
    15,174
    
    
    
    13.1
    
    
    
    53,481
    
    
    
    53,853
    
    
    
    0.7Other (4)
    
    
    (12,465
    )
    
    
    (29,787
    )
    
    
    N/M
    
    
    
    (40,742
    )
    
    
    (205,602
    )
    
    
    N/MTotal company
    
    $
    54,963
    
    
    $
    56,146
    
    
    
    2.2
    %
    
    $
    173,349
    
    
    $
    63,126
    
    
    
    (63.6
    )%Adjusted EBITDA:(3)Specialty hospitals
    
    $
    58,945
    
    
    $
    77,642
    
    
    
    31.7
    %
    
    $
    174,966
    
    
    $
    235,190
    
    
    
    34.4
    %Outpatient rehabilitation
    
    
    17,349
    
    
    
    18,032
    
    
    
    3.9
    
    
    
    64,427
    
    
    
    62,321
    
    
    
    (3.3
    )Other (4)
    
    
    (11,067
    )
    
    
    (11,490
    )
    
    
    (3.8
    )
    
    
    (36,511
    )
    
    
    (35,077
    )
    
    
    3.9Adjusted EBITDA margins:(3)Specialty hospitals
    
    
    21.8
    %
    
    
    22.8
    %
    
    
    4.6
    %
    
    
    21.7
    %
    
    
    22.8
    %
    
    
    5.1
    %Outpatient rehabilitation
    
    
    13.0
    
    
    
    13.3
    
    
    
    2.3
    
    
    
    15.2
    
    
    
    15.0
    
    
    
    (1.3
    )Other (4)
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    509,050
    
    
    $
    1,585,792
    
    
    
    
    
    
    $
    509,050
    
    
    $
    1,585,792Outpatient rehabilitation
    
    
    367,578
    
    
    
    516,697
    
    
    
    
    
    
    
    367,578
    
    
    
    516,697Other (4)
    
    
    229,430
    
    
    
    36,903
    
    
    
    
    
    
    
    229,430
    
    
    
    36,903Total company
    
    $
    1,106,058
    
    
    $
    2,139,392
    
    
    
    
    
    
    $
    1,106,058
    
    
    $
    2,139,392Purchases of property and
equipment, net:Specialty hospitals
    
    $
    5,397
    
    
    $
    13,814
    
    
    
    
    
    
    $
    18,422
    
    
    $
    68,106Outpatient rehabilitation
    
    
    1,219
    
    
    
    324
    
    
    
    
    
    
    
    4,370
    
    
    
    1,345Other (4)
    
    
    344
    
    
    
    113
    
    
    
    
    
    
    
    3,300
    
    
    
    3,594Total company
    
    $
    6,960
    
    
    $
    14,251
    
    
    
    
    
    
    $
    26,092
    
    
    $
    73,045
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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005 (1)(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    270,647
    
    
    $
    340,898
    
    
    $
    807,944
    
    
    $
    1,029,283Less: Specialty hospitals opened,
acquired or closed after 1/1/04
    
    
    3,599
    
    
    
    52,589
    
    
    
    7,574
    
    
    
    154,006Specialty hospitals same store net
operating revenue
    
    $
    267,048
    
    
    $
    288,309
    
    
    $
    800,370
    
    
    $
    875,277Adjusted EBITDA(3)Specialty hospitals Adjusted EBITDA(3)
    
    $
    58,945
    
    
    $
    77,642
    
    
    $
    174,966
    
    
    $
    235,190Less: Specialty hospitals opened,
acquired or closed after 1/1/04
    
    
    (2,083
    )
    
    
    9,224
    
    
    
    (3,921
    )
    
    
    24,770Specialty hospitals same store Adjusted
EBITDA(3)
    
    $
    61,028
    
    
    $
    68,418
    
    
    $
    178,887
    
    
    $
    210,420All specialty hospitals Adjusted EBITDA
margin(3)
    
    
    21.8
    %
    
    
    22.8
    %
    
    
    21.7
    %
    
    
    22.8
    %Specialty hospitals same store Adjusted
EBITDA margin(3)
    
    
    22.9
    %
    
    
    23.7
    %
    
    
    22.4
    %
    
    
    24.0
    %
 
 N/M  Not Meaningful.(1)
    
    The financial data for the period after the Merger, February 25, 2005 through September
30, 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
nine months ended September 30, 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, income from discontinued operations, loss on early retirement of debt, merger
related charges, stock compensation expense, long-term incentive compensation, 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 11 to our interim consolidated financial statements for the period
ended September 30, 2005 for a reconciliation of net income to Adjusted EBITDA as utilized
by us in reporting our segment performance in accordance with SFAS No. 131.(4)
    
    Other primarily includes the Companys general and administrative services, as well as
businesses associated with the sale of home medical equipment, orthotics, prosthetics, and
infusion/intravenous services. - 43 -




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Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
 Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  - 44 -




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Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Stock Compensation Expense
  - 45 -




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Long-term Incentive Compensation
  Income (Loss) from Operations
  Interest Expense
  Minority Interests
  Income Taxes
  Income from Discontinued Operations, Net of Tax
  Combined Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
 Net Operating Revenues
  - 46 -




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Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  - 47 -




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Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Stock Compensation Expense
  Long-term Incentive Compensation
  Income (Loss) from Operations
  - 48 -




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Loss on Early Retirement of Debt
  Merger Related Charges
  Interest Expense
  Minority Interests
  Income Taxes
  - 49 -




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Income from Discontinued Operations, Net of Tax
  Liquidity and Capital Resources
    Capital Resources
  - 50 -




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
    
    a $300.0 million revolving loan facility that will
terminate on February 24, 2011 including both a
letter of credit sub-facility and a swingline loan sub-facility, and
    
    a $580.0 million term loan facility that matures on
February 24, 2012.
    - 51 -




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Inflation
  - 52 -




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Recent Accounting Pronouncements
     - 53 -




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  - 54 -




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- 55 -




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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:
November 14, 2005
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Exhibit
    
    Description10.1
    
    Office Lease Agreement dated August 10, 2005 among Old Gettysburg
Associates II and Select Medical Corporation, incorporated by
reference to Exhibit 10.1 of Select Medical Corporations Form 8-K
filed August 16, 2005.10.2
    
    Amendment No. 1, dated as of September 26, 2005, to Credit Agreement,
dated as of February 24, 2005, among Select Medical Holdings
Corporation, Select Medical Corporation, as Borrower, the Lenders
party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and
Collateral Agent, Wachovia Bank, National Association, as Syndication
Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC
Inc., as Co-Documentation Agents.31.1
    
    Certification of President and 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 President and 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.
 - 57 -