##### 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 June 30, 2006
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 For the Period From  to .
 Commission File Number: 000-32499
 SELECT MEDICAL CORPORATION
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    23-2872718
(I.R.S. employer identification
number)
 4716 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
 
  þ o
  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 stockholders 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
    
    
    25ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    41ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    42PART II
    
    OTHER INFORMATION
    
    
    42ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    42ITEM 1A.
    
    RISK FACTORS
    
    
    43ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    47ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    47ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    47ITEM 5.
    
    OTHER INFORMATION
    
    
    47ITEM 6.
    
    EXHIBITS
    
    
    47SIGNATURES
    
    
    
    
    47Certification of Chief Executive OfficerCertification of Senior Vice President and Chief Financial OfficerCertification of Chief Executive Officer pursuant to U.S. Section 1350Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
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PART I
 FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 Select Medical Corporation
 
 Consolidated Balance Sheets
 (unaudited)
 (in thousands, except share and per share amounts)
 December 31,
    
    
    June 30,2005
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    35,861
    
    
    $
    12,140Restricted cash
    
    
    6,345
    
    
    
    5,548Accounts receivable, net of allowance for doubtful accounts
of $74,891 and $65,974 in 2005 and 2006, respectively
    
    
    256,798
    
    
    
    268,024Prepaid income taxes
    
    
    4,110
    
    
    
    Current deferred tax asset
    
    
    59,135
    
    
    
    57,182Current assets held for sale
    
    
    13,876
    
    
    
    Other current assets
    
    
    19,725
    
    
    
    17,803Total Current Assets
    
    
    395,850
    
    
    
    360,697Property and equipment, net
    
    
    248,541
    
    
    
    301,366Goodwill
    
    
    1,305,210
    
    
    
    1,319,011Other identifiable intangibles
    
    
    86,789
    
    
    
    83,409Other assets held for sale
    
    
    61,388
    
    
    
    Other assets
    
    
    65,591
    
    
    
    70,889Total Assets
    
    $
    2,163,369
    
    
    $
    2,135,372LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    19,355
    
    
    $
    Current portion of long-term debt and notes payable
    
    
    6,516
    
    
    
    6,350Accounts payable
    
    
    60,528
    
    
    
    61,895Accrued payroll
    
    
    61,531
    
    
    
    52,454Accrued vacation
    
    
    26,983
    
    
    
    29,004Accrued interest
    
    
    25,230
    
    
    
    25,206Accrued professional liability
    
    
    21,527
    
    
    
    23,048Accrued restructuring
    
    
    390
    
    
    
    280Accrued other
    
    
    69,046
    
    
    
    63,535Income taxes payable
    
    
    
    
    
    
    33,589Due to third party payors
    
    
    12,175
    
    
    
    9,562Current liabilities held for sale
    
    
    4,215
    
    
    
    Total Current Liabilities
    
    
    307,496
    
    
    
    304,923Long-term debt, net of current portion
    
    
    1,315,764
    
    
    
    1,227,463Non-current deferred tax liability
    
    
    25,771
    
    
    
    37,684Non-current liabilities held for sale
    
    
    3,817
    
    
    
    Total Liabilities
    
    
    1,652,848
    
    
    
    1,570,070Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    4,356
    
    
    
    2,507Stockholders Equity:Common stock, $0.01par value, 100 shares issued and outstanding
    
    
    
    
    
    
    Capital in excess of par
    
    
    440,799
    
    
    
    442,690Retained earnings
    
    
    61,134
    
    
    
    114,627Accumulated other comprehensive income
    
    
    4,232
    
    
    
    5,478Total Stockholders Equity
    
    
    506,165
    
    
    
    562,795Total Liabilities and Stockholders Equity
    
    $
    2,163,369
    
    
    $
    2,135,372
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statements of Operations
 (unaudited)
 (in thousands)
 For the Quarter Ended June 30,2005
    
    
    2006Net operating revenues
    
    $
    473,704
    
    
    $
    482,141Costs and expenses:Cost of services
    
    
    371,559
    
    
    
    372,500General and administrative
    
    
    13,075
    
    
    
    11,549Bad debt expense
    
    
    5,308
    
    
    
    8,433Depreciation and amortization
    
    
    12,156
    
    
    
    11,666Total costs and expenses
    
    
    402,098
    
    
    
    404,148Income from operations
    
    
    71,606
    
    
    
    77,993Other income and expense:Other income
    
    
    308
    
    
    
    1,608Interest income
    
    
    193
    
    
    
    197Interest expense
    
    
    (25,054
    )
    
    
    (23,995
    )Income from continuing operations before
minority interests and income taxes
    
    
    47,053
    
    
    
    55,803Minority interest in consolidated subsidiary companies
    
    
    554
    
    
    
    335Income from continuing operations before income taxes
    
    
    46,499
    
    
    
    55,468Income tax expense
    
    
    18,712
    
    
    
    21,531Income from continuing operations
    
    
    27,787
    
    
    
    33,937Income from discontinued operations, net of tax
    
    
    1,634
    
    
    
    Net income
    
    $
    29,421
    
    
    $
    33,937
 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 fromJanuary 1
    
    
    
    February 25
    
    
    For the Sixthrough February
    
    
    
    through June
    
    
    Months Ended24, 2005
    
    
    
    30, 2005
    
    
    June 30, 2006Net operating revenues
    
    $
    277,736
    
    
    
    $
    662,090
    
    
    $
    961,884Costs and expenses:Cost of services
    
    
    244,321
    
    
    
    
    512,086
    
    
    
    757,697General and administrative
    
    
    122,509
    
    
    
    
    21,739
    
    
    
    23,749Bad debt expense
    
    
    6,588
    
    
    
    
    9,866
    
    
    
    13,433Depreciation and amortization
    
    
    5,933
    
    
    
    
    16,282
    
    
    
    22,561Total costs and expenses
    
    
    379,351
    
    
    
    
    559,973
    
    
    
    817,440Income (loss) from operations
    
    
    (101,615
    )
    
    
    
    102,117
    
    
    
    144,444Other income and expense:Loss on early retirement of debt
    
    
    (42,736
    )
    
    
    
    
    
    
    
    Merger related charges
    
    
    (12,025
    )
    
    
    
    
    
    
    
    Other income
    
    
    267
    
    
    
    
    411
    
    
    
    4,042Interest income
    
    
    523
    
    
    
    
    270
    
    
    
    419Interest expense
    
    
    (4,651
    )
    
    
    
    (34,654
    )
    
    
    (48,267
    )Income (loss) from continuing operations before
minority interests and income taxes
    
    
    (160,237
    )
    
    
    
    68,144
    
    
    
    100,638Minority interest in consolidated subsidiary companies
    
    
    330
    
    
    
    
    856
    
    
    
    726Income (loss) from continuing operations before income taxes
    
    
    (160,567
    )
    
    
    
    67,288
    
    
    
    99,912Income tax expense (benefit)
    
    
    (59,794
    )
    
    
    
    27,100
    
    
    
    40,626Income (loss) from continuing operations
    
    
    (100,773
    )
    
    
    
    40,188
    
    
    
    59,286Income from discontinued operations, net of tax (Includes
pre-tax gain of $13,950 in 2006)
    
    
    522
    
    
    
    
    2,306
    
    
    
    10,018Net income (loss)
    
    $
    (100,251
    )
    
    
    $
    42,494
    
    
    $
    69,304
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income
 (unaudited)
 (in thousands)
 AccumulatedCommon
    
    Common
    
    Capital in
    
    
    
    
    
    OtherStock
    
    Stock Par
    
    Excess of
    
    Retained
    
    Comprehensive
    
    ComprehensiveIssued
    
    Value
    
    Par
    
    Earnings
    
    Income
    
    IncomeBalance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    $
    440,799
    
    
    $
    61,134
    
    
    $
    4,232Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,304
    
    
    
    
    
    
    $
    69,304Unrealized gain on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,064
    
    
    
    3,064Changes in foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,013
    
    
    
    1,013Sale of foreign subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,831
    )
    
    
    (2,831
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    70,550Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,811
    )Contribution related to restricted stock award issuances by Holdings
    
    
    
    
    
    
    
    
    
    
    1,891Balance at June 30, 2006
    
    
    
    
    
    $
    
    
    
    $
    442,690
    
    
    $
    114,627
    
    
    $
    5,478
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Predecessor
    
    
    
    SuccessorPeriod fromPeriod from
    
    
    
    February 25
    
    
    For the Six MonthsJanuary 1 through
    
    
    
    through June 30,
    
    
    Ended June 30,February 24, 2005
    
    
    
    2005
    
    
    2006Operating activitiesNet income (loss)
    
    $
    (100,251
    )
    
    
    $
    42,494
    
    
    $
    69,304Adjustments to reconcile net income (loss) to
net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    6,177
    
    
    
    
    16,737
    
    
    
    22,737Provision for bad debts
    
    
    6,661
    
    
    
    
    10,024
    
    
    
    13,520Gain from sale of business
    
    
    
    
    
    
    
    
    
    
    
    (13,950
    )Non-cash income from hedge
    
    
    
    
    
    
    
    
    
    
    
    (4,042
    )Loss on early retirement of debt (non-cash)
    
    
    7,977
    
    
    
    
    
    
    
    
    Non-cash stock compensation expense
    
    
    
    
    
    
    
    6,143
    
    
    
    1,891Minority interests
    
    
    469
    
    
    
    
    1,492
    
    
    
    1,066Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    259Changes in operating assets and
liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (48,976
    )
    
    
    
    (43,832
    )
    
    
    (25,530
    )Other current assets
    
    
    1,816
    
    
    
    
    516
    
    
    
    1,538Other assets
    
    
    (622
    )
    
    
    
    (224
    )
    
    
    2,608Accounts payable
    
    
    5,250
    
    
    
    
    2,828
    
    
    
    1,222Due to third-party payors
    
    
    667
    
    
    
    
    (2,448
    )
    
    
    (2,613
    )Accrued interest
    
    
    (4,839
    )
    
    
    
    19,797
    
    
    
    (24
    )Accrued expenses
    
    
    204,748
    
    
    
    
    (187,939
    )
    
    
    (11,747
    )Income taxes and deferred taxes
    
    
    (60,021
    )
    
    
    
    20,540
    
    
    
    42,346Net cash provided by (used in) operating activities
    
    
    19,056
    
    
    
    
    (113,872
    )
    
    
    98,585Investing activitiesPurchases of property and equipment
    
    
    (2,586
    )
    
    
    
    (56,208
    )
    
    
    (71,814
    )Earnout payments
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Proceeds from sale of business
    
    
    
    
    
    
    
    
    
    
    
    76,806Restricted cash
    
    
    108
    
    
    
    
    72
    
    
    
    798Acquisition of businesses, net of cash acquired
    
    
    (108,279
    )
    
    
    
    (2,215
    )
    
    
    (3,261
    )Net cash provided by (used in) investing activities
    
    
    (110,757
    )
    
    
    
    (58,351
    )
    
    
    2,429Financing activitiesEquity investment by Holdings
    
    
    
    
    
    
    
    722,242
    
    
    
    Proceeds from credit facility
    
    
    
    
    
    
    
    780,000
    
    
    
    Proceeds from senior subordinated notes
    
    
    
    
    
    
    
    660,000
    
    
    
    Repayment of senior subordinated notes
    
    
    
    
    
    
    
    (350,000
    )
    
    
    Payment of deferred financing costs
    
    
    
    
    
    
    
    (57,198
    )
    
    
    Costs associated with equity investment of Holdings
    
    
    
    
    
    
    
    (8,686
    )
    
    
    Net repayments on credit facility debt
    
    
    
    
    
    
    
    (16,450
    )
    
    
    (87,900
    )Principal payments on seller and other debt
    
    
    (528
    )
    
    
    
    (3,491
    )
    
    
    (600
    )Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    (15,811
    )Repurchases of common stock and options
    
    
    
    
    
    
    
    (1,687,994
    )
    
    
    Proceeds from issuance of common stock
    
    
    1,023
    
    
    
    
    
    
    
    
    Repayment of bank overdrafts
    
    
    
    
    
    
    
    
    
    
    
    (19,355
    )Distributions to minority interests
    
    
    (401
    )
    
    
    
    (871
    )
    
    
    (1,104
    )Net cash provided by (used in) financing activities
    
    
    94
    
    
    
    
    37,552
    
    
    
    (124,770
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    (149
    )
    
    
    
    20
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (91,756
    )
    
    
    
    (134,651
    )
    
    
    (23,721
    )Cash and cash equivalents at beginning of period
    
    
    247,476
    
    
    
    
    155,720
    
    
    
    35,861Cash and cash equivalents at end of period
    
    $
    155,720
    
    
    
    $
    21,069
    
    
    $
    12,140Supplemental Cash Flow InformationCash paid for interest
    
    $
    10,630
    
    
    
    $
    10,315
    
    
    $
    46,155Cash paid for taxes
    
    $
    1,502
    
    
    
    $
    6,975
    
    
    $
    2,666
 The accompanying notes are an integral part of this statement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Basis of Presentation
    2. Accounting Policies
 Use of Estimates
  Reclassifications
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Recent Accounting Pronouncements
    9




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3. Intangible Assets
  SuccessorAs of June 30, 2006Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (5,455
    )Non-compete agreements
    
    
    20,809
    
    
    
    (4,959
    )Total
    
    $
    41,265
    
    
    $
    (10,414
    )Indefinite-lived intangible assetsGoodwill
    
    $
    1,319,011Trademarks
    
    
    47,058Certificates of need
    
    
    3,608Accreditations
    
    
    1,892Total
    
    $
    1,371,569
  Successor
    
    Predecessor
    
    SuccessorPeriodfromPeriod from
    
    February
    
    SixThree
    
    Three
    
    January 1
    
    25
    
    MonthsMonths
    
    Months
    
    through
    
    through
    
    EndedEnded June
    
    Ended June
    
    February 24,
    
    June 30,
    
    June 30,30, 2005
    
    30, 2006
    
    2005
    
    2005
    
    2006(in thousands)Amortization expense
    
    $
    2,580
    
    
    $
    1,952
    
    
    $
    576
    
    
    $
    3,439
    
    
    $
    3,905
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Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    Total(in thousands)Balance as of December 31, 2005
    
    $
    1,221,776
    
    
    $
    83,434
    
    
    $
    1,305,210Tax adjustments related to merger
    
    
    112
    
    
    
    10,800
    
    
    
    10,912Goodwill acquired during year
    
    
    299
    
    
    
    1,194
    
    
    
    1,493Earnouts
    
    
    
    
    
    
    100
    
    
    
    100Other
    
    
    
    
    
    
    1,296
    
    
    
    1,296Balance as of June 30, 2006
    
    $
    1,222,187
    
    
    $
    96,824
    
    
    $
    1,319,011
  4. Accumulated Other Comprehensive Income
  5. Segment Information
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SuccessorThree Months Ended June 30, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    347,508
    
    
    $
    124,645
    
    
    $
    1,551
    
    
    $
    473,704Adjusted EBITDA
    
    
    78,613
    
    
    
    18,548
    
    
    
    (11,582
    )
    
    
    85,579Total assets
    
    
    1,610,965
    
    
    
    519,779
    
    
    
    57,217
    
    
    
    2,187,961Capital expenditures
    
    
    52,349
    
    
    
    339
    
    
    
    2,408
    
    
    
    55,096SuccessorThree Months Ended June 30, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    360,772
    
    
    $
    120,641
    
    
    $
    728
    
    
    $
    482,141Adjusted EBITDA
    
    
    82,673
    
    
    
    18,423
    
    
    
    (10,492
    )
    
    
    90,604Total assets
    
    
    1,755,128
    
    
    
    266,864
    
    
    
    113,380
    
    
    
    2,135,372Capital expenditures
    
    
    31,825
    
    
    
    1,310
    
    
    
    293
    
    
    
    33,428PredecessorPeriod from January 1 through February 24, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net revenue
    
    $
    202,781
    
    
    $
    73,344
    
    
    $
    1,611
    
    
    $
    277,736Adjusted EBITDA
    
    
    44,384
    
    
    
    9,848
    
    
    
    (7,701
    )
    
    
    46,531Total assets
    
    
    904,754
    
    
    
    239,019
    
    
    
    87,640
    
    
    
    1,231,413Capital expenditures
    
    
    1,165
    
    
    
    408
    
    
    
    1,013
    
    
    
    2,586SuccessorPeriod from February 25 through June 30, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net revenue
    
    $
    486,771
    
    
    $
    172,756
    
    
    $
    2,563
    
    
    $
    662,090Adjusted EBITDA
    
    
    113,356
    
    
    
    27,264
    
    
    
    (16,078
    )
    
    
    124,542Total assets
    
    
    1,610,965
    
    
    
    519,779
    
    
    
    57,217
    
    
    
    2,187,961Capital expenditures
    
    
    53,129
    
    
    
    613
    
    
    
    2,466
    
    
    
    56,208
 12




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##### Table of Contents



SuccessorFor the Six Months Ended June 30, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net revenue
    
    $
    720,444
    
    
    $
    239,931
    
    
    $
    1,509
    
    
    $
    961,884Adjusted EBITDA
    
    
    157,391
    
    
    
    33,183
    
    
    
    (21,678
    )
    
    
    168,896Total assets
    
    
    1,755,128
    
    
    
    266,864
    
    
    
    113,380
    
    
    
    2,135,372Capital expenditures
    
    
    68,330
    
    
    
    2,951
    
    
    
    533
    
    
    
    71,814
  Successor
    
    Predecessor
    
    SuccessorPeriod from
    
    Period from
    
    SixThree
    
    Three
    
    January 1
    
    February 25
    
    MonthsMonths
    
    Months
    
    through
    
    through
    
    EndedEnded June
    
    Ended June
    
    February
    
    June 30,
    
    June 30,30, 2005
    
    30, 2006
    
    24, 2005
    
    2005
    
    2006(in thousands)Net income (loss)
    
    $
    29,421
    
    
    $
    33,937
    
    
    $
    (100,251
    )
    
    $
    42,494
    
    
    $
    69,304Income from
discontinued
operations, net of
tax
    
    
    (1,634
    )
    
    
    
    
    
    
    (522
    )
    
    
    (2,306
    )
    
    
    (10,018
    )Income tax expense
(benefit)
    
    
    18,712
    
    
    
    21,531
    
    
    
    (59,794
    )
    
    
    27,100
    
    
    
    40,626Minority interest
    
    
    554
    
    
    
    335
    
    
    
    330
    
    
    
    856
    
    
    
    726Interest expense, net
    
    
    24,861
    
    
    
    23,798
    
    
    
    4,128
    
    
    
    34,384
    
    
    
    47,848Other income
    
    
    (308
    )
    
    
    (1,608
    )
    
    
    (267
    )
    
    
    (411
    )
    
    
    (4,042
    )Merger related charges
    
    
    
    
    
    
    
    
    
    
    12,025
    
    
    
    
    
    
    
    Loss on early
retirement of debt
    
    
    
    
    
    
    
    
    
    
    42,736
    
    
    
    
    
    
    
    Depreciation and
amortization
    
    
    12,156
    
    
    
    11,666
    
    
    
    5,933
    
    
    
    16,282
    
    
    
    22,561Stock compensation
expense (1)
    
    
    1,817
    
    
    
    945
    
    
    
    142,213
    
    
    
    6,143
    
    
    
    1,891Adjusted EBITDA
    
    $
    85,579
    
    
    $
    90,604
    
    
    $
    46,531
    
    
    $
    124,542
    
    
    $
    168,896
 
 (1)
    
    For the three months ended June 30, 2005 and 2006, the period from January 1, 2005 through
February 24, 2005, the period from February 25, 2005 through June 30, 2005 and the six months
ended June 30, 2006 approximately $1.8 million, $0.9 million, $115.0 million, $6.1 million and
$1.9 million of stock compensation expense was included in general and administrative expense on the
Companys consolidated statement of operations, respectively. For the period from January 1
through February 24, 2005, $27.2 million of stock compensation expense was included in cost of
services on the Companys consolidated statement of operations. 13




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##### Table of Contents



6. Discontinued Operations
  Successor
    
    
    Predecessor
    
    
    SuccessorPeriod from
    
    
    
    
    
    
    For the TwoJanuary 1
    
    
    Period from
    
    
    MonthsThree Months
    
    
    through
    
    
    February 25
    
    
    EndedEnded June
    
    
    February 24,
    
    
    through June
    
    
    February 28,30, 2005
    
    
    2005
    
    
    30, 2005
    
    
    2006 (1)(in thousands)Net revenue
    
    $
    17,936
    
    
    $
    10,051
    
    
    $
    24,662
    
    
    $
    12,902Income from
discontinued
operations before
income tax expense
    
    
    2,700
    
    
    
    950
    
    
    
    3,855
    
    
    
    15,547Income tax expense
    
    
    1,066
    
    
    
    428
    
    
    
    1,549
    
    
    
    5,529Income from
discontinued
operations, net of
tax
    
    $
    1,634
    
    
    $
    522
    
    
    $
    2,306
    
    
    $
    10,018
 
 (1)
    
    The income from discontinued operations before income taxes includes a gain on sale of
approximately $14.0 million. 14




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##### Table of Contents



7. Commitments and Contingencies
 Litigation
      15




---



##### Table of Contents



Other
  16




---



##### Table of Contents



8. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries
 5 8 5 8
    Caritas Rehab Services, LLC
    
    North Andover Physical Therapy, Inc.Cupertino Medical Center, P.C.
    
    OccuMed East, P.C.Elizabethtown Physical Therapy
    
    Ohio Occupational Health, P.C., Inc.Jeff Ayres, PT Therapy Center, Inc.
    
    Partners in Physical Therapy, PLLCJeffersontown Physical Therapy, LLC
    
    Philadelphia Occupational Health, P.C.Kentucky Orthopedic Rehabilitation, LLC
    
    Rehabilitation Physician Services, P.C.Kessler Core PT, OT and Speech Therapy at
    
    Robinson & Associates, P.C.New York, LLC
    
    Select Specialty Hospital  Central Pennsylvania, L.P.Langhorne, P.C.
    
    Select Specialty Hospital  Houston, L.P.Lester OSM, P.C.
    
    Select Specialty Hospital  Mississippi Gulf Coast, Inc.Louisville Physical Therapy, P.S.C.
    
    Sprint Physical Therapy, P.C.Medical Information Management Systems, LLC
    
    Therex, P.C.Metropolitan West Physical Therapy and Sports
    
    TJ Corporation I, LLCMedicine Services Inc.
    
    U.S. Regional Occupational Health II, P.C.MKJ Physical Therapy, Inc.
    
    U.S. Regional Occupational Health
II of New Jersey, P.C.New York Physician Services, P.C.
 17




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Balance Sheet
June 30, 2006
(unaudited)
 SuccessorSelect MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated( in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    8,040
    
    
    $
    2,311
    
    
    $
    1,789
    
    
    $
    
    
    
    $
    12,140Restricted cash
    
    
    5,548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,548Accounts receivable, net
    
    
    (5,148
    )
    
    
    255,137
    
    
    
    18,035
    
    
    
    
    
    
    
    268,024Current deferred tax asset
    
    
    25,321
    
    
    
    29,098
    
    
    
    2,763
    
    
    
    
    
    
    
    57,182Other current assets
    
    
    1,263
    
    
    
    14,432
    
    
    
    2,108
    
    
    
    
    
    
    
    17,803Total Current Assets
    
    
    35,024
    
    
    
    300,978
    
    
    
    24,695
    
    
    
    
    
    
    
    360,697Property and equipment, net
    
    
    10,475
    
    
    
    262,703
    
    
    
    28,188
    
    
    
    
    
    
    
    301,366Investment in affiliates
    
    
    1,708,458
    
    
    
    93,624
    
    
    
    
    
    
    
    (1,802,082
    )(a)
    
    
    Goodwill
    
    
    
    
    
    
    1,319,011
    
    
    
    
    
    
    
    
    
    
    
    1,319,011Other identifiable intangibles
    
    
    
    
    
    
    83,409
    
    
    
    
    
    
    
    
    
    
    
    83,409Other assets
    
    
    67,062
    
    
    
    3,171
    
    
    
    656
    
    
    
    
    
    
    
    70,889Total Assets
    
    $
    1,821,019
    
    
    $
    2,062,896
    
    
    $
    53,539
    
    
    $
    (1,802,082
    )
    
    $
    2,135,372Liabilities and Stockholders EquityCurrent Liabilities:Current portion of
long-term debt and notes
payable
    
    $
    5,920
    
    
    $
    430
    
    
    $
    
    
    
    $
    
    
    
    $
    6,350Accounts payable
    
    
    3,388
    
    
    
    54,554
    
    
    
    3,953
    
    
    
    
    
    
    
    61,895Intercompany accounts
    
    
    235,365
    
    
    
    (209,568
    )
    
    
    (25,797
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    782
    
    
    
    51,393
    
    
    
    279
    
    
    
    
    
    
    
    52,454Accrued vacation
    
    
    3,086
    
    
    
    23,550
    
    
    
    2,368
    
    
    
    
    
    
    
    29,004Accrued interest
    
    
    25,206
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,206Accrued professional
liability
    
    
    23,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,048Accrued restructuring
    
    
    
    
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    280Accrued other
    
    
    43,280
    
    
    
    18,750
    
    
    
    1,505
    
    
    
    
    
    
    
    63,535Due to third party payors
    
    
    
    
    
    
    9,562
    
    
    
    
    
    
    
    
    
    
    
    9,562Income taxes
    
    
    2,359
    
    
    
    32,299
    
    
    
    (1,069
    )
    
    
    
    
    
    
    33,589Total Current Liabilities
    
    
    342,434
    
    
    
    (18,750
    )
    
    
    (18,761
    )
    
    
    
    
    
    
    304,923Long-term debt, net of
current portion
    
    
    907,192
    
    
    
    296,444
    
    
    
    23,827
    
    
    
    
    
    
    
    1,227,463Noncurrent deferred tax
liability
    
    
    8,598
    
    
    
    29,392
    
    
    
    (306
    )
    
    
    
    
    
    
    37,684Total Liabilities
    
    
    1,258,224
    
    
    
    307,086
    
    
    
    4,760
    
    
    
    
    
    
    
    1,570,070Commitments and ContingenciesMinority interest in
consolidated subsidiary
companies
    
    
    
    
    
    
    
    
    
    
    2,507
    
    
    
    
    
    
    
    2,507Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    442,690
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    442,690Retained earnings
    
    
    114,627
    
    
    
    155,117
    
    
    
    27,698
    
    
    
    (182,815
    ) (b)
    
    
    114,627Subsidiary investment
    
    
    
    
    
    
    1,600,693
    
    
    
    18,574
    
    
    
    (1,619,267
    ) (a)(b)
    
    
    Accumulated other
comprehensive income
    
    
    5,478
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,478Total Stockholders Equity
    
    
    562,795
    
    
    
    1,755,810
    
    
    
    46,272
    
    
    
    (1,802,082
    )
    
    
    562,795Total Liabilities and
Stockholders Equity
    
    $
    1,821,019
    
    
    $
    2,062,896
    
    
    $
    53,539
    
    
    $
    (1,802,082
    )
    
    $
    2,135,372
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings. - 18 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2006
(unaudited)
 SuccessorSelect Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    380
    
    
    $
    882,079
    
    
    $
    79,425
    
    
    $
    
    
    
    $
    961,884Costs and expenses:Cost of services
    
    
    116
    
    
    
    692,258
    
    
    
    65,323
    
    
    
    
    
    
    
    757,697General and administrative
    
    
    23,711
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    23,749Bad debt expense
    
    
    
    
    
    
    12,710
    
    
    
    723
    
    
    
    
    
    
    
    13,433Depreciation and amortization
    
    
    1,210
    
    
    
    19,688
    
    
    
    1,663
    
    
    
    
    
    
    
    22,561Total costs and expenses
    
    
    25,037
    
    
    
    724,694
    
    
    
    67,709
    
    
    
    
    
    
    
    817,440Income (loss) from operations
    
    
    (24,657
    )
    
    
    157,385
    
    
    
    11,716
    
    
    
    
    
    
    
    144,444Other income and expense:Intercompany interest and royalty fees
    
    
    (29,210
    )
    
    
    29,010
    
    
    
    200
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    81,505
    
    
    
    (79,739
    )
    
    
    (1,766
    )
    
    
    
    
    
    
    Other income
    
    
    4,042
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,042Interest income
    
    
    397
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    419Interest expense
    
    
    (37,214
    )
    
    
    (10,182
    )
    
    
    (871
    )
    
    
    
    
    
    
    (48,267
    )Income (loss) before minority
interests and income taxes
    
    
    (5,137
    )
    
    
    96,496
    
    
    
    9,279
    
    
    
    
    
    
    
    100,638Minority interest in consolidated
subsidiary companies
    
    
    
    
    
    
    
    
    
    
    726
    
    
    
    
    
    
    
    726Income (loss) from continuing
operations before income taxes
    
    
    (5,137
    )
    
    
    96,496
    
    
    
    8,553
    
    
    
    
    
    
    
    99,912Income tax
expense (benefit)
    
    
    (322
    )
    
    
    40,087
    
    
    
    861
    
    
    
    
    
    
    
    40,626Income (loss) from continuing
operations
    
    
    (4,815
    )
    
    
    56,409
    
    
    
    7,692
    
    
    
    
    
    
    
    59,286Income from discontinued operations,
net of tax
    
    
    9,068
    
    
    
    
    
    
    
    950
    
    
    
    
    
    
    
    10,018Equity in earnings of subsidiaries
    
    
    65,051
    
    
    
    7,692
    
    
    
    
    
    
    
    (72,743
    )
    
    
    Net income
    
    $
    69,304
    
    
    $
    64,101
    
    
    $
    8,642
    
    
    $
    (72,743
    )
    
    $
    69,304
 - 19 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2006
(unaudited)
 SuccessorSelect MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    69,304
    
    
    $
    64,101
    
    
    $
    8,642
    
    
    $
    (72,743
    )(a)
    
    $
    69,304Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,210
    
    
    
    19,688
    
    
    
    1,839
    
    
    
    
    
    
    
    22,737Provision for bad debts
    
    
    
    
    
    
    12,710
    
    
    
    810
    
    
    
    
    
    
    
    13,520Gain from sale of business
    
    
    (13,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,950
    )Non-cash income from hedge
    
    
    (4,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,042
    )Non-cash stock compensation expense
    
    
    1,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,891Minority interests
    
    
    
    
    
    
    
    
    
    
    1,066
    
    
    
    
    
    
    
    1,066Loss (gain) on disposal of assets
    
    
    (17
    )
    
    
    246
    
    
    
    30
    
    
    
    
    
    
    
    259Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (65,051
    )
    
    
    (7,692
    )
    
    
    
    
    
    
    72,743
    (a)
    
    
    Intercompany
    
    
    26,914
    
    
    
    2,935
    
    
    
    (29,849
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    5,148
    
    
    
    (34,962
    )
    
    
    4,284
    
    
    
    
    
    
    
    (25,530
    )Other current assets
    
    
    648
    
    
    
    (1,792
    )
    
    
    2,682
    
    
    
    
    
    
    
    1,538Other assets
    
    
    (9,673
    )
    
    
    11,126
    
    
    
    1,155
    
    
    
    
    
    
    
    2,608Accounts payable
    
    
    1,397
    
    
    
    3,575
    
    
    
    (3,750
    )
    
    
    
    
    
    
    1,222Due to third-party payors
    
    
    (6,099
    )
    
    
    (4,591
    )
    
    
    8,077
    
    
    
    
    
    
    
    (2,613
    )Accrued interest
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )Accrued expenses
    
    
    3,932
    
    
    
    (14,158
    )
    
    
    (1,521
    )
    
    
    
    
    
    
    (11,747
    )Income taxes
    
    
    42,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,346Net cash provided by (used in) operating activities
    
    
    53,934
    
    
    
    51,186
    
    
    
    (6,535
    )
    
    
    
    
    
    
    98,585Investing activitiesPurchases of property and equipment
    
    
    (536
    )
    
    
    (60,958
    )
    
    
    (10,320
    )
    
    
    
    
    
    
    (71,814
    )Proceeds from sale of business
    
    
    76,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,806Earnout payments
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )Restricted cash
    
    
    798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (1,239
    )
    
    
    (2,022
    )
    
    
    
    
    
    
    (3,261
    )Net cash provided by (used in) investing activities
    
    
    77,068
    
    
    
    (62,297
    )
    
    
    (12,342
    )
    
    
    
    
    
    
    2,429Financing activitiesNet repayments on credit facility
    
    
    (87,900
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,900
    )Dividends to Holdings
    
    
    (15,811
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,811
    )Intercompany debt reallocation
    
    
    (16,669
    )
    
    
    10,354
    
    
    
    6,315
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (563
    )
    
    
    (37
    )
    
    
    
    
    
    
    (600
    )Payment of bank overdrafts
    
    
    (19,355
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,355
    )Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (1,104
    )
    
    
    
    
    
    
    (1,104
    )Net cash provided by (used in) financing activities
    
    
    (139,735
    )
    
    
    9,791
    
    
    
    5,174
    
    
    
    
    
    
    
    (124,770
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (8,698
    )
    
    
    (1,320
    )
    
    
    (13,703
    )
    
    
    
    
    
    
    (23,721
    )Cash and cash equivalents at beginning of period
    
    
    16,738
    
    
    
    3,631
    
    
    
    15,492
    
    
    
    
    
    
    
    35,861Cash and cash equivalents at end of period
    
    $
    8,040
    
    
    $
    2,311
    
    
    $
    1,789
    
    
    $
    
    
    
    $
    12,140
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 20 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Period January 1 through February 24, 2005
(unaudited)
 PredecessorSelect Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    28
    
    
    $
    248,857
    
    
    $
    28,851
    
    
    $
    
    
    
    $
    277,736Costs and expenses:Cost of services
    
    
    27,188
    
    
    
    193,323
    
    
    
    23,810
    
    
    
    
    
    
    
    244,321General and administrative
    
    
    121,956
    
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    122,509Bad debt expense
    
    
    
    
    
    
    6,223
    
    
    
    365
    
    
    
    
    
    
    
    6,588Depreciation and amortization
    
    
    371
    
    
    
    5,025
    
    
    
    537
    
    
    
    
    
    
    
    5,933Total costs and expenses
    
    
    149,515
    
    
    
    205,124
    
    
    
    24,712
    
    
    
    
    
    
    
    379,351Income (loss) from operations
    
    
    (149,487
    )
    
    
    43,733
    
    
    
    4,139
    
    
    
    
    
    
    
    (101,615
    )Other income and expense:Intercompany interest and royalty fees
    
    
    (6,261
    )
    
    
    6,221
    
    
    
    40
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    213,822
    
    
    
    (213,436
    )
    
    
    (386
    )
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    (42,736
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,736
    )Merger related charges
    
    
    (12,025
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,025
    )Other income
    
    
    267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267Interest income
    
    
    294
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    523Interest expense
    
    
    (1,433
    )
    
    
    (2,953
    )
    
    
    (265
    )
    
    
    
    
    
    
    (4,651
    )Income (loss) before minority
interests and income taxes
    
    
    2,441
    
    
    
    (166,206
    )
    
    
    3,528
    
    
    
    
    
    
    
    (160,237
    )Minority interest in consolidated
subsidiary companies
    
    
    
    
    
    
    7
    
    
    
    323
    
    
    
    
    
    
    
    330Income (loss) from continuing
operations before income taxes
    
    
    2,441
    
    
    
    (166,213
    )
    
    
    3,205
    
    
    
    
    
    
    
    (160,567
    )Income tax expense (benefit)
    
    
    130
    
    
    
    (59,937
    )
    
    
    13
    
    
    
    
    
    
    
    (59,794
    )Income (loss) from continuing
operations
    
    
    2,311
    
    
    
    (106,276
    )
    
    
    3,192
    
    
    
    
    
    
    
    (100,773
    )Income from discontinued operations,
net of tax
    
    
    
    
    
    
    
    
    
    
    522
    
    
    
    
    
    
    
    522Equity in earnings of subsidiaries
    
    
    (102,562
    )
    
    
    3,192
    
    
    
    
    
    
    
    99,370
    
    
    
    Net income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,714
    
    
    $
    99,370
    
    
    $
    (100,251
    )
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries. - 21 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Period February 25 through June 30, 2005
(unaudited)
 SuccessorSelect Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    7
    
    
    $
    599,663
    
    
    $
    62,420
    
    
    $
    
    
    
    $
    662,090Costs and expenses:Cost of services
    
    
    71
    
    
    
    461,495
    
    
    
    50,520
    
    
    
    
    
    
    
    512,086General and administrative
    
    
    20,692
    
    
    
    1,047
    
    
    
    
    
    
    
    
    
    
    
    21,739Bad debt expense
    
    
    
    
    
    
    9,314
    
    
    
    552
    
    
    
    
    
    
    
    9,866Depreciation and amortization
    
    
    3,044
    
    
    
    12,075
    
    
    
    1,163
    
    
    
    
    
    
    
    16,282Total costs and expenses
    
    
    23,807
    
    
    
    483,931
    
    
    
    52,235
    
    
    
    
    
    
    
    559,973Income (loss) from operations
    
    
    (23,800
    )
    
    
    115,732
    
    
    
    10,185
    
    
    
    
    
    
    
    102,117Other income and expense:Intercompany interest and royalty
fees
    
    
    (16,395
    )
    
    
    16,144
    
    
    
    251
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    64,148
    
    
    
    (63,945
    )
    
    
    (203
    )
    
    
    
    
    
    
    Other income
    
    
    411
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    411Interest income
    
    
    221
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    270Interest expense
    
    
    (27,454
    )
    
    
    (6,720
    )
    
    
    (480
    )
    
    
    
    
    
    
    (34,654
    )Income (loss) before minority
interests and income taxes
    
    
    (2,869
    )
    
    
    61,260
    
    
    
    9,753
    
    
    
    
    
    
    
    68,144Minority interest in consolidated
subsidiary companies
    
    
    
    
    
    
    90
    
    
    
    766
    
    
    
    
    
    
    
    856Income (loss) before income taxes
    
    
    (2,869
    )
    
    
    61,170
    
    
    
    8,987
    
    
    
    
    
    
    
    67,288Income tax expense (benefit)
    
    
    (322
    )
    
    
    26,914
    
    
    
    508
    
    
    
    
    
    
    
    27,100Income (loss) from continuing
operations
    
    
    (2,547
    )
    
    
    34,256
    
    
    
    8,479
    
    
    
    
    
    
    
    40,188Income from discontinued
operations, net of tax
    
    
    
    
    
    
    
    
    
    
    2,306
    
    
    
    
    
    
    
    2,306Equity in earnings of subsidiaries
    
    
    45,041
    
    
    
    8,479
    
    
    
    
    
    
    
    (53,520
    ) (a)
    
    
    Net income
    
    $
    42,494
    
    
    $
    42,735
    
    
    $
    10,785
    
    
    $
    (53,520
    )
    
    $
    42,494
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries. - 22 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Period January 1 through February 24, 2005
(unaudited)
 PredecessorSelect Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,714
    
    
    $
    99,370
    (a)
    
    $
    (100,251
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    371
    
    
    
    5,025
    
    
    
    781
    
    
    
    
    
    
    
    6,177Provision for bad debts
    
    
    
    
    
    
    6,223
    
    
    
    438
    
    
    
    
    
    
    
    6,661Loss on early retirement of debt
(non-cash)
    
    
    7,977
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,977Minority interests
    
    
    
    
    
    
    7
    
    
    
    462
    
    
    
    
    
    
    
    469Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of
subsidiaries
    
    
    102,562
    
    
    
    (3,192
    )
    
    
    
    
    
    
    (99,370
    ) (a)
    
    
    Intercompany
    
    
    (9,581
    )
    
    
    12,090
    
    
    
    (2,509
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (133
    )
    
    
    (47,567
    )
    
    
    (1,276
    )
    
    
    
    
    
    
    (48,976
    )Other current assets
    
    
    1,899
    
    
    
    (374
    )
    
    
    291
    
    
    
    
    
    
    
    1,816Other assets
    
    
    8,375
    
    
    
    (9,045
    )
    
    
    48
    
    
    
    
    
    
    
    (622
    )Accounts payable
    
    
    (296
    )
    
    
    6,128
    
    
    
    (582
    )
    
    
    
    
    
    
    5,250Due to third-party payors
    
    
    
    
    
    
    3,953
    
    
    
    (3,286
    )
    
    
    
    
    
    
    667Accrued interest
    
    
    (4,839
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,839
    )Accrued expenses
    
    
    52,042
    
    
    
    152,793
    
    
    
    (87
    )
    
    
    
    
    
    
    204,748Income and deferred taxes
    
    
    (59,190
    )
    
    
    
    
    
    
    (831
    )
    
    
    
    
    
    
    (60,021
    )Net cash provided by (used in) operating
activities
    
    
    (1,064
    )
    
    
    22,957
    
    
    
    (2,837
    )
    
    
    
    
    
    
    19,056Investing activitiesPurchases of property and equipment
    
    
    (305
    )
    
    
    (2,045
    )
    
    
    (236
    )
    
    
    
    
    
    
    (2,586
    )Restricted cash
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Acquisition of businesses, net of cash
acquired
    
    
    
    
    
    
    (105,092
    )
    
    
    (3,187
    )
    
    
    
    
    
    
    (108,279
    )Net cash used in investing activities
    
    
    (197
    )
    
    
    (107,137
    )
    
    
    (3,423
    )
    
    
    
    
    
    
    (110,757
    )Financing activitiesIntercompany debt reallocation
    
    
    (2,964
    )
    
    
    63
    
    
    
    2,901
    
    
    
    
    
    
    
    Principal payments on seller and other
debt
    
    
    
    
    
    
    (528
    )
    
    
    
    
    
    
    
    
    
    
    (528
    )Proceeds from issuance of common stock
    
    
    1,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,023Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (401
    )
    
    
    
    
    
    
    (401
    )Net cash provided by (used in) financing
activities
    
    
    (1,941
    )
    
    
    (465
    )
    
    
    2,500
    
    
    
    
    
    
    
    94Effect of exchange rate changes on cash
and cash equivalents
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149
    )Net decrease in cash and cash equivalents
    
    
    (3,351
    )
    
    
    (84,645
    )
    
    
    (3,760
    )
    
    
    
    
    
    
    (91,756
    )Cash and cash equivalents at beginning of
period
    
    
    161,704
    
    
    
    74,641
    
    
    
    11,131
    
    
    
    
    
    
    
    247,476Cash and cash equivalents at end of period
    
    $
    158,353
    
    
    $
    (10,004
    )
    
    $
    7,371
    
    
    $
    
    
    
    $
    155,720
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 23 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Period February 25 through June 30, 2005
(unaudited)
 SuccessorSelect MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    42,494
    
    
    $
    42,735
    
    
    $
    10,785
    
    
    $
    (53,520
    )(a)
    
    $
    42,494Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,044
    
    
    
    12,075
    
    
    
    1,618
    
    
    
    
    
    
    
    16,737Provision for bad debts
    
    
    
    
    
    
    9,314
    
    
    
    710
    
    
    
    
    
    
    
    10,024Non-cash stock compensation expense
    
    
    6,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,143Minority interests
    
    
    
    
    
    
    90
    
    
    
    1,402
    
    
    
    
    
    
    
    1,492Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (45,041
    )
    
    
    (8,479
    )
    
    
    
    
    
    
    53,520
    (a)
    
    
    Intercompany
    
    
    (120,007
    )
    
    
    130,975
    
    
    
    (10,968
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    47
    
    
    
    (42,566
    )
    
    
    (1,313
    )
    
    
    
    
    
    
    (43,832
    )Other current assets
    
    
    (387
    )
    
    
    939
    
    
    
    (36
    )
    
    
    
    
    
    
    516Other assets
    
    
    (56,556
    )
    
    
    56,762
    
    
    
    (430
    )
    
    
    
    
    
    
    (224
    )Accounts payable
    
    
    621
    
    
    
    1,564
    
    
    
    643
    
    
    
    
    
    
    
    2,828Due to third-party payors
    
    
    49
    
    
    
    (1,125
    )
    
    
    (1,372
    )
    
    
    
    
    
    
    (2,448
    )Accrued interest
    
    
    19,797
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,797Accrued expenses
    
    
    (49,614
    )
    
    
    (138,378
    )
    
    
    53
    
    
    
    
    
    
    
    (187,939
    )Income taxes
    
    
    14,201
    
    
    
    
    
    
    
    6,339
    
    
    
    
    
    
    
    20,540Net cash provided by (used in) operating activities
    
    
    (185,209
    )
    
    
    63,906
    
    
    
    7,431
    
    
    
    
    
    
    
    (113,872
    )Investing activitiesPurchases of property and equipment
    
    
    (919
    )
    
    
    (54,205
    )
    
    
    (1,084
    )
    
    
    
    
    
    
    (56,208
    )Restricted cash
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (2,215
    )
    
    
    
    
    
    
    
    
    
    
    (2,215
    )Net cash used in investing activities
    
    
    (847
    )
    
    
    (56,420
    )
    
    
    (1,084
    )
    
    
    
    
    
    
    (58,351
    )Financing activitiesEquity investment by Holdings
    
    
    722,242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722,242Proceeds from credit facility
    
    
    780,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780,000Proceeds from senior subordinated notes
    
    
    660,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660,000Repayment of senior subordinated notes
    
    
    (350,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350,000
    )Deferred financing costs
    
    
    (57,198
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57,198
    )Costs associated with equity investment of Holdings
    
    
    (8,686
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,686
    )Intercompany debt reallocation
    
    
    (6,365
    )
    
    
    8,370
    
    
    
    (2,005
    )
    
    
    
    
    
    
    Net repayments on credit facility debt
    
    
    (16,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,450
    )Principal payments on seller and other debt
    
    
    
    
    
    
    (3,447
    )
    
    
    (44
    )
    
    
    
    
    
    
    (3,491
    )Repurchases of common stock
    
    
    (1,687,994
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,687,994
    )Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (871
    )
    
    
    
    
    
    
    (871
    )Net cash provided by (used in) financing activities
    
    
    35,549
    
    
    
    4,923
    
    
    
    (2,920
    )
    
    
    
    
    
    
    37,552Effect of exchange rate changes on cash
and cash equivalents
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Net increase (decrease) in cash and cash
equivalents
    
    
    (150,487
    )
    
    
    12,409
    
    
    
    3,427
    
    
    
    
    
    
    
    (134,651
    )Cash and cash equivalents at beginning of period
    
    
    158,353
    
    
    
    (10,004
    )
    
    
    7,371
    
    
    
    
    
    
    
    155,720Cash and cash equivalents at end of period
    
    $
    7,866
    
    
    $
    2,405
    
    
    $
    10,798
    
    
    $
    
    
    
    $
    21,069
 
  - 24 -




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read this discussion together with our unaudited consolidated financial statements
and the accompanying notes.
 Forward Looking Statements
  
    
    compliance with the Medicare hospital within a hospital regulation changes will
require increased capital expenditures and may have an adverse effect on our future
net operating revenues and profitability;
    
    additional changes in government reimbursement for our services may have an
adverse effect on our future net operating revenues and profitability, such as the
regulations adopted by the Centers for Medicare & Medicaid Services on May 2, 2006;
    
    the failure of our long-term acute care hospitals to maintain their status as such
may cause our net operating revenues and profitability to decline;
    
    the failure of our facilities operated as hospitals within hospitals to qualify
as hospitals separate from their host hospitals may cause our net operating revenues
and profitability to decline;
    
    implementation of modifications to the admissions policies for our inpatient
rehabilitation facilities, as required to achieve compliance with Medicare
guidelines, may result in a loss of patient volume at these hospitals and, as a
result, may reduce our future net operating revenues and profitability;
    
    implementation of annual caps that limit the amounts that can be paid for
outpatient therapy services rendered to any Medicare beneficiary may reduce our
future net operating revenues and profitability;
    
    changes in applicable regulations or a government investigation or assertion that
we have violated applicable regulations may result in increased costs or sanctions
that reduce our net operating revenues and profitability;
    
    integration of recently acquired operations and future acquisitions may prove
difficult or unsuccessful, use significant resources or expose us to unforeseen
liabilities;
    
    private third-party payors for our services may undertake 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.
 25




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##### Table of Contents



Overview
    Recent Trends and Events
 CBIL Sale
  Second Quarter Ended June 30, 2006
  26




---



##### Table of Contents



Regulatory Changes
     27




---



##### Table of Contents



Development of New Specialty Hospitals and Clinics
  28




---



##### Table of Contents



Operating Statistics
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Specialty hospital data(1):Number of hospitals  start of
period
    
    
    103
    
    
    
    101
    
    
    
    86
    
    
    
    101Number of hospital start-ups
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Number of hospitals closed
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Number of hospitals consolidated
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Number of hospitals acquired
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    Number of hospitals  end of period
    
    
    102
    
    
    
    100
    
    
    
    102
    
    
    
    100Available licensed beds
    
    
    3,856
    
    
    
    3,931
    
    
    
    3,856
    
    
    
    3,931Admissions
    
    
    9,995
    
    
    
    10,154
    
    
    
    20,331
    
    
    
    20,637Patient days
    
    
    246,171
    
    
    
    246,275
    
    
    
    497,010
    
    
    
    497,976Average length of stay (days)
    
    
    24
    
    
    
    24
    
    
    
    25
    
    
    
    24Net revenue per patient day(2)
    
    $
    1,375
    
    
    $
    1,435
    
    
    $
    1,352
    
    
    $
    1,419Occupancy rate
    
    
    70
    %
    
    
    69
    %
    
    
    71
    %
    
    
    71
    %Percent patient days  Medicare
    
    
    75
    %
    
    
    73
    %
    
    
    76
    %
    
    
    73
    %Outpatient rehabilitation data (3):Number of clinics owned  start of
period
    
    
    592
    
    
    
    553
    
    
    
    589
    
    
    
    553Number of clinic start-ups
    
    
    6
    
    
    
    4
    
    
    
    15
    
    
    
    5Number of clinics closed/sold
    
    
    (24
    )
    
    
    (15
    )
    
    
    (30
    )
    
    
    (16
    )Number of clinics owned  end of
period
    
    
    574
    
    
    
    542
    
    
    
    574
    
    
    
    542Number of clinics managed  end of
period
    
    
    58
    
    
    
    68
    
    
    
    58
    
    
    
    68Total number of clinics (all) 
end of period
    
    
    632
    
    
    
    610
    
    
    
    632
    
    
    
    610Number of visits
    
    
    863,966
    
    
    
    762,177
    
    
    
    1,727,139
    
    
    
    1,547,016Net revenue per visit (4)
    
    $
    89
    
    
    $
    94
    
    
    $
    90
    
    
    $
    93
 
 (1)
    
    Specialty hospitals consist of long-term acute care hospitals and inpatient rehabilitation
facilities.(2)
    
    Net revenue per patient day is calculated by dividing specialty hospital patient service
revenues by the total number of patient days.(3)
    
    Clinic data has been restated to remove the clinics operated by CBIL, which is being reported
as a discontinued operation. Occupational health clinics have been reclassified as managed
clinics.(4)
    
    Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by
the total number of visits. For purposes of this computation, outpatient rehabilitation clinic
revenue does not include contract services revenue. 29




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##### Table of Contents



Results of Operations
  Predecessor
    
    
    Successor
    
    
    CombinedPeriodfromPeriod from
    
    
    FebruaryJanuary 1
    
    
    25through
    
    
    through
    
    
    Six MonthsFebruary
    
    
    June 30,
    
    
    Ended June24, 2005
    
    
    2005
    
    
    30, 2005(in thousands)Net operating revenues
    
    $
    277,736
    
    
    $
    662,090
    
    
    $
    939,826Costs and expenses:Cost of services
    
    
    244,321
    
    
    
    512,086
    
    
    
    756,407General and administrative
    
    
    122,509
    
    
    
    21,739
    
    
    
    144,248Bad debt expense
    
    
    6,588
    
    
    
    9,866
    
    
    
    16,454Depreciation and amortization
    
    
    5,933
    
    
    
    16,282
    
    
    
    22,215Total costs and expenses
    
    
    379,351
    
    
    
    559,973
    
    
    
    939,324Income (loss) from operations
    
    
    (101,615
    )
    
    
    102,117
    
    
    
    502Other income and expense:Loss on early retirement of debt
    
    
    (42,736
    )
    
    
    
    
    
    
    (42,736
    )Merger related charges
    
    
    (12,025
    )
    
    
    
    
    
    
    (12,025
    )Other income
    
    
    267
    
    
    
    411
    
    
    
    678Interest income
    
    
    523
    
    
    
    270
    
    
    
    793Interest expense
    
    
    (4,651
    )
    
    
    (34,654
    )
    
    
    (39,305
    )Income (loss) from continuing operations before
minority interests and income taxes
    
    
    (160,237
    )
    
    
    68,144
    
    
    
    (92,093
    )Minority interest in consolidated subsidiary companies
    
    
    330
    
    
    
    856
    
    
    
    1,186Income (loss) from continuing operations before
income taxes
    
    
    (160,567
    )
    
    
    67,288
    
    
    
    (93,279
    )Income tax expense (benefit)
    
    
    (59,794
    )
    
    
    27,100
    
    
    
    (32,694
    )Income (loss) from continuing operations
    
    
    (100,773
    )
    
    
    40,188
    
    
    
    (60,585
    )Income from discontinued operations, net of tax
    
    
    522
    
    
    
    2,306
    
    
    
    2,828Net income (loss)
    
    $
    (100,251
    )
    
    $
    42,494
    
    
    $
    (57,757
    )
 30




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005 (1)
    
    
    2006Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(2)
    
    
    78.4
    
    
    
    77.3
    
    
    
    80.5
    
    
    
    78.8General and administrative
    
    
    2.8
    
    
    
    2.4
    
    
    
    15.3
    
    
    
    2.5Bad debt expense
    
    
    1.1
    
    
    
    1.7
    
    
    
    1.8
    
    
    
    1.4Depreciation and amortization
    
    
    2.6
    
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.3Income (loss) from operations
    
    
    15.1
    
    
    
    16.2
    
    
    
    0.0
    
    
    
    15.0Loss on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    (4.5
    )
    
    
    Merger related charges
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    Other income
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.4Interest expense, net
    
    
    (5.3
    )
    
    
    (4.9
    )
    
    
    (4.1
    )
    
    
    (4.9
    )Income (loss) from continuing
operations before minority interests
and income taxes
    
    
    9.9
    
    
    
    11.6
    
    
    
    (9.8
    )
    
    
    10.5Minority interests
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Income (loss) from continuing
operations before income taxes
    
    
    9.8
    
    
    
    11.5
    
    
    
    (9.9
    )
    
    
    10.4Income tax expense (benefit)
    
    
    3.9
    
    
    
    4.5
    
    
    
    (3.5
    )
    
    
    4.2Income (loss) from continuing operations
    
    
    5.9
    
    
    
    7.0
    
    
    
    (6.4
    )
    
    
    6.2Income from discontinued operations,
net of tax
    
    
    0.3
    
    
    
    
    
    
    
    0.3
    
    
    
    1.0Net income (loss)
    
    
    6.2
    %
    
    
    7.0
    %
    
    
    (6.1
    )%
    
    
    7.2
    %
 31




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    % Change
    
    
    2005 (1 )
    
    
    2006
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    347,508
    
    
    $
    360,772
    
    
    
    3.8
    %
    
    $
    689,552
    
    
    $
    720,444
    
    
    
    4.5
    %Outpatient rehabilitation
    
    
    124,645
    
    
    
    120,641
    
    
    
    (3.2
    )
    
    
    246,100
    
    
    
    239,931
    
    
    
    (2.5
    )Other
    
    
    1,551
    
    
    
    728
    
    
    
    (53.1
    )
    
    
    4,174
    
    
    
    1,509
    
    
    
    (63.8
    )Total company
    
    $
    473,704
    
    
    $
    482,141
    
    
    
    1.8
    %
    
    $
    939,826
    
    
    $
    961,884
    
    
    
    2.3
    %Income (loss) from operations:Specialty hospitals
    
    $
    71,532
    
    
    $
    74,978
    
    
    
    4.8
    %
    
    $
    144,282
    
    
    $
    142,867
    
    
    
    (1.0
    %)Outpatient rehabilitation
    
    
    16,472
    
    
    
    15,200
    
    
    
    (7.7
    )
    
    
    32,202
    
    
    
    26,668
    
    
    
    (17.2
    )Other
    
    
    (16,398
    )
    
    
    (12,185
    )
    
    
    25.7
    
    
    
    (175,982
    )
    
    
    (25,091
    )
    
    
    85.7Total company
    
    $
    71,606
    
    
    $
    77,993
    
    
    
    8.9
    %
    
    $
    502
    
    
    $
    144,444
    
    
    
    N/MAdjusted EBITDA:(3)Specialty hospitals
    
    $
    78,613
    
    
    $
    82,673
    
    
    
    5.2
    %
    
    $
    157,740
    
    
    $
    157,391
    
    
    
    (0.2
    %)Outpatient rehabilitation
    
    
    18,548
    
    
    
    18,423
    
    
    
    (0.7
    )
    
    
    37,112
    
    
    
    33,183
    
    
    
    (10.6
    )Other
    
    
    (11,582
    )
    
    
    (10,492
    )
    
    
    9.4
    
    
    
    (23,779
    )
    
    
    (21,678
    )
    
    
    8.8Adjusted EBITDA margins:(3)Specialty hospitals
    
    
    22.6
    %
    
    
    22.9
    %
    
    
    1.3
    %
    
    
    22.9
    %
    
    
    21.8
    %
    
    
    (4.8
    %)Outpatient rehabilitation
    
    
    14.9
    
    
    
    15.3
    
    
    
    2.7
    
    
    
    15.1
    
    
    
    13.8
    
    
    
    (8.6
    )Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,610,965
    
    
    $
    1,755,128
    
    
    
    
    
    
    $
    1,610,965
    
    
    $
    1,755,128Outpatient rehabilitation
    
    
    519,779
    
    
    
    266,864
    
    
    
    
    
    
    
    519,779
    
    
    
    266,864Other
    
    
    57,217
    
    
    
    113,380
    
    
    
    
    
    
    
    57,217
    
    
    
    113,380Total company
    
    $
    2,187,961
    
    
    $
    2,135,372
    
    
    
    
    
    
    $
    2,187,961
    
    
    $
    2,135,372Purchases of property and
equipment, net:Specialty hospitals
    
    $
    52,349
    
    
    $
    31,825
    
    
    
    
    
    
    $
    54,294
    
    
    $
    68,330Outpatient rehabilitation
    
    
    339
    
    
    
    1,310
    
    
    
    
    
    
    
    1,021
    
    
    
    2,951Other
    
    
    2,408
    
    
    
    293
    
    
    
    
    
    
    
    3,479
    
    
    
    533Total company
    
    $
    55,096
    
    
    $
    33,428
    
    
    
    
    
    
    $
    58,794
    
    
    $
    71,814
 32




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005 (1)
    
    
    2006(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    347,508
    
    
    $
    360,772
    
    
    $
    689,552
    
    
    $
    720,444Less: Specialty hospitals in development
or closed after 1/1/05
    
    
    4,240
    
    
    
    770
    
    
    
    10,268
    
    
    
    974Specialty hospitals same store net
operating revenue
    
    $
    343,268
    
    
    $
    360,002
    
    
    $
    679,284
    
    
    $
    719,470Adjusted EBITDA(3)Specialty hospitals Adjusted EBITDA(3)
    
    $
    78,613
    
    
    $
    82,673
    
    
    $
    157,740
    
    
    $
    157,391Less: Specialty hospitals in development
or closed after 1/1/05
    
    
    505
    
    
    
    (1,970
    )
    
    
    1,839
    
    
    
    (2,347
    )Specialty hospitals same store Adjusted
EBITDA(3)
    
    $
    78,108
    
    
    $
    84,643
    
    
    $
    155,901
    
    
    $
    159,738All specialty hospitals Adjusted EBITDA
margin(3)
    
    
    22.6
    %
    
    
    22.9
    %
    
    
    22.9
    %
    
    
    21.8
    %Specialty hospitals same store Adjusted
EBITDA margin(3)
    
    
    22.8
    %
    
    
    23.5
    %
    
    
    23.0
    %
    
    
    22.2
    %
 
  (1)
    
    The financial data for the period after the Merger, February 25, 2005 through June 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 six
months ended June 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, other income, income from discontinued operations, loss on early retirement
of debt, merger related charges, stock compensation expense and minority interest. We
believe that the presentation of Adjusted EBITDA is important to investors because Adjusted
EBITDA is used by management to evaluate financial performance and determine resource
allocation for each of our operating units. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles. Items excluded from Adjusted
EBITDA are significant components in understanding and assessing financial performance.
Adjusted EBITDA should not be considered in isolation or as an alternative to, or
substitute for, net income, cash flows generated by operations, investing or financing
activities, or other financial statement data presented in the consolidated financial
statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is
not a measurement determined in accordance with generally accepted accounting principles
and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be
comparable to other similarly titled measures of other companies. See footnote 5 to our
interim unaudited consolidated financial statements for the period ended June 30, 2006 for
a reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our
segment performance in accordance with SFAS No. 131. 33




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##### Table of Contents



Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  34




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##### Table of Contents



Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income from Operations
  Interest Expense
  Minority Interests
  Income Taxes
  35




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##### Table of Contents



Income from Discontinued Operations, Net of Tax
  Six Months Ended June 30, 2006 Compared to Combined Six Months Ended June 30, 2005
 Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  36




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##### Table of Contents



Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income from Operations
  37




---



##### Table of Contents



Loss on Early Retirement of Debt
 1 2 1 2 1 2 1 2
 Merger Related Charges
  Interest Expense
  Minority Interests
  Income Taxes
  Income from Discontinued Operations, Net of Tax
  38




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##### Table of Contents



Liquidity and Capital Resources
    Capital Resources
     39




---



##### Table of Contents



Inflation
  Recent Accounting Pronouncements
  40




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  41




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
     42




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##### Table of Contents



ITEM 1A. RISK FACTORS.
 Our business involves a number of risks, some of which are beyond our control. The
risks and uncertainties described in Item 1A of our Form 10-K for the year ended December 31, 2005
and the risk factors described below are not the only ones we face. Additional risks and
uncertainties that we do not currently know or that we currently believe to be immaterial may also
adversely affect our business Set forth below are changes or additions to the risk factors set
forth in our Form 10-K for the year ended December 31, 2005.
 Compliance with recent changes in federal regulations applicable to long-term
acute care hospitals operated a hospitals within hospitals or as satellites
will result in increased capital expenditures and may have an adverse effect on
our future net operating revenues and profitability.
  43




---



##### Table of Contents



Government implementation of recent changes to Medicares method of reimbursing our
long-term acute care hospitals will reduce our future net operating revenues and profitability.
   44




---



##### Table of Contents



If our long-term acute care hospitals fail to maintain their certifications as long-term acute care
hospitals or if our facilities operated as HIHs fail to qualify as hospitals separate from their
host hospitals, our net operating revenues and profitability may decline.
  45




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##### Table of Contents



Competition may limit our ability to acquire hospitals and clinics and adversely affect our growth.
  Our business operations could be significantly disrupted if we lose key members of our management
team.
  Significant legal actions as well as the cost and possible lack of available insurance could
subject us to substantial uninsured liabilities.
   46




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##### Table of Contents



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: August 11, 2006
 47




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##### Table of Contents



Exhibit
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Senior Vice President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 48