##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarter Ended March 31, 2007
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the Period From  to.
 Commission File Numbers: 333-133284 and 000-31441
 SELECT MEDICAL HOLDINGS CORPORATION
 SELECT MEDICAL CORPORATION
  Delaware
    
    20-1764048Delaware
    
    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 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 statements of changes in stockholders equity and comprehensive income
    
    
    5Consolidated statements of cash flows
    
    
    6Notes to consolidated financial statements
    
    
    7ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    21ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    38ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    39PART II
    
    OTHER INFORMATION
    
    
    39ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    39ITEM 1A.
    
    RISK FACTORS
    
    
    40ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    43ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    43ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    43ITEM 5.
    
    OTHER INFORMATION
    
    
    44ITEM 6.
    
    EXHIBITS
    
    
    44SIGNATURES
    
    
    44Certification of Chief Executive OfficerCertification of Executive Vice President and Chief Financial OfficerCertification of Chief Executive Officer pursuant to Section 906Certification of Executive Vice President and Chief Financial Officer pursuant to Section 906
  2




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 Consolidated Balance Sheets
 (unaudited)
 (in thousands, except share and per share amounts)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationDecember 31,
    
    
    March 31,
    
    
    December 31,
    
    
    March 31,2006
    
    
    2007
    
    
    2006
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    81,600
    
    
    $
    37,536
    
    
    $
    81,600
    
    
    $
    37,536Restricted cash
    
    
    4,335
    
    
    
    4,389
    
    
    
    4,335
    
    
    
    4,389Accounts receivable, net of allowance for doubtful accounts
of $55,306 and $52,107 in 2006 and 2007, respectively
    
    
    199,927
    
    
    
    227,549
    
    
    
    199,927
    
    
    
    227,549Current deferred tax asset
    
    
    42,613
    
    
    
    41,804
    
    
    
    42,613
    
    
    
    41,804Prepaid income taxes
    
    
    
    
    
    
    2,570
    
    
    
    
    
    
    
    2,570Other current assets
    
    
    16,762
    
    
    
    17,479
    
    
    
    16,762
    
    
    
    17,479Total Current Assets
    
    
    345,237
    
    
    
    331,327
    
    
    
    345,237
    
    
    
    331,327Property and equipment, net
    
    
    356,336
    
    
    
    383,199
    
    
    
    356,336
    
    
    
    383,199Goodwill
    
    
    1,323,572
    
    
    
    1,323,572
    
    
    
    1,323,572
    
    
    
    1,323,572Other identifiable intangibles
    
    
    79,230
    
    
    
    77,541
    
    
    
    79,230
    
    
    
    77,541Other assets held for sale
    
    
    4,855
    
    
    
    4,825
    
    
    
    4,855
    
    
    
    4,825Other assets
    
    
    73,294
    
    
    
    71,727
    
    
    
    68,412
    
    
    
    67,000Total Assets
    
    $
    2,182,524
    
    
    $
    2,192,191
    
    
    $
    2,177,642
    
    
    $
    2,187,464LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    12,213
    
    
    $
    15,205
    
    
    $
    12,213
    
    
    $
    15,205Current portion of long-term debt and notes payable
    
    
    6,209
    
    
    
    7,184
    
    
    
    6,209
    
    
    
    7,184Accounts payable
    
    
    72,597
    
    
    
    76,478
    
    
    
    72,597
    
    
    
    76,478Accrued payroll
    
    
    55,084
    
    
    
    52,432
    
    
    
    55,084
    
    
    
    52,432Accrued vacation
    
    
    27,360
    
    
    
    28,583
    
    
    
    27,360
    
    
    
    28,583Accrued interest
    
    
    36,759
    
    
    
    15,455
    
    
    
    25,270
    
    
    
    12,263Accrued professional liability
    
    
    24,979
    
    
    
    25,459
    
    
    
    24,979
    
    
    
    25,459Accrued restructuring
    
    
    225
    
    
    
    208
    
    
    
    225
    
    
    
    208Accrued other
    
    
    67,084
    
    
    
    70,027
    
    
    
    67,084
    
    
    
    70,027Income taxes payable
    
    
    1,937
    
    
    
    
    
    
    
    1,937
    
    
    
    Due to third party payors
    
    
    12,886
    
    
    
    6,924
    
    
    
    12,886
    
    
    
    6,924Total Current Liabilities
    
    
    317,333
    
    
    
    297,955
    
    
    
    305,844
    
    
    
    294,763Long-term debt, net of current portion
    
    
    1,532,294
    
    
    
    1,530,072
    
    
    
    1,224,509
    
    
    
    1,221,972Non-current deferred tax liability
    
    
    32,075
    
    
    
    25,183
    
    
    
    30,721
    
    
    
    24,388Other non-current liabilities
    
    
    
    
    
    
    23,410
    
    
    
    
    
    
    
    23,410Total Liabilities
    
    
    1,881,702
    
    
    
    1,876,620
    
    
    
    1,561,074
    
    
    
    1,564,533Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    2,566
    
    
    
    2,091
    
    
    
    2,566
    
    
    
    2,091Preferred stock  Authorized shares (liquidation preference is $467,395 and $473,145 in 2006 and 2007,
respectively)
    
    
    467,395
    
    
    
    473,145
    
    
    
    
    
    
    
    Stockholders Equity:Common stock
of Holdings, $0.001 par value, 250,000,000 shares authorized, 204,904,000 shares and
205,101,000 shares issued and outstanding in 2006 and 2007, respectively
    
    
    205
    
    
    
    205
    
    
    
    
    
    
    
    Common stock
of Select, $0.01 par value, 100 shares issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    (295,256
    )
    
    
    (294,131
    )
    
    
    464,283
    
    
    
    467,948Retained earnings
    
    
    121,024
    
    
    
    130,805
    
    
    
    146,774
    
    
    
    150,622Accumulated other comprehensive income
    
    
    4,888
    
    
    
    3,456
    
    
    
    2,945
    
    
    
    2,270Total Stockholders Equity
    
    
    (169,139
    )
    
    
    (159,665
    )
    
    
    614,002
    
    
    
    620,840Total Liabilities and Stockholders Equity
    
    $
    2,182,524
    
    
    $
    2,192,191
    
    
    $
    2,177,642
    
    
    $
    2,187,464
 The
accompanying notes are an integral part of this statement.
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##### Table of Contents



Consolidated Statements of Operations
 (unaudited)
 (in thousands)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Quarter Ended March 31,
    
    
    For the Quarter Ended March 31,2006
    
    
    2007
    
    
    2006
    
    
    2007Net operating revenues
    
    $
    479,743
    
    
    $
    466,829
    
    
    $
    479,743
    
    
    $
    466,829Costs and expenses:Cost of services
    
    
    385,197
    
    
    
    377,627
    
    
    
    385,197
    
    
    
    377,627General and administrative
    
    
    12,200
    
    
    
    11,584
    
    
    
    12,200
    
    
    
    11,584Bad debt expense
    
    
    5,000
    
    
    
    5,589
    
    
    
    5,000
    
    
    
    5,589Depreciation and amortization
    
    
    10,895
    
    
    
    11,704
    
    
    
    10,895
    
    
    
    11,704Total costs and expenses
    
    
    413,292
    
    
    
    406,504
    
    
    
    413,292
    
    
    
    406,504Income from operations
    
    
    66,451
    
    
    
    60,325
    
    
    
    66,451
    
    
    
    60,325Other income and expense:Other income (expense)
    
    
    
    
    
    
    1,173
    
    
    
    2,434
    
    
    
    (143
    )Interest income
    
    
    222
    
    
    
    929
    
    
    
    222
    
    
    
    929Interest expense
    
    
    (32,881
    )
    
    
    (32,203
    )
    
    
    (24,272
    )
    
    
    (23,638
    )Income from continuing operations before
minority interests and income taxes
    
    
    33,792
    
    
    
    30,224
    
    
    
    44,835
    
    
    
    37,473Minority interest in consolidated subsidiary companies
    
    
    391
    
    
    
    323
    
    
    
    391
    
    
    
    323Income from continuing operations before income taxes
    
    
    33,401
    
    
    
    29,901
    
    
    
    44,444
    
    
    
    37,150Income tax expense
    
    
    15,230
    
    
    
    12,430
    
    
    
    19,095
    
    
    
    14,967Income from continuing operations
    
    
    18,171
    
    
    
    17,471
    
    
    
    25,349
    
    
    
    22,183Income from
discontinued operations, net of tax (includes pre-tax gain of $13,950
in 2006)
    
    
    10,018
    
    
    
    
    
    
    
    10,018
    
    
    
    Net income
    
    $
    28,189
    
    
    $
    17,471
    
    
    $
    35,367
    
    
    $
    22,183
 The
accompanying notes are an integral part of this statement.
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##### Table of Contents



Select Medical Holdings 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
    
    
    IncomeBalance at December 31, 2006
    
    
    204,904
    
    
    $
    205
    
    
    $
    (295,256
    )
    
    $
    121,024
    
    
    $
    4,888Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,471
    
    
    
    
    
    
    $
    17,471Unrealized loss on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,432
    )
    
    
    (1,432
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,039Cumulative impact of change in accounting for
uncertainties in income taxes (FIN No. 48 - see Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )Vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    925Issuance of restricted stock
    
    
    200
    
    
    
    
    
    
    
    200Stock option expense
    
    
    
    
    
    
    
    
    
    
    3Repurchase of common shares
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Accretion of dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,759
    )Balance at March 31, 2007
    
    
    205,101
    
    
    $
    205
    
    
    $
    (294,131
    )
    
    $
    130,805
    
    
    $
    3,456
 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, 2006
    
    
    
    
    
    $
    
    
    
    $
    464,283
    
    
    $
    146,774
    
    
    $
    2,945Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,183
    
    
    
    
    
    
    $
    22,183Unrealized loss on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (675
    )
    
    
    (675
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,508Cumulative impact of change in accounting for uncertainties in income taxes (FIN No. 48 - see Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,404
    )Federal tax benefit of losses contributed by Holdings
    
    
    
    
    
    
    
    
    
    
    2,537Additional investment by Holdings
    
    
    
    
    
    
    
    
    
    
    200Contribution related to restricted stock and stock option award issuances by Holdings
    
    
    
    
    
    
    
    
    
    
    928Balance at March 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    467,948
    
    
    $
    150,622
    
    
    $
    2,270
 The
accompanying notes are an integral part of this statement.
 5




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##### Table of Contents



Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Three Months Ended March 31,
    
    
    For the Three Months Ended March 31,2006
    
    
    2007
    
    
    2006
    
    
    2007Operating activitiesNet income
    
    $
    28,189
    
    
    $
    17,471
    
    
    $
    35,367
    
    
    $
    22,183Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    11,071
    
    
    
    11,704
    
    
    
    11,071
    
    
    
    11,704Provision for bad debts
    
    
    5,087
    
    
    
    5,589
    
    
    
    5,087
    
    
    
    5,589Gain from sale of business
    
    
    (13,950
    )
    
    
    (1,173
    )
    
    
    (13,950
    )
    
    
    (1,173
    )Non-cash loss (income) from hedge
    
    
    
    
    
    
    
    
    
    
    (2,434
    )
    
    
    1,316Non-cash stock compensation expense
    
    
    946
    
    
    
    927
    
    
    
    946
    
    
    
    927Amortization of debt discount
    
    
    281
    
    
    
    315
    
    
    
    
    
    
    
    Minority interests
    
    
    731
    
    
    
    323
    
    
    
    731
    
    
    
    323Loss on disposal of assets
    
    
    
    
    
    
    305
    
    
    
    
    
    
    
    305Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (34,211
    )
    
    
    (33,210
    )
    
    
    (34,211
    )
    
    
    (33,210
    )Other current assets
    
    
    (105
    )
    
    
    423
    
    
    
    (105
    )
    
    
    423Other assets
    
    
    1,798
    
    
    
    (1,013
    )
    
    
    1,667
    
    
    
    (1,169
    )Accounts payable
    
    
    3,569
    
    
    
    3,967
    
    
    
    3,569
    
    
    
    3,967Due to third-party payors
    
    
    659
    
    
    
    (5,961
    )
    
    
    659
    
    
    
    (5,961
    )Accrued interest
    
    
    (20,520
    )
    
    
    (21,304
    )
    
    
    (12,984
    )
    
    
    (13,008
    )Accrued expenses
    
    
    (8,465
    )
    
    
    2,170
    
    
    
    (8,465
    )
    
    
    2,170Income and deferred taxes
    
    
    19,342
    
    
    
    11,982
    
    
    
    23,207
    
    
    
    14,519Net cash provided by (used in) operating activities
    
    
    (5,578
    )
    
    
    (7,485
    )
    
    
    10,155
    
    
    
    8,905Investing activitiesPurchases of property and equipment
    
    
    (38,386
    )
    
    
    (38,099
    )
    
    
    (38,386
    )
    
    
    (38,099
    )Earnout payments
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )
    
    
    Proceeds from sale of business
    
    
    76,806
    
    
    
    880
    
    
    
    76,806
    
    
    
    880Restricted cash
    
    
    437
    
    
    
    (53
    )
    
    
    437
    
    
    
    (53
    )Acquisition of businesses, net of cash acquired
    
    
    (2,023
    )
    
    
    (81
    )
    
    
    (2,023
    )
    
    
    (81
    )Net cash provided by (used in) investing activities
    
    
    36,734
    
    
    
    (37,353
    )
    
    
    36,734
    
    
    
    (37,353
    )Financing activitiesNet repayments on credit facility debt
    
    
    (58,450
    )
    
    
    (1,450
    )
    
    
    (58,450
    )
    
    
    (1,450
    )Principal payments on seller and other debt
    
    
    (425
    )
    
    
    (111
    )
    
    
    (425
    )
    
    
    (111
    )Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    (15,733
    )
    
    
    (16,404
    )Repurchase of common and preferred stock
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    Proceeds from sale of restricted stock
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Proceeds from bank overdrafts
    
    
    6,551
    
    
    
    2,992
    
    
    
    6,551
    
    
    
    2,992Distributions to minority interests
    
    
    (877
    )
    
    
    (843
    )
    
    
    (877
    )
    
    
    (843
    )Net cash provided by (used in) financing activities
    
    
    (53,201
    )
    
    
    774
    
    
    
    (68,934
    )
    
    
    (15,616
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    35
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (22,010
    )
    
    
    (44,064
    )
    
    
    (22,010
    )
    
    
    (44,064
    )Cash and cash equivalents at beginning of period
    
    
    35,861
    
    
    
    81,600
    
    
    
    35,861
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    13,851
    
    
    $
    37,536
    
    
    $
    13,851
    
    
    $
    37,536Supplemental Cash Flow InformationCash paid for interest
    
    $
    51,830
    
    
    $
    52,001
    
    
    $
    36,099
    
    
    $
    35,610Cash paid for taxes
    
    $
    489
    
    
    $
    443
    
    
    $
    489
    
    
    $
    443
 The
accompanying notes are an integral part of this statement.
 6




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##### Table of Contents



SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Basis of Presentation
    2. Accounting Policies
 Use of Estimates
  Recent Accounting Pronouncements
  7




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##### Table of Contents



3. Intangible Assets
  As of March 31, 2007Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (8,523
    )Non-compete agreements
    
    
    20,809
    
    
    
    (7,749
    )Total
    
    $
    41,265
    
    
    $
    (16,272
    )Indefinite-lived intangible assetsGoodwill
    
    $
    1,323,572Trademarks
    
    
    47,058Certificates of need
    
    
    3,786Accreditations
    
    
    1,704Total
    
    $
    1,376,120
 8




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##### Table of Contents



Three Months Ended
    
    Three Months EndedMarch 31, 2006
    
    March 31, 2007(in thousands)Amortization expense
    
    $
    1,953
    
    
    $
    1,952
  2007
    
    $
    7,8112008
    
    
    7,8112009
    
    
    7,8112010
    
    
    3,2272011
    
    
    285
 4. Accumulated Other Comprehensive Income
 Holdings
  Select
  5. Segment Information
  9




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##### Table of Contents



Three Months Ended March 31, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    359,672
    
    
    $
    119,290
    
    
    $
    781
    
    
    $
    479,743Adjusted EBITDA
    
    
    74,718
    
    
    
    14,760
    
    
    
    (11,186
    )
    
    
    78,292Total assets:Select Medical Corporation
    
    
    1,746,744
    
    
    
    269,295
    
    
    
    114,363
    
    
    
    2,130,402Select Medical Holdings Corporation
    
    
    1,746,744
    
    
    
    269,295
    
    
    
    119,248
    
    
    
    2,135,287Capital expenditures
    
    
    36,505
    
    
    
    1,641
    
    
    
    240
    
    
    
    38,386
 Three Months Ended March 31, 2007Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    354,228
    
    
    $
    112,380
    
    
    $
    221
    
    
    $
    466,829Adjusted EBITDA
    
    
    66,031
    
    
    
    17,618
    
    
    
    (10,693
    )
    
    
    72,956Total assets:Select Medical Corporation
    
    
    1,795,902
    
    
    
    258,372
    
    
    
    133,190
    
    
    
    2,187,464Select Medical Holdings Corporation
    
    
    1,795,902
    
    
    
    258,372
    
    
    
    137,917
    
    
    
    2,192,191Capital expenditures
    
    
    35,879
    
    
    
    2,021
    
    
    
    199
    
    
    
    38,099
 10




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##### Table of Contents



Select Medical HoldingsCorporation
    
    Select Medical CorporationThree Months Ended
    
    Three Months EndedMarch 31,
    
    March 31,2006
    
    2007
    
    2006
    
    2007(in thousands)Net income
    
    $
    28,189
    
    
    $
    17,471
    
    
    $
    35,367
    
    
    $
    22,183Income from discontinued operations, net of tax
    
    
    (10,018
    )
    
    
    
    
    
    
    (10,018
    )
    
    
    Income tax expense
    
    
    15,230
    
    
    
    12,430
    
    
    
    19,095
    
    
    
    14,967Minority interest
    
    
    391
    
    
    
    323
    
    
    
    391
    
    
    
    323Interest expense, net
    
    
    32,659
    
    
    
    31,274
    
    
    
    24,050
    
    
    
    22,709Other expense (income)
    
    
    
    
    
    
    (1,173
    )
    
    
    (2,434
    )
    
    
    143Depreciation and amortization
    
    
    10,895
    
    
    
    11,704
    
    
    
    10,895
    
    
    
    11,704Stock compensation expense:Included in general and administrative
    
    
    888
    
    
    
    888
    
    
    
    888
    
    
    
    888Included in cost of services
    
    
    58
    
    
    
    39
    
    
    
    58
    
    
    
    39Adjusted EBITDA
    
    $
    78,292
    
    
    $
    72,956
    
    
    $
    78,292
    
    
    $
    72,956
 6. Income Tax
    11




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##### Table of Contents



7. Discontinued Operations
  For the TwoMonths EndedFebruary 28,2006 (1)Net revenue
    
    $
    12,902Income from
discontinued operations before income tax expense, including gain of
$13,950
    
    
    15,547Income tax expense
    
    
    5,529Income from discontinued operations, net of tax
    
    $
    10,018
 
 (1)
    
    The income from discontinued operations before income taxes includes a gain on
sale of approximately $14.0 million. 8. Commitments and Contingencies
 Litigation
   12




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##### Table of Contents



Construction Commitments
  9. Other
 Agreement to Purchase HealthSouth Corporations Outpatient Rehabilitation Division
  13




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##### Table of Contents



Agreement to Purchase Nexus Health Systems, Inc.
    Amendment to Credit Agreement
  10. Subsequent Event
  14




---



##### Table of Contents



11.
    
    Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under
Selects 75/8% Senior Subordinated Notes
 5 8 5 8
    Caritas Rehab Services, LLC
    
    North Andover Physical Therapy, Inc.Canadian Back Institute Limited and its subsidiaries (1)
    
    OccuMed East, P.C.Cupertino Medical Center, P.C. (2)
    
    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.C.Kentucky 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 
Mississippi Gulf Coast, Inc.Louisville Physical Therapy, P.S.C.
    
    Sprint Physical Therapy, P.C.Medical Information Management Systems, LLC (3)
    
    Therex, P.C.Metropolitan West Physical Therapy and Sports 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 of New Jersey, P.C.New York Physician Services, P.C.
 
 (1)
    
    The operating results have been classified as discontinued operations and cash flows
have been included with continuing operations for the three months ended March 31, 2006.
The operations were sold on March 1, 2006.(2)
    
    In December 2006, the Company sold a group of legal entities that operated outpatient
clinics. Cupertino Medical Center, P.C. was one of the legal entities sold.(3)
    
    In February 2007, the Company sold Medical Information Management Systems, LLC. 15




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Balance Sheet
March 31, 2007
 Select MedicalCorporation(Parent Company
    
    
    Subsidiary
    
    
    Non-GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated( in thousands)(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    5,244
    
    
    $
    31,379
    
    
    $
    913
    
    
    $
    
    
    
    $
    37,536Restricted cash
    
    
    4,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,389Accounts receivable, net
    
    
    133
    
    
    
    207,048
    
    
    
    20,368
    
    
    
    
    
    
    
    227,549Current deferred tax asset
    
    
    24,661
    
    
    
    15,277
    
    
    
    1,866
    
    
    
    
    
    
    
    41,804Prepaid income taxes
    
    
    2,570
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,570Other current assets
    
    
    3,158
    
    
    
    12,459
    
    
    
    1,862
    
    
    
    
    
    
    
    17,479Total Current Assets
    
    
    40,155
    
    
    
    266,163
    
    
    
    25,009
    
    
    
    
    
    
    
    331,327Property and equipment, net
    
    
    7,370
    
    
    
    345,796
    
    
    
    30,033
    
    
    
    
    
    
    
    383,199Investment in affiliates
    
    
    1,736,625
    
    
    
    90,938
    
    
    
    
    
    
    
    (1,827,563
    ) (a)
    
    
    Goodwill
    
    
    
    
    
    
    1,323,572
    
    
    
    
    
    
    
    
    
    
    
    1,323,572Other identifiable intangibles
    
    
    
    
    
    
    77,541
    
    
    
    
    
    
    
    
    
    
    
    77,541Other assets held for sale
    
    
    
    
    
    
    4,825
    
    
    
    
    
    
    
    
    
    
    
    4,825Other assets
    
    
    54,814
    
    
    
    11,644
    
    
    
    542
    
    
    
    
    
    
    
    67,000Total Assets
    
    $
    1,838,964
    
    
    $
    2,120,479
    
    
    $
    55,584
    
    
    $
    (1,827,563
    )
    
    $
    2,187,464Liabilities and Stockholders EquityCurrent Liabilities:Bank overdrafts
    
    $
    15,205
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15,205Current portion of long-term debt and notes payable
    
    
    6,921
    
    
    
    263
    
    
    
    
    
    
    
    
    
    
    
    7,184Accounts payable
    
    
    3,290
    
    
    
    63,647
    
    
    
    9,541
    
    
    
    
    
    
    
    76,478Intercompany accounts
    
    
    193,838
    
    
    
    (149,711
    )
    
    
    (44,127
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    1,460
    
    
    
    50,865
    
    
    
    107
    
    
    
    
    
    
    
    52,432Accrued vacation
    
    
    2,943
    
    
    
    23,369
    
    
    
    2,271
    
    
    
    
    
    
    
    28,583Accrued interest
    
    
    12,263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,263Accrued professional liability
    
    
    25,459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,459Accrued restructuring
    
    
    
    
    
    
    208
    
    
    
    
    
    
    
    
    
    
    
    208Accrued other
    
    
    41,516
    
    
    
    24,949
    
    
    
    3,562
    
    
    
    
    
    
    
    70,027Due to third party payors
    
    
    
    
    
    
    6,924
    
    
    
    
    
    
    
    
    
    
    
    6,924Total Current Liabilities
    
    
    302,895
    
    
    
    20,514
    
    
    
    (28,646
    )
    
    
    
    
    
    
    294,763Long-term debt, net of current portion
    
    
    891,840
    
    
    
    307,380
    
    
    
    22,752
    
    
    
    
    
    
    
    1,221,972Noncurrent deferred tax liability
    
    
    (21
    )
    
    
    21,909
    
    
    
    2,500
    
    
    
    
    
    
    
    24,388Other non-current liabilities
    
    
    23,410
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,410Total Liabilities
    
    
    1,218,124
    
    
    
    349,803
    
    
    
    (3,394
    )
    
    
    
    
    
    
    1,564,533Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    
    
    
    
    
    
    
    
    2,091
    
    
    
    
    
    
    
    2,091Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    467,948
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    467,948Retained earnings
    
    
    150,622
    
    
    
    231,661
    
    
    
    38,045
    
    
    
    (269,706
    ) (b)
    
    
    150,622Subsidiary investment
    
    
    
    
    
    
    1,539,015
    
    
    
    18,842
    
    
    
    (1,557,857
    ) (a)(b)
    
    
    Accumulated other comprehensive income
    
    
    2,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,270Total Stockholders Equity
    
    
    620,840
    
    
    
    1,770,676
    
    
    
    56,887
    
    
    
    (1,827,563
    )
    
    
    620,840Total Liabilities and Stockholders Equity
    
    $
    1,838,964
    
    
    $
    2,120,479
    
    
    $
    55,584
    
    
    $
    (1,827,563
    )
    
    $
    2,187,464
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings. - 16 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2007
 Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)(unaudited)Net operating revenues
    
    $
    41
    
    
    $
    426,853
    
    
    $
    39,935
    
    
    $
    
    
    
    $
    466,829Costs and expenses:Cost of services
    
    
    39
    
    
    
    343,263
    
    
    
    34,325
    
    
    
    
    
    
    
    377,627General and administrative
    
    
    11,568
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    11,584Bad debt expense
    
    
    
    
    
    
    4,591
    
    
    
    998
    
    
    
    
    
    
    
    5,589Depreciation and amortization
    
    
    488
    
    
    
    10,247
    
    
    
    969
    
    
    
    
    
    
    
    11,704Total costs and expenses
    
    
    12,095
    
    
    
    358,117
    
    
    
    36,292
    
    
    
    
    
    
    
    406,504Income (loss) from operations
    
    
    (12,054
    )
    
    
    68,736
    
    
    
    3,643
    
    
    
    
    
    
    
    60,325Other income and expense:Intercompany interest and royalty fees
    
    
    (17,761
    )
    
    
    17,606
    
    
    
    155
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    42,066
    
    
    
    (40,846
    )
    
    
    (1,220
    )
    
    
    
    
    
    
    Other income (expense)
    
    
    (143
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143
    )Interest income
    
    
    725
    
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    929Interest expense
    
    
    (17,938
    )
    
    
    (5,232
    )
    
    
    (468
    )
    
    
    
    
    
    
    (23,638
    )Income (loss) before minority interests and income taxes
    
    
    (5,105
    )
    
    
    40,468
    
    
    
    2,110
    
    
    
    
    
    
    
    37,473Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    
    
    
    
    323
    
    
    
    
    
    
    
    323Income (loss) from continuing operations before income taxes
    
    
    (5,105
    )
    
    
    40,468
    
    
    
    1,787
    
    
    
    
    
    
    
    37,150Income tax expense (benefit)
    
    
    (1,380
    )
    
    
    16,038
    
    
    
    309
    
    
    
    
    
    
    
    14,967Income (loss) from continuing operations
    
    
    (3,725
    )
    
    
    24,430
    
    
    
    1,478
    
    
    
    
    
    
    
    22,183Equity in earnings of subsidiaries
    
    
    25,908
    
    
    
    1,478
    
    
    
    
    
    
    
    (27,386
    )
    
    
    Net income
    
    $
    22,183
    
    
    $
    25,908
    
    
    $
    1,478
    
    
    $
    (27,386
    )
    
    $
    22,183
 - 17 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2007
 Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)(unaudited)Operating activitiesNet income
    
    $
    22,183
    
    
    $
    25,908
    
    
    $
    1,478
    
    
    $
    (27,386
    )(a)
    
    $
    22,183Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    488
    
    
    
    10,247
    
    
    
    969
    
    
    
    
    
    
    
    11,704Provision for bad debts
    
    
    
    
    
    
    4,591
    
    
    
    998
    
    
    
    
    
    
    
    5,589Gain from sale of business
    
    
    (1,173
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,173
    )Non-cash income from hedge
    
    
    1,316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,316Non-cash compensation expense
    
    
    927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    927Minority interests
    
    
    
    
    
    
    
    
    
    
    323
    
    
    
    
    
    
    
    323Loss on disposal of assets
    
    
    50
    
    
    
    255
    
    
    
    
    
    
    
    
    
    
    
    305Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (25,908
    )
    
    
    (1,478
    )
    
    
    
    
    
    
    27,386
    (a)
    
    
    Intercompany
    
    
    (18,224
    )
    
    
    20,185
    
    
    
    (1,961
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (156
    )
    
    
    (28,777
    )
    
    
    (4,277
    )
    
    
    
    
    
    
    (33,210
    )Other current assets
    
    
    (1,561
    )
    
    
    2,378
    
    
    
    (394
    )
    
    
    
    
    
    
    423Other assets
    
    
    1,544
    
    
    
    (2,713
    )
    
    
    
    
    
    
    
    
    
    
    (1,169
    )Accounts payable
    
    
    (593
    )
    
    
    294
    
    
    
    4,266
    
    
    
    
    
    
    
    3,967Due to third-party payors
    
    
    
    
    
    
    (5,598
    )
    
    
    (363
    )
    
    
    
    
    
    
    (5,961
    )Accrued interest
    
    
    (13,008
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,008
    )Accrued expenses
    
    
    (23
    )
    
    
    495
    
    
    
    1,698
    
    
    
    
    
    
    
    2,170Income taxes
    
    
    14,519
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,519Net cash provided by (used in) operating activities
    
    
    (19,619
    )
    
    
    25,787
    
    
    
    2,737
    
    
    
    
    
    
    
    8,905Investing activitiesPurchases of property and equipment
    
    
    (199
    )
    
    
    (37,057
    )
    
    
    (843
    )
    
    
    
    
    
    
    (38,099
    )Proceeds from sale of business
    
    
    880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    880Restricted cash
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (81
    )
    
    
    
    
    
    
    
    
    
    
    (81
    )Net cash provided by (used in) investing activities
    
    
    628
    
    
    
    (37,138
    )
    
    
    (843
    )
    
    
    
    
    
    
    (37,353
    )Financing activitiesNet repayments on credit facility
    
    
    (1,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,450
    )Dividends to Holdings
    
    
    (16,404
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,404
    )Intercompany debt reallocation
    
    
    (28,348
    )
    
    
    29,975
    
    
    
    (1,627
    )
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Principal payments on seller and other debt
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    
    
    
    
    (111
    )Proceeds from bank overdrafts
    
    
    2,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,992Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (843
    )
    
    
    
    
    
    
    (843
    )Net cash provided by (used in) financing activities
    
    
    (43,010
    )
    
    
    29,864
    
    
    
    (2,470
    )
    
    
    
    
    
    
    (15,616
    )Net increase (decrease) in cash and cash equivalents
    
    
    (62,001
    )
    
    
    18,513
    
    
    
    (576
    )
    
    
    
    
    
    
    (44,064
    )Cash and cash equivalents at beginning of period
    
    
    67,245
    
    
    
    12,866
    
    
    
    1,489
    
    
    
    
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    5,244
    
    
    $
    31,379
    
    
    $
    913
    
    
    $
    
    
    
    $
    37,536
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 18 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2006
 Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)(unaudited)Net operating revenues
    
    $
    62
    
    
    $
    440,481
    
    
    $
    39,200
    
    
    $
    
    
    
    $
    479,743Costs and expenses:Cost of services
    
    
    58
    
    
    
    352,074
    
    
    
    33,065
    
    
    
    
    
    
    
    385,197General and administrative
    
    
    12,181
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    12,200Bad debt expense
    
    
    
    
    
    
    5,306
    
    
    
    (306
    )
    
    
    
    
    
    
    5,000Depreciation and amortization
    
    
    604
    
    
    
    9,551
    
    
    
    740
    
    
    
    
    
    
    
    10,895Total costs and expenses
    
    
    12,843
    
    
    
    366,950
    
    
    
    33,499
    
    
    
    
    
    
    
    413,292Income (loss) from operations
    
    
    (12,781
    )
    
    
    73,531
    
    
    
    5,701
    
    
    
    
    
    
    
    66,451Other income and expense:Intercompany interest and royalty fees
    
    
    (13,818
    )
    
    
    13,685
    
    
    
    133
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    40,182
    
    
    
    (39,466
    )
    
    
    (716
    )
    
    
    
    
    
    
    Other income
    
    
    2,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,434Interest income
    
    
    209
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    222Interest expense
    
    
    (18,973
    )
    
    
    (4,916
    )
    
    
    (383
    )
    
    
    
    
    
    
    (24,272
    )Income (loss) before minority interests and income taxes
    
    
    (2,747
    )
    
    
    42,847
    
    
    
    4,735
    
    
    
    
    
    
    
    44,835Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    31
    
    
    
    360
    
    
    
    
    
    
    
    391Income (loss) from continuing operations before income taxes
    
    
    (2,747
    )
    
    
    42,816
    
    
    
    4,375
    
    
    
    
    
    
    
    44,444Income tax expense (benefit)
    
    
    (6
    )
    
    
    18,916
    
    
    
    185
    
    
    
    
    
    
    
    19,095Income (loss) from continuing operations
    
    
    (2,741
    )
    
    
    23,900
    
    
    
    4,190
    
    
    
    
    
    
    
    25,349Income from discontinued operations, net of tax
    
    
    9,068
    
    
    
    
    
    
    
    950
    
    
    
    
    
    
    
    10,018Equity in earnings of subsidiaries
    
    
    29,040
    
    
    
    4,190
    
    
    
    
    
    
    
    (33,230
    ) (a)
    
    
    Net income
    
    $
    35,367
    
    
    $
    28,090
    
    
    $
    5,140
    
    
    $
    (33,230
    )
    
    $
    35,367
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries. - 19 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2006
 Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)(unaudited)Operating activitiesNet income
    
    $
    35,367
    
    
    $
    28,090
    
    
    $
    5,140
    
    
    $
    (33,230
    )(a)
    
    $
    35,367Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    604
    
    
    
    9,551
    
    
    
    916
    
    
    
    
    
    
    
    11,071Provision for bad debts
    
    
    
    
    
    
    5,306
    
    
    
    (219
    )
    
    
    
    
    
    
    5,087Gain from sale of business
    
    
    (13,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,950
    )Non-cash income from hedge
    
    
    (2,434
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,434
    )Non-cash compensation expense
    
    
    946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    946Minority interests
    
    
    
    
    
    
    31
    
    
    
    700
    
    
    
    
    
    
    
    731Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (29,040
    )
    
    
    (4,190
    )
    
    
    
    
    
    
    33,230
    (a)
    
    
    Intercompany
    
    
    (14,514
    )
    
    
    46,625
    
    
    
    (32,111
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (28
    )
    
    
    (47,044
    )
    
    
    12,861
    
    
    
    
    
    
    
    (34,211
    )Other current assets
    
    
    531
    
    
    
    (1,664
    )
    
    
    1,028
    
    
    
    
    
    
    
    (105
    )Other assets
    
    
    (7,266
    )
    
    
    7,922
    
    
    
    1,011
    
    
    
    
    
    
    
    1,667Accounts payable
    
    
    1,499
    
    
    
    4,006
    
    
    
    (1,936
    )
    
    
    
    
    
    
    3,569Due to third-party payors
    
    
    
    
    
    
    1,640
    
    
    
    (981
    )
    
    
    
    
    
    
    659Accrued interest
    
    
    (12,984
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,984
    )Accrued expenses
    
    
    (4,864
    )
    
    
    (1,441
    )
    
    
    (2,160
    )
    
    
    
    
    
    
    (8,465
    )Income and deferred taxes
    
    
    23,207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,207Net cash provided by (used in) operating activities
    
    
    (22,926
    )
    
    
    48,832
    
    
    
    (15,751
    )
    
    
    
    
    
    
    10,155Investing activitiesPurchases of property and equipment
    
    
    (231
    )
    
    
    (35,177
    )
    
    
    (2,978
    )
    
    
    
    
    
    
    (38,386
    )Proceeds from sale of business, net
    
    
    76,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,806Earnout payments
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )Restricted cash
    
    
    437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (1,699
    )
    
    
    (324
    )
    
    
    
    
    
    
    (2,023
    )Net cash provided by (used in) investing activities
    
    
    77,012
    
    
    
    (36,976
    )
    
    
    (3,302
    )
    
    
    
    
    
    
    36,734Financing activitiesNet repayments on credit facility
    
    
    (58,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,450
    )Dividends to Holdings
    
    
    (15,733
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,733
    )Intercompany debt reallocation
    
    
    7,302
    
    
    
    (13,287
    )
    
    
    5,985
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (388
    )
    
    
    (37
    )
    
    
    
    
    
    
    (425
    )Proceeds from bank overdrafts
    
    
    6,551
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,551Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (877
    )
    
    
    
    
    
    
    (877
    )Net cash provided by (used in) financing activities
    
    
    (60,330
    )
    
    
    (13,675
    )
    
    
    5,071
    
    
    
    
    
    
    
    (68,934
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (6,209
    )
    
    
    (1,819
    )
    
    
    (13,982
    )
    
    
    
    
    
    
    (22,010
    )Cash and cash equivalents at beginning of period
    
    
    16,738
    
    
    
    3,631
    
    
    
    15,492
    
    
    
    
    
    
    
    35,861Cash and cash equivalents at end of period
    
    $
    10,529
    
    
    $
    1,812
    
    
    $
    1,510
    
    
    $
    
    
    
    $
    13,851
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 20 -




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read this discussion together with our unaudited consolidated financial statements and the accompanying notes.
 Forward Looking Statements
  
    
    additional changes in government reimbursement for our services may result in increased costs and have an adverse effect on our future net operating revenues and profitability, such as the regulations released by the Centers for Medicare
& Medicaid Services, or CMS, on May 2, 2006 and May 1, 2007;
    
    the failure of our long-term acute care hospitals, or LTCHs, 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, or HIHs, 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;
    
    a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;
    
    integration of recently acquired operations (such as the outpatient division of HealthSouth Corporation) 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.
 21




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##### Table of Contents



Overview
    Recent Trends and Events
 Agreement to Purchase HealthSouth Corporations Outpatient Rehabilitation Division
  Agreement to Purchase Nexus Health Systems, Inc.
   22




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##### Table of Contents



Amendment to Credit Agreement
  First Quarter Ended March 31, 2007
   Regulatory Changes
 August 2004 Final Rule
 23




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##### Table of Contents



August 2005 Final Rule
 May 2006 Final Rule.
   24




---



##### Table of Contents



August 2006 Final Rule.
 May 2007 Final Rule
  25




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##### Table of Contents



26




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##### Table of Contents



April 2007 Proposed Rule.
 Transition
Plan
   Development of New Specialty Hospitals and Clinics
  27




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##### Table of Contents



Operating Statistics
  Three Months EndedMarch 31,2006
    
    
    2007Specialty hospital data(1):Number of hospitals  start of period
    
    
    101
    
    
    
    96Number of hospitals closed
    
    
    
    
    
    
    (1
    )Number of hospitals consolidated
    
    
    
    
    
    
    (3
    )Number of hospitals  end of period
    
    
    101
    
    
    
    92Available licensed beds
    
    
    3,852
    
    
    
    3,899Admissions
    
    
    10,483
    
    
    
    10,416Patient days
    
    
    251,701
    
    
    
    252,476Average length of stay (days)
    
    
    25
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,405
    
    
    $
    1,378Occupancy rate
    
    
    73
    %
    
    
    72
    %Percent patient days  Medicare
    
    
    73
    %
    
    
    72
    %Outpatient rehabilitation data (3):Number of clinics owned  start of period
    
    
    553
    
    
    
    477Number of clinics acquired
    
    
    
    
    
    
    1Number of clinic start-ups
    
    
    1
    
    
    
    4Number of clinics closed/sold
    
    
    (1
    )
    
    
    (5
    )Number of clinics owned  end of period
    
    
    553
    
    
    
    477Number of clinics managed  end of period
    
    
    60
    
    
    
    68Total number of clinics (all)  end of period
    
    
    613
    
    
    
    545Number of visits
    
    
    784,839
    
    
    
    646,651Net revenue per visit (4)
    
    $
    91
    
    
    $
    101
 
 (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 excludes clinics operated by CBIL. CBIL is being reported as discontinued
operations for the three months ended March 31, 2006.(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. 28




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##### Table of Contents



Results of Operations
  Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationThree Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2006
    
    
    2007
    
    
    2006
    
    
    2007Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    80.3
    
    
    
    80.9
    
    
    
    80.3
    
    
    
    80.9General and administrative
    
    
    2.6
    
    
    
    2.5
    
    
    
    2.6
    
    
    
    2.5Bad debt expense
    
    
    1.0
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    1.2Depreciation and amortization
    
    
    2.3
    
    
    
    2.5
    
    
    
    2.3
    
    
    
    2.5Income from operations
    
    
    13.8
    
    
    
    12.9
    
    
    
    13.8
    
    
    
    12.9Other income
    
    
    
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    Interest expense, net
    
    
    (6.8
    )
    
    
    (6.7
    )
    
    
    (4.9
    )
    
    
    (4.9
    )Income from continuing operations before minority interests and income taxes
    
    
    7.0
    
    
    
    6.5
    
    
    
    9.4
    
    
    
    8.0Minority interests
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Income from continuing operations before income taxes
    
    
    6.9
    
    
    
    6.4
    
    
    
    9.3
    
    
    
    7.9Income tax expense
    
    
    3.2
    
    
    
    2.7
    
    
    
    4.0
    
    
    
    3.2Income from continuing operations
    
    
    3.7
    
    
    
    3.7
    
    
    
    5.3
    
    
    
    4.7Income from discontinued operations, net of tax
    
    
    2.1
    
    
    
    
    
    
    
    2.1
    
    
    
    Net income
    
    
    5.8
    %
    
    
    3.7
    %
    
    
    7.4
    %
    
    
    4.7
    %
 29




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##### Table of Contents



Select Medical HoldingsCorporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2007
    
    
    % Change
    
    
    2006
    
    
    2007
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    359,672
    
    
    $
    354,228
    
    
    
    (1.5
    )%
    
    $
    359,672
    
    
    $
    354,228
    
    
    
    (1.5
    )%Outpatient rehabilitation
    
    
    119,290
    
    
    
    112,380
    
    
    
    (5.8
    )
    
    
    119,290
    
    
    
    112,380
    
    
    
    (5.8
    )Other
    
    
    781
    
    
    
    221
    
    
    
    (71.7
    )
    
    
    781
    
    
    
    221
    
    
    
    (71.7
    )Total company
    
    $
    479,743
    
    
    $
    466,829
    
    
    
    (2.7
    )%
    
    $
    479,743
    
    
    $
    466,829
    
    
    
    (2.7
    )%Income (loss) from operations:Specialty hospitals
    
    $
    67,889
    
    
    $
    57,683
    
    
    
    (15.0
    )%
    
    $
    67,889
    
    
    $
    57,683
    
    
    
    (15.0
    )%Outpatient rehabilitation
    
    
    11,468
    
    
    
    14,861
    
    
    
    29.6
    
    
    
    11,468
    
    
    
    14,861
    
    
    
    29.6Other
    
    
    (12,906
    )
    
    
    (12,219
    )
    
    
    5.3
    
    
    
    (12,906
    )
    
    
    (12,219
    )
    
    
    5.3Total company
    
    $
    66,451
    
    
    $
    60,325
    
    
    
    (9.2
    )%
    
    $
    66,451
    
    
    $
    60,325
    
    
    
    (9.2
    )%Adjusted EBITDA:(2)Specialty hospitals
    
    $
    74,718
    
    
    $
    66,031
    
    
    
    (11.6
    )%
    
    $
    74,718
    
    
    $
    66,031
    
    
    
    (11.6
    )%Outpatient rehabilitation
    
    
    14,760
    
    
    
    17,618
    
    
    
    19.4
    
    
    
    14,760
    
    
    
    17,618
    
    
    
    19.4Other
    
    
    (11,186
    )
    
    
    (10,693
    )
    
    
    4.4
    
    
    
    (11,186
    )
    
    
    (10,693
    )
    
    
    4.4Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    20.8
    %
    
    
    18.6
    %
    
    
    (10.6
    )%
    
    
    20.8
    %
    
    
    18.6
    %
    
    
    (10.6
    )%Outpatient rehabilitation
    
    
    12.4
    
    
    
    15.7
    
    
    
    26.6
    
    
    
    12.4
    
    
    
    15.7
    
    
    
    26.6Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,746,744
    
    
    $
    1,795,902
    
    
    
    
    
    
    $
    1,746,744
    
    
    $
    1,795,902Outpatient rehabilitation
    
    
    269,295
    
    
    
    258,372
    
    
    
    
    
    
    
    269,295
    
    
    
    258,372Other
    
    
    119,248
    
    
    
    137,917
    
    
    
    
    
    
    
    114,363
    
    
    
    133,190Total company
    
    $
    2,135,287
    
    
    $
    2,192,191
    
    
    
    
    
    
    $
    2,130,402
    
    
    $
    2,187,464Purchases of property and equipment, net:Specialty hospitals
    
    $
    36,505
    
    
    $
    35,879
    
    
    
    
    
    
    $
    36,505
    
    
    $
    35,879Outpatient rehabilitation
    
    
    1,641
    
    
    
    2,021
    
    
    
    
    
    
    
    1,641
    
    
    
    2,021Other
    
    
    240
    
    
    
    199
    
    
    
    
    
    
    
    240
    
    
    
    199Total company
    
    $
    38,386
    
    
    $
    38,099
    
    
    
    
    
    
    $
    38,386
    
    
    $
    38,099
 30




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##### Table of Contents



Select Medical HoldingsCorporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2007
    
    
    2006
    
    
    2007(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    359,672
    
    
    $
    354,228
    
    
    $
    359,672
    
    
    $
    354,228Less: Specialty hospitals in development, opened or closed after 1/1/06
    
    
    11,894
    
    
    
    4,260
    
    
    
    11,894
    
    
    
    4,260Specialty hospitals same store net operating revenue
    
    $
    347,778
    
    
    $
    349,968
    
    
    $
    347,778
    
    
    $
    349,968Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    74,718
    
    
    $
    66,031
    
    
    $
    74,718
    
    
    $
    66,031Less: Specialty hospitals in development, opened or closed after 1/1/06
    
    
    1,009
    
    
    
    (3,020
    )
    
    
    1,009
    
    
    
    (3,020
    )Specialty hospitals same store Adjusted EBITDA(2)
    
    $
    73,709
    
    
    $
    69,051
    
    
    $
    73,709
    
    
    $
    69,051All specialty hospitals Adjusted EBITDA margin(2)
    
    
    20.8
    %
    
    
    18.6
    %
    
    
    20.8
    %
    
    
    18.6
    %Specialty hospitals same store Adjusted EBITDA margin(2)
    
    
    21.2
    %
    
    
    19.7
    %
    
    
    21.2
    %
    
    
    19.7
    %
 
 N/M
    
     Not Meaningful.(1)
    
    Cost of services include salaries, wages and benefits, operating supplies, lease and
rent expense and other operating costs.(2)
    
    We define Adjusted EBITDA as net income before interest, income taxes, depreciation and
amortization, other income, income from discontinued operations, stock compensation
expense, and minority interest. We believe that the presentation of Adjusted EBITDA is
important to investors because Adjusted EBITDA is used by management to evaluate financial
performance and determine resource allocation for each of our operating units. Adjusted
EBITDA is not a measure of financial performance under generally accepted accounting
principles. Items excluded from Adjusted EBITDA are significant components in understanding
and assessing financial performance. Adjusted EBITDA should not be considered in isolation
or as an alternative to, or substitute for, net income, cash flows generated by operations,
investing or financing activities, or other financial statement data presented in the
consolidated financial statements as indicators of financial performance or liquidity.
Because Adjusted EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and is thus susceptible to varying calculations, Adjusted
EBITDA as presented may not be comparable to other similarly titled measures of other
companies. See footnote 5 to our interim unaudited consolidated financial statements for
the period ended March 31, 2007 for a reconciliation of net income to Adjusted EBITDA as
utilized by us in reporting our segment performance in accordance with SFAS No. 131. 31




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##### Table of Contents



Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
  Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  32




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##### Table of Contents



Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income from Operations
  Interest Expense
 Select Medical Corporation.
 Select Medical Holdings Corporation .
 33




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Minority Interests
  Income Taxes
 Select Medical Corporation.
 Select Medical Holdings Corporation .
 Income from Discontinued Operations, Net of Tax
  34




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Liquidity and Capital Resources
  Select Medical HoldingsCorporation
    
    Select Medical CorporationThree Months Ended
    
    Three Months EndedMarch 31,
    
    March 31,2006
    
    2007
    
    2006
    
    2007(in thousands)
    
    (in thousands)Cash flows provided by (used in) operating activities
    
    $
    (5,578
    )
    
    $
    (7,485
    )
    
    $
    10,155
    
    
    $
    8,905Cash flows provided by (used in) investing activities
    
    
    36,734
    
    
    
    (37,353
    )
    
    
    36,734
    
    
    
    (37,353
    )Cash flows provided by (used in) financing activities
    
    
    (53,201
    )
    
    
    774
    
    
    
    (68,934
    )
    
    
    (15,616
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    35
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (22,010
    )
    
    
    (44,064
    )
    
    
    (22,010
    )
    
    
    (44,064
    )Cash and cash equivalents at beginning of period
    
    
    35,861
    
    
    
    81,600
    
    
    
    35,861
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    13,851
    
    
    $
    37,536
    
    
    $
    13,851
    
    
    $
    37,536
      35




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##### Table of Contents



Capital Resources
    
    
    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 $680.0 million term loan facility that matures on February 24, 2012.
  5 8
 36




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37




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##### Table of Contents



Inflation
  Recent Accounting Pronouncements
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  38




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   39




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##### Table of Contents



ITEM 1A. RISK FACTORS.
 Set
forth below are changes from our risk factors as previously reported in the Annual
Reports on Form 10-K for Holdings and Select for the year ended December 31, 2006.
 Compliance with changes in federal regulations applicable to long-term acute care
hospitals operated as 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.
   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.
   40




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41




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If there are changes in the rates or methods of government reimbursements for our services,
our net operating revenues and profitability could decline.
  42




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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
  43




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##### Table of Contents



ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  
 SIGNATURES
  SELECT MEDICAL CORPORATIONBy:
    
    /s/  Martin F. Jackson

      Martin F. Jackson
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer)
 By:
    
    /s/  Scott A. Romberger

     Scott A. RombergerSenior Vice President, Chief Accounting Officer and Controller(Principal Accounting Officer)
 Dated: May 15, 2007
 SELECT MEDICAL HOLDINGS CORPORATIONBy:
    
    /s/ Martin F. Jackson

      Martin F. JacksonExecutive Vice President and Chief Financial Officer(Duly Authorized Officer)
 By:
    
    /s/ Scott A. RombergerScott A. RombergerSenior Vice President, Chief Accounting Officer and Controller(Principal Accounting Officer)
 Dated: May 15, 2007
 44




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##### Table of Contents



Exhibit
    
    Description2.1
    
    Stock Purchase Agreement between HealthSouth Corporation and Select Medical Corporation dated January 27, 2007, incorporated by reference to Exhibit 2.1 of Selects Current Report on Form 8-K
filed January 30, 2007.2.2
    
    Stock Purchase Agreement among Select Medical Corporation, Nexus Health Systems, Inc., Neurobehavioral Management Services L.L.C., Nexus Health Inc. and the stockholders of Nexus Health Systems, Inc. dated
March 26, 2007, incorporated by reference to Exhibit 2.1 of Selects Current Report on Form 8-K filed March 28, 2007.10.1
    
    Amendment No. 2 and Waiver, dated as of March 19, 2007, 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, incorporated by reference to Exhibit 10.1 of Selects Current Report on Form 8-K filed
March 23, 2007.10.2
    
    Incremental Facility Amendment, dated as of March 28, 2007, 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, incorporated by reference to Exhibit 10.1 of Selects Current Report on Form 8-K filed
March 30, 2007.31.1
    
    Certification of Chief Executive Officer of Select Medical Holdings Corporation and Select Medical Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Executive Vice President and Chief Financial Officer of Select Medical Holdings Corporation and Select Medical Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer of Select Medical Holdings Corporation and Select Medical Corporation 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 Executive Vice President and Chief Financial Officer of Select Medical Holdings Corporation and Select Medical Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 45