##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarter Ended September 30, 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 
Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    20-1764048
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 statements of changes in stockholders equity and comprehensive income
    
    
    6Consolidated statements of cash flows
    
    
    7Notes to consolidated financial statements
    
    
    8ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    29ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    52ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    53PART II
    
    OTHER INFORMATION
    
    
    53ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    53ITEM 1A.
    
    RISK FACTORS
    
    
    55ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    55ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    55ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    55ITEM 5.
    
    OTHER INFORMATION
    
    
    55ITEM 6.
    
    EXHIBITS
    
    
    55SIGNATURES
    
    
    
    
    56Certification 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
  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,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    81,600
    
    
    $
    10,103
    
    
    $
    81,600
    
    
    $
    10,103Restricted cash
    
    
    4,335
    
    
    
    886
    
    
    
    4,335
    
    
    
    886Accounts receivable, net of allowance for doubtful accounts
of $55,306 and $57,683 in 2006 and 2007, respectively
    
    
    199,927
    
    
    
    257,318
    
    
    
    199,927
    
    
    
    257,318Current deferred tax asset
    
    
    42,613
    
    
    
    38,760
    
    
    
    42,613
    
    
    
    38,760Prepaid income taxes
    
    
    
    
    
    
    6,019
    
    
    
    
    
    
    
    6,019Other current assets
    
    
    16,762
    
    
    
    22,872
    
    
    
    16,762
    
    
    
    22,872Total Current Assets
    
    
    345,237
    
    
    
    335,958
    
    
    
    345,237
    
    
    
    335,958Property and equipment, net
    
    
    356,336
    
    
    
    479,833
    
    
    
    356,336
    
    
    
    479,833Goodwill
    
    
    1,323,572
    
    
    
    1,475,530
    
    
    
    1,323,572
    
    
    
    1,475,530Other identifiable intangibles
    
    
    79,230
    
    
    
    95,532
    
    
    
    79,230
    
    
    
    95,532Other assets held for sale
    
    
    4,855
    
    
    
    3,447
    
    
    
    4,855
    
    
    
    3,447Other assets
    
    
    73,294
    
    
    
    67,940
    
    
    
    68,412
    
    
    
    63,521Total Assets
    
    $
    2,182,524
    
    
    $
    2,458,240
    
    
    $
    2,177,642
    
    
    $
    2,453,821LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    12,213
    
    
    $
    18,911
    
    
    $
    12,213
    
    
    $
    18,911Current portion of long-term debt and notes payable
    
    
    6,209
    
    
    
    7,616
    
    
    
    6,209
    
    
    
    7,616Accounts payable
    
    
    72,597
    
    
    
    81,488
    
    
    
    72,597
    
    
    
    81,488Accrued payroll
    
    
    55,084
    
    
    
    67,068
    
    
    
    55,084
    
    
    
    67,068Accrued vacation
    
    
    27,360
    
    
    
    33,398
    
    
    
    27,360
    
    
    
    33,398Accrued interest
    
    
    36,759
    
    
    
    16,072
    
    
    
    25,270
    
    
    
    12,956Accrued professional liability
    
    
    24,979
    
    
    
    26,272
    
    
    
    24,979
    
    
    
    26,272Accrued restructuring
    
    
    225
    
    
    
    20,713
    
    
    
    225
    
    
    
    20,713Accrued other
    
    
    67,084
    
    
    
    71,150
    
    
    
    67,084
    
    
    
    71,150Income taxes payable
    
    
    1,937
    
    
    
    
    
    
    
    1,937
    
    
    
    Due to third party payors
    
    
    12,886
    
    
    
    10,791
    
    
    
    12,886
    
    
    
    10,791Total Current Liabilities
    
    
    317,333
    
    
    
    353,479
    
    
    
    305,844
    
    
    
    350,363Long-term debt, net of current portion
    
    
    1,532,294
    
    
    
    1,728,033
    
    
    
    1,224,509
    
    
    
    1,419,271Non-current deferred tax liability
    
    
    32,075
    
    
    
    24,675
    
    
    
    30,721
    
    
    
    24,275Other non-current liabilities
    
    
    
    
    
    
    22,857
    
    
    
    
    
    
    
    22,857Total Liabilities
    
    
    1,881,702
    
    
    
    2,129,044
    
    
    
    1,561,074
    
    
    
    1,816,766Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    2,566
    
    
    
    4,897
    
    
    
    2,566
    
    
    
    4,897Preferred stock  Authorized shares (liquidation preference is $467,395 and
$485,081 in 2006 and 2007,
respectively)
    
    
    467,395
    
    
    
    485,081
    
    
    
    
    
    
    
    Stockholders Equity:Common stock of Holdings, $0.001 par value, 250,000,000 shares authorized,
204,904,000 shares and
205,165,000 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
    )
    
    
    (292,186
    )
    
    
    464,283
    
    
    
    475,575Retained earnings
    
    
    121,024
    
    
    
    130,077
    
    
    
    146,774
    
    
    
    156,008Accumulated other comprehensive income
    
    
    4,888
    
    
    
    1,122
    
    
    
    2,945
    
    
    
    575Total Stockholders Equity
    
    
    (169,139
    )
    
    
    (160,782
    )
    
    
    614,002
    
    
    
    632,158Total Liabilities and Stockholders Equity
    
    $
    2,182,524
    
    
    $
    2,458,240
    
    
    $
    2,177,642
    
    
    $
    2,453,821
 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 September 30,
    
    
    For the Quarter Ended September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Net operating revenues
    
    $
    443,872
    
    
    $
    500,385
    
    
    $
    443,872
    
    
    $
    500,385Costs and expenses:Cost of services
    
    
    362,070
    
    
    
    429,831
    
    
    
    362,070
    
    
    
    429,831General and administrative
    
    
    9,762
    
    
    
    12,081
    
    
    
    9,762
    
    
    
    12,081Bad debt expense
    
    
    5,333
    
    
    
    10,782
    
    
    
    5,333
    
    
    
    10,782Depreciation and amortization
    
    
    12,394
    
    
    
    16,399
    
    
    
    12,394
    
    
    
    16,399Total costs and expenses
    
    
    389,559
    
    
    
    469,093
    
    
    
    389,559
    
    
    
    469,093Income from operations
    
    
    54,313
    
    
    
    31,292
    
    
    
    54,313
    
    
    
    31,292Other income and expense:Other expense
    
    
    
    
    
    
    (1,372
    )
    
    
    (3,124
    )
    
    
    (4,065
    )Interest income
    
    
    319
    
    
    
    158
    
    
    
    319
    
    
    
    158Interest expense
    
    
    (33,002
    )
    
    
    (35,678
    )
    
    
    (24,348
    )
    
    
    (27,093
    )Income (loss) from operations before
minority interests and income taxes
    
    
    21,630
    
    
    
    (5,600
    )
    
    
    27,160
    
    
    
    292Minority interest in consolidated subsidiary companies
    
    
    369
    
    
    
    237
    
    
    
    369
    
    
    
    237Income (loss) from operations before income taxes
    
    
    21,261
    
    
    
    (5,837
    )
    
    
    26,791
    
    
    
    55Income tax expense (benefit)
    
    
    8,717
    
    
    
    (2,731
    )
    
    
    10,652
    
    
    
    (669
    )Net income (loss)
    
    $
    12,544
    
    
    $
    (3,106
    )
    
    $
    16,139
    
    
    $
    724
 The
accompanying notes are an integral part of this  statement.
 4




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##### Table of Contents



Consolidated Statements of Operations
(unaudited)
(in thousands)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Nine Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Net operating revenues
    
    $
    1,405,756
    
    
    $
    1,473,698
    
    
    $
    1,405,756
    
    
    $
    1,473,698Costs and expenses:Cost of services
    
    
    1,119,767
    
    
    
    1,218,410
    
    
    
    1,119,767
    
    
    
    1,218,410General and administrative
    
    
    33,511
    
    
    
    35,847
    
    
    
    33,511
    
    
    
    35,847Bad debt expense
    
    
    18,766
    
    
    
    25,206
    
    
    
    18,766
    
    
    
    25,206Depreciation and amortization
    
    
    34,955
    
    
    
    42,042
    
    
    
    34,955
    
    
    
    42,042Total costs and expenses
    
    
    1,206,999
    
    
    
    1,321,505
    
    
    
    1,206,999
    
    
    
    1,321,505Income from operations
    
    
    198,757
    
    
    
    152,193
    
    
    
    198,757
    
    
    
    152,193Other income and expense:Other income (expense)
    
    
    
    
    
    
    (199
    )
    
    
    918
    
    
    
    (2,548
    )Interest income
    
    
    738
    
    
    
    1,956
    
    
    
    738
    
    
    
    1,956Interest expense
    
    
    (98,525
    )
    
    
    (103,630
    )
    
    
    (72,615
    )
    
    
    (77,798
    )Income from continuing operations before
minority interests and income taxes
    
    
    100,970
    
    
    
    50,320
    
    
    
    127,798
    
    
    
    73,803Minority interest in consolidated subsidiary companies
    
    
    1,095
    
    
    
    1,373
    
    
    
    1,095
    
    
    
    1,373Income from continuing operations before income taxes
    
    
    99,875
    
    
    
    48,947
    
    
    
    126,703
    
    
    
    72,430Income tax expense
    
    
    41,889
    
    
    
    20,267
    
    
    
    51,278
    
    
    
    28,486Income from continuing operations
    
    
    57,986
    
    
    
    28,680
    
    
    
    75,425
    
    
    
    43,944Income from discontinued operations, net of tax
(Includes pre-tax gain of $13,950)
    
    
    10,018
    
    
    
    
    
    
    
    10,018
    
    
    
    Net income
    
    $
    68,004
    
    
    $
    28,680
    
    
    $
    85,443
    
    
    $
    43,944
 The
accompanying notes are an integral part of this  statement.
 5




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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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,680
    
    
    
    
    
    
    $
    28,680Unrealized loss on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,766
    )
    
    
    (3,766
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,914Cumulative impact of change in 
accounting for uncertainties in 
income taxes (FIN 48 - see Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )Vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    2,791Issuance of restricted stock
    
    
    200
    
    
    
    
    
    
    
    200Exercise of stock options
    
    
    64
    
    
    
    
    
    
    
    64Stock option expense
    
    
    
    
    
    
    
    
    
    
    18Repurchase of common shares
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Accretion of dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,696
    )Balance at September 30, 2007
    
    
    205,165
    
    
    $
    205
    
    
    $
    (292,186
    )
    
    $
    130,077
    
    
    $
    1,122
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,944
    
    
    
    
    
    
    $
    43,944Unrealized loss on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,370
    )
    
    
    (2,370
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    41,574Cumulative impact of change in 
accounting for  uncertainties in 
income taxes (FIN 48 - see Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,779
    )Federal tax benefit of losses contributed by Holdings
    
    
    
    
    
    
    
    
    
    
    8,219Additional investment by Holdings
    
    
    
    
    
    
    
    
    
    
    264Contribution related to restricted stock and stock
option award issuances by Holdings
    
    
    
    
    
    
    
    
    
    
    2,809Balance at September 30, 2007
    
    
    
    
    
    $
    
    
    
    $
    475,575
    
    
    $
    156,008
    
    
    $
    575
 The
accompanying notes are an integral part of this statement.
 6




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##### Table of Contents



Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Nine Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Operating activitiesNet income
    
    $
    68,004
    
    
    $
    28,680
    
    
    $
    85,443
    
    
    $
    43,944Adjustments
to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    35,131
    
    
    
    42,042
    
    
    
    35,131
    
    
    
    42,042Provision for bad debts
    
    
    18,853
    
    
    
    25,206
    
    
    
    18,853
    
    
    
    25,206Gain from disposal of assets and sale of business units
    
    
    (12,532
    )
    
    
    (963
    )
    
    
    (12,532
    )
    
    
    (963
    )Non-cash loss (income) from interest rate swaps
    
    
    
    
    
    
    
    
    
    
    (918
    )
    
    
    2,350Non-cash stock compensation expense
    
    
    2,837
    
    
    
    2,809
    
    
    
    2,837
    
    
    
    2,809Amortization of debt discount
    
    
    868
    
    
    
    977
    
    
    
    
    
    
    
    Minority interests
    
    
    1,435
    
    
    
    1,373
    
    
    
    1,435
    
    
    
    1,373Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (10,811
    )
    
    
    (53,332
    )
    
    
    (10,811
    )
    
    
    (53,332
    )Other current assets
    
    
    2,494
    
    
    
    435
    
    
    
    2,494
    
    
    
    435Other assets
    
    
    3,591
    
    
    
    (547
    )
    
    
    3,539
    
    
    
    (1,011
    )Accounts payable
    
    
    4,300
    
    
    
    6,558
    
    
    
    4,300
    
    
    
    6,558Due to third-party payors
    
    
    (3,169
    )
    
    
    (2,095
    )
    
    
    (3,169
    )
    
    
    (2,095
    )Accrued interest
    
    
    (20,021
    )
    
    
    (20,687
    )
    
    
    (12,526
    )
    
    
    (12,314
    )Accrued expenses
    
    
    (9,991
    )
    
    
    12,678
    
    
    
    (9,991
    )
    
    
    12,678Income and deferred taxes
    
    
    24,177
    
    
    
    11,886
    
    
    
    33,562
    
    
    
    20,105Net cash provided by operating activities
    
    
    105,166
    
    
    
    55,020
    
    
    
    137,647
    
    
    
    87,785Investing activitiesPurchases of property and equipment
    
    
    (112,132
    )
    
    
    (127,897
    )
    
    
    (112,132
    )
    
    
    (127,897
    )Earnout payments
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )
    
    
    Proceeds from sale of business units
    
    
    76,806
    
    
    
    7,877
    
    
    
    76,806
    
    
    
    7,877Sale of building
    
    
    
    
    
    
    4,500
    
    
    
    
    
    
    
    4,500Changes in restricted cash
    
    
    1,098
    
    
    
    3,449
    
    
    
    1,098
    
    
    
    3,449Acquisition of businesses, net of cash acquired
    
    
    (3,261
    )
    
    
    (213,974
    )
    
    
    (3,261
    )
    
    
    (213,974
    )Net cash used in investing activities
    
    
    (37,589
    )
    
    
    (326,045
    )
    
    
    (37,589
    )
    
    
    (326,045
    )Financing activitiesBorrowings on revolving credit facility
    
    
    210,000
    
    
    
    324,000
    
    
    
    210,000
    
    
    
    324,000Payments on revolving credit facility
    
    
    (290,000
    )
    
    
    (224,000
    )
    
    
    (290,000
    )
    
    
    (224,000
    )Credit facility term loan borrowing
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    100,000Payments on credit facility term loan
    
    
    (4,350
    )
    
    
    (4,850
    )
    
    
    (4,350
    )
    
    
    (4,850
    )Principal payments on seller and other debt
    
    
    (614
    )
    
    
    (1,062
    )
    
    
    (614
    )
    
    
    (1,062
    )Proceeds from (repayment of) bank overdrafts
    
    
    (11,824
    )
    
    
    6,698
    
    
    
    (11,824
    )
    
    
    6,698Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    (32,522
    )
    
    
    (32,779
    )Repurchase of common and preferred stock
    
    
    (41
    )
    
    
    (14
    )
    
    
    
    
    
    
    Proceeds from issuance of restricted stock
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264Distributions to minority interests
    
    
    (1,604
    )
    
    
    (1,508
    )
    
    
    (1,604
    )
    
    
    (1,508
    )Net cash provided by (used in) financing activities
    
    
    (98,433
    )
    
    
    199,528
    
    
    
    (130,914
    )
    
    
    166,763Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    35
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (30,821
    )
    
    
    (71,497
    )
    
    
    (30,821
    )
    
    
    (71,497
    )Cash and cash equivalents at beginning of period
    
    
    35,861
    
    
    
    81,600
    
    
    
    35,861
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    5,040
    
    
    $
    10,103
    
    
    $
    5,040
    
    
    $
    10,103Supplemental Cash Flow InformationCash paid for interest
    
    $
    114,504
    
    
    $
    120,140
    
    
    $
    81,139
    
    
    $
    87,379Cash paid for taxes
    
    $
    21,840
    
    
    $
    8,460
    
    
    $
    21,840
    
    
    $
    8,460
 The
accompanying notes are an integral part of this statement.
 7




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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
  Reclassifications
  8




---



##### Table of Contents



Recent Accounting Pronouncements
   3. Acquisition
    9




---



##### Table of Contents



Cash paid, net of cash acquired
    
    $
    213,893Fair value of net tangible assets acquired:Accounts receivable
    
    
    31,498Other current assets
    
    
    4,366Property and equipment
    
    
    39,478Other assets
    
    
    820Current liabilities
    
    
    (13,731
    )Long-term debt
    
    
    (972
    )Net tangible assets acquired
    
    
    61,459Non-compete, 5-year
    
    
    20,000Restructuring reserve
    
    
    (22,101
    )Goodwill
    
    
    154,535$
    213,893
  For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2007
    
    2006
    
    2007(in thousands)Net revenue
    
    $
    513,605
    
    
    $
    500,385
    
    
    $
    1,626,791
    
    
    $
    1,567,319Net income (loss):Select Medical
Corporation
    
    $
    16,208
    
    
    $
    724
    
    
    $
    88,295
    
    
    $
    46,063Select Medical
Holdings
Corporation
    
    $
    12,635
    
    
    $
    (3,106
    )
    
    $
    70,932
    
    
    $
    30,842
 10




---



##### Table of Contents



4. Intangible Assets
  As of September 30, 2007Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assets:Contract therapy relationships
    
    $
    20,456
    
    
    $
    (10,569
    )Non-compete agreements
    
    
    40,809
    
    
    
    (11,275
    )Total
    
    $
    61,265
    
    
    $
    (21,844
    )Indefinite-lived intangible assets:Goodwill
    
    $
    1,475,530Trademarks
    
    
    47,857Certificates of need
    
    
    6,550Accreditations
    
    
    1,704Total
    
    $
    1,531,641
  For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2007
    
    2006
    
    2007(in thousands)Amortization expense
    
    $
    1,953
    
    
    $
    2,952
    
    
    $
    5,858
    
    
    $
    7,524
  2007
    
    $
    10,4772008
    
    
    11,8112009
    
    
    11,8112010
    
    
    7,2272011
    
    
    4,2862012
    
    
    1,333
 11




---



##### Table of Contents



Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    Total(in thousands)Balance as of December 31, 2006
    
    $
    1,227,533
    
    
    $
    96,039
    
    
    $
    1,323,572Goodwill acquired during year
    
    
    423
    
    
    
    154,535
    
    
    
    154,958Goodwill allocated to sale of business
    
    
    
    
    
    
    (3,000
    )
    
    
    (3,000
    )Balance as of September 30, 2007
    
    $
    1,227,956
    
    
    $
    247,574
    
    
    $
    1,475,530
  5. Restructuring Reserves
   LeaseTerminationCosts
    
    Severance
    
    Total(in thousands)December 31, 2006
    
    $
    225
    
    
    $
    
    
    
    $
    2252007 acquisition restructuring reserve
    
    
    16,673
    
    
    
    5,428
    
    
    
    22,101Amounts paid
    
    
    (798
    )
    
    
    (815
    )
    
    
    (1,613
    )September 30, 2007
    
    $
    16,100
    
    
    $
    4,613
    
    
    $
    20,713
  12




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##### Table of Contents



6. Accumulated Other Comprehensive Income
 Holdings
  Select
  7. Segment Information
   Three Months Ended September 30, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    329,324
    
    
    $
    114,043
    
    
    $
    505
    
    
    $
    443,872Adjusted EBITDA
    
    
    60,812
    
    
    
    15,737
    
    
    
    (8,896
    )
    
    
    67,653Total assets:Select Medical Corporation
    
    
    1,773,586
    
    
    
    254,865
    
    
    
    97,645
    
    
    
    2,126,096Select Medical Holdings Corporation
    
    
    1,773,586
    
    
    
    254,865
    
    
    
    102,610
    
    
    
    2,131,061Capital expenditures
    
    
    38,671
    
    
    
    876
    
    
    
    771
    
    
    
    40,318
 13




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##### Table of Contents



Three Months Ended September 30, 2007Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    334,023
    
    
    $
    166,290
    
    
    $
    72
    
    
    $
    500,385Adjusted EBITDA
    
    
    41,646
    
    
    
    18,099
    
    
    
    (11,123
    )
    
    
    48,622Total assets:Select Medical Corporation
    
    
    1,853,728
    
    
    
    483,386
    
    
    
    116,707
    
    
    
    2,453,821Select Medical Holdings Corporation
    
    
    1,853,728
    
    
    
    483,386
    
    
    
    121,126
    
    
    
    2,458,240Capital expenditures
    
    
    32,077
    
    
    
    5,010
    
    
    
    978
    
    
    
    38,065
 Nine Months Ended September 30, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    1,049,768
    
    
    $
    353,974
    
    
    $
    2,014
    
    
    $
    1,405,756Adjusted EBITDA
    
    
    218,203
    
    
    
    48,920
    
    
    
    (30,574
    )
    
    
    236,549Total assets:Select Medical Corporation
    
    
    1,773,586
    
    
    
    254,865
    
    
    
    97,645
    
    
    
    2,126,096Select Medical Holdings Corporation
    
    
    1,773,586
    
    
    
    254,865
    
    
    
    102,610
    
    
    
    2,131,061Capital expenditures
    
    
    107,001
    
    
    
    3,827
    
    
    
    1,304
    
    
    
    112,132
 Nine Months Ended September 30, 2007Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    1,033,533
    
    
    $
    438,356
    
    
    $
    1,809
    
    
    $
    1,473,698Adjusted EBITDA
    
    
    168,367
    
    
    
    60,270
    
    
    
    (31,593
    )
    
    
    197,044Total assets:Select Medical Corporation
    
    
    1,853,728
    
    
    
    483,386
    
    
    
    116,707
    
    
    
    2,453,821Select Medical Holdings Corporation
    
    
    1,853,728
    
    
    
    483,386
    
    
    
    121,126
    
    
    
    2,458,240Capital expenditures
    
    
    115,344
    
    
    
    9,655
    
    
    
    2,898
    
    
    
    127,897
 14




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##### Table of Contents



Three Months Ended September 30, 2006Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    60,812
    
    
    $
    15,737
    
    
    $
    (8,896
    )Depreciation and amortization
    
    
    8,388
    
    
    
    3,244
    
    
    
    762Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    946Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationIncome (loss) from operations
    
    $
    52,424
    
    
    $
    12,493
    
    
    $
    (10,604
    )
    
    $
    54,313
    
    
    $
    54,313Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,124
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,683
    )
    
    
    (24,029
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (369
    )
    
    
    (369
    )Income from continuing
operations before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,261
    
    
    $
    26,791
 Three Months Ended September 30, 2007Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    41,646
    
    
    $
    18,099
    
    
    $
    (11,123
    )Depreciation and amortization
    
    
    9,916
    
    
    
    5,757
    
    
    
    726Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    931Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationIncome (loss) from operations
    
    $
    31,730
    
    
    $
    12,342
    
    
    $
    (12,780
    )
    
    $
    31,292
    
    
    $
    31,292Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,372
    )
    
    
    (4,065
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,520
    )
    
    
    (26,935
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (237
    )
    
    
    (237
    )Income (loss) from continuing
operations before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,837
    )
    
    $
    55
 Nine Months Ended September 30, 2006Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    218,203
    
    
    $
    48,920
    
    
    $
    (30,574
    )Depreciation and amortization
    
    
    22,912
    
    
    
    9,759
    
    
    
    2,284Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    2,837Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationIncome (loss) from operations
    
    $
    195,291
    
    
    $
    39,161
    
    
    $
    (35,695
    )
    
    $
    198,757
    
    
    $
    198,757Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    918Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,787
    )
    
    
    (71,877
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,095
    )
    
    
    (1,095
    )Income from continuing operations
before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99,875
    
    
    $
    126,703
 15




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##### Table of Contents



Nine Months Ended September 30, 2007Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    168,367
    
    
    $
    60,270
    
    
    $
    (31,593
    )Depreciation and amortization
    
    
    27,340
    
    
    
    12,717
    
    
    
    1,985Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    2,809Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationIncome (loss) from operations
    
    $
    141,027
    
    
    $
    47,553
    
    
    $
    (36,387
    )
    
    $
    152,193
    
    
    $
    152,193Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (199
    )
    
    
    (2,548
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,674
    )
    
    
    (75,842
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,373
    )
    
    
    (1,373
    )Income from continuing
operations before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,947
    
    
    $
    72,430
 8. Income Tax
    9. Discontinued Operations
  16




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##### Table of Contents



For the TwoMonths EndedFebruary 28,2006(in thousands)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
 10. Commitments and Contingencies
 Litigation
   17




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##### Table of Contents



18




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##### Table of Contents



Construction Commitments
  11. Financing Events
 Amendment to Credit Agreement
  Interest Rate Swap Agreement
  12.
Subsequent Event
  19




---



##### Table of Contents



13.
    
    Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under
Selects 75/8% Senior Subordinated Notes
 5 8 5 8
    Caritas Rehab Services, LLCCanadian Back Institute Limited and its
subsidiaries (1)Cupertino Medical Center, P.C. (2)Elizabethtown Physical TherapyJeff Ayres, PT Therapy Center, Inc.Jeffersontown Physical Therapy, LLCKentucky Orthopedic Rehabilitation, LLCKessler Core PT, OT and Speech Therapy at New
York, LLCLanghorne, P.C.Lester OSM, P.C.Louisville Physical Therapy, P.S.C.Medical Information Management Systems, LLC (3)Metropolitan West Physical Therapy and Sports
Medicine Services Inc.MKJ Physical Therapy, Inc.New York Physician Services, P.C.North Andover Physical Therapy, Inc.OccuMed East, P.C.Ohio Occupational Health, P.C., Inc.Partners in Physical Therapy, PLLCPenn State Hershey Rehabilitation, LLCPhiladelphia Occupational Health, P.C.Rehabilitation Physician Services, P.C.Robinson & Associates, P.C.Select Physical Therapy of Las Vegas Limited PartnershipSelect Specialty Hospital  Central Pennsylvania, L.P.Select Specialty Hospital  Evansville, LLCSelect Specialty Hospital  Houston, L.P.Select Specialty Hospital  Gulf Coast, Inc.Sprint Physical Therapy, P.C.Therex, P.C.TJ Corporation I, LLCU.S. Regional Occupational Health II, P.C.U.S. Regional Occupational Health II of New Jersey, P.C.
 
 (1)
    
    The operating results have been classified as discontinued operations and cash flows
have been included with continuing operations for the nine months ended September 30, 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. 20




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Balance Sheet
September 30, 2007
(unaudited)
 Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash
equivalents
    
    $
    5,079
    
    
    $
    4,079
    
    
    $
    945
    
    
    $
    
    
    
    $
    10,103Restricted cash
    
    
    886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    886Accounts receivable,
net
    
    
    292
    
    
    
    245,204
    
    
    
    11,822
    
    
    
    
    
    
    
    257,318Prepaid income taxes
    
    
    6,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,019Current deferred tax
asset
    
    
    23,516
    
    
    
    12,793
    
    
    
    2,451
    
    
    
    
    
    
    
    38,760Other current assets
    
    
    4,037
    
    
    
    16,790
    
    
    
    2,045
    
    
    
    
    
    
    
    22,872Total Current Assets
    
    
    39,829
    
    
    
    278,866
    
    
    
    17,263
    
    
    
    
    
    
    
    335,958Property and
equipment, net
    
    
    9,115
    
    
    
    436,782
    
    
    
    33,936
    
    
    
    
    
    
    
    479,833Investment in affiliates
    
    
    2,009,120
    
    
    
    41,210
    
    
    
    
    
    
    
    (2,050,330
    ) (a)(b)
    
    
    Goodwill
    
    
    
    
    
    
    1,475,530
    
    
    
    
    
    
    
    
    
    
    
    1,475,530Other
identifiable intangibles
    
    
    
    
    
    
    95,532
    
    
    
    
    
    
    
    
    
    
    
    95,532Other assets
held for sale
    
    
    
    
    
    
    3,447
    
    
    
    
    
    
    
    
    
    
    
    3,447Other assets
    
    
    51,090
    
    
    
    10,234
    
    
    
    2,197
    
    
    
    
    
    
    
    63,521Total Assets
    
    $
    2,109,154
    
    
    $
    2,341,601
    
    
    $
    53,396
    
    
    $
    (2,050,330
    )
    
    $
    2,453,821Liabilities and
Stockholders EquityCurrent Liabilities:Bank overdrafts
    
    $
    18,911
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    18,911Current portion of
long-term debt and
notes payable
    
    
    6,920
    
    
    
    686
    
    
    
    10
    
    
    
    
    
    
    
    7,616Accounts payable
    
    
    1,921
    
    
    
    73,094
    
    
    
    6,473
    
    
    
    
    
    
    
    81,488Intercompany accounts
    
    
    312,631
    
    
    
    (284,028
    )
    
    
    (28,603
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    1,531
    
    
    
    65,432
    
    
    
    105
    
    
    
    
    
    
    
    67,068Accrued vacation
    
    
    2,951
    
    
    
    27,986
    
    
    
    2,461
    
    
    
    
    
    
    
    33,398Accrued interest
    
    
    12,948
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    12,956Accrued professional
liability
    
    
    26,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,272Accrued restructuring
    
    
    
    
    
    
    20,713
    
    
    
    
    
    
    
    
    
    
    
    20,713Accrued other
    
    
    41,392
    
    
    
    27,195
    
    
    
    2,563
    
    
    
    
    
    
    
    71,150Due to third party
payors
    
    
    
    
    
    
    20,196
    
    
    
    (9,405
    )
    
    
    
    
    
    
    10,791Total Current Liabilities
    
    
    425,477
    
    
    
    (48,718
    )
    
    
    (26,396
    )
    
    
    
    
    
    
    350,363Long-term debt, net of
current portion
    
    
    1,030,101
    
    
    
    360,535
    
    
    
    28,635
    
    
    
    
    
    
    
    1,419,271Noncurrent deferred tax
liability
    
    
    (1,439
    )
    
    
    23,051
    
    
    
    2,663
    
    
    
    
    
    
    
    24,275Other non-current
liabilities
    
    
    22,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,857Total Liabilities
    
    
    1,476,996
    
    
    
    334,868
    
    
    
    4,902
    
    
    
    
    
    
    
    1,816,766Commitments and
ContingenciesMinority interest in
consolidated subsidiary
companies
    
    
    
    
    
    
    
    
    
    
    4,897
    
    
    
    
    
    
    
    4,897Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of
par
    
    
    475,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    475,575Retained earnings
    
    
    156,008
    
    
    
    275,538
    
    
    
    23,201
    
    
    
    (298,739
    ) (b)
    
    
    156,008Subsidiary investment
    
    
    
    
    
    
    1,731,195
    
    
    
    20,396
    
    
    
    (1,751,591
    ) (a)
    
    
    Accumulated other
comprehensive income
    
    
    575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575Total Stockholders
Equity
    
    
    632,158
    
    
    
    2,006,733
    
    
    
    43,597
    
    
    
    (2,050,330
    )
    
    
    632,158Total Liabilities and
Stockholders Equity
    
    $
    2,109,154
    
    
    $
    2,341,601
    
    
    $
    53,396
    
    
    $
    (2,050,330
    )
    
    $
    2,453,821
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings. - 21 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2007
(unaudited)
 Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    72
    
    
    $
    455,300
    
    
    $
    45,013
    
    
    $
    
    
    
    $
    500,385Costs and expenses:Cost of services
    
    
    45
    
    
    
    389,818
    
    
    
    39,968
    
    
    
    
    
    
    
    429,831General and
administrative
    
    
    11,959
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    12,081Bad debt expense
    
    
    
    
    
    
    9,857
    
    
    
    925
    
    
    
    
    
    
    
    10,782Depreciation and
amortization
    
    
    619
    
    
    
    14,619
    
    
    
    1,161
    
    
    
    
    
    
    
    16,399Total costs and expenses
    
    
    12,623
    
    
    
    414,416
    
    
    
    42,054
    
    
    
    
    
    
    
    469,093Income (loss) from
operations
    
    
    (12,551
    )
    
    
    40,884
    
    
    
    2,959
    
    
    
    
    
    
    
    31,292Other income and expense:Intercompany interest
and royalty fees
    
    
    (13,995
    )
    
    
    13,903
    
    
    
    92
    
    
    
    
    
    
    
    Intercompany management
fees
    
    
    45,432
    
    
    
    (43,731
    )
    
    
    (1,701
    )
    
    
    
    
    
    
    Other income (expense)
    
    
    (5,445
    )
    
    
    1,380
    
    
    
    
    
    
    
    
    
    
    
    (4,065
    )Interest income
    
    
    144
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    158Interest expense
    
    
    (20,533
    )
    
    
    (5,994
    )
    
    
    (566
    )
    
    
    
    
    
    
    (27,093
    )Income (loss) before
minority interests and
income taxes
    
    
    (6,948
    )
    
    
    6,456
    
    
    
    784
    
    
    
    
    
    
    
    292Minority interest in
consolidated subsidiary
companies
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    237Income (loss) before
income taxes
    
    
    (6,948
    )
    
    
    6,456
    
    
    
    547
    
    
    
    
    
    
    
    55Income tax benefit
    
    
    (347
    )
    
    
    (163
    )
    
    
    (159
    )
    
    
    
    
    
    
    (669
    )Income (loss)
    
    
    (6,601
    )
    
    
    6,619
    
    
    
    706
    
    
    
    
    
    
    
    724Equity in earnings of
subsidiaries
    
    
    7,325
    
    
    
    1,377
    
    
    
    
    
    
    
    (8,702
    ) (a)
    
    
    Net income
    
    $
    724
    
    
    $
    7,996
    
    
    $
    706
    
    
    $
    (8,702
    )
    
    $
    724
 
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries. - 22 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2007
(unaudited)
 Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    1,629
    
    
    $
    1,344,376
    
    
    $
    127,693
    
    
    $
    
    
    
    $
    1,473,698Costs and expenses:Cost of services
    
    
    144
    
    
    
    1,110,488
    
    
    
    107,778
    
    
    
    
    
    
    
    1,218,410General and administrative
    
    
    35,692
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    35,847Bad debt expense
    
    
    
    
    
    
    22,494
    
    
    
    2,712
    
    
    
    
    
    
    
    25,206Depreciation and amortization
    
    
    1,661
    
    
    
    37,141
    
    
    
    3,240
    
    
    
    
    
    
    
    42,042Total costs and expenses
    
    
    37,497
    
    
    
    1,170,278
    
    
    
    113,730
    
    
    
    
    
    
    
    1,321,505Income (loss) from operations
    
    
    (35,868
    )
    
    
    174,098
    
    
    
    13,963
    
    
    
    
    
    
    
    152,193Other income and expense:Intercompany interest and royalty fees
    
    
    (46,825
    )
    
    
    46,473
    
    
    
    352
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    133,240
    
    
    
    (128,697
    )
    
    
    (4,543
    )
    
    
    
    
    
    
    Other income (expense)
    
    
    (3,928
    )
    
    
    1,380
    
    
    
    
    
    
    
    
    
    
    
    (2,548
    )Interest income
    
    
    1,312
    
    
    
    644
    
    
    
    
    
    
    
    
    
    
    
    1,956Interest expense
    
    
    (59,159
    )
    
    
    (16,987
    )
    
    
    (1,652
    )
    
    
    
    
    
    
    (77,798
    )Income (loss) before minority
interests and income taxes
    
    
    (11,228
    )
    
    
    76,911
    
    
    
    8,120
    
    
    
    
    
    
    
    73,803Minority interest in consolidated
subsidiary companies
    
    
    
    
    
    
    
    
    
    
    1,373
    
    
    
    
    
    
    
    1,373Income (loss) before income taxes
    
    
    (11,228
    )
    
    
    76,911
    
    
    
    6,747
    
    
    
    
    
    
    
    72,430Income tax expense
    
    
    287
    
    
    
    27,417
    
    
    
    782
    
    
    
    
    
    
    
    28,486Income (loss)
    
    
    (11,515
    )
    
    
    49,494
    
    
    
    5,965
    
    
    
    
    
    
    
    43,944Equity in earnings of subsidiaries
    
    
    55,459
    
    
    
    4,763
    
    
    
    
    
    
    
    (60,222
    ) (a)
    
    
    Net income
    
    $
    43,944
    
    
    $
    54,257
    
    
    $
    5,965
    
    
    $
    (60,222
    )
    
    $
    43,944
 
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries. - 23 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2007
(unaudited)
 Select MedicalCorporation(Parent Company
    
    
    Subsidiary
    
    
    Non-GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    43,944
    
    
    $
    54,257
    
    
    $
    5,965
    
    
    $
    (60,222
    ) (a)
    
    $
    43,944Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,661
    
    
    
    37,141
    
    
    
    3,240
    
    
    
    
    
    
    
    42,042Provision for bad debts
    
    
    
    
    
    
    22,494
    
    
    
    2,712
    
    
    
    
    
    
    
    25,206Loss (gain) from disposal of
assets and sale of business units
    
    
    (1,123
    )
    
    
    476
    
    
    
    (316
    )
    
    
    
    
    
    
    (963
    )Non-cash loss from interest rate
swaps
    
    
    2,350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,350Non-cash compensation expense
    
    
    2,809
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,809Minority interests
    
    
    
    
    
    
    
    
    
    
    1,373
    
    
    
    
    
    
    
    1,373Changes in operating assets and
liabilities, net of
effects from acquisition of businesses:Equity in earnings of
subsidiaries
    
    
    (55,459
    )
    
    $
    (4,763
    )
    
    
    
    
    
    
    60,222
    (a)
    
    
    Intercompany
    
    
    (150,751
    )
    
    
    157,064
    
    
    
    (6,313
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (315
    )
    
    
    (55,209
    )
    
    
    2,192
    
    
    
    
    
    
    
    (53,332
    )Other current assets
    
    
    (2,440
    )
    
    
    3,452
    
    
    
    (577
    )
    
    
    
    
    
    
    435Other assets
    
    
    5,268
    
    
    
    (4,624
    )
    
    
    (1,655
    )
    
    
    
    
    
    
    (1,011
    )Accounts payable
    
    
    (1,962
    )
    
    
    7,322
    
    
    
    1,198
    
    
    
    
    
    
    
    6,558Due to third-party payors
    
    
    
    
    
    
    7,310
    
    
    
    (9,405
    )
    
    
    
    
    
    
    (2,095
    )Accrued interest
    
    
    (12,322
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (12,314
    )Accrued expenses
    
    
    744
    
    
    
    11,047
    
    
    
    887
    
    
    
    
    
    
    
    12,678Income and deferred taxes
    
    
    20,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,105Net cash provided by (used in) operating
activities
    
    
    (147,491
    )
    
    
    235,975
    
    
    
    (699
    )
    
    
    
    
    
    
    87,785Investing activitiesPurchases of property and equipment
    
    
    (3,102
    )
    
    
    (122,216
    )
    
    
    (2,579
    )
    
    
    
    
    
    
    (127,897
    )Proceeds from sale of business units
    
    
    2,332
    
    
    
    5,545
    
    
    
    
    
    
    
    
    
    
    
    7,877Sale of building
    
    
    
    
    
    
    4,500
    
    
    
    
    
    
    
    
    
    
    
    4,500Changes in restricted cash
    
    
    3,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,449Acquisition of businesses, net of cash
acquired
    
    
    
    
    
    
    (213,974
    )
    
    
    
    
    
    
    
    
    
    
    (213,974
    )Net cash provided by (used in) investing
activities
    
    
    2,679
    
    
    
    (326,145
    )
    
    
    (2,579
    )
    
    
    
    
    
    
    (326,045
    )Financing activitiesBorrowings on revolving credit facility
    
    
    324,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324,000Payments on revolving credit facility
    
    
    (224,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (224,000
    )Credit facility term loan borrowing
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Payments on credit facility term loan
    
    
    (4,850
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,850
    )Principal payments on seller and other
debt
    
    
    
    
    
    
    (1,062
    )
    
    
    
    
    
    
    
    
    
    
    (1,062
    )Proceeds from bank overdrafts
    
    
    6,698
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,698Dividends to Holdings
    
    
    (32,779
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,779
    )Intercompany debt reallocation
    
    
    (86,687
    )
    
    
    82,445
    
    
    
    4,242
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (1,508
    )
    
    
    
    
    
    
    (1,508
    )Net cash provided by financing activities
    
    
    82,646
    
    
    
    81,383
    
    
    
    2,734
    
    
    
    
    
    
    
    166,763Net decrease in cash and cash equivalents
    
    
    (62,166
    )
    
    
    (8,787
    )
    
    
    (544
    )
    
    
    
    
    
    
    (71,497
    )Cash and cash equivalents at beginning of
period
    
    
    67,245
    
    
    
    12,866
    
    
    
    1,489
    
    
    
    
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    5,079
    
    
    $
    4,079
    
    
    $
    945
    
    
    $
    
    
    
    $
    10,103
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 24 -




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2006
(unaudited)
 Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    67,245
    
    
    $
    12,866
    
    
    $
    1,489
    
    
    $
    
    
    
    $
    81,600Restricted cash
    
    
    4,335
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,335Accounts receivable, net
    
    
    (23
    )
    
    
    182,861
    
    
    
    17,089
    
    
    
    
    
    
    
    199,927Current deferred tax asset
    
    
    24,438
    
    
    
    16,018
    
    
    
    2,157
    
    
    
    
    
    
    
    42,613Other current assets
    
    
    1,597
    
    
    
    13,697
    
    
    
    1,468
    
    
    
    
    
    
    
    16,762Total Current Assets
    
    
    97,592
    
    
    
    225,442
    
    
    
    22,203
    
    
    
    
    
    
    
    345,237Property and equipment, net
    
    
    10,979
    
    
    
    315,141
    
    
    
    30,216
    
    
    
    
    
    
    
    356,336Investment in affiliates
    
    
    1,968,074
    
    
    
    32,150
    
    
    
    
    
    
    
    (2,000,224
    ) (a)(b)
    
    
    Goodwill
    
    
    
    
    
    
    1,323,572
    
    
    
    
    
    
    
    
    
    
    
    1,323,572Other identifiable intangibles
    
    
    
    
    
    
    79,230
    
    
    
    
    
    
    
    
    
    
    
    79,230Other assets held for sale
    
    
    
    
    
    
    4,855
    
    
    
    
    
    
    
    
    
    
    
    4,855Other assets
    
    
    56,358
    
    
    
    11,512
    
    
    
    542
    
    
    
    
    
    
    
    68,412Total Assets
    
    $
    2,133,003
    
    
    $
    1,991,902
    
    
    $
    52,961
    
    
    $
    (2,000,224
    )
    
    $
    2,177,642Liabilities and Stockholders EquityCurrent Liabilities:Bank overdrafts
    
    $
    12,213
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    12,213Current portion of long-term debt and
notes payable
    
    
    5,921
    
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    6,209Accounts payable
    
    
    3,883
    
    
    
    63,439
    
    
    
    5,275
    
    
    
    
    
    
    
    72,597Intercompany accounts
    
    
    489,795
    
    
    
    (471,284
    )
    
    
    (18,511
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    730
    
    
    
    54,098
    
    
    
    256
    
    
    
    
    
    
    
    55,084Accrued vacation
    
    
    2,902
    
    
    
    22,292
    
    
    
    2,166
    
    
    
    
    
    
    
    27,360Accrued interest
    
    
    25,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,270Accrued professional liability
    
    
    24,979
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,979Accrued restructuring
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    225Accrued other
    
    
    42,791
    
    
    
    22,473
    
    
    
    1,820
    
    
    
    
    
    
    
    67,084Due to third party payors
    
    
    
    
    
    
    12,523
    
    
    
    363
    
    
    
    
    
    
    
    12,886Income taxes payable
    
    
    (17,235
    )
    
    
    20,202
    
    
    
    (1,030
    )
    
    
    
    
    
    
    1,937Total Current Liabilities
    
    
    591,249
    
    
    
    (275,744
    )
    
    
    (9,661
    )
    
    
    
    
    
    
    305,844Long-term debt, net of current portion
    
    
    922,638
    
    
    
    277,492
    
    
    
    24,379
    
    
    
    
    
    
    
    1,224,509Noncurrent deferred tax liability
    
    
    5,114
    
    
    
    23,265
    
    
    
    2,342
    
    
    
    
    
    
    
    30,721Total Liabilities
    
    
    1,519,001
    
    
    
    25,013
    
    
    
    17,060
    
    
    
    
    
    
    
    1,561,074Commitments and ContingenciesMinority interest in consolidated
subsidiary companies
    
    
    
    
    
    
    
    
    
    
    2,566
    
    
    
    
    
    
    
    2,566Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    464,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464,283Retained earnings
    
    
    146,774
    
    
    
    221,281
    
    
    
    17,323
    
    
    
    (238,604
    ) (b)
    
    
    146,774Subsidiary investment
    
    
    
    
    
    
    1,745,608
    
    
    
    16,012
    
    
    
    (1,761,620
    ) (a)
    
    
    Accumulated other comprehensive income
    
    
    2,945
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,945Total Stockholders Equity
    
    
    614,002
    
    
    
    1,966,889
    
    
    
    33,335
    
    
    
    (2,000,224
    )
    
    
    614,002Total Liabilities and Stockholders Equity
    
    $
    2,133,003
    
    
    $
    1,991,902
    
    
    $
    52,961
    
    
    $
    (2,000,224
    )
    
    $
    2,177,642
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings. - 25 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2006
(unaudited)
 Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    94
    
    
    $
    406,272
    
    
    $
    37,506
    
    
    $
    
    
    
    $
    443,872Costs and expenses:Cost of services
    
    
    58
    
    
    
    329,975
    
    
    
    32,037
    
    
    
    
    
    
    
    362,070General and administrative
    
    
    9,631
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    9,762Bad debt expense
    
    
    
    
    
    
    5,026
    
    
    
    307
    
    
    
    
    
    
    
    5,333Depreciation and amortization
    
    
    631
    
    
    
    11,000
    
    
    
    763
    
    
    
    
    
    
    
    12,394Total costs and expenses
    
    
    10,320
    
    
    
    346,132
    
    
    
    33,107
    
    
    
    
    
    
    
    389,559Income (loss) from operations
    
    
    (10,226
    )
    
    
    60,140
    
    
    
    4,399
    
    
    
    
    
    
    
    54,313Other income and expense:Intercompany interest and royalty fees
    
    
    (17,298
    )
    
    
    17,202
    
    
    
    96
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    42,518
    
    
    
    (41,113
    )
    
    
    (1,405
    )
    
    
    
    
    
    
    Other expense
    
    
    (3,124
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,124
    )Interest income
    
    
    303
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    319Interest expense
    
    
    (18,126
    )
    
    
    (5,998
    )
    
    
    (224
    )
    
    
    
    
    
    
    (24,348
    )Income (loss) before minority interests and income taxes
    
    
    (5,953
    )
    
    
    30,247
    
    
    
    2,866
    
    
    
    
    
    
    
    27,160Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    
    
    
    
    369
    
    
    
    
    
    
    
    369Income (loss) from continuing operations before income
taxes
    
    
    (5,953
    )
    
    
    30,247
    
    
    
    2,497
    
    
    
    
    
    
    
    26,791Income tax expense
    
    
    58
    
    
    
    10,487
    
    
    
    107
    
    
    
    
    
    
    
    10,652Income (loss) from continuing operations
    
    
    (6,011
    )
    
    
    19,760
    
    
    
    2,390
    
    
    
    
    
    
    
    16,139Equity in earnings of subsidiaries
    
    
    22,150
    
    
    
    2,719
    
    
    
    
    
    
    
    (24,869
    ) (a)
    
    
    Net income
    
    $
    16,139
    
    
    $
    22,479
    
    
    $
    2,390
    
    
    $
    (24,869
    )
    
    $
    16,139
 
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries. - 26 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2006
(unaudited)
 Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    474
    
    
    $
    1,288,351
    
    
    $
    116,931
    
    
    $
    
    
    
    $
    1,405,756Costs and expenses:Cost of services
    
    
    174
    
    
    
    1,022,233
    
    
    
    97,360
    
    
    
    
    
    
    
    1,119,767General and administrative
    
    
    33,342
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    33,511Bad debt expense
    
    
    
    
    
    
    17,736
    
    
    
    1,030
    
    
    
    
    
    
    
    18,766Depreciation and amortization
    
    
    1,841
    
    
    
    30,688
    
    
    
    2,426
    
    
    
    
    
    
    
    34,955Total costs and expenses
    
    
    35,357
    
    
    
    1,070,826
    
    
    
    100,816
    
    
    
    
    
    
    
    1,206,999Income (loss) from operations
    
    
    (34,883
    )
    
    
    217,525
    
    
    
    16,115
    
    
    
    
    
    
    
    198,757Other income and expense:Intercompany interest and royalty fees
    
    
    (46,508
    )
    
    
    46,212
    
    
    
    296
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    124,023
    
    
    
    (120,852
    )
    
    
    (3,171
    )
    
    
    
    
    
    
    Other income
    
    
    918
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    918Interest income
    
    
    700
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    738Interest expense
    
    
    (55,340
    )
    
    
    (16,180
    )
    
    
    (1,095
    )
    
    
    
    
    
    
    (72,615
    )Income (loss) before minority interests and income taxes
    
    
    (11,090
    )
    
    
    126,743
    
    
    
    12,145
    
    
    
    
    
    
    
    127,798Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    
    
    
    
    1,095
    
    
    
    
    
    
    
    1,095Income (loss) from continuing operations before income
taxes
    
    
    (11,090
    )
    
    
    126,743
    
    
    
    11,050
    
    
    
    
    
    
    
    126,703Income tax expense (benefit)
    
    
    (264
    )
    
    
    50,574
    
    
    
    968
    
    
    
    
    
    
    
    51,278Income (loss) from continuing operations
    
    
    (10,826
    )
    
    
    76,169
    
    
    
    10,082
    
    
    
    
    
    
    
    75,425Income from discontinued operations, net of tax
    
    
    9,068
    
    
    
    
    
    
    
    950
    
    
    
    
    
    
    
    10,018Equity in earnings of subsidiaries
    
    
    87,201
    
    
    
    9,697
    
    
    
    
    
    
    
    (96,898
    ) (a)
    
    
    Net income
    
    $
    85,443
    
    
    $
    85,866
    
    
    $
    11,032
    
    
    $
    (96,898
    )
    
    $
    85,443
 
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries. - 27 -




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2006
(unaudited)
 Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    85,443
    
    
    $
    85,866
    
    
    $
    11,032
    
    
    $
    (96,898
    ) (a)
    
    $
    85,443Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,841
    
    
    
    30,688
    
    
    
    2,602
    
    
    
    
    
    
    
    35,131Provision for bad debts
    
    
    
    
    
    
    17,736
    
    
    
    1,117
    
    
    
    
    
    
    
    18,853Gain from sale of business
    
    
    (13,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,950
    )Non cash income from hedge
    
    
    (918
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (918
    )Non-cash compensation expense
    
    
    2,837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,837Minority interests
    
    
    
    
    
    
    
    
    
    
    1,435
    
    
    
    
    
    
    
    1,435Loss on disposal of assets
    
    
    232
    
    
    
    1,132
    
    
    
    54
    
    
    
    
    
    
    
    1,418Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (87,201
    )
    
    
    (9,697
    )
    
    
    
    
    
    
    96,898
    (a)
    
    
    Intercompany
    
    
    41,724
    
    
    
    (6,275
    )
    
    
    (35,449
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    264
    
    
    
    (15,596
    )
    
    
    4,521
    
    
    
    
    
    
    
    (10,811
    )Other current assets
    
    
    761
    
    
    
    (1,456
    )
    
    
    3,189
    
    
    
    
    
    
    
    2,494Other assets
    
    
    (1,037
    )
    
    
    3,312
    
    
    
    1,264
    
    
    
    
    
    
    
    3,539Accounts payable
    
    
    1,458
    
    
    
    6,810
    
    
    
    (3,968
    )
    
    
    
    
    
    
    4,300Due to third-party payors
    
    
    (6,099
    )
    
    
    (5,423
    )
    
    
    8,353
    
    
    
    
    
    
    
    (3,169
    )Accrued interest
    
    
    (12,526
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,526
    )Accrued expenses
    
    
    3,522
    
    
    
    (12,206
    )
    
    
    (1,307
    )
    
    
    
    
    
    
    (9,991
    )Income taxes
    
    
    33,562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,562Net cash provided by (used in) operating activities
    
    
    49,913
    
    
    
    94,891
    
    
    
    (7,157
    )
    
    
    
    
    
    
    137,647Investing activitiesPurchases of property and equipment
    
    
    (1,094
    )
    
    
    (98,879
    )
    
    
    (12,159
    )
    
    
    
    
    
    
    (112,132
    )Proceeds from sale of business
    
    
    76,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,806Earnout payments
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )Restricted cash
    
    
    1,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,098Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (1,239
    )
    
    
    (2,022
    )
    
    
    
    
    
    
    (3,261
    )Net cash provided by (used in) investing activities
    
    
    76,810
    
    
    
    (100,218
    )
    
    
    (14,181
    )
    
    
    
    
    
    
    (37,589
    )Financing activitiesBorrowings
on revolving credit facility
    
    
    210,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210,000Payments on
revolving credit facility
    
    
    (290,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (290,000
    )Payments on
credit facility term loan
    
    
    (4,350
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,350
    )Dividends to Holdings
    
    
    (32,522
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,522
    )Intercompany debt reallocation
    
    
    (14,049
    )
    
    
    5,309
    
    
    
    8,740
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (577
    )
    
    
    (37
    )
    
    
    
    
    
    
    (614
    )Payment of bank overdrafts
    
    
    (11,824
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,824
    )Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (1,604
    )
    
    
    
    
    
    
    (1,604
    )Net cash provided by (used in) financing activities
    
    
    (142,745
    )
    
    
    4,732
    
    
    
    7,099
    
    
    
    
    
    
    
    (130,914
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (15,987
    )
    
    
    (595
    )
    
    
    (14,239
    )
    
    
    
    
    
    
    (30,821
    )Cash and cash equivalents at beginning of period
    
    
    16,738
    
    
    
    3,631
    
    
    
    15,492
    
    
    
    
    
    
    
    35,861Cash and cash equivalents at end of period
    
    $
    751
    
    
    $
    3,036
    
    
    $
    1,253
    
    
    $
    
    
    
    $
    5,040
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 28 -




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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 rehabilitation
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.
 29




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##### Table of Contents



Overview
    Recent Trends and Events
 Acquisition
of CORA Health Services, Inc.
  Acquisition of HealthSouth Corporations Outpatient Rehabilitation Division
  30




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##### Table of Contents



Amendment to Credit Agreement
  Overview of Third Quarter Ended September 30, 2007
   31




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##### Table of Contents



Regulatory Changes
 August 2004 Final Rule
   August 2005 Final Rule
 May 2006 Final Rule.
 32




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##### Table of Contents



August 2006 Final Rule.
 33




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##### Table of Contents



May 2007 Final Rule
     34




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##### Table of Contents



August 2007 Final Rule.
  Transition Plan
  35




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##### Table of Contents



Development of New Specialty Hospitals and Clinics
  36




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##### Table of Contents



Operating Statistics
  Three MonthsEnded
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Specialty hospital data(1):Number of hospitals  start of period
    
    
    100
    
    
    
    92
    
    
    
    101
    
    
    
    96Number of hospital start-ups
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    3Number of hospitals closed
    
    
    (3
    )
    
    
    (3
    )
    
    
    (4
    )
    
    
    (4
    )Number of hospitals consolidated
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )
    
    
    (4
    )Number of hospitals  end of period
    
    
    97
    
    
    
    91
    
    
    
    97
    
    
    
    91Available licensed beds
    
    
    3,825
    
    
    
    3,934
    
    
    
    3,825
    
    
    
    3,934Admissions
    
    
    9,485
    
    
    
    9,856
    
    
    
    30,122
    
    
    
    30,095Patient days
    
    
    236,094
    
    
    
    242,115
    
    
    
    734,070
    
    
    
    741,959Average length of stay (days)
    
    
    25
    
    
    
    25
    
    
    
    24
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,361
    
    
    $
    1,352
    
    
    $
    1,401
    
    
    $
    1,367Occupancy rate
    
    
    66
    %
    
    
    67
    %
    
    
    69
    %
    
    
    69
    %Percent patient days  Medicare
    
    
    72
    %
    
    
    68
    %
    
    
    73
    %
    
    
    70
    %Outpatient rehabilitation data (3):Number of clinics owned  start of period
    
    
    542
    
    
    
    996
    
    
    
    553
    
    
    
    477Number of clinics acquired
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    542Number of clinic start-ups
    
    
    2
    
    
    
    1
    
    
    
    7
    
    
    
    6Number of clinics closed/sold
    
    
    (7
    )
    
    
    (86
    )
    
    
    (23
    )
    
    
    (113
    )Number of clinics owned  end of period
    
    
    537
    
    
    
    912
    
    
    
    537
    
    
    
    912Number of clinics managed  end of period
    
    
    68
    
    
    
    109
    
    
    
    68
    
    
    
    109Total number of clinics (all)  end of period
    
    
    605
    
    
    
    1,021
    
    
    
    605
    
    
    
    1,021Number of visits
    
    
    714,064
    
    
    
    1,160,870
    
    
    
    2,261,080
    
    
    
    2,887,134Net revenue per visit (4)
    
    $
    95
    
    
    $
    101
    
    
    $
    93
    
    
    $
    100
 
 (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 inpatient service
revenues by the total number of patient days.(3)
    
    Clinic data excludes clinics operated by CBIL. CBIL was sold March 1, 2006 and is being
reported as discontinued operations for the nine months ended September 30, 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. 37




---



##### Table of Contents



Results of Operations
  Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationThree Months
    
    Three MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2006
    
    2007
    
    2006
    
    2007Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    81.6
    
    
    
    85.9
    
    
    
    81.6
    
    
    
    85.9General and administrative
    
    
    2.2
    
    
    
    2.4
    
    
    
    2.2
    
    
    
    2.4Bad debt expense
    
    
    1.2
    
    
    
    2.1
    
    
    
    1.2
    
    
    
    2.1Depreciation and amortization
    
    
    2.8
    
    
    
    3.3
    
    
    
    2.8
    
    
    
    3.3Income from operations
    
    
    12.2
    
    
    
    6.3
    
    
    
    12.2
    
    
    
    6.3Other expense
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.8
    )Interest expense, net
    
    
    (7.3
    )
    
    
    (7.2
    )
    
    
    (6.1
    )
    
    
    (5.4
    )Income (loss) before minority interests and income taxes
    
    
    4.9
    
    
    
    (1.1
    )
    
    
    6.1
    
    
    
    0.1Minority interests
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Income (loss) before income taxes
    
    
    4.8
    
    
    
    (1.2
    )
    
    
    6.0
    
    
    
    Income tax expense (benefit)
    
    
    2.0
    
    
    
    (0.6
    )
    
    
    2.4
    
    
    
    (0.1
    )Net income (loss)
    
    
    2.8
    %
    
    
    (0.6
    )%
    
    
    3.6
    %
    
    
    0.1
    %
 38




---



##### Table of Contents



Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationNine Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2006
    
    2007
    
    2006
    
    2007Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    79.7
    
    
    
    82.7
    
    
    
    79.7
    
    
    
    82.7General and administrative
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.4Bad debt expense
    
    
    1.3
    
    
    
    1.7
    
    
    
    1.3
    
    
    
    1.7Depreciation and amortization
    
    
    2.5
    
    
    
    2.9
    
    
    
    2.5
    
    
    
    2.9Income from operations
    
    
    14.1
    
    
    
    10.3
    
    
    
    14.1
    
    
    
    10.3Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Interest expense, net
    
    
    (6.9
    )
    
    
    (6.9
    )
    
    
    (5.0
    )
    
    
    (5.1
    )Income from continuing operations before minority
interests and income taxes
    
    
    7.2
    
    
    
    3.4
    
    
    
    9.1
    
    
    
    5.0Minority interests
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Income from continuing operations before income taxes
    
    
    7.1
    
    
    
    3.3
    
    
    
    9.0
    
    
    
    4.9Income tax expense
    
    
    3.0
    
    
    
    1.4
    
    
    
    3.6
    
    
    
    1.9Income from continuing operations
    
    
    4.1
    
    
    
    1.9
    
    
    
    5.4
    
    
    
    3.0Income from discontinued operations, net of tax
    
    
    0.7
    
    
    
    
    
    
    
    0.7
    
    
    
    Net income
    
    
    4.8
    %
    
    
    1.9
    %
    
    
    6.1
    %
    
    
    3.0
    %
 39




---



##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    % Change
    
    
    2006
    
    
    2007
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    329,324
    
    
    $
    334,023
    
    
    
    1.4
    %
    
    $
    329,324
    
    
    $
    334,023
    
    
    
    1.4
    %Outpatient rehabilitation
    
    
    114,043
    
    
    
    166,290
    
    
    
    45.8
    
    
    
    114,043
    
    
    
    166,290
    
    
    
    45.8Other
    
    
    505
    
    
    
    72
    
    
    
    (85.7
    )
    
    
    505
    
    
    
    72
    
    
    
    (85.7
    )Total company
    
    $
    443,872
    
    
    $
    500,385
    
    
    
    12.7
    %
    
    $
    443,872
    
    
    $
    500,385
    
    
    
    12.7
    %Income (loss) from
operations:Specialty hospitals
    
    $
    52,424
    
    
    $
    31,730
    
    
    
    (39.5
    )%
    
    $
    52,424
    
    
    $
    31,730
    
    
    
    (39.5
    )%Outpatient rehabilitation
    
    
    12,493
    
    
    
    12,342
    
    
    
    (1.2
    )
    
    
    12,493
    
    
    
    12,342
    
    
    
    (1.2
    )Other
    
    
    (10,604
    )
    
    
    (12,780
    )
    
    
    (20.5
    )
    
    
    (10,604
    )
    
    
    (12,780
    )
    
    
    (20.5
    )Total company
    
    $
    54,313
    
    
    $
    31,292
    
    
    
    (42.4
    )%
    
    $
    54,313
    
    
    $
    31,292
    
    
    
    (42.4
    )%Adjusted EBITDA:(2)Specialty hospitals
    
    $
    60,812
    
    
    $
    41,646
    
    
    
    (31.5
    )%
    
    $
    60,812
    
    
    $
    41,646
    
    
    
    (31.5
    )%Outpatient rehabilitation
    
    
    15,737
    
    
    
    18,099
    
    
    
    15.0
    
    
    
    15,737
    
    
    
    18,099
    
    
    
    15.0Other
    
    
    (8,896
    )
    
    
    (11,123
    )
    
    
    (25.0
    )
    
    
    (8,896
    )
    
    
    (11,123
    )
    
    
    (25.0
    )Adjusted EBITDA
margins:(2)Specialty hospitals
    
    
    18.5
    %
    
    
    12.5
    %
    
    
    (32.4
    )%
    
    
    18.5
    %
    
    
    12.5
    %
    
    
    (32.4
    )%Outpatient rehabilitation
    
    
    13.8
    
    
    
    10.9
    
    
    
    (21.0
    )
    
    
    13.8
    
    
    
    10.9
    
    
    
    (21.0
    )Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,773,586
    
    
    $
    1,853,728
    
    
    
    
    
    
    $
    1,773,586
    
    
    $
    1,853,728Outpatient rehabilitation
    
    
    254,865
    
    
    
    483,386
    
    
    
    
    
    
    
    254,865
    
    
    
    483,386Other
    
    
    102,610
    
    
    
    121,126
    
    
    
    
    
    
    
    97,645
    
    
    
    116,707Total company
    
    $
    2,131,061
    
    
    $
    2,458,240
    
    
    
    
    
    
    $
    2,126,096
    
    
    $
    2,453,821Purchases of property and
equipment, net:Specialty hospitals
    
    $
    38,671
    
    
    $
    32,077
    
    
    
    
    
    
    $
    38,671
    
    
    $
    32,077Outpatient rehabilitation
    
    
    876
    
    
    
    5,010
    
    
    
    
    
    
    
    876
    
    
    
    5,010Other
    
    
    771
    
    
    
    978
    
    
    
    
    
    
    
    771
    
    
    
    978Total company
    
    $
    40,318
    
    
    $
    38,065
    
    
    
    
    
    
    $
    40,318
    
    
    $
    38,065
 40




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    % Change
    
    
    2006
    
    
    2007
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    1,049,768
    
    
    $
    1,033,533
    
    
    
    (1.5
    )%
    
    $
    1,049,768
    
    
    $
    1,033,533
    
    
    
    (1.5
    )%Outpatient rehabilitation
    
    
    353,974
    
    
    
    438,356
    
    
    
    23.8
    
    
    
    353,974
    
    
    
    438,356
    
    
    
    23.8Other
    
    
    2,014
    
    
    
    1,809
    
    
    
    (10.2
    )
    
    
    2,014
    
    
    
    1,809
    
    
    
    (10.2
    )Total company
    
    $
    1,405,756
    
    
    $
    1,473,698
    
    
    
    4.8
    %
    
    $
    1,405,756
    
    
    $
    1,473,698
    
    
    
    4.8
    %Income (loss) from operations:Specialty hospitals
    
    $
    195,291
    
    
    $
    141,027
    
    
    
    (27.8
    )%
    
    $
    195,291
    
    
    $
    141,027
    
    
    
    (27.8
    )%Outpatient rehabilitation
    
    
    39,161
    
    
    
    47,553
    
    
    
    21.4
    
    
    
    39,161
    
    
    
    47,553
    
    
    
    21.4Other
    
    
    (35,695
    )
    
    
    (36,387
    )
    
    
    (1.9
    )
    
    
    (35,695
    )
    
    
    (36,387
    )
    
    
    (1.9
    )Total company
    
    $
    198,757
    
    
    $
    152,193
    
    
    
    (23.4
    )%
    
    $
    198,757
    
    
    $
    152,193
    
    
    
    (23.4
    )%Adjusted EBITDA:(2)Specialty hospitals
    
    $
    218,203
    
    
    $
    168,367
    
    
    
    (22.8
    )%
    
    $
    218,203
    
    
    $
    168,367
    
    
    
    (22.8
    )%Outpatient rehabilitation
    
    
    48,920
    
    
    
    60,270
    
    
    
    23.2
    
    
    
    48,920
    
    
    
    60,270
    
    
    
    23.2Other
    
    
    (30,574
    )
    
    
    (31,593
    )
    
    
    (3.3
    )
    
    
    (30,574
    )
    
    
    (31,593
    )
    
    
    (3.3
    )Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    20.8
    %
    
    
    16.3
    %
    
    
    (21.6
    )%
    
    
    20.8
    %
    
    
    16.3
    %
    
    
    (21.6
    )%Outpatient rehabilitation
    
    
    13.8
    
    
    
    13.7
    
    
    
    (0.7
    )
    
    
    13.8
    
    
    
    13.7
    
    
    
    (0.7
    )Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,773,586
    
    
    $
    1,853,728
    
    
    
    
    
    
    $
    1,773,586
    
    
    $
    1,853,728Outpatient rehabilitation
    
    
    254,865
    
    
    
    483,386
    
    
    
    
    
    
    
    254,865
    
    
    
    483,386Other
    
    
    102,610
    
    
    
    121,126
    
    
    
    
    
    
    
    97,645
    
    
    
    116,707Total company
    
    $
    2,131,061
    
    
    $
    2,458,240
    
    
    
    
    
    
    $
    2,126,096
    
    
    $
    2,453,821Purchases of property and
equipment, net:Specialty hospitals
    
    $
    107,001
    
    
    $
    115,344
    
    
    
    
    
    
    $
    107,001
    
    
    $
    115,344Outpatient rehabilitation
    
    
    3,827
    
    
    
    9,655
    
    
    
    
    
    
    
    3,827
    
    
    
    9,655Other
    
    
    1,304
    
    
    
    2,898
    
    
    
    
    
    
    
    1,304
    
    
    
    2,898Total company
    
    $
    112,132
    
    
    $
    127,897
    
    
    
    
    
    
    $
    112,132
    
    
    $
    127,897
 41




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(in thousands)
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    329,324
    
    
    $
    334,023
    
    
    $
    329,324
    
    
    $
    334,023Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    13,713
    
    
    
    10,214
    
    
    
    13,713
    
    
    
    10,214Specialty hospitals same store net
operating revenue
    
    $
    315,611
    
    
    $
    323,809
    
    
    $
    315,611
    
    
    $
    323,809Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    60,812
    
    
    $
    41,646
    
    
    $
    60,812
    
    
    $
    41,646Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    (1,907
    )
    
    
    (5,862
    )
    
    
    (1,907
    )
    
    
    (5,862
    )Specialty hospitals same store Adjusted
EBITDA(2)
    
    $
    62,719
    
    
    $
    47,508
    
    
    $
    62,719
    
    
    $
    47,508All specialty hospitals Adjusted EBITDA
margin(2)
    
    
    18.5
    %
    
    
    12.5
    %
    
    
    18.5
    %
    
    
    12.5
    %Specialty hospitals same store Adjusted
EBITDA margin(2)
    
    
    19.9
    %
    
    
    14.7
    %
    
    
    19.9
    %
    
    
    14.7
    %
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    1,049,768
    
    
    $
    1,033,533
    
    
    $
    1,049,768
    
    
    $
    1,033,533Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    51,024
    
    
    
    32,944
    
    
    
    51,024
    
    
    
    32,944Specialty hospitals same store net
operating revenue
    
    $
    998,744
    
    
    $
    1,000,589
    
    
    $
    998,744
    
    
    $
    1,000,589Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    218,203
    
    
    $
    168,367
    
    
    $
    218,203
    
    
    $
    168,367Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    1,008
    
    
    
    (10,550
    )
    
    
    1,008
    
    
    
    (10,550
    )Specialty hospitals same store Adjusted
EBITDA(2)
    
    $
    217,195
    
    
    $
    178,917
    
    
    $
    217,195
    
    
    $
    178,917All specialty hospitals Adjusted EBITDA
margin(2)
    
    
    20.8
    %
    
    
    16.3
    %
    
    
    20.8
    %
    
    
    16.3
    %Specialty hospitals same store Adjusted
EBITDA margin(2)
    
    
    21.7
    %
    
    
    17.9
    %
    
    
    21.7
    %
    
    
    17.9
    %
 42




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##### Table of Contents



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 expense (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 7 to our interim unaudited consolidated financial statements
for the period ended September 30, 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. Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
  Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 43




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##### Table of Contents



Other.
 Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 44




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##### Table of Contents



Other
 Income from Operations
  Interest Expense
 Select Medical Corporation.
 Select Medical Holdings Corporation.
 Minority Interests
  Income Taxes
 Select Medical Corporation.
 Select Medical Holdings Corporation .
 45




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##### Table of Contents



Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
  Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  46




---



##### Table of Contents



Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income from Operations
  47




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##### Table of Contents



Interest Expense
 Select Medical Corporation.
 Select Medical Holdings Corporation.
 Minority Interests
  Income Taxes
 Select Medical Corporation.
 Select Medical Holdings Corporation .
 Income from Discontinued Operations, Net of Tax
  48




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Liquidity and Capital Resources
  Select Medical HoldingsCorporation
    
    Select Medical CorporationNine Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2007
    
    2006
    
    2007(in thousands)
    
    (in thousands)Cash flows provided by operating activities
    
    $
    105,166
    
    
    $
    55,020
    
    
    $
    137,647
    
    
    $
    87,785Cash flows used in investing activities
    
    
    (37,589
    )
    
    
    (326,045
    )
    
    
    (37,589
    )
    
    
    (326,045
    )Cash flows provided by (used in) financing
activities
    
    
    (98,433
    )
    
    
    199,528
    
    
    
    (130,914
    )
    
    
    166,763Effect of exchange rate changes on cash and
cash equivalents
    
    
    35
    
    
    
    
    
    
    
    35
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (30,821
    )
    
    
    (71,497
    )
    
    
    (30,821
    )
    
    
    (71,497
    )Cash and cash equivalents at beginning of period
    
    
    35,861
    
    
    
    81,600
    
    
    
    35,861
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    5,040
    
    
    $
    10,103
    
    
    $
    5,040
    
    
    $
    10,103
     49




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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.
  50




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5 8
    51




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Inflation
  Recent Accounting Pronouncements
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
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ITEM 4T. CONTROLS AND PROCEDURES
   
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
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ITEM 1A. RISK FACTORS.
 There have been no material changes from our risk factors as previously reported in our Annual
Report on Form 10-K for the year ended December 31, 2006, as updated in our Quarterly Report on
Form 10-Q for the three months ended March 31, 2007.
 
 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
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SIGNATURES
  SELECT MEDICAL CORPORATIONBy:
    /s/          Martin F. JacksonMartin 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: November 13, 2007
 SELECT MEDICAL HOLDINGS CORPORATIONBy:
    /s/        Martin F. JacksonMartin 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: November 13, 2007
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Exhibit
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Executive Vice President and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.C
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 Executive 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.
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