##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarter Ended June 30, 2005
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 For
the Period From ____________ to ____________.
 Commission
File Number: 000-32499
 SELECT MEDICAL CORPORATION
  Delaware
    
    23-2872718(State or other jurisdiction of
    
    (I.R.S. employer identificationincorporation or organization)
    
    number)
 4716 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
 
  o þ
  o þ




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TABLE OF CONTENTS
 PART I
    
    FINANCIAL INFORMATION
    
    
    3ITEM 1.
    
    CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    3Consolidated statements of operations
    
    
    4Consolidated statement of changes in stockholders equity and comprehensive income
    
    
    6Consolidated statements of cash flows
    
    
    7Notes to consolidated financial statements
    
    
    8ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    33ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    52ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    52PART II
    
    OTHER INFORMATION
    
    
    52ITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    52ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    53ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    53ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    53ITEM 5.
    
    OTHER INFORMATION
    
    
    53ITEM 6.
    
    EXHIBITS
    
    
    53SIGNATURES
    
    
    53CERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF PRESIDENT AND CEO, PURSUANT TO 18 U.S.C. SECTION 1350CERTIFICATION OF SENIOR VICE PRESEIDENT AND CFO PURSUANT TO 18 U.S.C. SECTION 1350
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Select Medical Corporation
 
 Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
 Predecessor
    
    
    SuccessorDecember 31,
    
    
    June 30,2004
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    247,476
    
    
    
    $
    21,069Restricted cash
    
    
    7,031
    
    
    
    
    6,851Accounts receivable, net of allowance for doubtful accounts
of $94,622 and $106,345 in 2004 and 2005, respectively
    
    
    216,852
    
    
    
    
    315,142Current deferred tax asset
    
    
    59,239
    
    
    
    
    71,013Other current assets
    
    
    18,737
    
    
    
    
    20,442Total Current Assets
    
    
    549,335
    
    
    
    
    434,517Property and equipment, net
    
    
    165,336
    
    
    
    
    220,572Goodwill
    
    
    302,069
    
    
    
    
    1,369,637Other identifiable intangibles
    
    
    78,304
    
    
    
    
    89,858Non-current deferred tax asset
    
    
    
    
    
    
    
    8,137Other assets
    
    
    18,677
    
    
    
    
    65,240Total Assets
    
    $
    1,113,721
    
    
    
    $
    2,187,961LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term debt and notes payable
    
    $
    3,557
    
    
    
    $
    8,298Accounts payable
    
    
    48,632
    
    
    
    
    63,448Accrued payroll
    
    
    56,554
    
    
    
    
    58,067Accrued vacation
    
    
    23,102
    
    
    
    
    26,905Accrued professional liability
    
    
    14,627
    
    
    
    
    17,303Accrued restructuring
    
    
    4,924
    
    
    
    
    2,888Accrued other
    
    
    66,484
    
    
    
    
    96,581Income taxes payable
    
    
    4,474
    
    
    
    
    3,541Due to third party payors
    
    
    13,266
    
    
    
    
    11,484Total Current Liabilities
    
    
    235,620
    
    
    
    
    288,515Long-term debt, net of current portion
    
    
    351,033
    
    
    
    
    1,418,682Non-current deferred tax liability
    
    
    4,458
    
    
    
    
    Total Liabilities
    
    
    591,111
    
    
    
    
    1,707,197Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    6,667
    
    
    
    
    7,093Stockholders Equity:Common
stock, $0.01 par value, 200,000,000 shares
authorized, 101,954,000 issued and outstanding
(Predecessor)
and $0.01 par value, 100 shares issued and outstanding
(Successor)
    
    
    1,020
    
    
    
    
    Capital in excess of par
    
    
    275,281
    
    
    
    
    429,062Retained earnings
    
    
    230,535
    
    
    
    
    42,494Accumulated other comprehensive income
    
    
    9,107
    
    
    
    
    2,115Total Stockholders Equity
    
    
    515,943
    
    
    
    
    473,671Total Liabilities and Stockholders Equity
    
    $
    1,113,721
    
    
    
    $
    2,187,961
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statements of Operations
(unaudited)
(in thousands)
 Predecessor
    
    
    SuccessorFor the Quarter Ended June 30,2004
    
    
    2005Net operating revenues
    
    $
    415,237
    
    
    
    $
    491,640Costs and expenses:Cost of services
    
    
    321,562
    
    
    
    
    385,417Stock compensation associated with Merger
    
    
    
    
    
    
    
    1,817General and administrative
    
    
    13,932
    
    
    
    
    11,311Bad debt expense
    
    
    11,560
    
    
    
    
    5,415Depreciation and amortization
    
    
    9,072
    
    
    
    
    12,489Total costs and expenses
    
    
    356,126
    
    
    
    
    416,449Income from operations
    
    
    59,111
    
    
    
    
    75,191Other income and expense:Interest income
    
    
    (486
    )
    
    
    
    (204
    )Interest expense
    
    
    7,335
    
    
    
    
    25,166Income from continuing operations before
minority interests and income taxes
    
    
    52,262
    
    
    
    
    50,229Minority interest in consolidated subsidiary companies
    
    
    1,146
    
    
    
    
    1,030Income from continuing operations before income taxes
    
    
    51,116
    
    
    
    
    49,199Income tax expense
    
    
    20,654
    
    
    
    
    19,778Income from continuing operations
    
    
    30,462
    
    
    
    
    29,421Income from discontinued operations, net of tax
    
    
    509
    
    
    
    
    Net income
    
    $
    30,971
    
    
    
    $
    29,421
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 Consolidated Statements of Operations
(unaudited)
(in thousands)
 Predecessor
    
    
    SuccessorPeriod fromJanuary 1
    
    
    Period fromFor the Six
    
    through
    
    
    February 25Months Ended
    
    February 24,
    
    
    through JuneJune 30, 2004
    
    2005
    
    
    30, 2005Net operating revenues
    
    $
    833,706
    
    
    $
    287,787
    
    
    
    $
    686,752Costs and expenses:Cost of services
    
    
    647,307
    
    
    
    225,428
    
    
    
    
    531,025Stock compensation associated with Merger
    
    
    
    
    
    
    142,213
    
    
    
    
    6,143General and administrative
    
    
    25,545
    
    
    
    7,484
    
    
    
    
    15,667Bad debt expense
    
    
    23,199
    
    
    
    6,661
    
    
    
    
    10,024Depreciation and amortization
    
    
    19,269
    
    
    
    6,177
    
    
    
    
    16,737Total costs and expenses
    
    
    715,320
    
    
    
    387,963
    
    
    
    
    579,596Income (loss) from operations
    
    
    118,386
    
    
    
    (100,176
    )
    
    
    
    107,156Other income and expense:Loss on early retirement of debt
    
    
    
    
    
    
    42,736
    
    
    
    
    Merger related charges
    
    
    
    
    
    
    12,025
    
    
    
    
    Interest income
    
    
    (851
    )
    
    
    (523
    )
    
    
    
    (281
    )Interest expense
    
    
    16,753
    
    
    
    4,734
    
    
    
    
    34,802Income (loss) from continuing operations before
minority interests and income taxes
    
    
    102,484
    
    
    
    (159,148
    )
    
    
    
    72,635Minority interest in consolidated subsidiary companies
    
    
    2,152
    
    
    
    469
    
    
    
    
    1,492Income (loss) from continuing operations before income taxes
    
    
    100,332
    
    
    
    (159,617
    )
    
    
    
    71,143Income tax expense (benefit)
    
    
    40,447
    
    
    
    (59,366
    )
    
    
    
    28,649Income (loss) from continuing operations
    
    
    59,885
    
    
    
    (100,251
    )
    
    
    
    42,494Income from discontinued operations, net of tax

    
    
    656
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    60,541
    
    
    $
    (100,251
    )
    
    
    $
    42,494
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income
(unaudited)
(in thousands)
 AccumulatedCommon
    
    Common
    
    Capital in
    
    
    
    
    
    OtherStock
    
    Stock Par
    
    Excess of
    
    Retained
    
    Comprehensive
    
    ComprehensiveIssued
    
    Value
    
    Par
    
    Earnings
    
    Income
    
    LossPredecessor:Balance at December 31, 2004
    
    
    101,954
    
    
    $
    1,020
    
    
    $
    275,281
    
    
    $
    230,535
    
    
    $
    9,107Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,251
    )
    
    
    
    
    
    $
    (100,251
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,019
    )
    
    
    (1,019
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (101,270
    )Issuance of common stock
    
    
    267
    
    
    
    3
    
    
    
    1,020Repurchase of non-employee options
    
    
    
    
    
    
    
    
    
    
    (1,617
    )Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    1,507Balance at February 24, 2005
    
    
    102,221
    
    
    $
    1,023
    
    
    $
    276,191
    
    
    $
    130,284
    
    
    $
    8,088
 AccumulatedCommon
    
    Common
    
    Capital in
    
    
    
    
    
    OtherStock
    
    Stock Par
    
    Excess of
    
    Retained
    
    Comprehensive
    
    ComprehensiveIssued
    
    Value
    
    Par
    
    Earnings
    
    Income
    
    IncomeSuccessor:Capitalization of Successor company at February 25, 2005
    
    
    
    
    
    
    
    
    
    $
    431,167Expenses paid on behalf of Holdings
    
    
    
    
    
    
    
    
    
    
    (10,490
    )Additional investment by Holdings
    
    
    
    
    
    
    
    
    
    
    2,242Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    42,494
    
    
    
    
    
    
    $
    42,494Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,115
    
    
    
    2,115Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,609Contribution related to restricted stock award issuances by Holdings
    
    
    
    
    
    
    
    
    
    
    6,143Balance at June 30, 2005
    
    
    
    
    
    $
    
    
    
    $
    429,062
    
    
    $
    42,494
    
    
    $
    2,115
 The accompanying notes are an integral part of this statement.
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Select Medical Corporation
 
 Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Predecessor
    
    
    SuccessorPeriod fromFor the Six Months
    
    Period from
    
    
    February 25Ended June 30,
    
    January 1 through
    
    
    through June 30,2004
    
    February 24, 2005
    
    
    2005Operating activitiesNet income (loss)
    
    $
    60,541
    
    
    $
    (100,251
    )
    
    
    $
    42,494Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    19,143
    
    
    
    6,177
    
    
    
    
    16,737Provision for bad debts
    
    
    23,380
    
    
    
    6,661
    
    
    
    
    10,024Loss on
early retirement of debt (non-cash)
    
    
    
    
    
    
    7,977
    
    
    
    
    Non cash compensation expense
    
    
    
    
    
    
    
    
    
    
    
    6,143Minority interests
    
    
    2,152
    
    
    
    469
    
    
    
    
    1,492Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (30,649
    )
    
    
    (48,976
    )
    
    
    
    (43,832
    )Other current assets
    
    
    4,417
    
    
    
    1,816
    
    
    
    
    516Other assets
    
    
    3,258
    
    
    
    (622
    )
    
    
    
    (224
    )Accounts payable
    
    
    (12,030
    )
    
    
    5,250
    
    
    
    
    2,828Due to third-party payors
    
    
    (10,670
    )
    
    
    667
    
    
    
    
    (2,448
    )Accrued expenses
    
    
    (1,568
    )
    
    
    199,909
    
    
    
    
    (168,142
    )Income taxes
    
    
    6,466
    
    
    
    (60,021
    )
    
    
    
    20,540Net cash provided by (used in) operating activities
    
    
    64,440
    
    
    
    19,056
    
    
    
    
    (113,872
    )Investing activitiesPurchases of property and equipment
    
    
    (19,132
    )
    
    
    (2,586
    )
    
    
    
    (56,208
    )Earnout payments
    
    
    (2,876
    )
    
    
    
    
    
    
    
    Proceeds from sale of membership interests
    
    
    4,811
    
    
    

    
    
    
    
    Acquisition of businesses, net of cash acquired
    
    
    (122
    )
    
    
    (108,279
    )
    
    
    
    (2,215
    )Net cash used in investing activities
    
    
    (17,319
    )
    
    
    (110,865
    )
    
    
    
    (58,423
    )Financing activitiesEquity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    
    722,242Proceeds from credit facility
    
    
    
    
    
    
    
    
    
    
    
    780,000Proceeds from senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    660,000Repayment of senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    (350,000
    )Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    
    (57,198
    )Costs associated with equity investment of Holdings
    
    
    
    
    
    
    
    
    
    
    
    (8,686
    )Net repayments on credit facility debt
    
    
    (8,483
    )
    
    
    
    
    
    
    
    (16,450
    )Principal payments on seller and other debt
    
    
    (2,633
    )
    
    
    (528
    )
    
    
    
    (3,491
    )Repurchases of common stock and options
    
    
    (48,058
    )
    
    
    
    
    
    
    
    (1,687,994
    )Proceeds from issuance of common stock
    
    
    15,041
    
    
    
    1,023
    
    
    
    
    Payment of common stock dividends
    
    
    (6,153
    )
    
    
    
    
    
    
    
    Proceeds from bank overdrafts
    
    
    6,440
    
    
    
    
    
    
    
    
    Restricted cash
    
    
    
    
    
    
    108
    
    
    
    
    72Distributions to minority interests
    
    
    (671
    )
    
    
    (401
    )
    
    
    
    (871
    )Net cash provided by (used in) financing activities
    
    
    (44,517
    )
    
    
    202
    
    
    
    
    37,624Effect of exchange rate changes on cash
and cash equivalents
    
    
    (166
    )
    
    
    (149
    )
    
    
    
    20Net increase (decrease) in cash and cash equivalents
    
    
    2,438
    
    
    
    (91,756
    )
    
    
    
    (134,651
    )Cash and cash equivalents at beginning of period
    
    
    165,507
    
    
    
    247,476
    
    
    
    
    155,720Cash and cash equivalents at end of period
    
    $
    167,945
    
    
    $
    155,720
    
    
    
    $
    21,069Supplemental Cash Flow InformationCash paid for interest
    
    $
    15,022
    
    
    $
    10,630
    
    
    
    $
    10,315Cash paid for taxes
    
    $
    35,740
    
    
    $
    1,502
    
    
    
    $
    6,975
 The accompanying notes are an integral part of this statement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Basis of Presentation
    2. Merger and Related Transactions
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
    
    a cash common and preferred equity investment in Holdings by
Welsh, Carson, Anderson & Stowe IX, L.P. and other equity
investors of $570.0 million, which funds were contributed to the
Company;
    
    a senior subordinated notes offering by Holdings of $150.0
million, which funds were contributed to the Company;
    
    borrowing by the Company of $580.0 million in term loans and
$200.0 million on the revolving loan facility under its new senior
secured credit facility;
    
    the issuance by the Company of $660.0 million in aggregate
principle amount of 7 5/8% senior subordinated notes; and
    
    $131.1 million of cash on hand at the closing date.
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Cash contributions from Holdings
    
    $
    720,000Exchange of shares of predecessor company for shares of Holdings at $18.00 per share
    
    
    151,992Aggregate equity contribution
    
    
    871,992Continuing shareholders basis adjustment
    
    
    (440,825
    )Equity contribution, net
    
    
    431,167Proceeds from borrowings
    
    
    1,440,000Purchase price allocated
    
    $
    1,871,167Fair value of net tangible assets acquired:Cash
    
    $
    34,484Accounts receivable
    
    
    280,891Current deferred tax asset
    
    
    69,858Other current assets
    
    
    20,955Property and equipment
    
    
    177,634Non-current deferred tax asset
    
    
    31,879Other assets
    
    
    21,655Current liabilities
    
    
    (267,831
    )Long-term debt
    
    
    (7,052
    )Minority interest in consolidated subsidiary companies
    
    
    (6,661
    )Net tangible assets acquired
    
    
    355,812Capitalized debt issuance costs
    
    
    55,392Intangible assets acquired
    
    
    92,988Goodwill
    
    
    1,366,975$
    1,871,167
  For the ThreeMonths Ended
    

For the Six Months Ended June 30,June 30, 2004
    
    2004
    
    2005Net revenue
    
    $
    415,237
    
    
    $
    833,706
    
    
    $
    974,539Net income (loss)
    
    
    20,358
    
    
    
    39,310
    
    
    
    (65,371
    )
 1 2 1 2
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3. Accounting Policies
 Use of Estimates
  Financial Instruments and Hedging
   Recent Accounting Pronouncements
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4. Stock Option Plans
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2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterCompensation expense
    
    $
    7,577
    
    
    $
    2,868
    
    
    $
    2,868
    
    
    $
    1,427
    
    
    $
    1,139
    
    
    $
    191
     PredecessorPeriod fromJanuary 1
    
    For the SixFor the Three
    
    through
    
    MonthsMonths Ended
    
    February 24,
    
    EndedJune 30, 2004
    
    2005
    
    June 30, 2004(in thousands)Net income
(loss)  as reported
    
    $
    30,971
    
    
    $
    (100,251
    )
    
    $
    60,541Deduct: Total stock based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
    
    
    3,515
    
    
    
    1,760
    
    
    
    10,044Net income
(loss)  pro forma
    
    $
    27,456
    
    
    $
    (102,011
    )
    
    $
    50,497Weighted average grant-date fair value
    
    $
    4.14
    
    
    $
    4.48
    
    
    $
    4.21
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5.
Accumulated Other Comprehensive Income (Loss)
  Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorPeriod
    
    PeriodThree
    
    Six
    
    from
    
    fromThree
    
    Months
    
    Months
    
    January
    
    FebruaryMonths
    
    Ended
    
    Ended
    
    1 through
    
    25 throughEnded June
    
    June 30,
    
    June 30,
    
    February
    
    June 30,30, 2004
    
    2005
    
    2004
    
    24, 2005
    
    2005(in thousands)Net income (loss)
    
    $
    30,971
    
    
    $
    29,421
    
    
    $
    60,541
    
    
    $
    (100,251
    )
    
    $
    42,494Unrealized losses on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Realized losses on
available for sale
securities
    
    
    53
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    Changes in foreign
currency
translation
    
    
    (1,137
    )
    
    
    1,097
    
    
    
    (2,597
    )
    
    
    (1,019
    )
    
    
    2,115Total comprehensive
income (loss)
    
    $
    29,887
    
    
    $
    30,518
    
    
    $
    57,993
    
    
    $
    (101,270
    )
    
    $
    44,609
 6. Real Estate Purchases
  7. Intangible Assets
  - 14 -




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##### Table of Contents



Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorPeriod
    
    PeriodThree
    
    Six
    
    from
    
    fromThree
    
    Months
    
    Months
    
    January
    
    FebruaryMonths
    
    Ended
    
    Ended
    
    1 through
    
    25 throughEnded June
    
    June 30,
    
    June 30,
    
    February
    
    June 30,30, 2004
    
    2005
    
    2004
    
    24, 2005
    
    2005(in thousands)Amortization expense
    
    $
    857
    
    
    $
    2,580
    
    
    $
    1,714
    
    
    $
    576
    
    
    $
    3,439
   SuccessorAs of June 30, 2005Gross Carrying
    
    AccumulatedAmount
    
    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (2,200
    )Non-compete agreements
    
    
    20,808
    
    
    
    (1,239
    )Total
    
    $
    41,264
    
    
    $
    (3,439
    )Unamortized intangible assetsGoodwill
    
    $
    1,369,637Trademarks
    
    
    47,058Certificates of need
    
    
    3,083Accreditation
    
    
    1,892Total
    
    $
    1,421,670
 - 15 -




---



##### Table of Contents



8. Restructuring Charges
  LeaseTerminationCosts
    
    Severance
    
    Total(in thousands)January 1, 2005-Predecessor
    
    $
    3,225
    
    
    $
    1,699
    
    
    $
    4,924Amounts paid in 2005
    
    
    (822
    )
    
    
    (1,214
    )
    
    
    (2,036
    )June 30, 2005-Successor
    
    $
    2,403
    
    
    $
    485
    
    
    $
    2,888
  9. Debt
  June 30, 2005(in thousands)Senior secured credit facility
    
    $
    763,5507 5/8% senior subordinated notes
    
    
    660,000Seller notes
    
    
    2,011Other
    
    
    1,419Total debt
    
    
    1,426,980Less: current maturities
    
    
    8,298Total long-term debt
    
    $
    1,418,682
 Senior Secured Credit Facility
  
    
    A $300.0 million revolving credit facility that will terminate in six years including
both a letter of credit sub facility and a swing line loan sub facility and;
    
    A $580.0 million term loan facility with a maturity of seven years that was drawn at the
closing of the Merger.
  - 16 -




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##### Table of Contents



Senior Subordinated Notes
  - 17 -




---



##### Table of Contents



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




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##### Table of Contents



Future Principle Obligations
  2006
    
    $
    6,6772007
    
    
    5,9842008
    
    
    5,8352009
    
    
    5,8002010 and beyond
    
    
    1,397,450
 10. Stockholders Equity
  11. Segment Information
   PredecessorThree Months Ended June 30, 2004Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    267,918
    
    
    $
    144,279
    
    
    $
    3,040
    
    
    $
    415,237Adjusted EBITDA
    
    
    58,114
    
    
    
    24,170
    
    
    
    (14,101
    )
    
    
    68,183Total assets
    
    
    525,438
    
    
    
    368,098
    
    
    
    190,321
    
    
    
    1,083,857Capital expenditures
    
    
    9,147
    
    
    
    1,406
    
    
    
    817
    
    
    
    11,370
 SuccessorThree Months Ended June 30, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    346,874
    
    
    $
    142,582
    
    
    $
    2,184
    

    
    $
    491,640Adjusted EBITDA
    
    
    78,493
    
    
    
    22,466
    
    
    
    (11,462
    )
    
    
    89,497Total assets
    
    
    1,609,317
    
    
    
    519,779
    
    
    
    58,865
    
    
    
    2,187,961Capital expenditures
    
    
    52,349
    
    
    
    339
    
    
    
    2,408
    
    
    
    55,096
 - 19 -




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##### Table of Contents



PredecessorSix Months Ended June 30, 2004Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    537,297
    
    
    $
    289,943
    
    
    $
    6,466
    
    
    $
    833,706Adjusted EBITDA
    
    
    116,021
    
    
    
    47,078
    
    
    
    (25,444
    )
    
    
    137,655Total assets
    
    
    525,438
    
    
    
    368,098
    
    
    
    190,321
    
    
    
    1,083,857Capital expenditures
    
    
    13,025
    
    
    
    3,151
    
    
    
    2,956
    
    
    
    19,132
 PredecessorPeriod from January 1 through February 24, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    202,465
    
    
    $
    83,395
    
    
    $
    1,927
    
    
    $
    287,787Adjusted EBITDA
    
    
    44,343
    
    
    
    11,531
    
    
    
    (7,660
    )
    
    
    48,214Total assets
    
    
    903,208
    
    
    
    239,019
    
    
    
    89,186
    
    
    
    1,231,413Capital expenditures
    
    
    1,163
    
    
    
    408
    
    
    
    1,015
    
    
    
    2,586
 SuccessorPeriod from February 25 through June 30, 2005Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    485,920
    
    
    $
    197,419
    
    
    $
    3,413
    
    
    $
    686,752Adjusted EBITDA
    
    
    113,205
    
    
    
    32,758
    
    
    
    (15,927
    )
    
    
    130,036Total assets
    
    
    1,609,317
    
    
    
    519,779
    
    
    
    58,865
    
    
    
    2,187,961Capital expenditures
    
    
    53,129
    
    
    
    613
    
    
    
    2,466
    
    
    
    56,208
 - 20 -




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##### Table of Contents



Predecessor
    
    Successor
    
    Predecessor
    
    SuccessorPeriod
    
    PeriodThree
    
    Six
    
    from
    
    fromThree
    
    Months
    
    Months
    
    January
    
    FebruaryMonths
    
    Ended
    
    Ended
    
    1 through
    
    25 throughEnded June
    
    June 30,
    
    June 30,
    
    February
    
    June 30,30, 2004
    
    2005
    
    2004
    
    24, 2005
    
    2005(in thousands)Net income (loss)
    
    $
    30,971
    
    
    $
    29,421
    
    
    $
    60,541
    
    
    $
    (100,251
    )
    
    $
    42,494Income tax expense (benefit)
    
    
    20,654
    
    
    
    19,778
    
    
    
    40,447
    
    
    
    (59,366
    )
    
    
    28,649Minority interest
    
    
    1,146
    
    
    
    1,030
    
    
    
    2,152
    
    
    
    469
    
    
    
    1,492Interest expense, net
    
    
    6,849
    
    
    
    24,962
    
    
    
    15,902
    
    
    
    4,211
    
    
    
    34,521Merger related charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,025
    
    
    
    Loss on early retirement of
debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,736
    
    
    
    Income from discontinued
operations
    
    
    (509
    )
    
    
    
    
    
    
    (656
    )
    
    
    
    
    
    
    Depreciation and
amortization
    
    
    9,072
    
    
    
    12,489
    
    
    
    19,269
    
    
    
    6,177
    
    
    
    16,737Stock compensation
associated with merger
    
    
    
    
    
    
    1,817
    
    
    
    
    
    
    
    142,213
    
    
    
    6,143Adjusted EBITDA
    
    $
    68,183
    
    
    $
    89,497
    
    
    $
    137,655
    
    
    $
    48,214
    
    
    $
    130,036
 12. Acquisition
   Cash paid, net of cash acquired
    
    $
    105,085Fair value of net tangible assets acquired:Accounts receivable
    
    
    22,143Other current assets
    
    
    4,718Property and equipment
    
    

    9,265Other assets
    
    
    242Current liabilities
    
    
    (14,150
    )Long-term debt
    
    
    (1,203
    )Net tangible assets acquired
    
    
    21,015Intangible assets acquired
    
    
    2,000Goodwill
    
    
    82,070$
    105,085
  - 21 -




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##### Table of Contents



For the Three Months Ended
    
    For the Six Months EndedJune 30, 2004
    
    June 30, 2004(in thousands)Net revenue
    
    $
    450,934
    
    
    $
    903,314Net income
    
    $
    30,898
    
    
    $
    62,106
 13. Discontinued Operations
  PredecessorThree Months
    
    Six Months EndedEnded June 30,
    
    June 30,2004
    
    2004(in thousands)Net revenue
    
    $
    3,435
    
    
    $
    6,959Income from discontinued operations
before income tax expense
    
    $
    849
    
    
    $
    1,094Income tax expense
    
    
    340
    
    
    
    438Income from discontinued operations
    
    $
    509
    
    
    $
    656
 - 22 -




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14. Commitments and Contingencies
 Litigation
      - 23 -




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##### Table of Contents



qui tam Qui tam qui tam qui tam qui tam qui tam qui tam qui tam qui tam
 Other
  - 24 -




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##### Table of Contents



15. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries
     Caritas Rehab Services, LLC
    
    North Andover Physical Therapy, Inc.Canadian Back Institute Limited and its subsidiaries
    
    OccuMed East, P.C.Cupertino Medical Center, P.C.
    
    Ohio Occupational Health, P.C., Inc.Elizabethtown Physical Therapy
    
    Partners in Physical Therapy, PLLCJeff Ayres, PT Therapy Center, Inc.
    
    Philadelphia Occupational Health, P.C.Jeffersontown Physical Therapy, LLC
    
    Rehabilitation Physician Services, P.CKentucky Orthopedic Rehabilitation, LLC
    
    Robinson & Associates, P.C.Kessler Core PT, OT and Speech Therapy at New York, LLC
    
    Select Specialty Hospital  Central Pennsylvania, L.P.Langhorne, P.C.
    
    Select Specialty Hospital  Houston, L.P.Lester OSM, P.C.
    
    Select Specialty Hospital  Mississippi Gulf Coast, Inc.Louisville Physical Therapy, P.S.C.
    
    Sprint Physical Therapy, P.C.Medical Information Management Systems, LLC
    
    Therex, P.C.Metropolitan West Physical Therapy and Sports Medicine Services Inc.
    
    TJ Corporation I, LLCMetro Therapy, Inc.
    
    U.S. Regional Occupational Health II, P.C.MKJ Physical Therapy, Inc.
    
    U.S. Regional Occupational Health II of New Jersey, P.C.New York Physician Services, P.C.
 - 25 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetJune
30, 2005SuccessorSelect MedicalCorporation (Parent
    
    Subsidiary
    
    Non-GuarantorCompany Only)
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    7,866
    
    
    $
    2,405
    
    
    $
    10,798
    
    
    $
    
    
    
    $
    21,069Restricted cash
    
    
    6,851
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,851Accounts receivable, net
    
    
    115
    
    
    
    298,018
    
    
    
    17,009
    
    
    
    
    
    
    
    315,142Current deferred tax asset
    
    
    14,735
    
    
    
    52,366
    
    
    
    3,912
    
    
    
    
    
    
    
    71,013Other current assets
    
    
    1,384
    
    
    
    14,694
    
    
    
    4,364
    
    
    
    
    
    
    
    20,442Total Current Assets
    
    
    30,951
    
    
    
    367,483
    
    
    
    36,083
    
    
    
    
    
    
    
    434,517Property and equipment, net
    
    
    9,219
    
    
    
    186,880
    
    
    
    24,473
    
    
    
    
    
    
    
    220,572Investment in affiliates
    
    
    664,877
    
    
    
    61,102
    
    
    
    
    
    
    
    (725,979
    ) (a)
    
    
    Goodwill
    
    
    8,730
    
    
    
    1,360,907
    
    
    
    
    
    
    
    
    
    
    
    1,369,637Other identifiable intangibles
    
    
    (2,200
    )
    
    
    92,038
    
    
    
    20
    
    
    
    
    
    
    
    89,858Non-current deferred tax asset
    
    
    42,671
    
    
    
    (33,032
    )
    
    
    (1,502
    )
    
    
    
    
    
    
    8,137Other assets
    
    
    60,620
    
    
    
    3,003
    
    
    
    1,617
    
    
    
    
    
    
    
    65,240Total Assets
    
    $
    814,868
    
    
    $
    2,038,381
    
    
    $
    60,691
    
    
    $
    (725,979
    )
    
    $
    2,187,961Liabilities and Stockholders EquityCurrent Liabilities:Current portion of long-term debt and notes payable
    
    $
    1,380
    
    
    $
    6,447
    
    
    $
    471
    
    
    $
    
    
    
    $
    8,298Accounts payable
    
    
    1,971
    
    
    
    54,073
    
    
    
    7,404
    
    
    
    
    
    
    
    63,448Intercompany accounts
    
    
    (892,588
    )
    
    
    898,751
    
    
    
    (6,163
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    1,518
    
    
    
    56,119
    
    
    
    430
    
    
    
    
    
    
    
    58,067Accrued vacation
    
    
    2,786
    
    
    
    21,936
    
    
    
    2,183
    
    
    
    
    
    
    
    26,905Accrued professional liability
    
    
    17,303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,303Accrued restructuring
    
    
    
    
    
    
    2,888
    
    
    
    
    
    
    
    
    
    
    
    2,888Accrued other
    
    
    25,899
    
    
    
    68,165
    
    
    
    2,517
    
    
    
    
    
    
    
    96,581Income taxes payable
    
    
    7,550
    
    
    
    1,965
    
    
    
    (5,974
    )
    
    
    
    
    
    
    3,541Due to third party payors
    
    
    6,099
    
    
    
    11,217
    
    
    
    (5,832
    )
    
    
    
    
    
    
    11,484Total Current Liabilities
    
    
    (828,082
    )
    
    
    1,121,561
    
    
    
    (4,964
    )
    
    
    
    
    
    
    288,515Long-term debt, net of current portion
    
    
    1,169,279
    
    
    
    232,012
    
    
    
    17,391
    
    
    
    
    
    
    
    1,418,682Total liabilities
    
    
    341,197
    
    
    
    1,353,573
    
    
    
    12,427
    
    
    
    
    
    
    
    1,707,197Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    
    
    
    
    587
    
    
    
    6,506
    
    
    
    
    
    
    
    7,093Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    429,062
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429,062Retained earnings
    
    
    42,494
    
    
    
    41,520
    
    
    
    11,196
    
    
    
    (52,716
    ) (b)
    
    
    42,494Subsidiary investment
    
    
    
    
    
    
    642,701
    
    
    
    30,562
    
    
    
    (673,263
    ) (a)
    
    
    Accumulated other comprehensive income
    
    
    2,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,115Total Stockholders Equity
    
    
    473,671
    
    
    
    684,221
    
    
    
    41,758
    
    
    
    (725,979
    )
    
    
    473,671Total Liabilities and Stockholders Equity
    
    $
    814,868
    
    
    $
    2,038,381
    
    
    $
    60,691
    
    
    $
    (725,979
    )
    
    $
    2,187,961
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings. - 26 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Period January 1 through February 24, 2005PredecessorSelect Medical
    
    
    
    
    
    Non-Corporation (Parent
    
    Subsidiary
    
    GuarantorCompany Only)
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)Net operating revenues
    
    $
    28
    
    
    $
    248,857
    
    
    $
    38,902
    
    
    $
    
    
    
    $
    287,787Costs and expenses:Cost of services
    
    
    
    
    
    
    193,323
    
    
    
    32,105
    
    
    
    
    
    
    
    225,428Stock compensation associated with Merger
    
    
    142,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,213General and administrative
    
    
    6,931
    
    
    
    553
    
    
    
    
    
    
    
    
    
    
    
    7,484Bad debt expense
    
    
    
    
    
    
    6,223
    
    
    
    438
    
    
    
    
    
    
    
    6,661Depreciation and amortization
    
    
    371
    
    
    
    5,025
    
    
    
    781
    
    
    
    
    
    
    
    6,177Total costs and expenses
    
    
    149,515
    
    
    
    205,124
    
    
    
    33,324
    
    
    
    
    
    
    
    387,963Income (loss) from operations
    
    
    (149,487
    )
    
    
    43,733
    
    
    
    5,578
    
    
    
    
    
    
    
    (100,176
    )Other income and expense:Intercompany interest and royalty fees
    
    
    6,261
    
    
    
    (6,221
    )
    
    
    (40
    )
    
    
    
    
    
    
    Intercompany management fees
    
    
    (213,822
    )
    
    
    213,436
    
    
    
    386
    
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    42,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,736Merger related charges
    
    
    12,025
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,025Interest income
    
    
    (294
    )
    
    
    (229
    )
    
    
    
    
    
    
    
    
    
    
    (523
    )Interest expense
    
    
    1,433
    
    
    
    2,953
    
    
    
    348
    
    
    
    
    
    
    
    4,734Income (loss) before minority interests and income taxes
    
    
    2,174
    
    
    
    (166,206
    )
    
    
    4,884
    
    
    
    
    
    
    
    (159,148
    )Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    7
    
    
    
    462
    
    
    
    
    
    
    
    469Income (loss) before income taxes
    
    
    2,174
    
    
    
    (166,213
    )
    
    
    4,422
    
    
    
    
    
    
    
    (159,617
    )Income tax expense (benefit)
    
    
    130
    
    
    
    (59,937
    )
    
    
    441
    
    
    
    
    
    
    
    (59,366
    )Equity in earnings of subsidiaries
    
    
    (102,295
    )
    
    
    3,192
    
    
    
    
    
    
    
    99,103
    (a)
    
    
    Net income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,981
    
    
    $
    99,103
    
    
    $
    (100,251
    )
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries. - 27 -




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Period February 25 through June 30, 2005SuccessorSelect Medical
    
    
    
    
    
    Non-Corporation (Parent
    
    Subsidiary
    
    GuarantorCompany Only)
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)Net operating revenues
    
    $
    7
    
    
    $
    599,663
    
    
    $
    87,082
    
    
    $
    
    
    
    $
    686,752Costs and expenses:Cost of services
    
    
    
    
    
    
    461,495
    
    
    
    69,530
    
    
    
    
    
    
    
    531,025Stock compensation associated with Merger
    
    
    6,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,143General and administrative
    
    
    14,620
    
    
    
    1,047
    
    
    
    
    
    
    
    
    
    
    
    15,667Bad debt expense
    
    
    
    
    
    
    9,314
    
    
    
    710
    
    
    
    
    
    
    
    10,024Depreciation and amortization
    
    
    3,044
    
    
    
    12,075
    
    
    
    1,618
    
    
    
    
    
    
    
    16,737Total costs and expenses
    
    
    23,807
    
    
    
    483,931
    
    
    
    71,858
    
    
    
    
    
    
    
    579,596Income (loss) from operations
    
    
    (23,800
    )
    
    
    115,732
    
    
    
    15,224
    
    
    
    
    
    
    
    107,156Other income and expense:Intercompany interest and royalty fees
    
    
    16,395
    
    
    
    (16,144
    )
    
    
    (251
    )
    
    
    
    
    
    
    Intercompany management fees
    
    
    (64,148
    )
    
    
    63,945
    
    
    
    203
    
    
    
    
    
    
    
    Interest income
    
    
    (221
    )
    
    
    (49
    )
    
    
    (11
    )
    
    
    
    
    
    
    (281
    )Interest expense
    
    
    27,454
    
    
    
    6,720
    
    
    
    628
    
    
    
    
    
    
    
    34,802Income (loss) before minority interests and income taxes
    
    
    (3,280
    )
    
    
    61,260
    
    
    
    14,655
    
    
    
    
    
    
    
    72,635Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    90
    
    
    
    1,402
    
    
    
    
    
    
    
    1,492Income (loss) before income taxes
    
    
    (3,280
    )
    
    
    61,170
    
    
    
    13,253
    
    
    
    
    
    
    
    71,143Income tax expense (benefit)
    
    
    (322
    )
    
    
    26,914
    
    
    
    2,057
    
    
    
    
    
    
    
    28,649Equity in earnings of subsidiaries
    
    
    45,452
    
    
    
    7,264
    
    
    
    
    
    
    
    (52,716
    ) (a)
    
    
    Net income
    
    $
    42,494
    
    
    $
    41,520
    
    
    $
    11,196
    
    
    $
    (52,716
    )
    
    $
    42,494
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries. - 28 -




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Period January 1 through February 24, 2005PredecessorSelect Medical
    
    
    
    
    
    Non-Corporation (Parent
    
    Subsidiary
    
    GuarantorCompany Only)
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)Operating activitiesNet income (loss)
    
    $
    (100,251
    )
    
    $
    (103,084
    )
    
    $
    3,981
    
    
    $
    99,103
    (a)
    
    $
    (100,251
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    371
    
    
    
    5,025
    
    
    
    781
    
    
    
    
    
    
    
    6,177Provision for bad debts
    
    
    
    
    
    
    6,223
    
    
    
    438
    
    
    
    
    
    
    
    6,661Loss on early retirement of debt
    
    
    7,977
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,977Minority interests
    
    
    
    
    
    
    7
    
    
    
    462
    
    
    
    
    
    
    
    469Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    102,295
    
    
    
    (3,192
    )
    
    
    
    
    
    
    (99,103
    )(a)
    
    
    Intercompany
    
    
    (9,314
    )
    
    
    12,090
    
    
    
    (2,776
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (133
    )
    
    
    (47,567
    )
    
    
    (1,276
    )
    
    
    
    
    
    
    (48,976
    )Other current assets
    
    
    1,899
    
    
    
    (374
    )
    
    
    291
    
    
    
    
    
    
    
    1,816Other assets
    
    
    8,375
    
    
    
    (9,045
    )
    
    
    48
    
    
    
    
    
    
    
    (622
    )Accounts payable
    
    
    (296
    )
    
    
    6,128
    
    
    
    (582
    )
    
    
    
    
    
    
    5,250Due to third-party payors
    
    
    
    
    
    
    3,953
    
    
    
    (3,286
    )
    
    
    
    
    
    
    667Accrued expenses
    
    
    47,203
    
    
    
    152,793
    
    
    
    (87
    )
    
    
    
    
    
    
    199,909Income taxes
    
    
    (59,190
    )
    
    
    
    
    
    
    (831
    )
    
    
    
    
    
    
    (60,021
    )Net cash provided by (used in) operating activities
    
    
    (1,064
    )
    
    
    22,957
    
    
    
    (2,837
    )
    
    
    
    
    
    
    19,056Investing activitiesPurchases of property and equipment
    
    
    (305
    )
    
    
    (2,045
    )
    
    
    (236
    )
    
    
    
    
    
    
    (2,586
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (105,092
    )
    
    
    (3,187
    )
    
    
    
    
    
    
    (108,279
    )Net cash used in investing activities
    
    
    (305
    )
    
    
    (107,137
    )
    
    
    (3,423
    )
    
    
    
    
    
    
    (110,865
    )Financing activitiesIntercompany debt reallocation
    
    
    (2,964
    )
    
    
    63
    
    
    
    2,901
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (528
    )
    
    
    
    
    
    
    
    
    
    
    (528
    )Restricted cash
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Proceeds from issuance of common stock
    
    
    1,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,023Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (401
    )
    
    
    
    
    
    
    (401
    )Net cash provided by (used in) financing activities
    
    
    (1,833
    )
    
    
    (465
    )
    
    
    2,500
    
    
    
    
    
    
    
    202Effect of exchange rate changes on cash
and cash equivalents
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149
    )Net decrease in cash and cash equivalents
    
    
    (3,351
    )
    
    
    (84,645
    )
    
    
    (3,760
    )
    
    
    
    
    
    
    (91,756
    )Cash and cash equivalents at beginning of period
    
    
    161,704
    
    
    
    74,641
    
    
    
    11,131
    
    
    
    
    
    
    
    247,476Cash and cash equivalents at end of period
    
    $
    158,353
    
    
    $
    (10,004
    )
    
    $
    7,371
    
    
    $
    
    
    
    $
    155,720
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 29 -




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Period February 25 through June 30, 2005SuccessorSelect Medical
    
    
    
    
    
    Non-Corporation (Parent
    
    Subsidiary
    
    GuarantorCompany Only)
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    42,494
    
    
    $
    41,520
    
    
    $
    11,196
    
    
    $
    (52,716
    )(a)
    
    $
    42,494Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,044
    
    
    
    12,075
    
    
    
    1,618
    
    
    
    
    
    
    
    16,737Provision for bad debts
    
    
    
    
    
    
    9,314
    
    
    
    710
    
    
    
    
    
    
    
    10,024Noncash stock compensation expense
    
    
    6,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,143Minority interests
    
    
    
    
    
    
    90
    
    
    
    1,402
    
    
    
    
    
    
    
    1,492Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (45,452
    )
    
    
    (7,264
    )
    
    
    
    
    
    
    52,716
    (a)
    
    
    Intercompany
    
    
    (119,596
    )
    
    
    130,975
    
    
    
    (11,379
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    47
    
    
    
    (42,566
    )
    
    
    (1,313
    )
    
    
    
    
    
    
    (43,832
    )Other current assets
    
    
    (387
    )
    
    
    939
    
    
    
    (36
    )
    
    
    
    
    
    
    516Other assets
    
    
    (56,556
    )
    
    
    56,762
    
    
    
    (430
    )
    
    
    
    
    
    
    (224
    )Accounts payable
    
    
    621
    
    
    
    1,564
    
    
    
    643
    
    
    
    
    
    
    
    2,828Due to third-party payors
    
    
    49
    
    
    
    (1,125
    )
    
    
    (1,372
    )
    
    
    
    
    
    
    (2,448
    )Accrued expenses
    
    
    (29,817
    )
    
    
    (138,378
    )
    
    
    53
    
    
    
    
    
    
    
    (168,142
    )Income taxes
    
    
    14,201
    
    
    
    
    
    
    
    6,339
    
    
    
    
    
    
    
    20,540Net cash provided by (used in) operating activities
    
    
    (185,209
    )
    
    
    63,906
    
    
    
    7,431
    
    
    
    
    
    
    
    (113,872
    )Investing activitiesPurchases of property and equipment, net
    
    
    (919
    )
    
    
    (54,205
    )
    
    
    (1,084
    )
    
    
    
    
    
    
    (56,208
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (2,215
    )
    
    
    
    
    
    
    
    
    
    
    (2,215
    )Net cash used in investing activities
    
    
    (919
    )
    
    
    (56,420
    )
    
    
    (1,084
    )
    
    
    
    
    
    
    (58,423
    )Financing activitiesEquity investment by Holdings
    
    
    722,242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722,242Proceeds from credit facility
    
    
    780,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    780,000Proceeds from senior subordinated notes
    
    
    660,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660,000Repayment of senior subordinated notes
    
    
    (350,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350,000
    )Deferred financing costs
    
    
    (57,198
    )
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    (57,198
    )Costs associated with equity investment of Holdings
    
    
    (8,686
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,686
    )Intercompany debt reallocation
    
    
    (6,365
    )
    
    
    8,370
    
    
    
    (2,005
    )
    
    
    
    
    
    
    Net repayments on credit facility debt
    
    
    (16,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,450
    )Principal payments on seller and other debt
    
    
    
    
    
    
    (3,447
    )
    
    
    (44
    )
    
    
    
    
    
    
    (3,491
    )Restricted cash
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Repurchases of common stock
    
    
    (1,687,994
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,687,994
    )Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (871
    )
    
    
    
    
    
    
    (871
    )Net cash provided by (used in) financing activities
    
    
    35,621
    
    
    
    4,923
    
    
    
    (2,920
    )
    
    
    
    
    
    
    37,624Effect of exchange rate changes on cash
and cash equivalents
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Net increase (decrease) in cash and cash equivalents
    
    
    (150,487
    )
    
    
    12,409
    

    
    
    3,427
    
    
    
    
    
    
    
    (134,651
    )Cash and cash equivalents at beginning of period
    
    
    158,353
    
    
    
    (10,004
    )
    
    
    7,371
    
    
    
    
    
    
    
    155,720Cash and cash equivalents at end of period
    
    $
    7,866
    
    
    $
    2,405
    
    
    $
    10,798
    
    
    $
    
    
    
    $
    21,069
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 30 -




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Six Months Ended June 30, 2004PredecessorSelect MedicalCorporation
    
    
    
    
    
    Non-(Parent Company
    
    Subsidiary
    
    GuarantorOnly)
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)Net operating revenues
    
    $
    22
    
    
    $
    717,605
    
    
    $
    116,079
    
    
    $
    
    
    
    $
    833,706Costs and expenses:Cost of services
    
    
    
    
    
    
    553,615
    
    
    
    93,692
    
    
    
    
    
    
    
    647,307General and administrative
    
    
    24,550
    
    
    
    995
    
    
    
    
    
    
    
    
    
    
    
    25,545Bad debt expense
    
    
    
    
    
    
    22,362
    
    
    
    837
    
    
    
    
    
    
    
    23,199Depreciation and amortization
    
    
    1,288
    
    
    
    15,555
    
    
    
    2,426
    
    
    
    
    
    
    
    19,269Total costs and expenses
    
    
    25,838
    
    
    
    592,527
    
    
    
    96,955
    
    
    
    
    
    
    
    715,320Income (loss) from operations
    
    
    (25,816
    )
    
    
    125,078
    
    
    
    19,124
    
    
    
    
    
    
    
    118,386Other income and expense:Intercompany interest and royalty fees
    
    
    14,800
    
    
    
    (14,774
    )
    
    
    (26
    )
    
    
    
    
    
    
    Intercompany management fees
    
    
    (50,684
    )
    
    
    48,787
    
    
    
    1,897
    
    
    
    
    
    
    
    Interest income
    
    
    (620
    )
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    (851
    )Interest expense
    
    
    5,178
    
    
    
    10,164
    
    
    
    1,411
    
    
    
    
    
    
    
    16,753Income from continuing operations before minority interests and income taxes
    
    
    5,510
    
    
    
    81,132
    
    
    
    15,842
    
    
    
    
    
    
    
    102,484Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    166
    
    
    
    1,986
    
    
    
    
    
    
    
    2,152Income from continuing operations before income taxes
    
    
    5,510
    
    
    
    80,966
    
    
    
    13,856
    
    
    
    
    
    
    
    100,332Income tax expense
    
    
    4,877
    
    
    
    33,044
    
    
    
    2,526
    
    
    
    
    
    
    
    40,447Income from continuing operations
    
    
    633
    
    
    
    47,922
    
    
    
    11,330
    
    
    
    
    
    
    
    59,885Income from discontinued operations, net of tax
    
    
    
    
    
    
    656
    
    
    
    
    
    
    
    
    
    
    
    656Equity in
earnings of subsidiaries
    
    
    59,908
    
    
    
    7,053
    
    
    
    
    
    
    
    (66,961
    )(a)
    
    
    Net income
    
    $
    60,541
    
    
    $
    55,631
    
    
    $
    11,330
    
    
    $
    (66,961
    )
    
    $
    60,541
 
 (a)
    
    Elimination of equity in net income (loss) from consolidated subsidiaries. - 31 -




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Six Months Ended June 30, 2004PredecessorSelect MedicalCorporation
    
    
    
    
    
    Non-(Parent Company
    
    Subsidiary
    
    GuarantorOnly)
    
    Guarantors
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    60,541
    
    
    $
    55,631
    
    
    $
    11,330
    
    
    $
    (66,961
    )(a)
    
    $
    60,541Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,288
    
    
    
    15,429
    
    
    
    2,426
    
    
    
    
    
    
    
    19,143Provision for bad debts
    
    
    
    
    
    
    22,543
    
    
    
    837
    
    
    
    
    
    
    
    23,380Minority interests
    
    
    
    
    
    
    166
    
    
    
    1,986
    
    
    
    
    
    
    
    2,152Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (59,908
    )
    
    
    (7,053
    )
    
    
    
    
    
    
    66,961
    (a)
    
    
    Intercompany
    
    
    16,230
    
    
    
    (6,761
    )
    
    
    (9,469
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    258
    
    
    
    (45,231
    )
    
    
    14,324
    
    
    
    
    
    
    
    (30,649
    )Other current assets
    
    
    (1,732
    )
    
    
    1,144
    
    
    
    5,005
    
    
    
    
    
    
    
    4,417Other assets
    
    
    1,897
    
    
    
    1,430
    
    
    
    (69
    )
    
    
    
    
    
    
    3,258Accounts payable
    
    
    (7,097
    )
    
    
    (4,481
    )
    
    
    (452
    )
    
    
    
    
    
    
    (12,030
    )Due to third-party payors
    
    
    
    
    
    
    (809
    )
    
    
    (9,861
    )
    
    
    
    
    
    
    (10,670
    )Accrued expenses
    
    
    (892
    )
    
    
    (115
    )
    
    
    (561
    )
    
    
    
    
    
    
    (1,568
    )Income taxes
    
    
    6,087
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    6,466Net cash provided by operating activities
    
    
    16,672
    
    
    
    31,893
    
    
    
    15,875
    
    
    
    
    
    
    
    64,440Investing activitiesPurchases of property and equipment, net
    
    
    (2,880
    )
    
    
    (15,031
    )
    
    
    (1,221
    )
    
    
    
    
    
    
    (19,132
    )Earnout payments
    
    
    
    
    
    
    (2,876
    )
    
    
    
    
    
    
    
    
    
    
    (2,876
    )Proceeds from sale of membership interests
    
    
    
    
    
    
    4,811
    
    
    
    
    
    
    
    
    
    
    
    4,811Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    
    
    
    
    (122
    )Net cash used in investing activities
    
    
    (2,880
    )
    
    
    (13,096
    )
    
    
    (1,343
    )
    
    
    
    
    
    
    (17,319
    )Financing activitiesIntercompany debt reallocation
    
    
    9,210
    
    
    
    (7,713
    )
    
    
    (1,497
    )
    
    
    
    
    
    
    Net repayments on credit facility debt
    
    
    
    
    
    
    
    
    
    
    (8,483
    )
    
    
    
    
    
    
    (8,483
    )Principal payments on seller and other debt
    
    
    
    
    
    
    (2,501
    )
    
    
    (132
    )
    
    
    
    
    
    
    (2,633
    )Repurchases of common stock
    
    
    (48,058
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,058
    )Proceeds from issuance of common stock
    
    
    15,041
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,041Payment of common stock dividends
    
    
    (6,153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,153
    )Proceeds from bank overdrafts
    
    
    6,440
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,440Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (671
    )
    
    
    
    
    
    
    (671
    )Net cash used in financing activities
    
    
    (23,520
    )
    
    
    (10,214
    )
    
    
    (10,783
    )
    
    
    
    
    
    
    (44,517
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    (166
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (166
    )Net increase (decrease) in cash and cash equivalents
    
    
    (9,894
    )
    
    
    8,583
    
    
    
    3,749
    
    
    
    
    
    
    
    2,438Cash and cash equivalents at beginning of period
    
    
    101,989
    
    
    
    60,878
    
    
    
    2,640
    
    
    
    
    
    
    
    165,507Cash and cash equivalents at end of period
    
    $
    92,095
    
    
    $
    69,461
    
    
    $
    6,389
    
    
    $
    
    
    
    $
    167,945
 
 (a)
    
    Elimination of equity in earnings of subsidiary. - 32 -




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read this discussion together with our consolidated financial statements and the
accompanying notes.
 Forward Looking Statements
  
    
    compliance with the Medicare hospital within a hospital regulation changes will
require increased capital expenditures and may have an adverse effect on our future
net operating revenues and profitability;
    
    the failure of our long-term acute care hospitals to maintain their status as such
may cause our net operating revenues and profitability to decline;
    
    the failure of our facilities operated as hospitals within hospitals to qualify
as hospitals separate from their host hospitals may cause our net operating revenues
and profitability to decline;
    
    implementation of modifications to the admissions policies for our inpatient
rehabilitation facilities, as required to achieve compliance with Medicare
guidelines, may result in a loss of patient volume at these hospitals and, as a
result, may reduce our future net operating revenues and profitability;
    
    implementation of annual caps that limit the amounts that can be paid for
outpatient therapy services rendered to any Medicare beneficiary may reduce our
future net operating revenues and profitability;
    
    additional changes in government reimbursement for our services may have an
adverse effect on our future net operating revenues and profitability;
    
    changes in applicable regulations or a government investigation or assertion that
we have violated applicable regulations may result in increased costs or sanctions
that reduce our net operating revenues and profitability;
    
    integration of recently acquired operations and future acquisitions may prove
difficult or unsuccessful, use significant resources or expose us to unforeseen
liabilities;
    
    private third-party payors for our services may undertake future cost containment
initiatives that limit our future net operating revenues and profitability;
    
    the failure to maintain established relationships with the physicians in our
markets could reduce our net operating revenues and profitability;
    
    shortages in qualified nurses or therapists could increase our operating costs
significantly;
    
    competition may limit our ability to grow and result in a decrease in our net
operating revenues and profitability;
    
    the loss of key members of our management team could significantly disrupt our
operations; and
    
    the effect of claims asserted against us or lack of adequate available insurance
could subject us to substantial uninsured liabilities.
 - 33 -




---



##### Table of Contents



Overview
      - 34 -




---



##### Table of Contents



Second Quarter Ended June 30, 2005
  1 2 1 2
  SemperCare Acquisition
  Merger and Related Transactions
  - 35 -




---



##### Table of Contents




    
    $1,827.7 million to pay our then existing stockholders (other than rollover stockholders)
and option holders all amounts due under the merger agreement;
    
    $152.0 million of rollover equity from our continuing investors;
    
    $344.2 million to repay existing indebtedness; and
    
    $119.2 million to pay related fees and expenses, including premiums, consent fees and
interest payable in connection with the tender offers and consent solicitations for our
existing senior subordinated notes.
  
    
    a cash equity investment in Holdings of $570.0 million by an investor group led by our
sponsors (the net proceeds of which were contributed by Holdings to us) and a rollover
equity investment in Holdings of $152.0 million by our continuing investors;
    
    Holdings issuance and sale of senior subordinated notes, preferred stock and common
stock to WCAS Capital Partners IV, L.P., an investment fund affiliated with Welsh Carson,
Rocco A. Ortenzio, Robert A. Ortenzio and certain other investors who are members of or
affiliated with the Ortenzio family, for an aggregate purchase price of $150.0 million (the
net proceeds of which will be contributed by Holdings to us);
    
    borrowings by us of $580.0 million in term loans and $200.0 million in revolving loans
under our new senior secured credit facility;
    
    existing cash on hand of $131.1 million; and
    
    the issuance of $660.0 million in aggregate principal amount of the outstanding notes.
 1 2 1 2 1 2 1 2
 - 36 -




---



##### Table of Contents



Regulatory Changes
    Development of New Specialty Hospitals and Clinics
  - 37 -




---



##### Table of Contents



Operating Statistics
  Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Specialty hospital data(1):Number of hospitals  start of period
    
    
    83
    
    
    
    103
    
    
    
    83
    
    
    
    86Number of hospital start-ups
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Number of hospitals closed
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Number of hospitals acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Number of hospitals  end of period
    
    
    86
    
    
    
    102
    
    
    
    86
    
    
    
    102Available licensed beds
    
    
    3,359
    
    
    
    3,856
    
    
    
    3,359
    
    
    
    3,856Admissions
    
    
    8,306
    
    
    
    9,995
    
    
    
    17,044
    
    
    
    20,331Patient days
    
    
    204,525
    
    
    
    246,458
    
    
    
    417,252
    
    
    
    497,297Average length of stay (days)
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,285
    
    
    $
    1,375
    
    
    $
    1,264
    
    
    $
    1,352Occupancy rate
    
    
    69
    %
    
    
    70
    %
    
    
    70
    %
    
    
    71
    %Percent patient days  Medicare
    
    
    73
    %
    
    
    75
    %
    
    
    74
    %
    
    
    76
    %Outpatient rehabilitation data:Number of clinics owned  start of period
    
    
    741
    
    
    
    715
    
    
    
    758
    
    
    
    705Number of clinics acquired
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    7Number of clinic start-ups
    
    
    9
    
    
    
    6
    
    
    
    13
    
    
    
    15Number of clinics closed/sold
    
    
    (22
    )
    
    
    (25
    )
    
    
    (45
    )
    
    
    (31
    )Number of clinics owned  end of period
    
    
    728
    
    
    
    696
    
    
    
    728
    
    
    
    696Number of clinics managed  end of period
    
    
    33
    
    
    
    44
    
    
    
    33
    
    
    
    44Total number of clinics (all)  end of period
    
    
    761
    
    
    
    740
    
    
    
    761
    
    
    
    740Number of visits (U.S.)
    
    
    993,237
    
    
    
    917,573
    
    
    
    1,997,343
    
    
    
    1,833,395Net revenue per visit (U.S.)(3)
    
    $
    89
    
    
    $
    89
    
    
    $
    90
    
    
    $
    90
 
 (1)
    
    Specialty hospitals consist of long-term acute care hospitals and inpatient rehabilitation
facilities.(2)
    
    Net revenue per patient day is calculated by dividing specialty hospital patient service
revenues by the total number of patient days.(3)
    
    Net revenue per visit (U.S.) is calculated by dividing outpatient rehabilitation clinic
revenue by the total number of visits. For purposes of this computation, outpatient
rehabilitation clinic revenue does not include our Canadian subsidiary and contract services
revenue. - 38 -




---



##### Table of Contents



Results of Operations
  Six Months EndedJune 30, 2005(in thousands)Predecessor
    
    Successor
    
    CombinedNet operating revenues
    
    $
    287,787
    
    
    $
    686,752
    
    
    $
    974,539Costs and expenses:Cost of services
    
    
    225,428
    
    
    
    531,025
    
    
    
    756,453Stock compensation associated with Merger
    
    
    142,213
    
    
    
    6,143
    
    
    
    148,356General and administrative
    
    
    7,484
    
    
    
    15,667
    
    
    
    23,151Bad debt expense
    
    
    6,661
    
    
    
    10,024
    
    
    
    16,685Depreciation and amortization
    
    
    6,177
    
    
    
    16,737
    
    
    
    22,914Total costs and expenses
    
    
    387,963
    
    
    
    579,596
    
    
    
    967,559Income (loss) from operations
    
    
    (100,176
    )
    
    
    107,156
    
    
    
    6,980Other income and expense:Loss on early retirement of debt
    
    
    42,736
    
    
    
    
    
    
    
    42,736Merger related charges
    
    
    12,025
    
    
    
    
    
    
    
    12,025Interest income
    
    
    (523
    )
    
    
    (281
    )
    
    
    (804
    )Interest expense
    
    
    4,734
    
    
    
    34,802
    
    
    
    39,536Income (loss) before minority interests and income taxes
    
    
    (159,148
    )
    
    
    72,635
    
    
    
    (86,513
    )Minority interest in consolidated subsidiary companies
    
    
    469
    
    
    
    1,492
    
    
    
    1,961Income (loss) before income taxes
    
    
    (159,617
    )
    
    
    71,143
    
    
    
    (88,474
    )Income tax expense (benefit)
    
    
    (59,366
    )
    
    
    28,649
    
    
    
    (30,717
    )Net income (loss)
    
    $
    (100,251
    )
    
    $
    42,494
    
    
    $
    (57,757
    )
 - 39 -




---



##### Table of Contents



Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(2)
    
    
    77.5
    
    
    
    78.4
    
    
    
    77.7
    
    
    
    77.6Stock compensation associated with Merger
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    15.2General and administrative
    
    
    3.3
    
    
    
    2.3
    
    
    
    3.0
    
    
    
    2.4Bad debt expense
    
    
    2.8
    
    
    
    1.1
    
    
    
    2.8
    
    
    
    1.7Depreciation and amortization
    
    
    2.1
    
    
    
    2.5
    
    
    
    2.3
    
    
    
    2.4Income (loss) from operations
    
    
    14.3
    
    
    
    15.3
    
    
    
    14.2
    
    
    
    0.7Loss on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.4Merger related charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Interest expense, net
    
    
    1.6
    
    
    
    5.1
    
    
    
    1.9
    
    
    
    4.0Income (loss) from continuing operations before minority
interests and income taxes
    
    
    12.7
    
    
    
    10.2
    
    
    
    12.3
    
    
    
    (8.9
    )Minority interests
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Income (loss) from continuing operations before income taxes
    
    
    12.4
    
    
    
    10.0
    
    
    
    12.1
    
    
    
    (9.1
    )Income tax (benefit)
    
    
    5.0
    
    
    
    4.0
    
    
    
    4.9
    
    
    
    (3.2
    )Income (loss) from continuing operations
    
    
    7.4
    
    
    
    6.0
    
    
    
    7.2
    
    
    
    (5.9
    )Income from discontinued operations, net of tax
    
    
    N/M
    
    
    
    
    
    
    
    N/M
    
    
    
    Net income (loss)
    
    
    7.4
    %
    
    
    6.0
    %
    
    
    7.2
    %
    
    
    (5.9
    )%
 - 40 -




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    % Change
    
    2004
    
    2005 (1)
    
    % Change(in thousands)









(in thousands)Net operating revenues:Specialty hospitals
    
    $
    267,918
    
    
    $
    346,874
    
    
    
    29.5
    %
    
    $
    537,297
    
    
    $
    688,385
    
    
    
    28.1
    %Outpatient rehabilitation
    
    
    144,279
    
    
    
    142,582
    
    
    
    (1.2
    )
    
    
    289,943
    
    
    
    280,814
    
    
    
    (3.1
    )Other (4)
    
    
    3,040
    
    
    
    2,184
    
    
    
    (28.2
    )
    
    
    6,466
    
    
    
    5,340
    
    
    
    (17.4
    )Total company
    
    $
    415,237

    
    
    $
    491,640
    
    
    
    18.4
    %
    
    $
    833,706
    
    
    $
    974,539
    
    
    
    16.9
    %Income (loss) from operations:Specialty hospitals
    
    $
    53,526
    
    
    $
    71,424
    
    
    
    33.4
    %
    
    $
    106,596
    
    
    $
    144,114
    
    
    
    35.2
    %Outpatient rehabilitation
    
    
    20,728
    
    
    
    19,505
    
    
    
    (5.9
    )
    
    
    40,067
    
    
    
    38,679
    
    
    
    (3.5
    )Other (4)
    
    
    (15,143
    )
    
    
    (15,738
    )
    
    
    (3.9
    )
    
    
    (28,277
    )
    
    
    (175,813
    )
    
    
    N/MTotal company
    
    $
    59,111
    
    
    $
    75,191
    
    
    
    27.2
    %
    
    $
    118,386
    
    
    $
    6,980
    
    
    
    (94.1
    )%Adjusted
EBITDA:(3)Specialty hospitals
    
    $
    58,114
    
    
    $
    78,493
    
    
    
    35.1
    %
    
    $
    116,021
    
    
    $
    157,548
    
    
    
    35.8
    %Outpatient rehabilitation
    
    
    24,170
    
    
    
    22,466
    
    
    
    (7.1
    )
    
    
    47,078
    
    
    
    44,289
    
    
    
    (5.9
    )Other (4)
    
    
    (14,101
    )
    
    
    (11,462
    )
    
    
    18.7
    
    
    
    (25,444
    )
    
    
    (23,587
    )
    
    
    7.3Adjusted EBITDA margins:(3)Specialty hospitals
    
    
    21.7
    %
    
    
    22.6
    %
    
    
    4.1
    %
    
    
    21.6
    %
    
    
    22.9
    %
    
    
    6.0
    %Outpatient rehabilitation
    
    
    16.8
    
    
    
    15.8
    
    
    
    (6.0
    )
    
    
    16.2
    
    
    
    15.8
    
    
    
    (2.5
    )Other (4)
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    525,438
    
    
    $
    1,609,317
    
    
    
    
    
    
    $
    525,438
    
    
    $
    1,609,317Outpatient rehabilitation
    
    
    368,098
    
    
    
    519,779
    
    
    
    
    
    
    
    368,098
    
    
    
    519,779Other (4)
    
    
    190,321
    
    
    
    58,865
    
    
    
    
    
    
    
    190,321
    
    
    
    58,865Total company
    
    $
    1,083,857
    
    
    $
    2,187,961
    
    
    
    
    
    
    $
    1,083,857
    
    
    $
    2,187,961Purchases of property and
equipment, net:Specialty hospitals
    
    $
    9,147
    
    
    $
    52,349
    
    
    
    
    
    
    $
    13,025
    
    
    $
    54,292Outpatient rehabilitation
    
    
    1,406
    
    
    
    339
    
    
    
    
    
    
    
    3,151
    
    
    
    1,021Other (4)
    
    
    817
    
    
    
    2,408
    
    
    
    
    
    
    
    2,956
    
    
    
    3,481Total company
    
    $
    11,370
    
    
    $
    55,096
    
    
    
    
    
    
    $
    19,132
    
    
    $
    58,794
 - 41 -




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005 (1)(in thousands)
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    267,918
    
    
    $
    346,874
    
    
    $
    537,297
    
    
    $
    688,385Less: Specialty hospitals opened, acquired or
closed after 1/1/04
    
    
    1,990
    
    
    
    52,743
    
    
    
    3,975
    
    
    
    101,417Specialty hospitals same store net operating revenue
    
    $
    265,928
    
    
    $
    294,131
    
    
    $
    533,322
    
    
    $
    586,968Adjusted EBITDA(3)Specialty hospitals Adjusted EBITDA(3)
    
    $
    58,114
    
    
    $
    78,493
    
    
    $
    116,021
    
    
    $
    157,548Less: Specialty hospitals opened, acquired or
closed after 1/1/04
    
    
    (1,175
    )
    
    
    8,232
    
    
    
    (1,838
    )
    
    
    15,546Specialty hospitals same store Adjusted EBITDA(3)
    
    $
    59,289
    
    
    $
    70,261
    
    
    $
    117,859
    
    
    $
    142,002All specialty hospitals Adjusted EBITDA margin(3)
    
    
    21.7
    %
    
    
    22.6
    %
    
    
    21.6
    %
    
    
    22.9
    %Specialty hospitals same store Adjusted EBITDA
margin(3)
    
    
    22.3
    %
    
    
    23.9
    %
    
    
    22.1
    %
    
    
    24.2
    %
 
 N/M  Not Meaningful.(1)
    
    The financial data for the period after the Merger, February 25, 2005 through June 30,
2005 (Successor period), has been added to the financial data for the period from January
1, 2005 through February 24, 2005 (Predecessor period), to arrive at the combined six
months ended June 30, 2005.(2)
    
    Cost of services include salaries, wages and benefits, operating supplies, lease and
rent expense and other operating costs.(3)
    
    We define Adjusted EBITDA as net income before interest, income taxes, depreciation and
amortization, income from discontinued operations, loss on early retirement of debt, merger
related charges, stock compensation associated with the merger, and minority interest. We
believe that the presentation of Adjusted EBITDA is important to investors because Adjusted
EBITDA is used by management to evaluate financial performance and determine resource
allocation for each of our operating units. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles. Items excluded from Adjusted
EBITDA are significant components in understanding and assessing financial performance.
Adjusted EBITDA should not be considered in isolation or as an alternative to, or
substitute for, net income, cash flows generated by operations, investing or financing
activities, or other financial statement data presented in the consolidated financial
statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is
not a measurement determined in accordance with generally accepted accounting principles
and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be
comparable to other similarly titled measures of other companies. See
footnote  11 to our
interim consolidated financial statements for the period ended June 30, 2005 for a
reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our segment
performance in accordance with SFAS No. 131.(4)
    
    Other primarily includes the Companys general and
administrative services, as well as businesses associated with the sale
of home medical equipment, orthotics, prosthetics and
infusion/intravenous services. - 42 -




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Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
 Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  - 43 -




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Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income (Loss) from Operations
  Interest Expense
  Minority Interests
  - 44 -




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Income Taxes
  Income from Discontinued Operations, Net of Tax
  Combined Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
 Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 - 45 -




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Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income (Loss) from Operations
  - 46 -




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Loss on Early Retirement of Debt
 1 2 1 2 1 2 1 2
 Merger Related Charges
  Interest Expense
  Minority Interests
  Income Taxes
  - 47 -




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Income from Discontinued Operations, Net of Tax
  Liquidity and Capital Resources
    Capital Resources
   - 48 -




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
    
    a $300.0 million revolving loan facility with a maturity of six years, including both a
letter of credit sub-facility and a swingline loan sub-facility, and
    
    a $580.0 million term loan facility with a maturity of seven years.
     1 2
 - 49 -




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1 2
    Inflation
  - 50 -




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Recent Accounting Pronouncements
     - 51 -




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART
II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
        - 52 -




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  
 SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 SELECT MEDICAL CORPORATIONBy:
    
    /s/
    
    Martin F. JacksonMartin F. JacksonSenior Vice President and Chief Financial Officer(Duly Authorized Officer)By:
    
    /s/
    
    Scott A. RombergerScott A. RombergerVice President, Chief Accounting Officer and Controller(Principal Accounting Officer)
 Dated:
August 11, 2005
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Exhibit
    
    Description31.1

Certification of President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2

Certification of Senior Vice President and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1

Certification of President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Senior Vice President and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 - 54 -