##### 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, 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
    
    
    4ITEM 1. CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    4Consolidated statements of operations
    
    
    5Consolidated statements of changes in stockholders equity and comprehensive income
    
    
    7Consolidated statements of cash flows
    
    
    8Notes to consolidated financial statements
    
    
    9ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    28ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    50ITEM 4. CONTROLS AND PROCEDURES
    
    
    51PART II OTHER INFORMATION
    
    
    51ITEM 1. LEGAL PROCEEDINGS
    
    
    51ITEM 1A. RISK FACTORS
    
    
    52ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    52ITEM 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 Executive Vice President and Chief Financial OfficerCertification of Chief Executive Officer, pursuant to Section 906Certification of Executive Vice President and Chief Financial Officer, pursuant to Section 906
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 Consolidated Balance Sheets
 (unaudited)
 (in thousands, except share and per share amounts)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationDecember 31,
    
    
    June 30,
    
    
    December 31,
    
    
    June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    81,600
    
    
    $
    25,610
    
    
    $
    81,600
    
    
    $
    25,610Restricted cash
    
    
    4,335
    
    
    
    3,800
    
    
    
    4,335
    
    
    
    3,800Accounts receivable, net of allowance for doubtful accounts
of $55,306 and $58,762 in 2006 and 2007, respectively
    
    
    199,927
    
    
    
    261,311
    
    
    
    199,927
    
    
    
    261,311Current deferred tax asset
    
    
    42,613
    
    
    
    40,837
    
    
    
    42,613
    
    
    
    40,837Other current assets
    
    
    16,762
    
    
    
    23,710
    
    
    
    16,762
    
    
    
    23,710Total Current Assets
    
    
    345,237
    
    
    
    355,268
    
    
    
    345,237
    
    
    
    355,268Property and equipment, net
    
    
    356,336
    
    
    
    460,227
    
    
    
    356,336
    
    
    
    460,227Goodwill
    
    
    1,323,572
    
    
    
    1,468,086
    
    
    
    1,323,572
    
    
    
    1,468,086Other identifiable intangibles
    
    
    79,230
    
    
    
    97,237
    
    
    
    79,230
    
    
    
    97,237Other assets held for sale
    
    
    4,855
    
    
    
    
    
    
    
    4,855
    
    
    
    Other assets
    
    
    73,294
    
    
    
    77,022
    
    
    
    68,412
    
    
    
    72,445Total Assets
    
    $
    2,182,524
    
    
    $
    2,457,840
    
    
    $
    2,177,642
    
    
    $
    2,453,263LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    12,213
    
    
    $
    19,023
    
    
    $
    12,213
    
    
    $
    19,023Current portion of long-term debt and notes payable
    
    
    6,209
    
    
    
    8,239
    
    
    
    6,209
    
    
    
    8,239Accounts payable
    
    
    72,597
    
    
    
    78,102
    
    
    
    72,597
    
    
    
    78,102Accrued payroll
    
    
    55,084
    
    
    
    64,653
    
    
    
    55,084
    
    
    
    64,653Accrued vacation
    
    
    27,360
    
    
    
    35,203
    
    
    
    27,360
    
    
    
    35,203Accrued interest
    
    
    36,759
    
    
    
    36,908
    
    
    
    25,270
    
    
    
    25,518Accrued professional liability
    
    
    24,979
    
    
    
    25,356
    
    
    
    24,979
    
    
    
    25,356Accrued restructuring
    
    
    225
    
    
    
    11,742
    
    
    
    225
    
    
    
    11,742Accrued other
    
    
    67,084
    
    
    
    70,329
    
    
    
    67,084
    
    
    
    86,829Income taxes payable
    
    
    1,937
    
    
    
    3,431
    
    
    
    1,937
    
    
    
    3,431Due to third party payors
    
    
    12,886
    
    
    
    6,267
    
    
    
    12,886
    
    
    
    6,267Total Current Liabilities
    
    
    317,333
    
    
    
    359,253
    
    
    
    305,844
    
    
    
    364,363Long-term debt, net of current portion
    
    
    1,532,294
    
    
    
    1,709,546
    
    
    
    1,224,509
    
    
    
    1,401,118Non-current deferred tax liability
    
    
    32,075
    
    
    
    27,787
    
    
    
    30,721
    
    
    
    26,330Other non-current liabilities
    
    
    
    
    
    
    24,648
    
    
    
    
    
    
    
    24,648Total Liabilities
    
    
    1,881,702
    
    
    
    2,121,234
    
    
    
    1,561,074
    
    
    
    1,816,459Commitments and ContingenciesMinority interest in consolidated subsidiary companies
    
    
    2,566
    
    
    
    3,873
    
    
    
    2,566
    
    
    
    3,873Preferred stock  Authorized shares (liquidation preference is $467,395 and $479,044
in 2006 and 2007,
respectively)
    
    
    467,395
    
    
    
    479,044
    
    
    
    
    
    
    
    Stockholders Equity:Common stock
of Holdings, $0.001 par value, 250,000,000 shares authorized,
204,904,000 shares and
205,125,000 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
    )
    
    
    (293,157
    )
    
    
    464,283
    
    
    
    472,542Retained earnings
    
    
    121,024
    
    
    
    139,223
    
    
    
    146,774
    
    
    
    155,154Accumulated other comprehensive income
    
    
    4,888
    
    
    
    7,418
    
    
    
    2,945
    
    
    
    5,235Total Stockholders Equity
    
    
    (169,139
    )
    
    
    (146,311
    )
    
    
    614,002
    
    
    
    632,931Total Liabilities and Stockholders Equity
    
    $
    2,182,524
    
    
    $
    2,457,840
    
    
    $
    2,177,642
    
    
    $
    2,453,263
 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 June 30,
    
    
    For the Quarter Ended June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Net operating revenues
    
    $
    482,141
    
    
    $
    506,484
    
    
    $
    482,141
    
    
    $
    506,484Costs and expenses:Cost of services
    
    
    372,500
    
    
    
    410,952
    
    
    
    372,500
    
    
    
    410,952General and administrative
    
    
    11,549
    
    
    
    12,182
    
    
    
    11,549
    
    
    
    12,182Bad debt expense
    
    
    8,433
    
    
    
    8,835
    
    
    
    8,433
    
    
    
    8,835Depreciation and amortization
    
    
    11,666
    
    
    
    13,939
    
    
    
    11,666
    
    
    
    13,939Total costs and expenses
    
    
    404,148
    
    
    
    445,908
    
    
    
    404,148
    
    
    
    445,908Income from operations
    
    
    77,993
    
    
    
    60,576
    
    
    
    77,993
    
    
    
    60,576Other income and expense:Other income
    
    
    
    
    
    
    
    
    
    
    1,608
    
    
    
    1,660Interest income
    
    
    197
    
    
    
    869
    
    
    
    197
    
    
    
    869Interest expense
    
    
    (32,642
    )
    
    
    (35,749
    )
    
    
    (23,995
    )
    
    
    (27,067
    )Income from continuing operations before
minority interests and income taxes
    
    
    45,548
    
    
    
    25,696
    
    
    
    55,803
    
    
    
    36,038Minority interest in consolidated
subsidiary companies
    
    
    335
    
    
    
    813
    
    
    
    335
    
    
    
    813Income from continuing operations
before income taxes
    
    
    45,213
    
    
    
    24,883
    
    
    
    55,468
    
    
    
    35,225Income tax expense
    
    
    17,942
    
    
    
    10,568
    
    
    
    21,531
    
    
    
    14,188Net income
    
    $
    27,271
    
    
    $
    14,315
    
    
    $
    33,937
    
    
    $
    21,037
 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 Six Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Net operating revenues
    
    $
    961,884
    
    
    $
    973,313
    
    
    $
    961,884
    
    
    $
    973,313Costs and expenses:Cost of services
    
    
    757,697
    
    
    
    788,579
    
    
    
    757,697
    
    
    
    788,579General and administrative
    
    
    23,749
    
    
    
    23,766
    
    
    
    23,749
    
    
    
    23,766Bad debt expense
    
    
    13,433
    
    
    
    14,424
    
    
    
    13,433
    
    
    
    14,424Depreciation and amortization
    
    
    22,561
    
    
    
    25,643
    
    
    
    22,561
    
    
    
    25,643Total costs and expenses
    
    
    817,440
    
    
    
    852,412
    
    
    
    817,440
    
    
    
    852,412Income from operations
    
    
    144,444
    
    
    
    120,901
    
    
    
    144,444
    
    
    
    120,901Other income and expense:Other income
    
    
    
    
    
    
    1,173
    
    
    
    4,042
    
    
    
    1,517Interest income
    
    
    419
    
    
    
    1,798
    
    
    
    419
    
    
    
    1,798Interest expense
    
    
    (65,523
    )
    
    
    (67,952
    )
    
    
    (48,267
    )
    
    
    (50,705
    )Income from continuing operations before
minority interests and income taxes
    
    
    79,340
    
    
    
    55,920
    
    
    
    100,638
    
    
    
    73,511Minority interest in consolidated subsidiary companies
    
    
    726
    
    
    
    1,136
    
    
    
    726
    
    
    
    1,136Income from continuing operations before income taxes
    
    
    78,614
    
    
    
    54,784
    
    
    
    99,912
    
    
    
    72,375Income tax expense
    
    
    33,172
    
    
    
    22,998
    
    
    
    40,626
    
    
    
    29,155Income from continuing operations
    
    
    45,442
    
    
    
    31,786
    
    
    
    59,286
    
    
    
    43,220Income from discontinued operations, net of tax
(Includes pre-tax gain of $13,950)
    
    
    10,018
    
    
    
    
    
    
    
    10,018
    
    
    
    Net income
    
    $
    55,460
    
    
    $
    31,786
    
    
    $
    69,304
    
    
    $
    43,220
 The
accompanying notes are an integral part of this statement.
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##### Table of Contents



Select Medical Holdings Corporation
 
 Consolidated Statement
of Changes in 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
    
    
    204,904
    
    
    $
    205
    
    
    $
    (295,256
    )
    
    $
    121,024
    
    
    $
    4,888Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,786
    
    
    
    
    
    
    $
    31,786Unrealized gain on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,530
    
    
    
    2,530Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    34,316Cumulative impact of change in accounting for
uncertainties in income taxes (FIN 48 - see Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )Vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    1,866Issuance of restricted stock
    
    
    200
    
    
    
    
    
    
    
    200Exercise of stock options
    
    
    24
    
    
    
    
    
    
    
    24Stock option expense
    
    
    
    
    
    
    
    
    
    
    12Repurchase of common shares
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Accretion of dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,656
    )Balance at June 30, 2007
    
    
    205,125
    
    
    $
    205
    
    
    $
    (293,157
    )
    
    $
    139,223
    
    
    $
    7,418
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,220
    
    
    
    
    
    
    $
    43,220Unrealized gain on interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,290
    
    
    
    2,290Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    45,510Cumulative impact of change in accounting for
uncertainties in income taxes (FIN 48 - see Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )Dividends declared to Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,500
    )Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,409
    )Federal tax benefit of losses contributed by Holdings
    
    
    
    
    
    
    
    
    
    
    6,157Additional investment by Holdings
    
    
    
    
    
    
    
    
    
    
    224Contribution related to restricted stock and stock
option award issuances by Holdings
    
    
    
    
    
    
    
    
    
    
    1,878Balance at June 30, 2007
    
    
    
    
    
    $
    
    
    
    $
    472,542
    
    
    $
    155,154
    
    
    $
    5,235
 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 Six Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Operating activitiesNet income
    
    $
    55,460
    
    
    $
    31,786
    
    
    $
    69,304
    
    
    $
    43,220Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    22,737
    
    
    
    25,643
    
    
    
    22,737
    
    
    
    25,643Provision for bad debts
    
    
    13,520
    
    
    
    14,424
    
    
    
    13,520
    
    
    
    14,424Gain from disposal of assets and sale of business units
    
    
    (13,691
    )
    
    
    (3,037
    )
    
    
    (13,691
    )
    
    
    (3,037
    )Non-cash income from interest rate swaps
    
    
    
    
    
    
    
    
    
    
    (4,042
    )
    
    
    (344
    )Non-cash stock compensation expense
    
    
    1,891
    
    
    
    1,878
    
    
    
    1,891
    
    
    
    1,878Amortization of debt discount
    
    
    571
    
    
    
    643
    
    
    
    
    
    
    
    Minority interests
    
    
    1,066
    
    
    
    1,136
    
    
    
    1,066
    
    
    
    1,136Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (25,530
    )
    
    
    (44,398
    )
    
    
    (25,530
    )
    
    
    (44,398
    )Other current assets
    
    
    1,538
    
    
    
    (1,391
    )
    
    
    1,538
    
    
    
    (1,391
    )Other assets
    
    
    2,791
    
    
    
    1,070
    
    
    
    2,608
    
    
    
    765Accounts payable
    
    
    1,222
    
    
    
    3,172
    
    
    
    1,222
    
    
    
    3,172Due to third-party payors
    
    
    (2,613
    )
    
    
    (6,578
    )
    
    
    (2,613
    )
    
    
    (6,578
    )Accrued interest
    
    
    667
    
    
    
    142
    
    
    
    (24
    )
    
    
    238Accrued expenses
    
    
    (11,747
    )
    
    
    10,661
    
    
    
    (11,747
    )
    
    
    10,661Income and deferred taxes
    
    
    34,892
    
    
    
    20,153
    
    
    
    42,346
    
    
    
    26,310Net cash provided by operating activities
    
    
    82,774
    
    
    
    55,304
    
    
    
    98,585
    
    
    
    71,699Investing activitiesPurchases of property and equipment
    
    
    (71,814
    )
    
    
    (89,832
    )
    
    
    (71,814
    )
    
    
    (89,832
    )Earnout payments
    
    
    (100
    )
    
    
    
    
    
    
    (100
    )
    
    
    Proceeds from sale of business units
    
    
    76,806
    
    
    
    5,045
    
    
    
    76,806
    
    
    
    5,045Sale of building
    
    
    
    
    
    
    4,500
    
    
    
    
    
    
    
    4,500Changes in restricted cash
    
    
    798
    
    
    
    535
    
    
    
    798
    
    
    
    535Acquisition of businesses, net of cash acquired
    
    
    (3,261
    )
    
    
    (214,099
    )
    
    
    (3,261
    )
    
    
    (214,099
    )Net cash provided by (used in) investing activities
    
    
    2,429
    
    
    
    (293,851
    )
    
    
    2,429
    
    
    
    (293,851
    )Financing activitiesBorrowings on revolving credit facility
    
    
    151,000
    
    
    
    165,000
    
    
    
    151,000
    
    
    
    165,000Payments on
revolving credit facility
    
    
    (236,000
    )
    
    
    (85,000
    )
    
    
    (236,000
    )
    
    
    (85,000
    )Credit facility term loan borrowing
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    100,000Payments on credit facility term loan
    
    
    (2,900
    )
    
    
    (3,150
    )
    
    
    (2,900
    )
    
    
    (3,150
    )Principal payments on seller and other debt
    
    
    (600
    )
    
    
    (291
    )
    
    
    (600
    )
    
    
    (291
    )Proceeds from (repayment of) bank overdrafts
    
    
    (19,355
    )
    
    
    6,810
    
    
    
    (19,355
    )
    
    
    6,810Dividends to Holdings
    
    
    
    
    
    
    
    
    
    
    (15,811
    )
    
    
    (16,409
    )Repurchase of common and preferred stock
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    Proceeds from issuance of restricted stock
    
    
    
    
    
    
    200
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224Distributions to minority interests
    
    
    (1,104
    )
    
    
    (1,022
    )
    
    
    (1,104
    )
    
    
    (1,022
    )Net cash provided by (used in) financing activities
    
    
    (108,959
    )
    
    
    182,557
    
    
    
    (124,770
    )
    
    
    166,162Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    35
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (23,721
    )
    
    
    (55,990
    )
    
    
    (23,721
    )
    
    
    (55,990
    )Cash and cash equivalents at beginning of period
    
    
    35,861
    
    
    
    81,600
    
    
    
    35,861
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    12,140
    
    
    $
    25,610
    
    
    $
    12,140
    
    
    $
    25,610Supplemental Cash Flow InformationCash paid for interest
    
    $
    61,886
    
    
    $
    61,772
    
    
    $
    46,155
    
    
    $
    45,381Cash paid for taxes
    
    $
    2,666
    
    
    $
    2,849
    
    
    $
    2,666
    
    
    $
    2,849
 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)
 Basis of Presentation
    2. Accounting Policies
 Use of Estimates
  Reclassifications
  Recent Accounting Pronouncements
  8




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##### Table of Contents



3. Acquisition
    9




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##### Table of Contents



Cash paid, net of cash acquired
    
    $
    214,018Fair value of net tangible assets acquired:Accounts receivable
    
    
    31,410Other current assets
    
    
    4,331Property and equipment
    
    
    39,550Other assets
    
    
    803Current liabilities
    
    
    (13,713
    )Long-term debt
    
    
    (972
    )Net tangible assets acquired
    
    
    61,409Non-compete, 5-year
    
    
    20,000Restructuring reserve
    
    
    (11,905
    )Goodwill
    
    
    144,514$
    214,018
  For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2006
    
    2007
    
    2006
    
    2007(in thousands)Net revenue
    
    $
    557,571
    
    
    $
    528,465
    
    
    $
    1,113,186
    
    
    $
    1,066,934Net income:Select Medical
Corporation
    
    $
    35,604
    
    
    $
    20,574
    
    
    $
    72,838
    
    
    $
    45,873Select Medical
Holdings
Corporation
    
    $
    28,946
    
    
    $
    13,846
    
    
    $
    59,027
    
    
    $
    34,459
 4. Intangible Assets
  As of June 30, 2007Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assets:Contract therapy relationships
    
    $
    20,456
    
    
    $
    (9,546
    )Non-compete agreements
    
    
    40,809
    
    
    
    (9,346
    )Total
    
    $
    61,265
    
    
    $
    (18,892
    )Indefinite-lived intangible assets:Goodwill
    
    $
    1,468,086Trademarks
    
    
    47,058Certificates of need
    
    
    6,102Accreditations
    
    
    1,704Total
    
    $
    1,522,950
 10




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##### Table of Contents



Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,
    
    Ended June 30,
    
    Ended June 30,2006
    
    2007
    
    2006
    
    2007(in thousands)Amortization expense
    
    $
    1,952
    
    
    $
    2,620
    
    
    $
    3,905
    
    
    $
    4,572
  2007
    
    $
    10,4772008
    
    
    11,8112009
    
    
    11,8112010
    
    
    7,2272011
    
    
    4,2862012
    
    
    1,333
  Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    

Total(in thousands)Balance as of December 31, 2006
    
    $
    1,227,533
    
    
    $
    96,039
    
    
    $
    1,323,572Goodwill acquired during year
    
    
    
    
    
    
    144,514
    
    
    
    144,514Balance as of June 30, 2007
    
    $
    1,227,533
    
    
    $
    240,553
    
    
    $
    1,468,086
  11




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##### Table of Contents



5. Restructuring Reserves
   LeaseTerminationCosts
    
    
    



    Severance


    
    Total(in thousands)December 31, 2006
    
    $
    225
    
    
    $
    
    
    
    $
    2252007 acquisition
restructuring reserve
    
    
    6,821
    
    
    
    5,084
    
    
    
    11,905Amounts paid
    
    
    (71
    )
    
    
    (317
    )
    
    
    (388
    )June 30, 2007
    
    $
    6,975
    
    
    $
    4,767
    
    
    $
    11,742
  6. Accumulated Other Comprehensive Income
 Holdings
  Select
  7. Segment Information
  12




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##### Table of Contents



Three Months Ended June 30, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    360,772
    
    
    $
    120,641
    
    
    $
    728
    
    
    $
    482,141Adjusted EBITDA
    
    
    82,673
    
    
    
    18,423
    
    
    
    (10,492
    )
    
    
    90,604Total assets:Select Medical Corporation
    
    
    1,755,128
    
    
    
    266,864
    
    
    
    113,380
    
    
    
    2,135,372Select Medical Holdings
Corporation
    
    
    1,755,128
    
    
    
    266,864
    
    
    
    118,213
    
    
    
    2,140,205Capital expenditures
    
    
    31,825
    
    
    
    1,310
    
    
    
    293
    
    
    
    33,428
 Three Months Ended June 30, 2007Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    345,282
    
    
    $
    159,686
    
    
    $
    1,516
    
    
    $
    506,484Adjusted EBITDA
    
    
    60,690
    
    
    
    24,553
    
    
    
    (9,777
    )
    
    
    75,466Total assets:Select Medical Corporation
    
    
    1,832,312
    
    
    
    482,006
    
    
    
    138,945
    
    
    
    2,453,263Select Medical Holdings Corporation
    
    
    1,832,312
    
    
    
    482,006
    
    
    
    143,522
    
    
    
    2,457,840Capital expenditures
    
    
    47,388
    
    
    
    2,624
    
    
    
    1,721
    
    
    
    51,733
 Six Months Ended June 30, 2006Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    720,444
    
    
    $
    239,931
    
    
    $
    1,509
    
    
    $
    961,884Adjusted EBITDA
    
    
    157,391
    
    
    
    33,183
    
    
    
    (21,678
    )
    
    
    168,896Total assets:Select Medical Corporation
    
    
    1,755,128
    
    
    
    266,864
    
    
    
    113,380
    
    
    
    2,135,372Select Medical Holdings
Corporation
    
    
    1,755,128
    
    
    
    266,864
    
    
    
    118,213
    
    
    
    2,140,205Capital expenditures
    
    
    68,330
    
    
    
    2,951
    
    
    
    533
    
    
    
    71,814
 13




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##### Table of Contents



Six Months Ended June 30, 2007Specialty
    
    OutpatientHospitals
    
    Rehabilitation
    
    All Other
    
    Total(in thousands)Net operating revenue
    
    $
    699,510
    
    
    $
    272,066
    
    
    $
    1,737
    
    
    $
    973,313Adjusted EBITDA
    
    
    126,721
    
    
    
    42,171
    
    
    
    (20,470
    )
    
    
    148,422Total assets:Select Medical Corporation
    
    
    1,832,312
    
    
    
    482,006
    
    
    
    138,945
    
    
    
    2,453,263Select Medical Holdings Corporation
    
    
    1,832,312
    
    
    
    482,006
    
    
    
    143,522
    
    
    
    2,457,840Capital expenditures
    
    
    83,267
    
    
    
    4,645
    
    
    
    1,920
    
    
    
    89,832
  Select Medical HoldingsCorporation
    
    
    Select Medical CorporationThree Months Ended June
    
    
    Three Months Ended June30,
    
    
    30,2006
    
    
    2007
    
    
    2006
    
    
    2007(in thousands)Net income
    
    $
    27,271
    
    
    $
    14,315
    
    
    $
    33,937
    
    
    $
    21,037Income tax expense
    
    
    17,942
    
    
    
    10,568
    
    
    
    21,531
    
    
    
    14,188Minority interest
    
    
    335
    
    
    
    813
    
    
    
    335
    
    
    
    813Interest expense, net
    
    
    32,445
    
    
    
    34,880
    
    
    
    23,798
    
    
    
    26,198Other income
    
    
    
    
    
    
    
    
    
    
    (1,608
    )
    
    
    (1,660
    )Depreciation and
amortization
    
    
    11,666
    
    
    
    13,939
    
    
    
    11,666
    
    
    
    13,939Stock compensation
expense:Included in
general and
administrative
    
    
    887
    
    
    
    891
    
    
    
    887
    
    
    
    891Included in cost
of services
    
    
    58
    
    
    
    60
    
    
    
    58
    
    
    
    60Adjusted EBITDA
    
    $
    90,604
    
    
    $
    75,466
    
    
    $
    90,604
    
    
    $
    75,466
 14




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##### Table of Contents



Select Medical HoldingsCorporation
    
    Select Medical CorporationSix Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2007
    
    2006
    
    2007(in thousands)Net income
    
    $
    55,460
    
    
    $
    31,786
    
    
    $
    69,304
    
    
    $
    43,220Income from
discontinued
operations, net of
tax
    
    
    (10,018
    )
    
    
    
    
    
    
    (10,018
    )
    
    
    Income tax expense
    
    
    33,172
    
    
    
    22,998
    
    
    
    40,626
    
    
    
    29,155Minority interest
    
    
    726
    
    
    
    1,136
    
    
    
    726
    
    
    
    1,136Interest expense, net
    
    
    65,104
    
    
    
    66,154
    
    
    
    47,848
    
    
    
    48,907Other income
    
    
    
    
    
    
    (1,173
    )
    
    
    (4,042
    )
    
    
    (1,517
    )Depreciation and
amortization
    
    
    22,561
    
    
    
    25,643
    
    
    
    22,561
    
    
    
    25,643Stock compensation
expense:Included in
general and
administrative
    
    
    1,775
    
    
    
    1,779
    
    
    
    1,775
    
    
    
    1,779Included in cost
of services
    
    
    116
    
    
    
    99
    
    
    
    116
    
    
    
    99Adjusted EBITDA
    
    $
    168,896
    
    
    $
    148,422
    
    
    $
    168,896
    
    
    $
    148,422
 8. Income Tax
    15




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##### Table of Contents



9. Discontinued Operations
   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
   16




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##### Table of Contents



17




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##### Table of Contents



Construction Commitments
  11. Other
 Amendment to Credit Agreement
  Interest Rate Swap Agreement
  18




---



##### Table of Contents



12.
    
    Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under
Selects 75/8% Senior Subordinated Notes
 5 8 5 8
    Caritas Rehab Services, LLC
    
    North Andover Physical Therapy, Inc.Canadian Back Institute Limited and its
subsidiaries (1)
    
    OccuMed East, P.C.Cupertino Medical Center, P.C. (2)
    
    Ohio Occupational Health, P.C., Inc.Elizabethtown Physical Therapy
    
    Partners in Physical Therapy, PLLCJeff Ayres, PT Therapy Center, Inc.
    
    Philadelphia Occupational Health, P.C.Jeffersontown Physical Therapy, LLC
    
    Rehabilitation Physician Services, P.C.Kentucky Orthopedic Rehabilitation, LLC
    
    Robinson & Associates, P.C.Kessler Core PT, OT and Speech Therapy at New York, LLC
    
    Select Physical Therapy of Las Vegas Limited PartnershipLanghorne, P.C.
    
    Select Specialty Hospital  Central Pennsylvania, L.P.Lester OSM, P.C.
    
    Select Specialty Hospital  Evansville, LLCLouisville Physical Therapy, P.S.C.
    
    Select Specialty Hospital  Houston, L.P.Medical Information Management Systems, LLC (3)
    
    Select Specialty Hospital  Gulf Coast, Inc.Metropolitan West Physical Therapy and Sports
    
    Sprint Physical Therapy, P.C.Medicine Services Inc.
    
    Therex, P.C.MKJ Physical Therapy, Inc.
    
    TJ Corporation I, LLCNew York Physician Services, P.C.
    
    U.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 six months ended June 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. 19




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetJune 30, 2007(unaudited)Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated( in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    20,185
    
    
    $
    4,320
    
    
    $
    1,105
    
    
    $
    
    
    
    $
    25,610Restricted cash
    
    
    3,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800Accounts receivable, net
    
    
    283
    
    
    
    237,916
    
    
    
    23,112
    
    
    
    
    
    
    
    261,311Current deferred tax asset
    
    
    24,184
    
    
    
    14,285
    
    
    
    2,368
    
    
    
    
    
    
    
    40,837Other current assets
    
    
    4,672
    
    
    
    17,118
    
    
    
    1,920
    
    
    
    
    
    
    
    23,710Total Current Assets
    
    
    53,124
    
    
    
    273,639
    
    
    
    28,505
    
    
    
    
    
    
    
    355,268Property and equipment, net
    
    
    8,891
    
    
    
    417,868
    
    
    
    33,468
    
    
    
    
    
    
    
    460,227Investment in affiliates
    
    
    1,807,649
    
    
    
    24,186
    
    
    
    
    
    
    
    (1,831,835
    )(a)
    
    
    Goodwill
    
    
    
    
    
    
    1,468,086
    
    
    
    
    
    
    
    
    
    
    
    1,468,086Other identifiable intangibles
    
    
    
    
    
    
    97,237
    
    
    
    
    
    
    
    
    
    
    
    97,237Other assets
    
    
    60,203
    
    
    
    11,641
    
    
    
    601
    
    
    
    
    
    
    
    72,445Total Assets
    
    $
    1,929,867
    
    
    $
    2,292,657
    
    
    $
    62,574
    
    
    $
    (1,831,835
    )
    
    $
    2,453,263Liabilities and Stockholders EquityCurrent Liabilities:Bank overdrafts
    
    $
    19,023
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    19,023Current portion of long-term debt and
notes payable
    
    
    6,921
    
    
    
    1,318
    
    
    
    
    
    
    
    
    
    
    
    8,239Accounts payable
    
    
    4,137
    
    
    
    69,099
    
    
    
    4,866
    
    
    
    
    
    
    
    78,102Intercompany accounts
    
    
    94,432
    
    
    
    (84,972
    )
    
    
    (9,460
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    974
    
    
    
    63,493
    
    
    
    186
    
    
    
    
    
    
    
    64,653Accrued vacation
    
    
    3,105
    
    
    
    29,527
    
    
    
    2,571
    
    
    
    
    
    
    
    35,203Accrued interest
    
    
    25,518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,518Accrued professional liability
    
    
    25,356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,356Accrued restructuring
    
    
    
    
    
    
    11,742
    
    
    
    
    
    
    
    
    
    
    
    11,742Accrued other
    
    
    56,904
    
    
    
    27,756
    
    
    
    2,169
    
    
    
    
    
    
    
    86,829Income taxes payable
    
    
    3,431
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,431Due to third party payors
    
    
    
    
    
    
    6,267
    
    
    
    
    
    
    
    
    
    
    
    6,267Total Current Liabilities
    
    
    239,801
    
    
    
    124,230
    
    
    
    332
    
    
    
    
    
    
    
    364,363Long-term debt, net of current portion
    
    
    1,031,395
    
    
    
    341,225
    
    
    
    28,498
    
    
    
    
    
    
    
    1,401,118Noncurrent deferred tax liability
    
    
    1,092
    
    
    
    22,611
    
    
    
    2,627
    
    
    
    
    
    
    
    26,330Other non-current liabilities
    
    
    24,648
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,648Total Liabilities
    
    
    1,296,936
    
    
    
    488,066
    
    
    
    31,457
    
    
    
    
    
    
    
    1,816,459Commitments and ContingenciesMinority interest in consolidated
subsidiary companies
    
    
    
    
    
    
    
    
    
    
    3,873
    
    
    
    
    
    
    
    3,873Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    472,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    472,542Retained earnings
    
    
    155,154
    
    
    
    219,954
    
    
    
    5,283
    
    
    
    (225,237
    )(b)
    
    
    155,154Subsidiary investment
    
    
    
    
    
    
    1,584,637
    
    
    
    21,961
    
    
    
    (1,606,598
    )(a)(b)
    
    
    Accumulated other comprehensive income
    
    
    5,235
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,235Total Stockholders Equity
    
    
    632,931
    
    
    
    1,804,591
    
    
    
    27,244
    
    
    
    (1,831,835
    )
    
    
    632,931Total Liabilities and Stockholders Equity
    
    $
    1,929,867
    
    
    $
    2,292,657
    
    
    $
    62,574
    
    
    $
    (1,831,835
    )
    
    $
    2,453,263
 
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings. 20




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Three Months Ended June 30, 2007(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    1,516
    
    
    $
    462,223
    
    
    $
    42,745
    
    
    $
    
    
    
    $
    506,484Costs and expenses:Cost of services
    
    
    60
    
    
    
    377,407
    
    
    
    33,485
    
    
    
    
    
    
    
    410,952General and administrative
    
    
    12,165
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    12,182Bad debt expense
    
    
    
    
    
    
    8,046
    
    
    
    789
    
    
    
    
    
    
    
    8,835Depreciation and amortization
    
    
    554
    
    
    
    12,275
    
    
    
    1,110
    
    
    
    
    
    
    
    13,939Total costs and expenses
    
    
    12,779
    
    
    
    397,745
    
    
    
    35,384
    
    
    
    
    
    
    
    445,908Income (loss) from operations
    
    
    (11,263
    )
    
    
    64,478
    
    
    
    7,361
    
    
    
    
    
    
    
    60,576Other income and expense:Intercompany interest and royalty fees
    
    
    (15,069
    )
    
    
    14,964
    
    
    
    105
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    45,742
    
    
    
    (44,120
    )
    
    
    (1,622
    )
    
    
    
    
    
    
    Other income
    
    
    1,660
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,660Interest income
    
    
    443
    
    
    
    426
    
    
    
    
    
    
    
    
    
    
    
    869Interest expense
    
    
    (20,688
    )
    
    
    (5,761
    )
    
    
    (618
    )
    
    
    
    
    
    
    (27,067
    )Income before minority interests and income taxes
    
    
    825
    
    
    
    29,987
    
    
    
    5,226
    
    
    
    
    
    
    
    36,038Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    
    
    
    
    813
    
    
    
    
    
    
    
    813Income from continuing operations before income taxes
    
    
    825
    
    
    
    29,987
    
    
    
    4,413
    
    
    
    
    
    
    
    35,225Income tax expense
    
    
    2,014
    
    
    
    11,542
    
    
    
    632
    
    
    
    
    
    
    
    14,188Income (loss) from continuing operations
    
    
    (1,189
    )
    
    
    18,445
    
    
    
    3,781
    
    
    
    
    
    
    
    21,037Equity in earnings of subsidiaries
    
    
    22,226
    
    
    
    1,178
    
    
    
    
    
    
    
    (23,404
    )(a)
    
    
    Net income
    
    $
    21,037
    
    
    $
    19,623
    
    
    $
    3,781
    
    
    $
    (23,404
    )
    
    $
    21,037
 
 (a)
    
    Elimination of equity in net income from consolidated
subsidiaries. 21




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Six Months Ended June 30, 2007(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    1,557
    
    
    $
    889,076
    
    
    $
    82,680
    
    
    $
    
    
    
    $
    973,313Costs and expenses:Cost of services
    
    
    99
    
    
    
    720,670
    
    
    
    67,810
    
    
    
    
    
    
    
    788,579General and administrative
    
    
    23,733
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    23,766Bad debt expense
    
    
    
    
    
    
    12,637
    
    
    
    1,787
    
    
    
    
    
    
    
    14,424Depreciation and amortization
    
    
    1,042
    
    
    
    22,522
    
    
    
    2,079
    
    
    
    
    
    
    
    25,643Total costs and expenses
    
    
    24,874
    
    
    
    755,862
    
    
    
    71,676
    
    
    
    
    
    
    
    852,412Income (loss) from operations
    
    
    (23,317
    )
    
    
    133,214
    
    
    
    11,004
    
    
    
    
    
    
    
    120,901Other income and expense:Intercompany interest and royalty fees
    
    
    (32,830
    )
    
    
    32,570
    
    
    
    260
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    87,808
    
    
    
    (84,966
    )
    
    
    (2,842
    )
    
    
    
    
    
    
    Other income
    
    
    1,517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,517Interest income
    
    
    1,168
    
    
    
    630
    
    
    
    
    
    
    
    
    
    
    
    1,798Interest expense
    
    
    (38,626
    )
    
    
    (10,993
    )
    
    
    (1,086
    )
    
    
    
    
    
    
    (50,705
    )Income (loss) before minority interests and income taxes
    
    
    (4,280
    )
    
    
    70,455
    
    
    
    7,336
    
    
    
    
    
    
    
    73,511Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    
    
    
    
    1,136
    
    
    
    
    
    
    
    1,136Income (loss) from continuing operations before income taxes
    
    
    (4,280
    )
    
    
    70,455
    
    
    
    6,200
    
    
    
    
    
    
    
    72,375Income tax expense (benefit)
    
    
    634
    
    
    
    27,580
    
    
    
    941
    
    
    
    
    
    
    
    29,155Income (loss) from continuing operations
    
    
    (4,914
    )
    
    
    42,875
    
    
    
    5,259
    
    
    
    
    
    
    
    43,220Equity in earnings of subsidiaries
    
    
    48,134
    
    
    
    3,386
    
    
    
    
    
    
    
    (51,520
    )(a)
    
    
    Net income
    
    $
    43,220
    
    
    $
    46,261
    
    
    $
    5,259
    
    
    $
    (51,520
    )
    
    $
    43,220
 
 (a)
    
    Elimination of equity in net income from consolidated
subsidiaries. 22




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating
Statement of Cash FlowsFor the Six Months
Ended June 30, 2007(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation
    
    
    Subsidiary
    
    
    Guarantor(Parent Company Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    43,220
    
    
    $
    46,261
    
    
    $
    5,259
    
    
    $
    (51,520
    )(a)
    
    $
    43,220Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,042
    
    
    
    22,522
    
    
    
    2,079
    
    
    
    
    
    
    
    25,643Provision for bad debts
    
    
    
    
    
    
    12,637
    
    
    
    1,787
    
    
    
    
    
    
    
    14,424Gain from disposal of assets and sale of business units
    
    
    (1,123
    )
    
    
    (1,650
    )
    
    
    (264
    )
    
    
    
    
    
    
    (3,037
    )Non-cash income from interest rate swaps
    
    
    (344
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344
    )Non-cash compensation expense
    
    
    1,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,878Minority interests
    
    
    
    
    
    
    
    
    
    
    1,136
    
    
    
    
    
    
    
    1,136Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (48,134
    )
    
    
    (3,386
    )
    
    
    
    
    
    
    51,520
    (a)
    
    
    Intercompany
    
    
    (160,499
    )
    
    
    163,819
    
    
    
    (3,320
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (306
    )
    
    
    (35,919
    )
    
    
    (8,173
    )
    
    
    
    
    
    
    (44,398
    )Other current assets
    
    
    (3,075
    )
    
    
    2,136
    
    
    
    (452
    )
    
    
    
    
    
    
    (1,391
    )Other assets
    
    
    (3,845
    )
    
    
    4,669
    
    
    
    (59
    )
    
    
    
    
    
    
    765Accounts payable
    
    
    254
    
    
    
    3,327
    
    
    
    (409
    )
    
    
    
    
    
    
    3,172Due to third-party payors
    
    
    
    
    
    
    (6,578
    )
    
    
    
    
    
    
    
    
    
    
    (6,578
    )Accrued interest
    
    
    248
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    238Accrued expenses
    
    
    (1,563
    )
    
    
    11,540
    
    
    
    684
    
    
    
    
    
    
    
    10,661Income and deferred taxes
    
    
    26,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,310Net cash provided by (used in) operating activities
    
    
    (145,937
    )
    
    
    219,368
    
    
    
    (1,732
    )
    
    
    
    
    
    
    71,699Investing activitiesPurchases of property and equipment
    
    
    (1,920
    )
    
    
    (86,163
    )
    
    
    (1,749
    )
    
    
    
    
    
    
    (89,832
    )Proceeds from sale of business units
    
    
    880
    
    
    
    4,165
    
    
    
    
    
    
    
    
    
    
    
    5,045Sale of building
    
    
    
    
    
    
    4,500
    
    
    
    
    
    
    
    
    
    
    
    4,500Changes in restricted cash
    
    
    535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    535Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (214,099
    )
    
    
    
    
    
    
    
    
    
    
    (214,099
    )Net cash used in investing activities
    
    
    (505
    )
    
    
    (291,597
    )
    
    
    (1,749
    )
    
    
    
    
    
    
    (293,851
    )Financing activitiesBorrowings on revolving credit facility
    
    
    165,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165,000Repayments
on revolving credit facility
    
    
    (85,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85,000
    )Credit facility term loan borrowing
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Payments on credit facility term loan
    
    
    (3,150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,150
    )Principal payments on seller and other debt
    
    
    
    
    
    
    (291
    )
    
    
    
    
    
    
    
    
    
    
    (291
    )Proceeds from bank overdrafts
    
    
    6,810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,810Dividends to Holdings
    
    
    (16,409
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,409
    )Intercompany debt reallocation
    
    
    (68,093
    )
    
    
    63,974
    
    
    
    4,119
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (1,022
    )
    
    
    
    
    
    
    (1,022
    )Net cash provided by financing activities
    
    
    99,382
    
    
    
    63,683
    
    
    
    3,097
    
    
    
    
    
    
    
    166,162Net decrease in cash and cash equivalents
    
    
    (47,060
    )
    
    
    (8,546
    )
    
    
    (384
    )
    
    
    
    
    
    
    (55,990
    )Cash and cash equivalents at beginning of period
    
    
    67,245
    
    
    
    12,866
    
    
    
    1,489
    
    
    
    
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    20,185
    
    
    $
    4,320
    
    
    $
    1,105
    
    
    $
    
    
    
    $
    25,610(a) Elimination of equity in earnings of Subsidiary.
 23




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Three Months Ended June 30, 2006(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    318
    
    
    $
    441,598
    
    
    $
    40,225
    
    
    $
    
    
    
    $
    482,141Costs and expenses:Cost of services
    
    
    58
    
    
    
    340,184
    
    
    
    32,258
    
    
    
    
    
    
    
    372,500General and administrative
    
    
    11,530
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    11,549Bad debt expense
    
    
    
    
    
    
    7,404
    
    
    
    1,029
    
    
    
    
    
    
    
    8,433Depreciation and amortization
    
    
    606
    
    
    
    10,137
    
    
    
    923
    
    
    
    
    
    
    
    11,666Total costs and expenses
    
    
    12,194
    
    
    
    357,744
    
    
    
    34,210
    
    
    
    
    
    
    
    404,148Income (loss) from operations
    
    
    (11,876
    )
    
    
    83,854
    
    
    
    6,015
    
    
    
    
    
    
    
    77,993Other income and expense:Intercompany interest and royalty fees
    
    
    (15,392
    )
    
    
    15,325
    
    
    
    67
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    41,323
    
    
    
    (40,273
    )
    
    
    (1,050
    )
    
    
    
    
    
    
    Other income
    
    
    1,608
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,608Interest income
    
    
    188
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    197Interest expense
    
    
    (18,241
    )
    
    
    (5,266
    )
    
    
    (488
    )
    
    
    
    
    
    
    (23,995
    )Income (loss) before minority interests and income taxes
    
    
    (2,390
    )
    
    
    53,649
    
    
    
    4,544
    
    
    
    
    
    
    
    55,803Minority interest in consolidated subsidiary companies
    
    
    
    
    
    
    (31
    )
    
    
    366
    
    
    
    
    
    
    
    335Income (loss) from continuing operations before income taxes
    
    
    (2,390
    )
    
    
    53,680
    
    
    
    4,178
    
    
    
    
    
    
    
    55,468Income tax expense (benefit)
    
    
    (316
    )
    
    
    21,171
    
    
    
    676
    
    
    
    
    
    
    
    21,531Income (loss) from continuing operations
    
    
    (2,074
    )
    
    
    32,509
    
    
    
    3,502
    
    
    
    
    
    
    
    33,937Equity in earnings of subsidiaries
    
    
    36,011
    
    
    
    2,686
    
    
    
    
    
    
    
    (38,697
    )(a)
    
    
    Net income
    
    $
    33,937
    
    
    $
    35,195
    
    
    $
    3,502
    
    
    $
    (38,697
    )
    
    $
    33,937
 
 (a)
    
    Elimination of equity in net income from consolidated
subsidiaries. 24




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Six Months Ended June 30, 2006(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    380
    
    
    $
    882,079
    
    
    $
    79,425
    
    
    $
    
    
    
    $
    961,884Costs and expenses:Cost of services
    
    
    116
    
    
    
    692,258
    
    
    
    65,323
    
    
    
    
    
    
    
    757,697General and
administrative
    
    
    23,711
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    23,749Bad debt expense
    
    
    
    
    
    
    12,710
    
    
    
    723
    
    
    
    
    
    
    
    13,433Depreciation and
amortization
    
    
    1,210
    
    
    
    19,688
    
    
    
    1,663
    
    
    
    
    
    
    
    22,561Total costs and expenses
    
    
    25,037
    
    
    
    724,694
    
    
    
    67,709
    
    
    
    
    
    
    
    817,440Income (loss) from
operations
    
    
    (24,657
    )
    
    
    157,385
    
    
    
    11,716
    
    
    
    
    
    
    
    144,444Other income and expense:Intercompany interest and
royalty fees
    
    
    (29,210
    )
    
    
    29,010
    
    
    
    200
    
    
    
    
    
    
    
    Intercompany management
fees
    
    
    81,505
    
    
    
    (79,739
    )
    
    
    (1,766
    )
    
    
    
    
    
    
    Other income
    
    
    4,042
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,042Interest income
    
    
    397
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    419Interest expense
    
    
    (37,214
    )
    
    
    (10,182
    )
    
    
    (871
    )
    
    
    
    
    
    
    (48,267
    )Income (loss) before
minority interests and
income taxes
    
    
    (5,137
    )
    
    
    96,496
    
    
    
    9,279
    
    
    
    
    
    
    
    100,638Minority interest in
consolidated subsidiary
companies
    
    
    
    
    
    
    
    
    
    
    726
    
    
    
    
    
    
    
    726Income (loss) from
continuing operations
before income taxes
    
    
    (5,137
    )
    
    
    96,496
    
    
    
    8,553
    
    
    
    
    
    
    
    99,912Income tax expense
(benefit)
    
    
    (322
    )
    
    
    40,087
    
    
    
    861
    
    
    
    
    
    
    
    40,626Income (loss) from
continuing operations
    
    
    (4,815
    )
    
    
    56,409
    
    
    
    7,692
    
    
    
    
    
    
    
    59,286Income from discontinued
operations, net of tax
    
    
    9,068
    
    
    
    
    
    
    
    950
    
    
    
    
    
    
    
    10,018Equity in earnings of
subsidiaries
    
    
    65,051
    
    
    
    6,978
    
    
    
    
    
    
    
    (72,029
    )(a)
    
    
    Net income
    
    $
    69,304
    
    
    $
    63,387
    
    
    $
    8,642
    
    
    $
    (72,029
    )
    
    $
    69,304
 
 (a)
    
    Elimination of equity in net income from consolidated
subsidiaries. 25




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating
Statement of Cash FlowsFor the Six Months Ended June 30, 2006(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation
    
    
    Subsidiary
    
    
    Guarantor(Parent Company Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    69,304
    
    
    $
    63,387
    
    
    $
    8,642
    
    
    $
    (72,029
    )(a)
    
    $
    69,304Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,210
    
    
    
    19,688
    
    
    
    1,839
    
    
    
    
    
    
    
    22,737Provision for bad debts
    
    
    
    
    
    
    12,710
    
    
    
    810
    
    
    
    
    
    
    
    13,520Gain from sale of business
    
    
    (13,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,950
    )Non-cash income from interest rate swaps
    
    
    (4,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,042
    )Non-cash stock compensation expense
    
    
    1,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,891Minority interests
    
    
    
    
    
    
    
    
    
    
    1,066
    
    
    
    
    
    
    
    1,066Loss (gain) on disposal of assets
    
    
    (17
    )
    
    
    246
    
    
    
    30
    
    
    
    
    
    
    
    259Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (65,051
    )
    
    
    (6,978
    )
    
    
    
    
    
    
    72,029
    (a)
    
    
    Intercompany
    
    
    26,914
    
    
    
    2,935
    
    
    
    (29,849
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    5,148
    
    
    
    (34,962
    )
    
    
    4,284
    
    
    
    
    
    
    
    (25,530
    )Other current assets
    
    
    648
    
    
    
    (1,792
    )
    
    
    2,682
    
    
    
    
    
    
    
    1,538Other assets
    
    
    (9,673
    )
    
    
    11,126
    
    
    
    1,155
    
    
    
    
    
    
    
    2,608Accounts payable
    
    
    1,397
    
    
    
    3,575
    
    
    
    (3,750
    )
    
    
    
    
    
    
    1,222Due to third-party payors
    
    
    (6,099
    )
    
    
    (4,591
    )
    
    
    8,077
    
    
    
    
    
    
    
    (2,613
    )Accrued interest
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )Accrued expenses
    
    
    3,932
    
    
    
    (14,158
    )
    
    
    (1,521
    )
    
    
    
    
    
    
    (11,747
    )Income taxes
    
    
    42,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,346Net cash provided by (used in) operating activities
    
    
    53,934
    
    
    
    51,186
    
    
    
    (6,535
    )
    
    
    
    
    
    
    98,585Investing activitiesPurchases of property and equipment
    
    
    (536
    )
    
    
    (60,958
    )
    
    
    (10,320
    )
    
    
    
    
    
    
    (71,814
    )Proceeds from sale of business
    
    
    76,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,806Earnout payments
    
    
    
    
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    (100
    )Changes in restricted cash
    
    
    798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (1,239
    )
    
    
    (2,022
    )
    
    
    
    
    
    
    (3,261
    )Net cash provided by (used in) investing activities
    
    
    77,068
    
    
    
    (62,297
    )
    
    
    (12,342
    )
    
    
    
    
    
    
    2,429Financing activitiesBorrowings
on revolving credit facility
    
    
    151,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    151,000Repayments
on revolving credit facility
    
    
    (236,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (236,000
    )Payments on
credit facility term loan
    
    
    (2,900
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,900
    )Dividends to Holdings
    
    
    (15,811
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,811
    )Intercompany debt reallocation
    
    
    (16,669
    )
    
    
    10,354
    
    
    
    6,315
    
    
    
    
    
    
    
    Principal payments on seller and other debt
    
    
    
    
    
    
    (563
    )
    
    
    (37
    )
    
    
    
    
    
    
    (600
    )Payment of bank overdrafts
    
    
    (19,355
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,355
    )Distributions to minority interests
    
    
    
    
    
    
    
    
    
    
    (1,104
    )
    
    
    
    
    
    
    (1,104
    )Net cash provided by (used in) financing activities
    
    
    (139,735
    )
    
    
    9,791
    
    
    
    5,174
    
    
    
    
    
    
    
    (124,770
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Net decrease in cash and cash equivalents
    
    
    (8,698
    )
    
    
    (1,320
    )
    
    
    (13,703
    )
    
    
    
    
    
    
    (23,721
    )Cash and cash equivalents at beginning of period
    
    
    16,738
    
    
    
    3,631
    
    
    
    15,492
    
    
    
    
    
    
    
    35,861Cash and cash equivalents at end of period
    
    $
    8,040
    
    
    $
    2,311
    
    
    $
    1,789
    
    
    $
    
    
    
    $
    12,140
 
 (a)
    
    Elimination of equity in earnings of subsidiary. 26




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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.
 27




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##### Table of Contents



Overview
    Recent Trends and Events
 Acquisition of HealthSouth Corporations Outpatient Rehabilitation Division
   Amendment to Credit Agreement
  28




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##### Table of Contents



Second Quarter Ended June 30, 2007
    29




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##### Table of Contents



Regulatory Changes
 August 2004 Final Rule
   August 2005 Final Rule
 May 2006 Final Rule.
 30




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##### Table of Contents



August 2006 Final Rule.
 May 2007 Final Rule
 31




---



##### Table of Contents



32




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##### Table of Contents



August 2007 Final Rule.
  Transition Plan
  Development of New Specialty Hospitals and Clinics
  33




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##### Table of Contents



Operating Statistics
  Three MonthsEnded
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007Specialty hospital data(1):Number of hospitals  start of
period
    
    
    101
    
    
    
    92
    
    
    
    101
    
    
    
    96Number of hospital start-ups
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Number of hospitals closed
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Number of hospitals consolidated
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (4
    )Number of hospitals  end of period
    
    
    100
    
    
    
    92
    
    
    
    100
    
    
    
    92Available licensed beds
    
    
    3,931
    
    
    
    3,983
    
    
    
    3,931
    
    
    
    3,983Admissions
    
    
    10,154
    
    
    
    9,666
    
    
    
    20,637
    
    
    
    20,082Patient days
    
    
    246,275
    
    
    
    247,368
    
    
    
    497,976
    
    
    
    499,844Average length of stay (days)
    
    
    24
    
    
    
    25
    
    
    
    24
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,435
    
    
    $
    1,370
    
    
    $
    1,419
    
    
    $
    1,374Occupancy rate
    
    
    69
    %
    
    
    69
    %
    
    
    71
    %
    
    
    71
    %Percent patient days  Medicare
    
    
    73
    %
    
    
    70
    %
    
    
    73
    %
    
    
    71
    %Outpatient rehabilitation data (3):Number of clinics owned  start of
period
    
    
    553
    
    
    
    477
    
    
    
    553
    
    
    
    477Number of clinics acquired
    
    
    
    
    
    
    540
    
    
    
    
    
    
    
    541Number of clinic start-ups
    
    
    4
    
    
    
    1
    
    
    
    5
    
    
    
    5Number of clinics closed/sold
    
    
    (15
    )
    
    
    (22
    )
    
    
    (16
    )
    
    
    (27
    )Number of clinics owned  end of
period
    
    
    542
    
    
    
    996
    
    
    
    542
    
    
    
    996Number of clinics managed  end of
period
    
    
    68
    
    
    
    110
    
    
    
    68
    
    
    
    110Total number of clinics (all) 
end of period
    
    
    610
    
    
    
    1,106
    
    
    
    610
    
    
    
    1,106Number of visits
    
    
    762,177
    
    
    
    1,079,613
    
    
    
    1,547,016
    
    
    
    1,726,264Net revenue per visit (4)
    
    $
    94
    
    
    $
    99
    
    
    $
    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 patient 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 six months ended June 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. 
 34




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##### Table of Contents



Results of Operations
  Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationThree Months
    
    Three MonthsEnded
    
    EndedJune 30,
    
    June 30,2006
    
    2007
    
    2006
    
    2007Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    77.3
    
    
    
    81.1
    
    
    
    77.3
    
    
    
    81.1General and administrative
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.4Bad debt expense
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.7Depreciation and amortization
    
    
    2.4
    
    
    
    2.8
    
    
    
    2.4
    
    
    
    2.8Income from operations
    
    
    16.2
    
    
    
    12.0
    
    
    
    16.2
    
    
    
    12.0Other income
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.3Interest expense, net
    
    
    (6.7
    )
    
    
    (6.9
    )
    
    
    (4.9
    )
    
    
    (5.2
    )Income from continuing
operations before minority
interests and income taxes
    
    
    9.5
    
    
    
    5.1
    
    
    
    11.6
    
    
    
    7.1Minority interests
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2Income from continuing
operations before income
taxes
    
    
    9.4
    
    
    
    4.9
    
    
    
    11.5
    
    
    
    6.9Income tax expense
    
    
    3.7
    
    
    
    2.1
    
    
    
    4.5
    
    
    
    2.8Net income
    
    
    5.7
    %
    
    
    2.8
    %
    
    
    7.0
    %
    
    
    4.1
    %
 35




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##### Table of Contents



Select MedicalHoldings
    
    Select MedicalCorporation
    
    CorporationSix Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2006
    
    2007
    
    2006
    
    2007Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    78.8
    
    
    
    81.0
    
    
    
    78.8
    
    
    
    81.0General and administrative
    
    
    2.5
    
    
    
    2.4
    
    
    
    2.5
    
    
    
    2.4Bad debt expense
    
    
    1.4
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    1.5Depreciation and amortization
    
    
    2.3
    
    
    
    2.6
    
    
    
    2.3
    
    
    
    2.6Income from operations
    
    
    15.0
    
    
    
    12.5
    
    
    
    15.0
    
    
    
    12.5Other income
    
    
    
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.2Interest expense, net
    
    
    (6.7
    )
    
    
    (6.8
    )
    
    
    (4.9
    )
    
    
    (5.0
    )Income from continuing
operations before minority
interests and income taxes
    
    
    8.3
    
    
    
    5.8
    
    
    
    10.5
    
    
    
    7.7Minority interests
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Income from continuing
operations before income taxes
    
    
    8.2
    
    
    
    5.7
    
    
    
    10.4
    
    
    
    7.6Income tax expense
    
    
    3.4
    
    
    
    2.4
    
    
    
    4.2
    
    
    
    3.0Income from continuing operations
    
    
    4.8
    
    
    
    3.3
    
    
    
    6.2
    
    
    
    4.6Income from discontinued
operations, net of tax
    
    
    1.0
    
    
    
    
    
    
    
    1.0
    
    
    
    Net income
    
    
    5.8
    %
    
    
    3.3
    %
    
    
    7.2
    %
    
    
    4.6
    %
 36




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2007
    
    
    % Change
    
    
    2006
    
    
    2007
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    360,772
    
    
    $
    345,282
    
    
    
    (4.3
    )%
    
    $
    360,772
    
    
    $
    345,282
    
    
    
    (4.3
    )%Outpatient rehabilitation
    
    
    120,641
    
    
    
    159,686
    
    
    
    32.4
    
    
    
    120,641
    
    
    
    159,686
    
    
    
    32.4Other
    
    
    728
    
    
    
    1,516
    
    
    
    108.2
    
    
    
    728
    
    
    
    1,516
    
    
    
    108.2Total company
    
    $
    482,141
    
    
    $
    506,484
    
    
    
    5.0
    %
    
    $
    482,141
    
    
    $
    506,484
    
    
    
    5.0
    %Income (loss) from operations:Specialty hospitals
    
    $
    74,978
    
    
    $
    51,614
    
    
    
    (31.2
    )%
    
    $
    74,978
    
    
    $
    51,614
    
    
    
    (31.2
    )%Outpatient rehabilitation
    
    
    15,200
    
    
    
    20,350
    
    
    
    33.9
    
    
    
    15,200
    
    
    
    20,350
    
    
    
    33.9Other
    
    
    (12,185
    )
    
    
    (11,388
    )
    
    
    6.5
    
    
    
    (12,185
    )
    
    
    (11,388
    )
    
    
    6.5Total company
    
    $
    77,993
    
    
    $
    60,576
    
    
    
    (22.3
    )%
    
    $
    77,993
    
    
    $
    60,576
    
    
    
    (22.3
    )%Adjusted EBITDA:(2)Specialty hospitals
    
    $
    82,673
    
    
    $
    60,690
    
    
    
    (26.6
    )%
    
    $
    82,673
    
    
    $
    60,690
    
    
    
    (26.6
    )%Outpatient rehabilitation
    
    
    18,423
    
    
    
    24,553
    
    
    
    33.3
    
    
    
    18,423
    
    
    
    24,553
    
    
    
    33.3Other
    
    
    (10,492
    )
    
    
    (9,777
    )
    
    
    6.8
    
    
    
    (10,492
    )
    
    
    (9,777
    )
    
    
    6.8Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    22.9
    %
    
    
    17.6
    %
    
    
    (23.1
    )%
    
    
    22.9
    %
    
    
    17.6
    %
    
    
    (23.1
    )%Outpatient rehabilitation
    
    
    15.3
    
    
    
    15.4
    
    
    
    0.7
    
    
    
    15.3
    
    
    
    15.4
    
    
    
    0.7Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,755,128
    
    
    $
    1,832,312
    
    
    
    
    
    
    $
    1,755,128
    
    
    $
    1,832,312Outpatient rehabilitation
    
    
    266,864
    
    
    
    482,006
    
    
    
    
    
    
    
    266,864
    
    
    
    482,006Other
    
    
    118,213
    
    
    
    143,522
    
    
    
    
    
    
    
    113,380
    
    
    
    138,945Total company
    
    $
    2,140,205
    
    
    $
    2,457,840
    
    
    
    
    
    
    $
    2,135,372
    
    
    $
    2,453,263Purchases of property and
equipment, net:Specialty hospitals
    
    $
    31,825
    
    
    $
    47,388
    
    
    
    
    
    
    $
    31,825
    
    
    $
    47,388Outpatient rehabilitation
    
    
    1,310
    
    
    
    2,624
    
    
    
    
    
    
    
    1,310
    
    
    
    2,624Other
    
    
    293
    
    
    
    1,721
    
    
    
    
    
    
    
    293
    
    
    
    1,721Total company
    
    $
    33,428
    
    
    $
    51,733
    
    
    
    
    
    
    $
    33,428
    
    
    $
    51,733
 37




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2007
    
    
    % Change
    
    
    2006
    
    
    2007
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    720,444
    
    
    $
    699,510
    
    
    
    (2.9
    )%
    
    $
    720,444
    
    
    $
    699,510
    
    
    
    (2.9
    )%Outpatient rehabilitation
    
    
    239,931
    
    
    
    272,066
    
    
    
    13.4
    
    
    
    239,931
    
    
    
    272,066
    
    
    
    13.4Other
    
    
    1,509
    
    
    
    1,737
    
    
    
    15.1
    
    
    
    1,509
    
    
    
    1,737
    
    
    
    15.1Total company
    
    $
    961,884
    
    
    $
    973,313
    
    
    
    1.2
    %
    
    $
    961,884
    
    
    $
    973,313
    
    
    
    1.2
    %Income (loss) from operations:Specialty hospitals
    
    $
    142,867
    
    
    $
    109,297
    
    
    
    (23.5
    )%
    
    $
    142,867
    
    
    $
    109,297
    
    
    
    (23.5
    )%Outpatient rehabilitation
    
    
    26,668
    
    
    
    35,211
    
    
    
    32.0
    
    
    
    26,668
    
    
    
    35,211
    
    
    
    32.0Other
    
    
    (25,091
    )
    
    
    (23,607
    )
    
    
    5.9
    
    
    
    (25,091
    )
    
    
    (23,607
    )
    
    
    5.9Total company
    
    $
    144,444
    
    
    $
    120,901
    
    
    
    (16.3
    )%
    
    $
    144,444
    
    
    $
    120,901
    
    
    
    (16.3
    )%Adjusted EBITDA:(2)Specialty hospitals
    
    $
    157,391
    
    
    $
    126,721
    
    
    
    (19.5
    )%
    
    $
    157,391
    
    
    $
    126,721
    
    
    
    (19.5
    )%Outpatient rehabilitation
    
    
    33,183
    
    
    
    42,171
    
    
    
    27.1
    
    
    
    33,183
    
    
    
    42,171
    
    
    
    27.1Other
    
    
    (21,678
    )
    
    
    (20,470
    )
    
    
    5.6
    
    
    
    (21,678
    )
    
    
    (20,470
    )
    
    
    5.6Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    21.8
    %
    
    
    18.1
    %
    
    
    (17.0
    )%
    
    
    21.8
    %
    
    
    18.1
    %
    
    
    (17.0
    )%Outpatient rehabilitation
    
    
    13.8
    
    
    
    15.5
    
    
    
    12.3
    
    
    
    13.8
    
    
    
    15.5
    
    
    
    12.3Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,755,128
    
    
    $
    1,832,312
    
    
    
    
    
    
    $
    1,755,128
    
    
    $
    1,832,312Outpatient rehabilitation
    
    
    266,864
    
    
    
    482,006
    
    
    
    
    
    
    
    266,864
    
    
    
    482,006Other
    
    
    118,213
    
    
    
    143,522
    
    
    
    
    
    
    
    113,380
    
    
    
    138,945Total company
    
    $
    2,140,205
    
    
    $
    2,457,840
    
    
    
    
    
    
    $
    2,135,372
    
    
    $
    2,453,263Purchases of property and
equipment, net:Specialty hospitals
    
    $
    68,330
    
    
    $
    83,267
    
    
    
    
    
    
    $
    68,330
    
    
    $
    83,267Outpatient rehabilitation
    
    
    2,951
    
    
    
    4,645
    
    
    
    
    
    
    
    2,951
    
    
    
    4,645Other
    
    
    533
    
    
    
    1,920
    
    
    
    
    
    
    
    533
    
    
    
    1,920Total company
    
    $
    71,814
    
    
    $
    89,832
    
    
    
    
    
    
    $
    71,814
    
    
    $
    89,832
 38




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##### Table of Contents



Select Medical HoldingsCorporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    360,772
    
    
    $
    345,282
    
    
    $
    360,772
    
    
    $
    345,282Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    9,546
    
    
    
    5,844
    
    
    
    9,546
    
    
    
    5,844Specialty hospitals same store net
operating revenue
    
    $
    351,226
    
    
    $
    339,438
    
    
    $
    351,226
    
    
    $
    339,438Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    82,673
    
    
    $
    60,690
    
    
    $
    82,673
    
    
    $
    60,690Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    (1,803
    )
    
    
    (2,926
    )
    
    
    (1,803
    )
    
    
    (2,926
    )Specialty hospitals same store Adjusted
EBITDA(2)
    
    $
    84,476
    
    
    $
    63,616
    
    
    $
    84,476
    
    
    $
    63,616All specialty hospitals Adjusted EBITDA
margin(2)
    
    
    22.9
    %
    
    
    17.6
    %
    
    
    22.9
    %
    
    
    17.6
    %Specialty hospitals same store Adjusted
EBITDA margin(2)
    
    
    24.1
    %
    
    
    18.7
    %
    
    
    24.1
    %
    
    
    18.7
    %
 Select Medical HoldingsCorporation
    
    
    Select Medical CorporationSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2007
    
    
    2006
    
    
    2007(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    720,444
    
    
    $
    699,510
    
    
    $
    720,444
    
    
    $
    699,510Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    21,440
    
    
    
    10,104
    
    
    
    21,440
    
    
    
    10,104Specialty hospitals same store net
operating revenue
    
    $
    699,004
    
    
    $
    689,406
    
    
    $
    699,004
    
    
    $
    689,406Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    157,391
    
    
    $
    126,721
    
    
    $
    157,391
    
    
    $
    126,721Less: Specialty hospitals in
development, opened or closed after
1/1/06
    
    
    (794
    )
    
    
    (5,946
    )
    
    
    (794
    )
    
    
    (5,946
    )Specialty hospitals same store Adjusted
EBITDA(2)
    
    $
    158,185
    
    
    $
    132,667
    
    
    $
    158,185
    
    
    $
    132,667All specialty hospitals Adjusted EBITDA
margin(2)
    
    
    21.8
    %
    
    
    18.1
    %
    
    
    21.8
    %
    
    
    18.1
    %Specialty hospitals same store Adjusted
EBITDA margin(2)
    
    
    22.6
    %
    
    
    19.2
    %
    
    
    22.6
    %
    
    
    19.2
    %
 39




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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 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 June 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 June 30, 2007 Compared to Three Months Ended June 30, 2006
  Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 40




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Other.
 Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 41




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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 .
 42




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##### Table of Contents



Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
  Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
 Other.
 Operating Expenses
  43




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Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income from Operations
  44




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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
  45




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##### Table of Contents



Liquidity and Capital Resources
  Select Medical HoldingsCorporation
    
    Select Medical CorporationSix Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2007
    
    2006
    
    2007(in thousands)
    
    (in thousands)Cash flows provided by operating activities
    
    $
    82,774
    
    
    $
    55,304
    
    
    $
    98,585
    
    
    $
    71,699Cash flows provided by (used in) investing
activities
    
    
    2,429
    
    
    
    (293,851
    )
    
    
    2,429
    
    
    
    (293,851
    )Cash flows provided by (used in) financing
activities
    
    
    (108,959
    )
    
    
    182,557
    
    
    
    (124,770
    )
    
    
    166,162Effect of exchange rate changes on cash and
cash equivalents
    
    
    35
    
    
    
    
    
    
    
    35
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (23,721
    )
    
    
    (55,990
    )
    
    
    (23,721
    )
    
    
    (55,990
    )Cash and cash equivalents at beginning of period
    
    
    35,861
    
    
    
    81,600
    
    
    
    35,861
    
    
    
    81,600Cash and cash equivalents at end of period
    
    $
    12,140
    
    
    $
    25,610
    
    
    $
    12,140
    
    
    $
    25,610
     46




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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.
   47




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5 8
      48




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##### Table of Contents



Inflation
  Recent Accounting Pronouncements
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  49




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ITEM 4. CONTROLS AND PROCEDURES
   
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   50




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##### Table of Contents



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
  51




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##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  
 SIGNATURES
  SELECT MEDICAL CORPORATIONBy:
    /s/        Martin F. JacksonMartin F. 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: August 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: August 13, 2007
 52




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##### Table of Contents



Exhibit
    
    Description2.1
    
    Letter Agreement between HealthSouth Corporation and Select
Medical Corporation dated May 1, 2007, incorporated by reference
to the Form 8-K filed by Select Medical Corporation on May 7,
2007.31.1
    
    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 2002.32.1
    
    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.
 53