ACQUISITIONS

9 Months Ended

Sep. 30, 2011

ACQUISITIONS

ACQUISITIONS

NOTE F — ACQUISITIONS

On December 1, 2010, the Company completed the acquisition of ACP for approximately $157.8 million in cash and incurred $5.4 million of costs to complete the transaction. These costs, which are reflected as acquisition expenses on the consolidated financial statements, are comprised of $3.3 million in legal and advisor fees and $2.1 million in stock based compensation related to the sale of stock to executives of ACP. The Company recorded: (i) approximately $96.5 million of goodwill, which is not amortizable for tax purposes; (ii) $48.2 million of intangible assets; (iii) $32.5 million of fixed assets at fair value; (iv) $7.2 million of current assets; (v) $6.4 million of current liabilities; and (vi) $20.0 million of deferred tax liabilities related to the ACP transaction. The value of the goodwill from this acquisition can be attributed to a number of business factors including, but not limited to, expected revenue and cash flow growth in future years and the ability to provide services to a previously underserved market. The Company identified intangible assets totaling $48.2 million comprised of: (i) $22.3 million of customer relationships with a useful life of 14 years; (ii) $9.1 million related to the trade name which has an indefinite life; (iii) $8.1 million related to proprietary treatment programs with a useful life of 15 years; (iv) $5.4 million of patented technology with a useful life of eight years; and (v) $3.3 million related to other assets with a three to five year useful life. The results of operations for ACP are included in the Company’s results of operations from the date of acquisition. Pro forma results for the prior period would not be materially different.

ACP is the nation’s leading provider of integrated clinical programs for sub-acute and long-term care rehabilitation providers and has contracts to serve more than 4,000 out of a total market of approximately 15,000 skilled nursing facilities (“SNFs”) nationwide, including facilities operated by 20 of the 25 largest national providers. ACP’s unique value proposition is to provide its customers with a full-service “total solutions” approach encompassing proven medical technology, evidence-based clinical programs and continuous onsite therapist education and training. Their services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. The Company financed this transaction through cash on hand and a concurrent refinancing and increase of its senior credit facilities. See Note G for further discussion of refinancing.

During the nine months ended September 30, 2011, the Company acquired five O&P companies, operating a total of 10 patient-care centers. The aggregate purchase price for these O&P businesses was $16.2 million. Of this aggregate purchase price, $3.9 million consisted of promissory notes, $2.3 million is made up of contingent consideration payable within the next two years and $10.0 million was paid in cash. Contingent consideration is reported as other liabilities on the Company’s consolidated balance sheet. The Company recorded approximately $10.0 million of goodwill related to these acquisitions, and the expenses incurred related to these acquisitions were insignificant and are included in other operating expenses. The results of operations for these acquisitions are included in the Company’s results of operations from the date of acquisition. Pro forma results would not be materially different. Of the $10.0 million of goodwill recorded for the 2011 acquisitions, the Company plans to make the election to treat $8.9 million as asset purchases, and this amount will be amortizable for tax purposes.

In connection with contingent consideration agreements with acquisitions completed prior to adoption of the revised authoritative guidance effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, the Company made payments of $0.7 million and $1.1 million during the nine months ended September 30, 2011 and 2010, respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in goodwill. In connection with contingent consideration agreements with acquisitions completed subsequent to adoption of revised authoritative guidance, the Company made payments of $0.7 million in the first nine months of 2011 and $0.2 million in the same period 2010. The Company estimates that it may pay up to a total of $6.2 million related to contingent consideration provisions of acquisitions in future periods. Of the $6.2 million, $6.0 million is related to acquisitions completed after adoption of the revised authoritative guidance discussed above.