Exhibit 99.2

Unaudited pro forma condensed combined financial data of Kindred and RehabCare

The following unaudited pro forma condensed combined financial data is based upon the historical audited consolidated financial data of Kindred Healthcare, Inc. and its consolidated subsidiaries (“Kindred”, “we” or “our”) and RehabCare Group, Inc. and its consolidated subsidiaries (“RehabCare”) and has been prepared to reflect our previously announced acquisition of RehabCare in which Kindred will acquire all of the outstanding common stock of RehabCare (the “RehabCare Acquisition”), the issuance of $550 million senior notes due 2019 (the “Notes”), the entry into the new credit facilities in connection with the RehabCare Acquisition (the “New Credit Facilities”) and the use of proceeds from the Notes offering and the borrowings under the New Credit Facilities are collectively referred to herein as the “Transactions.” The unaudited pro forma condensed combined balance sheet is presented as if the Transactions had occurred on March 31, 2011. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2010 and the three months ended March 31, 2010 and March 31, 2011 were prepared assuming the Transactions occurred on January 1, 2010. The historical consolidated financial data has been adjusted to give effect to estimated pro forma events that are (1) directly attributable to the Transactions, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results of operations. The historical consolidated financial statements of RehabCare have been adjusted to reflect certain reclassifications to conform with our financial statement presentation.

The following unaudited pro forma condensed combined financial data should be read in conjunction with Kindred’s and RehabCare’s consolidated financial statements and related notes previously filed with the SEC by Kindred and RehabCare, respectively.

The following unaudited pro forma condensed combined financial data has been prepared for illustrative purposes only and is not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had Kindred and RehabCare been a combined company during the periods specified.

The following unaudited pro forma condensed combined financial data has been prepared using the acquisition method of accounting under generally accepted accounting principles in the United States (“GAAP”), which is subject to change and interpretation. The acquisition accounting for certain items, including property and equipment, identifiable intangible assets, leasehold interests and noncontrolling interests, is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are based upon estimates and current preliminary information and may differ materially from actual amounts. For purposes of this unaudited pro forma condensed combined financial data, the conversion of each share of RehabCare common stock outstanding immediately prior to the consummation of the RehabCare Acquisition into the right to receive 0.471 of a share of Kindred common stock and $26.00 in cash, without interest (the “Merger Consideration”) has been preliminarily allocated to the tangible and intangible assets being acquired and liabilities being assumed based upon various estimates of fair value. The Merger Consideration will be allocated among the fair values of the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the RehabCare Acquisition. Any excess of the Merger Consideration over the fair value of RehabCare identifiable net assets will be recorded as goodwill. The final allocation is dependent upon the completion of the aforementioned valuations and other analyses that cannot be completed prior to the RehabCare Acquisition. The actual amounts recorded at the completion of the RehabCare Acquisition may differ materially from the information presented in the accompanying unaudited pro forma condensed combined financial data and those differences could have a material impact on the unaudited pro forma condensed combined financial data and the combined company’s future results of operations and financial performance. The unaudited pro forma condensed combined statement of operations does not include expenses and certain write-offs related to debt refinancing that we expect to incur in connection with the consummation of the RehabCare Acquisition, which, at this time, are estimated to be approximately $89 million. Additionally, the

 

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unaudited pro forma condensed combined financial data does not reflect the cost of any integration activities or benefits from synergies that may be derived from any integration activities, nor does the unaudited pro forma condensed combined statement of operations include the effects of any other items directly attributable to the RehabCare Acquisition that are not expected to have a continuing impact on the combined results of operations.

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Kindred and RehabCare

Unaudited pro forma condensed combined balance sheet

As of March 31, 2011

(in thousands)

 

		Historical								Pro forma adjustments
		Kindred				RehabCare				Reclassifications				Merger and financing (h)				Allocation of Merger Consideration				Pro forma combined
Assets
Current assets:
Cash and cash equivalents		$	18,500			$	33,622			$	-			$	(1,506,932	)		$	-			$	52,122
															1,506,932
Cash–restricted			5,456				-				-				-				-				5,456
Insurance subsidiary investments			62,414				-				-				-				-				62,414
Accounts receivable less allowance for loss			662,687				249,015				(186	)(a)			-				-				911,516
Inventories			24,662				-				5,988	(b)			-				-				30,650
Deferred tax assets			12,981				24,094				-				-				-				37,075
Income taxes			1,492				-				(13,025	)(c)			21,438				-				9,905
Other			29,935				11,221				186	(a)			-				-				35,354
											(5,988	)(b)
			818,127				317,952				(13,025	)			21,438				-				1,144,492
Property and equipment, net			906,102				117,386				-				-				12,979	(i)			1,036,467
Goodwill			242,420				567,863				-				-				(567,863	)(i)			1,032,299
																			789,879	(i)
Intangible assets less accumulated amortization			92,399				129,576				-				-				(129,576	)(i)			493,399
																			401,000	(i)
Assets held for sale			7,082				-				-				-				-				7,082
Insurance subsidiary investments			106,501				-				-				-				-				106,501
Deferred tax assets			89,713				-				(89,713	)(d)			-				-				-
Investment in RehabCare Group, Inc.			-				-				-				950,727				(950,727	)(j)			-
Other			71,264				27,563				-				(15,538 (805	)  )			(2,295	)(k)			137,689
															57,500
Total assets		$	2,333,608			$	1,160,340			$	(102,738	)		$	1,013,322			$	(446,603	)		$	3,957,929
Liabilities and equity
Current liabilities:
Accounts payable		$	161,258			$	15,665			$	-			$	-			$	-			$	176,923
Salaries, wages and other compensation			289,550				68,478				9,182	(e)			-				-				367,210
Due to third party payors			24,093				-				368	(f)			-				-				24,461
Professional liability risks			40,145				-				7,494	(g)			-				-				47,639
Income taxes			-				13,025				(13,025	)(c)			-				-				-
Other accrued liabilities			85,841				72,124				(9,182	)(e)			(575	)			(7,980	)(l)			128,072
											(368	)(f)			(1,999	)			(2,295	)(k)
											(7,494	)(g)
Long-term debt due within one year			92				7,791				-				(4,500	)			-				10,383
															7,000
			600,979				177,083				(13,025	)			(74	)			(10,275	)			754,688
Long-term debt			350,533				365,138				-				(364,875	)			-				1,507,976
															(350,000	)
															1,506,932
															7,248
															(7,000	)
Professional liability risks			214,791				-				-				-				-				214,791
Deferred tax liabilities			-				56,571				(89,713	)(d)			-				98,614	(i)			65,472
Deferred credits and other liabilities			111,435				5,479				-				-				-				116,914
Noncontrolling interests-redeemable			-				-				-				-				9,508	(m)			9,508
Equity:
Stockholders’ equity:
Common stock, par value			9,995				289				-				2,997				(289	)(n)			12,992
Capital in excess of par value			830,657				306,151				-				285,338				(306,151	)(n)			1,115,995
Accumulated other comprehensive income			393				-				-				-				-				393
Treasury stock			-				(54,704	)			-				-				54,704	(n)			-
Retained earnings			214,825				283,206				-				(67,244	)			(283,206	)(n)			147,581
			1,055,870				534,942				-				221,091				(534,942	)			1,276,961
Noncontrolling interests-nonredeemable			-				21,127				-				-				(9,508	)(m)			11,619
Total equity			1,055,870				556,069				-				221,091				(544,450	)			1,288,580
Total liabilities and equity		$	2,333,608			$	1,160,340			$	(102,738	)		$	1,013,322			$	(446,603	)		$	3,957,929

See accompanying notes to unaudited pro forma condensed combined financial data.

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Kindred and RehabCare

Unaudited pro forma condensed combined statement of operations

Year ended December 31, 2010

(in thousands, except per share amounts)

 

		Historical								Pro forma adjustments
		Kindred				RehabCare				Reclassifications (o)				Merger and financing				Allocation of Merger Consideration				Pro forma combined
Revenues		$	4,359,697			$	1,329,443			$	-			$	-			$	-			$	5,689,140
Salaries, wages and benefits			2,505,690				-				862,602				-				-				3,368,292
Supplies			342,197				-				74,194				-				-				416,391
Rent			357,372				-				49,208				-				-				406,580
Other operating expenses			948,609				1,056,671				(877,386	)			-				(996	)(s)			1,126,898
Selling, general and administrative			-				108,618				(108,618	)			-				-				-
Other income			(11,422	)			(959	)			-				-				-				(12,381	)
Depreciation and amortization			121,552				30,595				-				-				1,018	(t)			157,047
																			(8,178	)(u)
																			12,060	(u)
Interest expense			7,090				33,167				-				(37,676	)(p)			-				107,073
															104,492	(p)
Investment income			(1,245	)			(98	)			-				-				-				(1,343	)
			4,269,843				1,227,994				-				66,816				3,904				5,568,557
Income from continuing operations before income taxes			89,854				101,449				-				(66,816	)			(3,904	)			120,583
Provision for income taxes			33,708				36,559				-				(25,724	)(q)			1,881	(q)			46,424
Income from continuing operations			56,146				64,890				-				(41,092	)			(5,785	)			74,159
Earnings attributable to noncontrolling interests			-				(3,677	)			-				-				-				(3,677	)
Income from continuing operations attributable to Kindred		$	56,146			$	61,213			$	-			$	(41,092	)		$	(5,785	)		$	70,482
Pro forma earnings from continuing operations per common share:
Basic		$	1.42																			$	1.37	(v)
Diluted		$	1.42																			$	1.36	(v)
Pro forma shares used in computing earnings from continuing operations per common share:
Basic			38,738												11,989	(r)							50,727
Diluted			38,954												11,989	(r)							50,943

See accompanying notes to unaudited pro forma condensed combined financial data.

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Kindred and RehabCare

Unaudited pro forma condensed combined statement of operations

Three months ended March 31, 2010

(in thousands, except per share amounts)

 

		Historical								Pro forma adjustments
		Kindred				RehabCare				Reclassifications (o)				Merger and financing				Allocation of Merger Consideration				Pro forma combined
Revenues		$	1,089,837			$	321,954			$	-			$	-			$	-			$	1,411,791
Salaries, wages and benefits			627,175				-				209,856				-				-				837,031
Supplies			85,886				-				17,172				-				-				103,058
Rent			88,319				-				12,101				-				-				100,420
Other operating expenses			234,204				256,636				(212,594)				-				-				278,246
Selling, general and administrative			-				26,535				(26,535)				-				-				-
Other income			(3,084)				(123)				-				-				-				(3,207)
Depreciation and amortization			31,121				7,218				-				-				761	(t)			39,989
																			(2,126)	(u)
																			3,015	(u)
Interest expense			1,307				8,500				-				(9,132)	(p)			-				26,401
															25,726	(p)
Investment income			(877)				(18)				-				-				-				(895)
			1,064,051				298,748				-				16,594				1,650				1,381,043
Income from continuing operations before income taxes			25,786				23,206				-				(16,594)				(1,650)				30,748
Provision for income taxes			10,631				8,941				-				(6,389)	(q)			(1,345)	(q)			11,838
Income from continuing operations			15,155				14,265				-				(10,205)				(305)				18,910
Loss attributable to noncontrolling interests			-				164				-				-				-				164
Income from continuing operations attributable to Kindred		$	15,155			$	14,429			$	-			$	(10,205)			$	(305)			$	19,074
Pro forma earnings from continuing operations per common share:
Basic		$	0.38																			$	0.37	(v)
Diluted		$	0.38																			$	0.37	(v)
Pro forma shares used in computing earnings from continuing operations per common share:
Basic			38,626												11,989	(r)							50,615
Diluted			38,859												11,989	(r)							50,848

See accompanying notes to unaudited pro forma condensed combined financial data.

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Kindred and RehabCare

Unaudited pro forma condensed combined statement of operations

Three months ended March 31, 2011

(in thousands, except per share amounts)

 

		Historical								Pro forma adjustments
		Kindred				RehabCare				Reclassifications (o)				Merger and financing				Allocation of Merger Consideration				Pro forma combined
Revenues		$	1,192,421			$	364,599			$	-			$	-			$	-			$	1,557,020
Salaries, wages and benefits			678,695				-				231,672				-				-				910,367
Supplies			90,022				-				19,918				-				-				109,940
Rent			91,453				-				13,282				-				-				104,735
Other operating expenses			259,369				284,980				(231,269	)			-				(8,712	)(s)			304,368
Selling, general and administrative			-				33,603				(33,603	)			-				-				-
Other income			(2,785	)			(149	)			-				-				-				(2,934	)
Depreciation and amortization			32,549				8,223				-				-				(591	)(t)			41,444
																			(1,752	)(u)
																			3,015	(u)
Interest expense			5,728				7,468				-				(12,638	)(p)							26,284
															25,726	(p)
Investment income			(495	)			(12	)			-				-				-				(507	)
			1,154,536				334,113				-				13,088				(8,040	)			1,493,697
Income from continuing operations before income taxes			37,885				30,486				-				(13,088	)			8,040				63,323
Provision for income taxes			15,609				11,024				-				(5,039	)(q)			2,785	(q)			24,379
Income from continuing operations			22,276				19,462				-				(8,049	)			5,255				38,944
Earnings attributable to noncontrolling interests			-				(1,665	)			-				-				-				(1,665	)
Income from continuing operations attributable to Kindred		$	22,276			$	17,797			$	-			$	(8,049	)		$	5,255			$	37,279
Pro forma earnings from continuing operations per common share:
Basic		$	0.56																			$	0.72	(v)
Diluted		$	0.55																			$	0.71	(v)
Pro forma shares used in computing earnings from continuing operations per common share:
Basic			39,035												11,989	(r)							51,024
Diluted			39,543												11,989	(r)							51,532

See accompanying notes to unaudited pro forma condensed combined financial data.

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Notes to unaudited pro forma condensed combined financial data

Note 1—Basis of presentation

The accompanying unaudited pro forma condensed combined financial data was prepared in accordance with the provisions of the authoritative guidance for business combinations using the acquisition method of accounting in which Kindred acquires all of the outstanding common stock of RehabCare.

The accompanying unaudited pro forma condensed combined financial data presents the pro forma combined financial position and results of operations based upon the historical audited and unaudited financial statements of Kindred and RehabCare, after giving effect to the Transactions, which include the RehabCare Acquisition, related financing activities and other adjustments. The unaudited pro forma condensed combined financial data has been prepared for illustrative purposes only and does not reflect the cost of any integration activities or benefits from synergies that may be derived from any integration activities, nor does the unaudited pro forma condensed combined statement of operations include the effects of any other items directly attributable to the RehabCare Acquisition that are not expected to have a continuing impact on the combined results of operations.

The accompanying unaudited pro forma condensed combined balance sheet gives effect to the Transactions as if they had been consummated on March 31, 2011, and includes estimated pro forma adjustments for the preliminary valuations of assets acquired and liabilities assumed. These adjustments are subject to further revision as additional information becomes available. The unaudited pro forma condensed combined statement of operations gives effect to the Transactions as if they had been consummated on January 1, 2010.

Note 2—Preliminary allocation of Merger Consideration

On February 7, 2011, we entered into a merger agreement (the “Merger Agreement”) with RehabCare, providing for Kindred’s acquisition of all of the outstanding common stock of RehabCare. Each share of RehabCare common stock outstanding immediately prior to the effective time (subject to certain exceptions) will be converted into the right to receive 0.471 of a share of Kindred’s common stock and $26.00 in cash, without interest. No fractional shares of our common stock will be issued in the RehabCare Acquisition and RehabCare stockholders will receive cash in lieu of fractional shares. The Merger Agreement also provides for the vesting and conversion of certain RehabCare stock options and the vesting and lapse of restrictions on RehabCare restricted shares. The value of the equity consideration portion of the preliminary Merger Consideration is subject to change based upon changes in the market price of our common stock prior to closing. The total value of the transaction, including the assumption and refinancing of RehabCare long-term debt, is approximately $1.3 billion.

Upon completion of the RehabCare Acquisition, RehabCare stockholders will own approximately 23% of our outstanding common stock.

We will fund the RehabCare Acquisition and repay existing indebtedness of Kindred and RehabCare with borrowings under the New Credit Facilities and the proceeds of the Notes offering.

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An estimate of the Merger Consideration paid to RehabCare stockholders upon the consummation of the RehabCare Acquisition and a preliminary allocation of the Merger Consideration to the assets to be acquired and the liabilities to be assumed follows (in thousands, except per share cash consideration, exchange ratio and closing price, or per option weighted average value amounts):

 

Estimate of Merger Consideration:
Cash consideration:
RehabCare common stock and unvested restricted shares outstanding as of March 31, 2011			25,455
Cash consideration paid per share per the Merger Agreement		$	26.00
			661,830
RehabCare employee stock options outstanding with exercise prices below the Merger Consideration as of March 31, 2011			39
Weighted average value per outstanding RehabCare stock options as of April 15, 2011		$	14.41
			562
Total cash consideration			662,392
Kindred equity consideration:
RehabCare common stock and unvested restricted shares outstanding as of March 31, 2011			25,455
Exchange ratio per Merger Agreement			0.471
Assumed Kindred common stock issued			11,989
Kindred closing price per share as of April 15, 2011		$	24.05
Total equity consideration			288,335
Total Merger Consideration to RehabCare stockholders and stock option holders		$	950,727

Allocation of Merger Consideration to assets acquired and liabilities assumed (in thousands):

 

		Historical balances as of March 31, 2011				Reclassifications and fair value adjustments				Allocation of Merger Consideration
Cash and cash equivalents		$	33,622			$	-			$	33,622
Accounts receivable			249,015				(186	)			248,829
Deferred tax assets			24,094				-				24,094
Other current assets (liabilities)			11,221				(12,839	)			(1,618	)
Property and equipment			117,386				12,979				130,365
Identifiable intangible assets			129,576				271,424				401,000
Other assets			27,563				-				27,563
Current portion of long-term debt			(7,791	)			-				(7,791	)
Accounts payable and other current liabilities			(169,292	)			21,005				(148,287	)
Long-term debt, less current portion			(365,138	)			-				(365,138	)
Deferred tax liabilities			(56,571	)			(98,614	)			(155,185	)
Other liabilities			(5,479	)			-				(5,479	)
Noncontrolling interests-nonredeemable			(21,127	)			9,508				(11,619	)
Noncontrolling interests-redeemable			-				(9,508	)			(9,508	)
Total identifiable net assets			(32,921	)							160,848
Goodwill			567,863								789,879
Net assets		$	534,942							$	950,727

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A change of $1 in the price of our common stock would increase or decrease the equity consideration, including unvested employee restricted shares and employee stock option consideration, by approximately $12 million, which would result in a corresponding adjustment to goodwill.

The final Merger Consideration allocation for certain items, including property and equipment, identifiable intangible assets, leasehold interests and noncontrolling interests, is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. The actual amounts recorded at the completion of the RehabCare Acquisition may differ materially from the information presented herein.

Note 3—Pro forma adjustments

The unaudited pro forma condensed combined financial data includes the following adjustments to conform the RehabCare balance sheet and statement of operations with the Kindred presentation, to give effect to the RehabCare Acquisition and Kindred’s financing activities and to adjust historical amounts to estimated fair value in connection with the Merger Consideration allocation. See Note 2.

Unaudited pro forma condensed combined balance sheet adjustments

 

a)	To reclassify $0.2 million of RehabCare Medicare and Medicaid cost report accounts and other accounts receivable from other current assets to accounts receivable.

 

b)	To reclassify $6.0 million of RehabCare inventory from other current assets to inventory.

 

c)	To reclassify $13.0 million of RehabCare income taxes payable to offset Kindred’s income taxes receivable.

 

d)	To reclassify $89.7 million of Kindred long-term deferred tax assets to long-term deferred tax liabilities to conform to the pro forma condensed combined balance sheet presentation after adjustments.

 

e)	To reclassify $9.2 million of RehabCare workers compensation liabilities from other accrued liabilities to accrued salaries, wages and other compensation.

 

f)	To reclassify $0.4 million of RehabCare Medicare and Medicaid cost report payables from other accrued liabilities to due to third party payors.

 

g)	To reclassify $7.5 million of RehabCare professional liability risks from other current liabilities to professional liability risks classified as current.

 

h)

We will fund the RehabCare Acquisition and repay existing indebtedness of Kindred and RehabCare with borrowings under the New Credit Facilities and the proceeds of the Notes offering. The New Credit Facilities include a $650 million senior secured asset-based revolving credit facility (“the ABL Facility”) with a five-year term and a $700 million senior secured term loan facility (the “Term Loan Facility”) with a seven-year term. We expect to pay various financing costs related to executing these debt instruments that will be amortized over the terms of the loans or expensed at the consummation of the RehabCare Acquisition.

 

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Unaudited pro forma condensed combined balance sheet adjustments (continued)

 

The financing activities related to the RehabCare Acquisition, including both debt and equity financing and the related uses of funds, follows (in thousands, except per share amounts):

 

Financing sources:
New debt:
$650 million ABL Facility		$	263,932
$700 million Term Loan Facility (current portion—$7 million)			700,000
$550 million Notes offering			550,000			$	1,513,932
Equity exchanged:
Kindred common stock, $0.25 par value			2,997
Capital in excess of par value			285,338				288,335
						$	1,802,267
Financing uses:
Consideration to acquire RehabCare (see Note 2):
Cash consideration		$	662,392
Equity exchanged			288,335			$	950,727
RehabCare long-term debt refinanced			364,875
Current portion of RehabCare long-term debt refinanced			4,500				369,375
Kindred revolving credit facility to be refinanced							350,000
Accrued interest related to debt refinanced							575
Financing costs paid at merger closing (deferred as long-term assets)							57,500
Original issue discount on Term Loan Facility (recorded for accounting purposes as a reduction to new debt)							7,000
Expenses paid at closing							67,090
						$	1,802,267

 

Expenses related to RehabCare Acquisition closing:
Cash payments:
Legal and professional fees		$	33,000
Employee change in control payments and other severance agreements			21,100
Bridge loan facility commitment fee			8,250
Other expenses			4,740
			67,090
Less amounts accrued at March 31, 2011			(1,999	)
			65,091
Non-cash write-offs:
RehabCare deferred financing costs			15,538
RehabCare original issue discount			7,248
Kindred deferred financing costs			805
			23,591
			88,682
Income tax benefit(1)			(21,438	)
Charge to retained earnings		$	67,244

(1) The combined company estimated statutory income tax rate of 38.5% was only applied to expenses related to the RehabCare Acquisition that are expected to be deductible for income tax purposes.

 

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Unaudited pro forma condensed combined balance sheet adjustments (continued)

 

i)

To adjust the tangible and identifiable intangible assets acquired and liabilities assumed based upon preliminary estimates of fair value and eliminate historical RehabCare goodwill and identifiable intangible asset balances. The preliminary estimates of fair value for property and equipment and identifiable intangible assets follow (dollars in thousands):

 

		Historical net book value as of March 31, 2011				Estimated fair value				Estimated fair value adjustment
Property and equipment:
Land		$	6,043			$	6,338			$	295
Buildings			53,089				58,725				5,636
Buildings and equipment under capital lease obligations			6,443				7,021				578
Equipment			51,474				57,927				6,453
Construction in progress			337				354				17
		$	117,386			$	130,365			$	12,979

 

		Estimated fair value
Identifiable intangibles:
Indefinite lived:
RehabCare trade name		$	141,100
Medicare certifications			122,200
Certificates of need			8,000
Finite lived:
Customer relationships			110,400
Other trade name			16,500
Non-compete agreements			2,800
		$	401,000

The excess of the Merger Consideration for RehabCare over the fair value of its identifiable net assets of $789.9 million is recorded as goodwill. See Note 2.

Adjustments to deferred tax liabilities related to the tax effect of fair value adjustments (in thousands):

 

Property and equipment		$	4,997
Identifiable intangible assets			104,498
Goodwill			(10,881	)
		$	98,614

 

j)	To allocate the total Merger Consideration paid to RehabCare stockholders to the assets acquired and liabilities assumed. See Note 2.

 

k)	To remove $2.3 million of financing costs accrued by Kindred at March 31, 2011 that will be paid upon the consummation of the RehabCare Acquisition and are reflected in pro forma adjustment (h) as financing costs paid upon the consummation of the RehabCare Acquisition.

 

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Unaudited pro forma condensed combined balance sheet adjustments (continued)

 

l)

To eliminate $8.0 million of deferred rent liabilities related to straight-line rent accruals in accordance with the provisions of the authoritative guidance for business combinations. In subsequent periods following the date of the merger, lease payments that are not contingent will continue to be accounted for on a straight-line basis.

 

m)	To reclassify $9.5 million of RehabCare noncontrolling interests that may be redeemable under the change in control provisions of existing contracts.

 

n)	To eliminate the historical stockholders’ equity balances of RehabCare.

Unaudited pro forma condensed combined statement of operations adjustments

 

o)	To reclassify the RehabCare statement of operations presentation to conform with the Kindred presentation (in thousands):

 

		For the year ended December 31, 2010
		Other operating expenses				Selling, general and administrative				Total
Salaries, wages and benefits		$	789,507			$	73,095			$	862,602
Supplies			73,473				721				74,194
Rent			46,559				2,649				49,208
Other operating expenses			(909,539	)			32,153				(877,386	)
Selling, general and administrative			-				(108,618	)			(108,618	)
		$	-			$	-			$	-

 

		For the three months ended March 31, 2010												For the three months ended March 31, 2011
		Other operating expenses				Selling, general and administrative				Total				Other operating expenses				Selling, general and administrative				Total
Salaries, wages and benefits		$	191,463			$	18,393			$	209,856			$	212,068			$	19,604			$	231,672
Supplies			17,005				167				17,172				19,750				168				19,918
Rent			10,978				1,123				12,101				12,600				682				13,282
Other operating expenses			(219,446	)			6,852				(212,594	)			(244,418	)			13,149				(231,269	)
Selling, general and administrative			-				(26,535	)			(26,535	)			-				(33,603	)			(33,603	)
		$	-			$	-			$	-			$	-			$	-			$	-

Pro forma stock-based compensation expense, which is included in pro forma salaries, wages and benefits, totaled $14.6 million, $4.7 million and $3.4 million for the year ended December 31, 2010, the three months ended March 31, 2011 and the three months ended March 31, 2010, respectively.

 

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Unaudited pro forma condensed combined statement of operations adjustments (continued)

 

p)

To eliminate historical interest expense and deferred financing cost amortization related to Kindred and RehabCare debt obligations that will be refinanced at the closing date of the RehabCare Acquisition and to add the new interest expense and deferred financing cost amortization related to the New Credit Facilities and the Notes offering, which are computed as follows (in thousands):

 

		For the year ended December 31,  2010
		Interest expense				Deferred cost amortization				Total decrease to interest expense
Historical interest expense eliminated:
RehabCare		$	26,947			$	4,521			$	31,468
Kindred			4,976				1,232				6,208
		$	31,923			$	5,753			$	37,676

 

		For the three months ended March 31, 2010												For the three months ended March 31, 2011
		Interest expense				Deferred cost amortization				Total decrease to interest expense				Interest expense				Deferred cost amortization				Total decrease to interest expense
Historical interest expense eliminated:
RehabCare		$	6,917			$	1,127			$	8,044			$	5,952			$	1,173			$	7,125
Kindred			860				228				1,088				4,853				660				5,513
		$	7,777			$	1,355			$	9,132			$	10,805			$	1,833			$	12,638

 

		Debt borrowings at merger date				Deferred costs related to financing				Interest expense				Deferred cost amortization				Other fees				Total increase to interest expense
New interest expense:
For the year ended December 31, 2010		$	1,513,932			$	64,500			$	92,321			$	10,041			$	2,130			$	104,492
For the three months ended March 31, 2010 and March 31, 2011		$	1,513,932			$	64,500			$	22,682			$	2,511			$	533			$	25,726

Interest expense for each period was computed using a blended interest rate for the New Credit Facilities and the Notes offering of approximately 6.1%. The deferred cost amortization was calculated using a blended term of approximately 6.4 years.

A change in interest rate of 1/8th percent would increase or decrease pro forma annual interest expense by approximately $2 million.

 

q)	To adjust the income tax provision to reflect the pro forma combined company estimated statutory income tax rate of 38.5%.

 

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Unaudited pro forma condensed combined statement of operations adjustments (continued)

 

r)	The basic and diluted shares used in the computation of earnings from continuing operations per common share were increased by 12.0 million shares to reflect the additional shares issued in the equity consideration to RehabCare stockholders in the RehabCare Acquisition.

 

s)

To eliminate the direct incremental costs of the RehabCare Acquisition that are reflected in the historical statement of operations of both Kindred and RehabCare. Additional transaction costs unrelated to the RehabCare Acquisition were not eliminated. These amounts, on a pro forma basis, totaled $3.9 million, $0.3 million and $0.8 million for the year ended December 31, 2010, the three months ended March 31, 2011 and the three months ended March 31, 2010, respectively.

 

t)	To record additional depreciation expense based upon the estimated fair value of the property and equipment acquired over each asset’s estimated remaining useful life. The computation of these amounts follows (dollars in thousands):

 

																		Depreciation expense
																		For the year ended December 31, 2010				For the three months ended March 31, 2010 and March 31, 2011
		Historical net book value				Estimated fair value adjustment				Estimated fair value				Estimated remaining useful life
Land		$	6,043			$	295			$	6,338							$	-			$	-
Buildings			53,089				5,636				58,725				9				6,525				1,631
Buildings and equipment under capital lease obligations			6,443				578				7,021				4				1,755				439
Equipment			51,474				6,453				57,927				4				14,482				3,621
Construction in progress			337				17				354								-				-
		$	117,386			$	12,979			$	130,365				6				22,762				5,691
For the year ended December 31, 2010:
Historical RehabCare depreciation expense																			21,744
Depreciation adjustment																		$	1,018
For the three months ended March 31, 2010:
Historical RehabCare depreciation expense																							4,930
Depreciation adjustment																						$	761
For the three months ended March 31, 2011:
Historical RehabCare depreciation expense																							6,282
Depreciation adjustment																						$	(591	)

 

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Unaudited pro forma condensed combined statement of operations adjustments (continued)

 

u)	To eliminate historical RehabCare intangible amortization expense and replace with new amortization amounts based upon the estimated fair value of finite lived intangible assets. The computation of the new amortization amounts follow (dollars in thousands):

 

										Amortization expense
		Estimated fair value				Estimated weighted average useful life				For the year ended December 31, 2010				For the three months ended March 31, 2010 and March 31, 2011
Customer relationships		$	110,400				15			$	7,360			$	1,840
Other trade name			16,500				5				3,300				825
Non-compete agreements			2,800				2				1,400				350
		$	129,700							$	12,060			$	3,015
Historical RehabCare amortization expense:
For the year ended December 31, 2010										$	8,178
For the three months ended March 31, 2010														$	2,126
For the three months ended March 31, 2011														$	1,752

 

15

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Unaudited pro forma condensed combined statement of operations adjustments (continued)

 

v)

Pro forma earnings from continuing operations per common share are based upon the weighted average number of common shares outstanding. The diluted calculation of pro forma earnings from continuing operations per common share includes the dilutive effect of our stock options and performance-based restricted shares. We follow the provisions of the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which requires that unvested restricted stock that entitles the holder to receive nonforfeitable dividends before vesting be included as a participating security in the basic and diluted earnings per common share calculation pursuant to the two-class method. A computation of the pro forma earnings from continuing operations per common share follows (in thousands, except per share amounts):

 

		Year ended								For the three months ended
		December 31, 2010								March 31, 2010								March 31, 2011
		Basic				Diluted				Basic				Diluted				Basic				Diluted
Pro forma earnings:
As reported in unaudited pro forma condensed combined statement of operations		$	70,482			$	70,482			$	19,074			$	19,074			$	37,279			$	37,279
Allocation to participating unvested restricted stockholders			(977	)			(973	)			(268	)			(266	)			(551	)			(545	)
Available to common stockholders		$	69,505			$	69,509			$	18,806			$	18,808			$	36,728			$	36,734
Shares used in the computation:
Weighted average shares outstanding—basic computation			50,727				50,727				50,615				50,615				51,024				51,024
Dilutive effect of Kindred employee stock options							135								233								508
Dilutive effect of Kindred performance-based restricted shares							81								-								-
Adjusted weighted average shares outstanding – diluted computation							50,943								50,848								51,532
Pro forma earnings from continuing operations per common share		$	1.37			$	1.36			$	0.37			$	0.37			$	0.72			$	0.71