##### Table of Contents



UNITED STATES
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 Quarterly Period Ended June 30, 2010
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition Period From  to .
 Commission File Numbers: 001-34465 and 001-31441
 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)
 4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
 
  þ o
  o o
  Large accelerated filers o
    
    Accelerated filers o
    
    Non-accelerated filers þ
    
    Smaller reporting company o
  o þ




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##### 



TABLE OF CONTENTS
 PART I FINANCIAL INFORMATION
    
    
    3ITEM 1. CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    3Consolidated statements of operations
    
    
    4Consolidated statements of changes in stockholders equity and income (loss)
    
    
    6Consolidated statements of cash flows
    
    
    7Notes to consolidated financial statements
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    29ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    55ITEM 4T. CONTROLS AND PROCEDURES
    
    
    55PART II OTHER INFORMATION
    
    
    56ITEM 1. LEGAL PROCEEDINGS
    
    
    56ITEM 1A. RISK FACTORS
    
    
    57ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    57ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    57ITEM 4. REMOVED AND RESERVED
    
    
    57ITEM 5. OTHER INFORMATION
    
    
    57ITEM 6. EXHIBITS
    
    
    57SIGNATURES
    
    
    58Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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##### Table of Contents



Consolidated Balance Sheets
 (unaudited)
 (in thousands, except per share amounts)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationDecember 31,
    
    
    June 30,
    
    
    December 31,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    83,680
    
    
    $
    128,753
    
    
    $
    83,680
    
    
    $
    128,753Accounts receivable, net of allowance for doubtful accounts
of $43,357 and $39,392 in 2009 and 2010, respectively
    
    
    307,079
    
    
    
    338,320
    
    
    
    307,079
    
    
    
    338,320Current deferred tax asset
    
    
    48,535
    
    
    
    40,808
    
    
    
    48,535
    
    
    
    40,808Prepaid income taxes
    
    
    11,179
    
    
    
    6,841
    
    
    
    11,179
    
    
    
    6,841Other current assets
    
    
    24,240
    
    
    
    24,730
    
    
    
    24,240
    
    
    
    24,730Total Current Assets
    
    
    474,713
    
    
    
    539,452
    
    
    
    474,713
    
    
    
    539,452Property and equipment, net
    
    
    466,131
    
    
    
    459,567
    
    
    
    466,131
    
    
    
    459,567Goodwill
    
    
    1,548,269
    
    
    
    1,548,269
    
    
    
    1,548,269
    
    
    
    1,548,269Other identifiable intangibles
    
    
    65,297
    
    
    
    63,468
    
    
    
    65,297
    
    
    
    63,468Assets held for sale
    
    
    11,342
    
    
    
    11,342
    
    
    
    11,342
    
    
    
    11,342Other assets
    
    
    36,481
    
    
    
    38,025
    
    
    
    33,427
    
    
    
    35,242Total Assets
    
    $
    2,602,233
    
    
    $
    2,660,123
    
    
    $
    2,599,179
    
    
    $
    2,657,340LIABILITIES AND EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    
    
    
    $
    14,201
    
    
    $
    
    
    
    $
    14,201Current portion of long-term debt and notes payable
    
    
    4,145
    
    
    
    102,410
    
    
    
    4,145
    
    
    
    102,410Accounts payable
    
    
    73,434
    
    
    
    64,634
    
    
    
    73,434
    
    
    
    64,634Accrued payroll
    
    
    62,035
    
    
    
    58,269
    
    
    
    62,035
    
    
    
    58,269Accrued vacation
    
    
    41,013
    
    
    
    43,692
    
    
    
    41,013
    
    
    
    43,692Accrued interest
    
    
    32,919
    
    
    
    31,947
    
    
    
    23,473
    
    
    
    22,608Accrued restructuring
    
    
    4,256
    
    
    
    3,232
    
    
    
    4,256
    
    
    
    3,232Accrued other
    
    
    84,234
    
    
    
    78,505
    
    
    
    97,134
    
    
    
    91,144Due to third party payors
    
    
    1,905
    
    
    
    2,492
    
    
    
    1,905
    
    
    
    2,492Total Current Liabilities
    
    
    303,941
    
    
    
    399,382
    
    
    
    307,395
    
    
    
    402,682Long-term debt, net of current portion
    
    
    1,401,426
    
    
    
    1,305,069
    
    
    
    1,096,842
    
    
    
    999,567Non-current deferred tax liability
    
    
    66,768
    
    
    
    66,604
    
    
    
    66,768
    
    
    
    66,604Other non-current liabilities
    
    
    60,543
    
    
    
    61,712
    
    
    
    60,543
    
    
    
    61,712Total Liabilities
    
    
    1,832,678
    
    
    
    1,832,767
    
    
    
    1,531,548
    
    
    
    1,530,565Stockholders Equity:Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 159,981,000
shares and
160,010,060 shares issued and outstanding in 2009 and 2010, respectively
    
    
    160
    
    
    
    160Common stock of Select, $0.01 par value, 100 shares issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    578,648
    
    
    
    579,719
    
    
    
    822,664
    
    
    
    828,621Retained earnings
    
    
    169,094
    
    
    
    217,782
    
    
    
    223,314
    
    
    
    268,459Accumulated other comprehensive loss
    
    
    (8,914
    )
    
    
    (1,898
    )
    
    
    (8,914
    )
    
    
    (1,898
    )Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders Equity
    
    
    738,988
    
    
    
    795,763
    
    
    
    1,037,064
    
    
    
    1,095,182Non-controlling interest
    
    
    30,567
    
    
    
    31,593
    
    
    
    30,567
    
    
    
    31,593Total Equity
    
    
    769,555
    
    
    
    827,356
    
    
    
    1,067,631
    
    
    
    1,126,775Total Liabilities and Equity
    
    $
    2,602,233
    
    
    $
    2,660,123
    
    
    $
    2,599,179
    
    
    $
    2,657,340
   3




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##### Table of Contents



Consolidated Statements of Operations
 (unaudited)
 (in thousands, except per share amounts)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Quarter Ended June 30,
    
    
    For the Quarter Ended June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    $
    559,535
    
    
    $
    579,877
    
    
    $
    559,535
    
    
    $
    579,877Costs and expenses:Cost of services
    
    
    453,011
    
    
    
    470,044
    
    
    
    453,011
    
    
    
    470,044General and administrative
    
    
    12,885
    
    
    
    9,802
    
    
    
    12,885
    
    
    
    9,802Bad debt expense
    
    
    10,312
    
    
    
    10,845
    
    
    
    10,312
    
    
    
    10,845Depreciation and amortization
    
    
    17,939
    
    
    
    16,610
    
    
    
    17,939
    
    
    
    16,610Total costs and expenses
    
    
    494,147
    
    
    
    507,301
    
    
    
    494,147
    
    
    
    507,301Income from operations
    
    
    65,388
    
    
    
    72,576
    
    
    
    65,388
    
    
    
    72,576Other income and expense:Gain on early retirement of debt
    
    
    3,562
    
    
    
    
    
    
    
    3,562
    
    
    
    Other income (expense)
    
    
    
    
    
    
    182
    
    
    
    (32
    )
    
    
    182Interest income
    
    
    28
    
    
    
    
    
    
    
    28
    
    
    
    Interest expense
    
    
    (33,658
    )
    
    
    (29,279
    )
    
    
    (24,853
    )
    
    
    (22,325
    )Income from operations before income taxes
    
    
    35,320
    
    
    
    43,479
    
    
    
    44,093
    
    
    
    50,433Income tax expense
    
    
    15,137
    
    
    
    17,306
    
    
    
    18,207
    
    
    
    19,740Net income
    
    
    20,183
    
    
    
    26,173
    
    
    
    25,886
    
    
    
    30,693Less: Net income attributable to non-controlling interests
    
    
    391
    
    
    
    1,711
    
    
    
    391
    
    
    
    1,711Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation
    
    
    19,792
    
    
    
    24,462
    
    
    $
    25,495
    
    
    $
    28,982Less: Preferred dividends
    
    
    6,508
    
    
    
    Net income available to common stockholders
and participating securities
    
    $
    13,284
    
    
    $
    24,462Income per common share:Basic
    
    $
    0.20
    
    
    $
    0.15Diluted
    
    $
    0.19
    
    
    $
    0.15
   4




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##### Table of Contents



Consolidated Statements of Operations

(unaudited)
(in thousands, except per share amounts)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Six Months Ended June 30,
    
    
    For the Six Months Ended June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    $
    1,120,707
    
    
    $
    1,164,690
    
    
    $
    1,120,707
    
    
    $
    1,164,690Costs and expenses:Cost of services
    
    
    904,405
    
    
    
    942,421
    
    
    
    904,405
    
    
    
    942,421General and administrative
    
    
    25,660
    
    
    
    22,591
    
    
    
    25,660
    
    
    
    22,591Bad debt expense
    
    
    21,958
    
    
    
    20,132
    
    
    
    21,958
    
    
    
    20,132Depreciation and amortization
    
    
    35,670
    
    
    
    34,321
    
    
    
    35,670
    
    
    
    34,321Total costs and expenses
    
    
    987,693
    
    
    
    1,019,465
    
    
    
    987,693
    
    
    
    1,019,465Income from operations
    
    
    133,014
    
    
    
    145,225
    
    
    
    133,014
    
    
    
    145,225Other income and expense:Gain on early retirement of debt
    
    
    15,316
    
    
    
    
    
    
    
    15,316
    
    
    
    Other income
    
    
    
    
    
    
    316
    
    
    
    1,621
    
    
    
    316Interest income
    
    
    80
    
    
    
    
    
    
    
    80
    
    
    
    Interest expense
    
    
    (68,330
    )
    
    
    (59,321
    )
    
    
    (50,822
    )
    
    
    (45,363
    )Income from operations before income taxes
    
    
    80,080
    
    
    
    86,220
    
    
    
    99,209
    
    
    
    100,178Income tax expense
    
    
    33,880
    
    
    
    34,415
    
    
    
    40,575
    
    
    
    39,300Net income
    
    
    46,200
    
    
    
    51,805
    
    
    
    58,634
    
    
    
    60,878Less: Net income attributable to non-controlling interests
    
    
    1,412
    
    
    
    3,117
    
    
    
    1,412
    
    
    
    3,117Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation
    
    
    44,788
    
    
    
    48,688
    
    
    $
    57,222
    
    
    $
    57,761Less: Preferred dividends
    
    
    12,870
    
    
    
    Net income available to common stockholders
and participating securities
    
    $
    31,918
    
    
    $
    48,688Income per common share:Basic
    
    $
    0.47
    
    
    $
    0.30Diluted
    
    $
    0.47
    
    
    $
    0.30
   5




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##### Table of Contents



Select Medical Holdings Corporation
 
 Consolidated Statement of Changes in Equity and Income (Loss)
 (unaudited)
 (in thousands)
 Select Medical Holdings Corporation StockholdersCommon
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    
    Non-Comprehensive
    
    
    Stock
    
    
    Stock Par
    
    
    Capital in
    
    
    Retained
    
    
    Comprehensive
    
    
    controllingTotal
    
    
    Income
    
    
    Issued
    
    
    Value
    
    
    Excess of  Par
    
    
    Earnings
    
    
    Income (Loss)
    
    
    InterestsBalance at December 31, 2009
    
    $
    769,555
    
    
    
    
    
    
    
    159,981
    
    
    $
    160
    
    
    $
    578,648
    
    
    $
    169,094
    
    
    $
    (8,914
    )
    
    $
    30,567Net income
    
    
    51,805
    
    
    $
    51,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,688
    
    
    
    
    
    
    
    3,117Unrealized gain on interest rate swap,
net of tax
    
    
    7,016
    
    
    
    7,016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,016Total comprehensive income
    
    $
    58,821
    
    
    $
    58,821Issuance and vesting of restricted stock
    
    
    371
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371Exercise of stock options
    
    
    125
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    125Stock option expense
    
    
    575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575Distributions to non-controlling interests
    
    
    (2,091
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,091
    )Balance at June 30, 2010
    
    $
    827,356
    
    
    
    
    
    
    
    160,010
    
    
    $
    160
    
    
    $
    579,719
    
    
    $
    217,782
    
    
    $
    (1,898
    )
    
    $
    31,593
 Select Medical Corporation
Consolidated Statement of Changes in Equity and Income (Loss)
(unaudited)
(in thousands)
 Select Medical Corporation StockholdersCommon
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    Accumulated Other
    
    
    Non-Comprehensive
    
    
    Stock
    
    
    Stock Par
    
    
    Capital in
    
    
    Retained
    
    
    Comprehensive
    
    
    controllingTotal
    
    
    Income
    
    
    Issued
    
    
    Value
    
    
    Excess of  Par
    
    
    Earnings
    
    
    Income (Loss)
    
    
    InterestsBalance at December 31, 2009
    
    $
    1,067,631
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    822,664
    
    
    $
    223,314
    
    
    $
    (8,914
    )
    
    $
    30,567Net income
    
    
    60,878
    
    
    $
    60,878
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,761
    
    
    
    
    
    
    
    3,117Unrealized gain on interest rate swap, net of tax
    
    
    7,016
    
    
    
    7,016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,016Total comprehensive income
    
    $
    67,894
    
    
    $
    67,894Federal tax benefit of losses contributed by Holdings
    
    
    4,887
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,887Additional investment by Holdings
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Dividends declared to Holdings
    
    
    (12,639
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,639
    )Settlement of dividends paid to Holdings
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Distributions to non-controlling interests
    
    
    (2,091
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,091
    )Contribution related to restricted stock awards and
stock
option issuances by Holdings
    
    
    945
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    945Balance at June 30, 2010
    
    $
    1,126,775
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    828,621
    
    
    $
    268,459
    
    
    $
    (1,898
    )
    
    $
    31,593
   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 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Operating activitiesNet income
    
    $
    46,200
    
    
    $
    51,805
    
    
    $
    58,634
    
    
    $
    60,878Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    35,670
    
    
    
    34,321
    
    
    
    35,670
    
    
    
    34,321Provision for bad debts
    
    
    21,958
    
    
    
    20,132
    
    
    
    21,958
    
    
    
    20,132Gain on early retirement of debt
    
    
    (15,316
    )
    
    
    
    
    
    
    (15,316
    )
    
    
    Loss from disposal of assets
    
    
    117
    
    
    
    660
    
    
    
    117
    
    
    
    660Non-cash gain from interest rate swaps
    
    
    
    
    
    
    (316
    )
    
    
    (1,621
    )
    
    
    (316
    )Non-cash stock compensation expense
    
    
    594
    
    
    
    945
    
    
    
    594
    
    
    
    945Amortization of debt discount
    
    
    815
    
    
    
    918
    
    
    
    
    
    
    
    Changes in operating assets and liabilities,
net of
effects from acquisition of businesses:Accounts receivable
    
    
    (49,155
    )
    
    
    (51,373
    )
    
    
    (49,155
    )
    
    
    (51,373
    )Other current assets
    
    
    (667
    )
    
    
    (495
    )
    
    
    (667
    )
    
    
    (495
    )Other assets
    
    
    4,242
    
    
    
    (1,140
    )
    
    
    3,959
    
    
    
    (1,410
    )Accounts payable
    
    
    (3,693
    )
    
    
    (8,796
    )
    
    
    (3,693
    )
    
    
    (8,796
    )Due to third-party payors
    
    
    (216
    )
    
    
    587
    
    
    
    (216
    )
    
    
    587Accrued expenses
    
    
    (5,927
    )
    
    
    1,546
    
    
    
    (5,927
    )
    
    
    1,659Income and deferred taxes
    
    
    22,613
    
    
    
    9,925
    
    
    
    29,308
    
    
    
    14,810Net cash provided by operating activities
    
    
    57,235
    
    
    
    58,719
    
    
    
    73,645
    
    
    
    71,602Investing activitiesPurchases of property and equipment
    
    
    (20,981
    )
    
    
    (26,454
    )
    
    
    (20,981
    )
    
    
    (26,454
    )Proceeds from sale of property
    
    
    1,341
    
    
    
    
    
    
    
    1,341
    
    
    
    Net cash used in investing activities
    
    
    (19,640
    )
    
    
    (26,454
    )
    
    
    (19,640
    )
    
    
    (26,454
    )Financing activitiesBorrowings on revolving credit facility
    
    
    138,000
    
    
    
    
    
    
    
    138,000
    
    
    
    Payments on revolving credit facility
    
    
    (173,000
    )
    
    
    
    
    
    
    (173,000
    )
    
    
    Payment on credit facility term loan
    
    
    (3,400
    )
    
    
    
    
    
    
    (3,400
    )
    
    
    Repurchase of 7 5/8% senior subordinated notes
    
    
    (30,114
    )
    
    
    
    
    
    
    (30,114
    )
    
    
    Borrowings of other debt
    
    
    5,184
    
    
    
    5,015
    
    
    
    5,184
    
    
    
    5,015Principal payments on seller and other debt
    
    
    (3,891
    )
    
    
    (4,442
    )
    
    
    (3,891
    )
    
    
    (4,442
    )Dividends paid to Holdings
    
    
    
    
    
    
    
    
    
    
    (16,490
    )
    
    
    (12,883
    )Payment of initial public offering costs
    
    
    (417
    )
    
    
    
    
    
    
    (417
    )
    
    
    Repurchase of common and preferred stock
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    24
    
    
    
    125
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    125Proceeds from (repayment of) bank overdrafts
    
    
    (4,658
    )
    
    
    14,201
    
    
    
    (4,658
    )
    
    
    14,201Distributions to non-controlling interests
    
    
    (1,814
    )
    
    
    (2,091
    )
    
    
    (1,814
    )
    
    
    (2,091
    )Net cash provided by (used in) financing activities
    
    
    (74,166
    )
    
    
    12,808
    
    
    
    (90,576
    )
    
    
    (75
    )Net increase (decrease) in cash and cash equivalents
    
    
    (36,571
    )
    
    
    45,073
    
    
    
    (36,571
    )
    
    
    45,073Cash and cash equivalents at beginning of period
    
    
    64,260
    
    
    
    83,680
    
    
    
    64,260
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    27,689
    
    
    $
    128,753
    
    
    $
    27,689
    
    
    $
    128,753Supplemental Cash Flow InformationCash paid for interest
    
    $
    64,710
    
    
    $
    55,928
    
    
    $
    48,301
    
    
    $
    43,055Cash paid for taxes
    
    $
    11,090
    
    
    $
    24,664
    
    
    $
    11,090
    
    
    $
    24,664
   7




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##### Table of Contents



SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Basis of Presentation
    2. Accounting Policies
 Use of Estimates
   8




---



##### Table of Contents



Recent Accounting Pronouncements
  3. Intangible Assets
  As of June 30, 2010Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (20,456
    )Non-compete agreements
    
    
    25,909
    
    
    
    (23,068
    )Total
    
    $
    46,365
    
    
    $
    (43,524
    )Indefinite-lived intangible assetsGoodwill
    
    $
    1,548,269Trademarks
    
    
    47,858Certificates of need
    
    
    11,430Accreditations
    
    
    1,339Total
    
    $
    1,608,896
   9




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)Amortization expense
    
    $
    2,208
    
    
    $
    1,185
    
    
    $
    4,416
    
    
    $
    3,052
  2010
    
    $
    4,2472011
    
    
    1,3062012
    
    
    3402013
    
    
    02014
    
    
    0
 4. Restructuring Reserves
   Lease Termination Costs(in thousands)December 31, 2009
    
    $
    4,256Amounts paid in 2010
    
    
    (699
    )Revision of estimate
    
    
    (325
    )June 30, 2010
    
    $
    3,232
   10




---



##### Table of Contents



5. Extension of Revolving Credit Facility
  6. Fair Value
 Fair Value Measurements
  Fair Value of Financial Instruments
   5 8 5 8
   11




---



##### Table of Contents



Interest Rate Swaps
   Accumulated Other
Comprehensive Loss.
 7. Accumulated Other Comprehensive Loss
  8. Stockholders Equity
 Participating Preferred Stock
  
    
    dividing the original cost of a share of the preferred stock ($26.90 per share of
preferred stock) plus all accrued and unpaid dividends through September 30, 2009 thereon less
the amount of any previously declared and paid special dividends, or the accreted value of
such preferred stock, by the initial public
offering price per share net of any expenses incurred and underwriting commissions or
concessions paid or allowed in connection with the offering; plus
 
    
    .30 shares of common stock for each share of preferred stock owned.
  12




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##### Table of Contents



Common Stock
  9. Segment Information
   Three Months Ended June 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    386,331
    
    
    $
    173,190
    
    
    $
    14
    
    
    $
    559,535Adjusted EBITDA
    
    
    70,960
    
    
    
    25,294
    
    
    
    (12,628
    )
    
    
    83,626Total assets:Select Medical Corporation
    
    
    1,920,040
    
    
    
    492,936
    
    
    
    115,324
    
    
    
    2,528,300Select Medical Holdings Corporation
    
    
    1,920,040
    
    
    
    492,936
    
    
    
    119,706
    
    
    
    2,532,682Capital expenditures
    
    
    11,222
    
    
    
    2,199
    
    
    
    524
    
    
    
    13,945
  13




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##### Table of Contents



Three Months Ended June 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    403,079
    
    
    $
    176,785
    
    
    $
    13
    
    
    $
    579,877Adjusted EBITDA
    
    
    73,344
    
    
    
    25,956
    
    
    
    (9,677
    )
    
    
    89,623Total assets:Select Medical Corporation
    
    
    1,969,566
    
    
    
    495,399
    
    
    
    192,375
    
    
    
    2,657,340Select Medical Holdings
Corporation
    
    
    1,969,566
    
    
    
    495,399
    
    
    
    195,158
    
    
    
    2,660,123Capital expenditures
    
    
    10,026
    
    
    
    3,133
    
    
    
    248
    
    
    
    13,407
 Six Months Ended June 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    779,563
    
    
    $
    341,009
    
    
    $
    135
    
    
    $
    1,120,707Adjusted EBITDA
    
    
    147,741
    
    
    
    46,578
    
    
    
    (25,041
    )
    
    
    169,278Total assets:Select Medical Corporation
    
    
    1,920,040
    
    
    
    492,936
    
    
    
    115,324
    
    
    
    2,528,300Select Medical Holdings Corporation
    
    
    1,920,040
    
    
    
    492,936
    
    
    
    119,706
    
    
    
    2,532,682Capital expenditures
    
    
    15,377
    
    
    
    5,009
    
    
    
    595
    
    
    
    20,981
 Six Months Ended June 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    814,764
    
    
    $
    349,850
    
    
    $
    76
    
    
    $
    1,164,690Adjusted EBITDA
    
    
    156,241
    
    
    
    46,474
    
    
    
    (22,224
    )
    
    
    180,491Total assets:Select Medical Corporation
    
    
    1,969,566
    
    
    
    495,399
    
    
    
    192,375
    
    
    
    2,657,340Select Medical Holdings
Corporation
    
    
    1,969,566
    
    
    
    495,399
    
    
    
    195,158
    
    
    
    2,660,123Capital expenditures
    
    
    20,624
    
    
    
    5,168
    
    
    
    662
    
    
    
    26,454
  14




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##### Table of Contents



Three Months Ended June 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    70,960
    
    
    $
    25,294
    
    
    $
    (12,628
    )Depreciation and amortization
    
    
    (10,790
    )
    
    
    (6,264
    )
    
    
    (885
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (299
    )Select Medical Holdings Corporation
    
    Select Medical CorporationIncome (loss) from operations
    
    $
    60,170
    
    
    $
    19,030
    
    
    $
    (13,812
    )
    
    $
    65,388
    
    
    $
    65,388Gain on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,562
    
    
    
    3,562Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,630
    )
    
    
    (24,825
    )Income from operations
before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,320
    
    
    $
    44,093
 Three Months Ended June 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    73,344
    
    
    $
    25,956
    
    
    $
    (9,677
    )Depreciation and amortization
    
    
    (10,899
    )
    
    
    (4,943
    )
    
    
    (768
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (437
    )Select Medical Holdings Corporation
    
    Select Medical CorporationIncome (loss) from operations
    
    $
    62,445
    
    
    $
    21,013
    
    
    $
    (10,882
    )
    
    $
    72,576
    
    
    $
    72,576Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182
    
    
    
    182Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,279
    )
    
    
    (22,325
    )Income from operations
before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    43,479
    
    
    $
    50,433
 Six Months Ended June 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    147,741
    
    
    $
    46,578
    
    
    $
    (25,041
    )Depreciation and amortization
    
    
    (21,537
    )
    
    
    (12,397
    )
    
    
    (1,736
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (594
    )Select Medical Holdings Corporation
    
    Select Medical CorporationIncome (loss) from operations
    
    $
    126,204
    
    
    $
    34,181
    
    
    $
    (27,371
    )
    
    $
    133,014
    
    
    $
    133,014Gain on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,316
    
    
    
    15,316Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,621Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,250
    )
    
    
    (50,742
    )Income from operations
before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,080
    
    
    $
    99,209
  15




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##### Table of Contents



Six Months Ended June 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    156,241
    
    
    $
    46,474
    
    
    $
    (22,224
    )Depreciation and amortization
    
    
    (21,858
    )
    
    
    (10,799
    )
    
    
    (1,664
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (945
    )Select Medical Holdings Corporation
    
    Select Medical CorporationIncome (loss) from operations
    
    $
    134,383
    
    
    $
    35,675
    
    
    $
    (24,833
    )
    
    $
    145,225
    
    
    $
    145,225Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316
    
    
    
    316Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,321
    )
    
    
    (45,363
    )Income from operations
before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    86,220
    
    
    $
    100,178
 10. Income per Common Share
   16




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##### Table of Contents



For the Quarter Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands, except per share data)Numerator:Net income attributable to
Select Medical Holdings
Corporation
    
    $
    19,792
    
    
    $
    24,462
    
    
    $
    44,788
    
    
    $
    48,688Less: Preferred stock dividends
    
    
    6,508
    
    
    
    
    
    
    
    12,870Less: Earnings allocated to
preferred stockholders
    
    
    1,296
    
    
    
    
    
    
    
    3,115Less: Earnings allocated to
unvested restricted stockholders
    
    
    161
    
    
    
    46
    
    
    
    443
    
    
    
    97Income available to common and
preferred stockholders  basic
and diluted
    
    $
    11,827
    
    
    $
    24,416
    
    
    $
    28,360
    
    
    $
    48,591Denominator:Weighted average shares  basic
    
    
    60,632
    
    
    
    159,709
    
    
    
    60,509
    
    
    
    159,686Effect of dilutive securities:Stock options
    
    
    482
    
    
    
    266
    
    
    
    482
    
    
    
    298Weighted average shares  diluted
    
    
    61,114
    
    
    
    159,975
    
    
    
    60,991
    
    
    
    159,984Basic income per common share
    
    $
    0.20
    
    
    $
    0.15
    
    
    $
    0.47
    
    
    $
    0.30Diluted income per common share
    
    $
    0.19
    
    
    $
    0.15
    
    
    $
    0.47
    
    
    $
    0.30
  For the Quarter Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)Stock options
    
    
    141
    
    
    
    2,399
    
    
    
    136
    
    
    
    1,620
  17




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##### Table of Contents



11. Early Retirement of Debt
 5 8 5 8
 12. Commitments and Contingencies
 Litigation
      18




---



##### Table of Contents



Construction Commitments
  13. Agreement to Purchase Regency Hospital Company, L.L.C.
    19




---



##### Table of Contents



14. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Selects
75/8% Senior Subordinated Notes
 5 8 5 8
    Caritas Rehab Services, LLCElizabethtown Physical Therapy, P.S.C.Great Lakes Specialty Hospital  Hackley, LLCGreat Lakes Specialty Hospital  Oak, LLCJeff Ayres, PT Therapy Center, Inc.Jeffersontown Physical Therapy, LLCKentucky Orthopedic Rehabilitation, LLCKessler Core PT, OT and Speech Therapy at New York, LLCLouisville Physical Therapy, P.S.C.Metropolitan West Physical Therapy and Sports Medicine Services, Inc.MKJ Physical Therapy, Inc.New York Physician Services, P.C.North Andover Physical Therapy, P.C.Partners in Physical Therapy, PLLCPenn State Hershey Rehabilitation, LLCPhiladelphia Occupational Health, P.C.Rehabilitation Physician Services, P.C.Select LifeCare Western Michigan, LLCSelect Physical Therapy/Baptist Rehabilitation Center, LLCSelect Physical Therapy of Las Vegas Limited PartnershipSelect Specialty  Downriver, LLCSelect Specialty Hospital  Akron, LLCSelect Specialty Hospital  Evansville, LLCSelect Specialty Hospital  Central Pennsylvania, L.P.Select Specialty Hospital  Houston, L.P.Select Specialty Hospital  Gulf Coast, Inc.SSM Select Rehab St. Louis, LLCTherex, P.C.TJ Corporation I, LLCU.S. Regional Occupational Health II, P.C.U.S. Regional Occupational Health II of New Jersey, P.C.
  20




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetJune 30, 2010(unaudited)Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated( in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    126,145
    
    
    $
    2,136
    
    
    $
    472
    
    
    $
    
    
    
    $
    128,753Accounts receivable, net
    
    
    
    
    
    
    304,081
    
    
    
    34,239
    
    
    
    
    
    
    
    338,320Current deferred tax asset
    
    
    8,914
    
    
    
    26,569
    
    
    
    5,325
    
    
    
    
    
    
    
    40,808Other current assets
    
    
    5,017
    
    
    
    23,787
    
    
    
    2,767
    
    
    
    
    
    
    
    31,571Total Current Assets
    
    
    140,076
    
    
    
    356,573
    
    
    
    42,803
    
    
    
    
    
    
    
    539,452Property and equipment, net
    
    
    5,770
    
    
    
    403,892
    
    
    
    49,905
    
    
    
    
    
    
    
    459,567Investment in affiliates
    
    
    2,208,389
    
    
    
    83,661
    
    
    
    
    
    
    
    (2,292,050
    )(a)(b)
    
    
    Goodwill
    
    
    
    
    
    
    1,548,269
    
    
    
    
    
    
    
    
    
    
    
    1,548,269Other identifiable intangibles
    
    
    
    
    
    
    63,468
    
    
    
    
    
    
    
    
    
    
    
    63,468Assets held for sale
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,342Other assets
    
    
    24,917
    
    
    
    7,595
    
    
    
    2,730
    
    
    
    
    
    
    
    35,242Total Assets
    
    $
    2,390,494
    
    
    $
    2,463,458
    
    
    $
    95,438
    
    
    $
    (2,292,050
    )
    
    $
    2,657,340Liabilities and EquityCurrent Liabilities:Bank overdrafts
    
    $
    14,201
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    14,201Current portion of long-term debt
and notes payable
    
    
    101,113
    
    
    
    795
    
    
    
    502
    
    
    
    
    
    
    
    102,410Accounts payable
    
    
    5,947
    
    
    
    51,074
    
    
    
    7,613
    
    
    
    
    
    
    
    64,634Intercompany accounts
    
    
    569,652
    
    
    
    (484,442
    )
    
    
    (85,210
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    205
    
    
    
    57,785
    
    
    
    279
    
    
    
    
    
    
    
    58,269Accrued vacation
    
    
    3,053
    
    
    
    35,119
    
    
    
    5,520
    
    
    
    
    
    
    
    43,692Accrued interest
    
    
    22,354
    
    
    
    254
    
    
    
    
    
    
    
    
    
    
    
    22,608Accrued restructuring
    
    
    
    
    
    
    3,232
    
    
    
    
    
    
    
    
    
    
    
    3,232Accrued other
    
    
    32,390
    
    
    
    53,406
    
    
    
    5,348
    
    
    
    
    
    
    
    91,144Due to third party payors
    
    
    
    
    
    
    18,369
    
    
    
    (15,877
    )
    
    
    
    
    
    
    2,492Total Current Liabilities
    
    
    748,915
    
    
    
    (264,408
    )
    
    
    (81,825
    )
    
    
    
    
    
    
    402,682Long-term debt, net of current portion
    
    
    511,062
    
    
    
    431,475
    
    
    
    57,030
    
    
    
    
    
    
    
    999,567Non-current deferred tax liability
    
    
    (306
    )
    
    
    61,585
    
    
    
    5,325
    
    
    
    
    
    
    
    66,604Other non-current liabilities
    
    
    35,641
    
    
    
    26,071
    
    
    
    
    
    
    
    
    
    
    
    61,712Total Liabilities
    
    
    1,295,312
    
    
    
    254,723
    
    
    
    (19,470
    )
    
    
    
    
    
    
    1,530,565Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    828,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828,621Retained earnings
    
    
    268,459
    
    
    
    474,070
    
    
    
    29,293
    
    
    
    (503,363
    )(b)
    
    
    268,459Subsidiary investment
    
    
    
    
    
    
    1,734,665
    
    
    
    54,022
    
    
    
    (1,788,687
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (1,898
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,898
    )Total Select Medical Corporation
Stockholders Equity
    
    
    1,095,182
    
    
    
    2,208,735
    
    
    
    83,315
    
    
    
    (2,292,050
    )
    
    
    1,095,182Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    31,593
    
    
    
    
    
    
    
    31,593Total Equity
    
    
    1,095,182
    
    
    
    2,208,735
    
    
    
    114,908
    
    
    
    (2,292,050
    )
    
    
    1,126,775Total Liabilities and Equity
    
    $
    2,390,494
    
    
    $
    2,463,458
    
    
    $
    95,438
    
    
    $
    (2,292,050
    )
    
    $
    2,657,340
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings.  21




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Quarter Ended June 30, 2010(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    13
    
    
    $
    499,330
    
    
    $
    80,534
    
    
    $
    
    
    
    $
    579,877Costs and expenses:Cost of services
    
    
    326
    
    
    
    403,366
    
    
    
    66,352
    
    
    
    
    
    
    
    470,044General and administrative
    
    
    9,785
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    9,802Bad debt expense
    
    
    
    
    
    
    9,070
    
    
    
    1,775
    
    
    
    
    
    
    
    10,845Depreciation and amortization
    
    
    680
    
    
    
    13,888
    
    
    
    2,042
    
    
    
    
    
    
    
    16,610Total costs and expenses
    
    
    10,791
    
    
    
    426,341
    
    
    
    70,169
    
    
    
    
    
    
    
    507,301Income (loss) from operations
    
    
    (10,778
    )
    
    
    72,989
    
    
    
    10,365
    
    
    
    
    
    
    
    72,576Other income and expense:Intercompany interest and royalty fees
    
    
    (887
    )
    
    
    882
    
    
    
    5
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    22,413
    
    
    
    (18,458
    )
    
    
    (3,955
    )
    
    
    
    
    
    
    Other income
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182Interest expense
    
    
    (12,652
    )
    
    
    (8,477
    )
    
    
    (1,196
    )
    
    
    
    
    
    
    (22,325
    )Income (loss) from operations before income taxes
    
    
    (1,722
    )
    
    
    46,936
    
    
    
    5,219
    
    
    
    
    
    
    
    50,433Income tax expense (benefit)
    
    
    1,402
    
    
    
    19,067
    
    
    
    (729
    )
    
    
    
    
    
    
    19,740Equity in earnings of subsidiaries
    
    
    32,106
    
    
    
    4,270
    
    
    
    
    
    
    
    (36,376
    )(a)
    
    
    Net income
    
    
    28,982
    
    
    
    32,139
    
    
    
    5,948
    
    
    
    (36,376
    )
    
    
    30,693Less: Net income attributable to non-controlling
interests
    
    
    
    
    
    
    
    
    
    
    1,711
    
    
    
    
    
    
    
    1,711Net income attributable to Select Medical Corporation
    
    $
    28,982
    
    
    $
    32,139
    
    
    $
    4,237
    
    
    $
    (36,376
    )
    
    $
    28,982
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  22




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Six Months Ended June 30, 2010(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    76
    
    
    $
    1,001,657
    
    
    $
    162,957
    
    
    $
    
    
    
    $
    1,164,690Costs and expenses:Cost of services
    
    
    654
    
    
    
    808,631
    
    
    
    133,136
    
    
    
    
    
    
    
    942,421General and administrative
    
    
    22,559
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    22,591Bad debt expense
    
    
    
    
    
    
    16,741
    
    
    
    3,391
    
    
    
    
    
    
    
    20,132Depreciation and amortization
    
    
    1,498
    
    
    
    28,538
    
    
    
    4,285
    
    
    
    
    
    
    
    34,321Total costs and expenses
    
    
    24,711
    
    
    
    853,942
    
    
    
    140,812
    
    
    
    
    
    
    
    1,019,465Income (loss) from operations
    
    
    (24,635
    )
    
    
    147,715
    
    
    
    22,145
    
    
    
    
    
    
    
    145,225Other income and expense:Intercompany interest and royalty fees
    
    
    (1,961
    )
    
    
    1,952
    
    
    
    9
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    45,229
    
    
    
    (37,769
    )
    
    
    (7,460
    )
    
    
    
    
    
    
    Other income
    
    
    316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316Interest expense
    
    
    (26,100
    )
    
    
    (17,004
    )
    
    
    (2,259
    )
    
    
    
    
    
    
    (45,363
    )Income (loss) from operations before income taxes
    
    
    (7,151
    )
    
    
    94,894
    
    
    
    12,435
    
    
    
    
    
    
    
    100,178Income tax expense (benefit)
    
    
    1,490
    
    
    
    38,559
    
    
    
    (749
    )
    
    
    
    
    
    
    39,300Equity in earnings of subsidiaries
    
    
    66,402
    
    
    
    9,866
    
    
    
    
    
    
    
    (76,268
    )(a)
    
    
    Net income
    
    
    57,761
    
    
    
    66,201
    
    
    
    13,184
    
    
    
    (76,268
    )
    
    
    60,878Less: Net income attributable to non-controlling
interests
    
    
    
    
    
    
    
    
    
    
    3,117
    
    
    
    
    
    
    
    3,117Net income attributable to Select Medical Corporation
    
    $
    57,761
    
    
    $
    66,201
    
    
    $
    10,067
    
    
    $
    (76,268
    )
    
    $
    57,761
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  23




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Six Months Ended June 30, 2010(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    57,761
    
    
    $
    66,201
    
    
    $
    13,184
    
    
    $
    (76,268
    )(a)
    
    $
    60,878Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,498
    
    
    
    28,538
    
    
    
    4,285
    
    
    
    
    
    
    
    34,321Provision for bad debts
    
    
    
    
    
    
    16,741
    
    
    
    3,391
    
    
    
    
    
    
    
    20,132Loss from disposal of assets
    
    
    
    
    
    
    643
    
    
    
    17
    
    
    
    
    
    
    
    660Non-cash gain from interest rate swaps
    
    
    (316
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (316
    )Non-cash stock compensation expense
    
    
    945
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    945Changes in operating assets and
liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (66,402
    )
    
    
    (9,866
    )
    
    
    
    
    
    
    76,268
    (a)
    
    
    Intercompany
    
    
    48,740
    
    
    
    (38,047
    )
    
    
    (10,693
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    
    
    
    
    (38,152
    )
    
    
    (13,221
    )
    
    
    
    
    
    
    (51,373
    )Other current assets
    
    
    369
    
    
    
    (3,363
    )
    
    
    2,499
    
    
    
    
    
    
    
    (495
    )Other assets
    
    
    (2,517
    )
    
    
    1,526
    
    
    
    (419
    )
    
    
    
    
    
    
    (1,410
    )Accounts payable
    
    
    2,718
    
    
    
    (10,137
    )
    
    
    (1,377
    )
    
    
    
    
    
    
    (8,796
    )Due to third-party payors
    
    
    
    
    
    
    7,050
    
    
    
    (6,463
    )
    
    
    
    
    
    
    587Accrued expenses
    
    
    (13,018
    )
    
    
    14,022
    
    
    
    655
    
    
    
    
    
    
    
    1,659Income and deferred taxes
    
    
    14,810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,810Net cash provided by (used in) operating activities
    
    
    44,588
    
    
    
    35,156
    
    
    
    (8,142
    )
    
    
    
    
    
    
    71,602Investing activitiesPurchases of property and equipment
    
    
    (662
    )
    
    
    (24,041
    )
    
    
    (1,751
    )
    
    
    
    
    
    
    (26,454
    )Net cash used in investing activities
    
    
    (662
    )
    
    
    (24,041
    )
    
    
    (1,751
    )
    
    
    
    
    
    
    (26,454
    )Financing activitiesBorrowings of other debt
    
    
    5,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,015Principal payments on seller and other debt
    
    
    3,556
    
    
    
    (8,503
    )
    
    
    505
    
    
    
    
    
    
    
    (4,442
    )Dividends paid to Holdings
    
    
    (12,883
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,883
    )Equity investment by Holdings
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Proceeds from bank overdrafts
    
    
    14,201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,201Intercompany debt reallocation
    
    
    (8,735
    )
    
    
    (2,429
    )
    
    
    11,164
    
    
    
    
    
    
    
    Distributions to non-controlling interests
    
    
    
    
    
    
    (345
    )
    
    
    (1,746
    )
    
    
    
    
    
    
    (2,091
    )Net cash provided by (used in) financing activities
    
    
    1,279
    
    
    
    (11,277
    )
    
    
    9,923
    
    
    
    
    
    
    
    (75
    )Net increase (decrease) in cash and cash equivalents
    
    
    45,205
    
    
    
    (162
    )
    
    
    30
    
    
    
    
    
    
    
    45,073Cash and cash equivalents at beginning of period
    
    
    80,940
    
    
    
    2,298
    
    
    
    442
    
    
    
    
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    126,145
    
    
    $
    2,136
    
    
    $
    472
    
    
    $
    
    
    
    $
    128,753
 (a)
    
    Elimination of equity in earnings of subsidiaries.  24




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetDecember 31, 2009Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated( in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    80,940
    
    
    $
    2,298
    
    
    $
    442
    
    
    $
    
    
    
    $
    83,680Accounts receivable, net
    
    
    
    
    
    
    282,670
    
    
    
    24,409
    
    
    
    
    
    
    
    307,079Current deferred tax asset
    
    
    13,677
    
    
    
    29,854
    
    
    
    5,004
    
    
    
    
    
    
    
    48,535Prepaid income taxes
    
    
    11,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,179Other current assets
    
    
    5,386
    
    
    
    13,588
    
    
    
    5,266
    
    
    
    
    
    
    
    24,240Total Current Assets
    
    
    111,182
    
    
    
    328,410
    
    
    
    35,121
    
    
    
    
    
    
    
    474,713Property and equipment, net
    
    
    6,649
    
    
    
    409,258
    
    
    
    50,224
    
    
    
    
    
    
    
    466,131Investment in affiliates
    
    
    2,142,189
    
    
    
    72,628
    
    
    
    
    
    
    
    (2,214,817
    )(a)(b)
    
    
    Goodwill
    
    
    
    
    
    
    1,548,269
    
    
    
    
    
    
    
    
    
    
    
    1,548,269Other identifiable intangibles
    
    
    
    
    
    
    65,297
    
    
    
    
    
    
    
    
    
    
    
    65,297Assets held for sale
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,342Other assets
    
    
    22,400
    
    
    
    8,716
    
    
    
    2,311
    
    
    
    
    
    
    
    33,427Total Assets
    
    $
    2,293,762
    
    
    $
    2,432,578
    
    
    $
    87,656
    
    
    $
    (2,214,817
    )
    
    $
    2,599,179Liabilities and EquityCurrent Liabilities:Current portion of long-term debt
and notes payable
    
    $
    2,545
    
    
    $
    803
    
    
    $
    797
    
    
    $
    
    
    
    $
    4,145Accounts payable
    
    
    3,229
    
    
    
    61,215
    
    
    
    8,990
    
    
    
    
    
    
    
    73,434Intercompany accounts
    
    
    495,981
    
    
    
    (416,944
    )
    
    
    (79,037
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    81
    
    
    
    61,860
    
    
    
    94
    
    
    
    
    
    
    
    62,035Accrued vacation
    
    
    2,942
    
    
    
    33,024
    
    
    
    5,047
    
    
    
    
    
    
    
    41,013Accrued interest
    
    
    23,354
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    23,473Accrued restructuring
    
    
    
    
    
    
    4,256
    
    
    
    
    
    
    
    
    
    
    
    4,256Accrued other
    
    
    50,122
    
    
    
    41,661
    
    
    
    5,351
    
    
    
    
    
    
    
    97,134Due to third party payors
    
    
    
    
    
    
    11,319
    
    
    
    (9,414
    )
    
    
    
    
    
    
    1,905Total Current Liabilities
    
    
    578,254
    
    
    
    (202,687
    )
    
    
    (68,172
    )
    
    
    
    
    
    
    307,395Long-term debt, net of current portion
    
    
    616,906
    
    
    
    434,384
    
    
    
    45,552
    
    
    
    
    
    
    
    1,096,842Non-current deferred tax liability
    
    
    995
    
    
    
    58,346
    
    
    
    7,427
    
    
    
    
    
    
    
    66,768Other non-current liabilities
    
    
    60,543
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,543Total Liabilities
    
    
    1,256,698
    
    
    
    290,043
    
    
    
    (15,193
    )
    
    
    
    
    
    
    1,531,548Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    822,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    822,664Retained earnings
    
    
    223,314
    
    
    
    407,870
    
    
    
    21,075
    
    
    
    (428,945
    )(b)
    
    
    223,314Subsidiary investment
    
    
    
    
    
    
    1,734,665
    
    
    
    51,207
    
    
    
    (1,785,872
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (8,914
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,914
    )Total Select Medical Corporation
Stockholders Equity
    
    
    1,037,064
    
    
    
    2,142,535
    
    
    
    72,282
    
    
    
    (2,214,817
    )
    
    
    1,037,064Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    30,567
    
    
    
    
    
    
    
    30,567Total Equity
    
    
    1,037,064
    
    
    
    2,142,535
    
    
    
    102,849
    
    
    
    (2,214,817
    )
    
    
    1,067,631Total Liabilities and Equity
    
    $
    2,293,762
    
    
    $
    2,432,578
    
    
    $
    87,656
    
    
    $
    (2,214,817
    )
    
    $
    2,599,179
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings.  25




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Quarter Ended June 30, 2009(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    14
    
    
    $
    500,206
    
    
    $
    59,315
    
    
    $
    
    
    
    $
    559,535Costs and expenses:Cost of services
    
    
    58
    
    
    
    401,855
    
    
    
    51,098
    
    
    
    
    
    
    
    453,011General and administrative
    
    
    12,872
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    12,885Bad debt expense
    
    
    
    
    
    
    9,045
    
    
    
    1,267
    
    
    
    
    
    
    
    10,312Depreciation and amortization
    
    
    805
    
    
    
    15,555
    
    
    
    1,579
    
    
    
    
    
    
    
    17,939Total costs and expenses
    
    
    13,735
    
    
    
    426,468
    
    
    
    53,944
    
    
    
    
    
    
    
    494,147Income (loss) from operations
    
    
    (13,721
    )
    
    
    73,738
    
    
    
    5,371
    
    
    
    
    
    
    
    65,388Other income and expense:Intercompany interest and royalty fees
    
    
    (1,449
    )
    
    
    1,440
    
    
    
    9
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    23,884
    
    
    
    (21,427
    )
    
    
    (2,457
    )
    
    
    
    
    
    
    Gain on early retirement of debt
    
    
    3,562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,562Other expense
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )Interest income
    
    
    12
    
    
    
    15
    
    
    
    1
    
    
    
    
    
    
    
    28Interest expense
    
    
    (15,058
    )
    
    
    (9,012
    )
    
    
    (783
    )
    
    
    
    
    
    
    (24,853
    )Income (loss) from operations before income taxes
    
    
    (2,802
    )
    
    
    44,754
    
    
    
    2,141
    
    
    
    
    
    
    
    44,093Income tax expense (benefit)
    
    
    (554
    )
    
    
    18,989
    
    
    
    (228
    )
    
    
    
    
    
    
    18,207Equity in earnings of subsidiaries
    
    
    27,743
    
    
    
    2,101
    
    
    
    
    
    
    
    (29,844
    )(a)
    
    
    Net income
    
    
    25,495
    
    
    
    27,866
    
    
    
    2,369
    
    
    
    (29,844
    )
    
    
    25,886Less: Net income attributable to non-controlling
interests
    
    
    
    
    
    
    
    
    
    
    391
    
    
    
    
    
    
    
    391Net income attributable to Select Medical Corporation
    
    $
    25,495
    
    
    $
    27,866
    
    
    $
    1,978
    
    
    $
    (29,844
    )
    
    $
    25,495
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  26




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Six Months Ended June 30, 2009(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    135
    
    
    $
    1,000,941
    
    
    $
    119,631
    
    
    $
    
    
    
    $
    1,120,707Costs and expenses:Cost of services
    
    
    111
    
    
    
    802,691
    
    
    
    101,603
    
    
    
    
    
    
    
    904,405General and administrative
    
    
    25,616
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    25,660Bad debt expense
    
    
    
    
    
    
    19,422
    
    
    
    2,536
    
    
    
    
    
    
    
    21,958Depreciation and amortization
    
    
    1,577
    
    
    
    31,018
    
    
    
    3,075
    
    
    
    
    
    
    
    35,670Total costs and expenses
    
    
    27,304
    
    
    
    853,175
    
    
    
    107,214
    
    
    
    
    
    
    
    987,693Income (loss) from operations
    
    
    (27,169
    )
    
    
    147,766
    
    
    
    12,417
    
    
    
    
    
    
    
    133,014Other income and expense:Intercompany interest and royalty fees
    
    
    (5,151
    )
    
    
    5,114
    
    
    
    37
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    63,134
    
    
    
    (58,524
    )
    
    
    (4,610
    )
    
    
    
    
    
    
    Gain on early retirement of debt
    
    
    15,316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,316Other income
    
    
    1,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,621Interest income
    
    
    63
    
    
    
    16
    
    
    
    1
    
    
    
    
    
    
    
    80Interest expense
    
    
    (32,401
    )
    
    
    (16,944
    )
    
    
    (1,477
    )
    
    
    
    
    
    
    (50,822
    )Income from operations before income taxes
    
    
    15,413
    
    
    
    77,428
    
    
    
    6,368
    
    
    
    
    
    
    
    99,209Income tax expense (benefit)
    
    
    7,188
    
    
    
    33,515
    
    
    
    (128
    )
    
    
    
    
    
    
    40,575Equity in earnings of subsidiaries
    
    
    48,997
    
    
    
    5,196
    
    
    
    
    
    
    
    (54,193
    )(a)
    
    
    Net income
    
    
    57,222
    
    
    
    49,109
    
    
    
    6,496
    
    
    
    (54,193
    )
    
    
    58,634Less: Net income attributable to non-controlling
interests
    
    
    
    
    
    
    
    
    
    
    1,412
    
    
    
    
    
    
    
    1,412Net income attributable to Select Medical Corporation
    
    $
    57,222
    
    
    $
    49,109
    
    
    $
    5,084
    
    
    $
    (54,193
    )
    
    $
    57,222
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  27




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Six Months Ended June 30, 2009(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    57,222
    
    
    $
    49,109
    
    
    $
    6,496
    
    
    $
    (54,193
    )(a)
    
    $
    58,634Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,577
    
    
    
    31,018
    
    
    
    3,075
    
    
    
    
    
    
    
    35,670Provision for bad debts
    
    
    
    
    
    
    19,422
    
    
    
    2,536
    
    
    
    
    
    
    
    21,958Gain on early retirement of debt
    
    
    (15,316
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,316
    )Loss from disposal of assets
    
    
    1
    
    
    
    113
    
    
    
    3
    
    
    
    
    
    
    
    117Non-cash gain from interest rate swaps
    
    
    (1,621
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,621
    )Non-cash stock compensation expense
    
    
    594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    594Changes in operating assets and
liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (48,997
    )
    
    
    (5,196
    )
    
    
    
    
    
    
    54,193
    (a)
    
    
    Intercompany
    
    
    95,550
    
    
    
    (94,903
    )
    
    
    (647
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (130
    )
    
    
    (45,637
    )
    
    
    (3,388
    )
    
    
    
    
    
    
    (49,155
    )Other current assets
    
    
    (1,971
    )
    
    
    2,174
    
    
    
    (870
    )
    
    
    
    
    
    
    (667
    )Other assets
    
    
    4,358
    
    
    
    (456
    )
    
    
    57
    
    
    
    
    
    
    
    3,959Accounts payable
    
    
    (1,293
    )
    
    
    (2,666
    )
    
    
    266
    
    
    
    
    
    
    
    (3,693
    )Due to third-party payors
    
    
    
    
    
    
    1,603
    
    
    
    (1,819
    )
    
    
    
    
    
    
    (216
    )Accrued expenses
    
    
    (2,101
    )
    
    
    (4,360
    )
    
    
    534
    
    
    
    
    
    
    
    (5,927
    )Income and deferred taxes
    
    
    29,308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,308Net cash provided by (used in) operating activities
    
    
    117,181
    
    
    
    (49,779
    )
    
    
    6,243
    
    
    
    
    
    
    
    73,645Investing activitiesPurchases of property and equipment
    
    
    (785
    )
    
    
    (14,110
    )
    
    
    (6,086
    )
    
    
    
    
    
    
    (20,981
    )Proceeds from sale of property
    
    
    
    
    
    
    1,341
    
    
    
    
    
    
    
    
    
    
    
    1,341Net cash used in investing activities
    
    
    (785
    )
    
    
    (12,769
    )
    
    
    (6,086
    )
    
    
    
    
    
    
    (19,640
    )Financing activitiesBorrowings on revolving credit facility
    
    
    138,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,000Payments on revolving credit facility
    
    
    (173,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,000
    )Payments on credit facility term loan
    
    
    (3,400
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,400
    )Repurchase
of 7 5/8% senior subordinated notes
    
    
    (30,114
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,114
    )Borrowings of other debt
    
    
    5,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,184Principal payments on seller and other debt
    
    
    (3,330
    )
    
    
    (555
    )
    
    
    (6
    )
    
    
    
    
    
    
    (3,891
    )Dividends paid to Holdings
    
    
    (16,490
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,490
    )Payment of initial public offering costs
    
    
    (417
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (417
    )Equity investment by Holdings
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Repayment of bank overdrafts
    
    
    (4,658
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,658
    )Intercompany debt reallocation
    
    
    (61,872
    )
    
    
    60,504
    
    
    
    1,368
    
    
    
    
    
    
    
    Distributions to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    (1,814
    )
    
    
    
    
    
    
    (1,814
    )Net cash provided by (used in) financing activities
    
    
    (150,073
    )
    
    
    59,949
    
    
    
    (452
    )
    
    
    
    
    
    
    (90,576
    )Net decrease in cash and cash equivalents
    
    
    (33,677
    )
    
    
    (2,599
    )
    
    
    (295
    )
    
    
    
    
    
    
    (36,571
    )Cash and cash equivalents at beginning of period
    
    
    58,332
    
    
    
    5,108
    
    
    
    820
    
    
    
    
    
    
    
    64,260Cash and cash equivalents at end of period
    
    $
    24,655
    
    
    $
    2,509
    
    
    $
    525
    
    
    $
    
    
    
    $
    27,689
 (a)
    
    Elimination of equity in earnings of subsidiaries.  28




---



##### 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 accompanying notes.
 Forward Looking Statements
   
    
    additional changes in government reimbursement for our services, including changes that
will result from the expiration of the moratorium for long term acute care hospitals
established by the SCHIP Extension Act of 2007, the American Recovery and Reinvestment Act,
and the Patient Protection and Affordable Care Act may result in a reduction in net
operating revenues, an increase in costs and a reduction in profitability;
    
    the failure of our specialty hospitals to maintain their Medicare certifications as such
may cause our net operating revenues and profitability to decline;
    
    the failure of our facilities operated as hospitals within hospitals to qualify as
hospitals separate from their host hospitals may cause our net operating revenues and
profitability to decline;
    
    a government investigation or assertion that we have violated applicable regulations may
result in sanctions or reputational harm and increased costs;
    
    future acquisitions or joint ventures (such as the acquisition of Regency Hospital
Company, LLC) 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 the areas we
serve 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;
  29




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##### Table of Contents




    
    the effect of claims asserted against us or lack of adequate available insurance could
subject us to substantial uninsured liabilities;
    
    other factors discussed from time to time in our filings with the SEC, including factors
discussed under the heading Risk Factors of our Annual Report on Form 10-K for the year
ended December 31, 2009.
   Overview
   Recent Trends and Events
 Agreement to Purchase Regency Hospital Company, L.L.C.
   30




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##### Table of Contents



Extension of Revolving Credit Facility
  Summary Financial Results
 Second Quarter Ended June 30, 2010
    31




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##### Table of Contents



Regulatory Changes
  Health Reform Legislation
  Extension of Changes Made by the Medicare, Medicaid, and SCHIP Extension Act of 2007
   32




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##### Table of Contents



25% Rule
  Type of LTCH
    
    Non Co-located Admissions
    
    Co-located AdmissionsNon-grandfathered HIHs 
opened before October
1, 2004
(54 owned hospitals)
    
    Not subject to any
extensions of the
admissions thresholds
under the 25% Rule.
LTCHs in this category
are subject to a payment
adjustment for
discharged Medicare
patients exceeding 25%
of the LTCHs total
Medicare population.
    
    Percentage admissions
threshold was raised
from 25% to 50%. This
relief is now effective
for five years starting
with cost reporting
periods beginning on or
after October 1, 2007.
In the special case of
rural LTCHs, LTCHs
co-located with an
urban single hospital,
or LTCHs co-located
with an MSA-dominate
hospital the referral
percentage was raised
to 75%.Non-grandfathered
satellite facilities 
opened before October
1, 2004
(five owned hospitals)
    
    Not subject to any
extensions of the
admissions thresholds
under the 25% Rule.
LTCHs in this category
are subject to a payment
adjustment for
discharged Medicare
patients exceeding 25%
of the LTCHs total
Medicare population.
    
    Percentage admissions
threshold was raised
from 25% to 50%. This
relief is now effective
for five years starting
with cost reporting
periods beginning on or
after October 1, 2007.
In the special case of
rural LTCHs, LTCHs
co-located with an
urban single hospital,
or LTCHs co-located
with an MSA-dominate
hospital the referral
percentage was raised
to 75%.Grandfathered HIHs
(two owned hospitals)
    
    Percentage admissions
threshold is suspended
for five years starting
with cost reporting
periods beginning on or
after July 1, 2007.
    
    Percentage admission
threshold is suspended
for five years starting
with cost reporting
periods beginning on or
after July 1, 2007.Grandfathered satellites
(no owned hospitals)
    
    Not subject to any
extensions of the
admissions thresholds
under the 25% Rule.
LTCHs in this category
are subject to a payment
adjustment for
discharged Medicare
patients exceeding 25%
of the LTCHs total
Medicare population.
    
    Percentage admissions
threshold was raised
from 25% to 50%. This
relief is now effective
for five years starting
with cost reporting
periods beginning on or
after July 1, 2007. In
the special case of
rural LTCHs, LTCHs
co-located with an
urban single hospital,
or LTCHs co-located
with an MSA-dominate
hospital the referral
percentage was raised
to 75%.
  33




---



##### Table of Contents



Type of LTCH
    
    Non Co-located Admissions
    
    Co-located AdmissionsFreestanding facilities
(23 owned hospitals)
    
    Percentage admissions
threshold is suspended
for five years starting
with cost reporting
periods beginning on or
after July 1, 2007.
    
    25% Rule not applicable.Facilities co-located
with a provider-based,
off-campus,
non-inpatient location
of an inpatient
prospective payment
system hospital
(no owned hospitals)
    
    Percentage admissions
threshold is suspended
for five years starting
with cost reporting
periods beginning on or
after July 1, 2007.
    
    Percentage admission
threshold is suspended
for five years starting
with cost reporting
periods beginning on or
after July 1, 2007.HIHs and satellite
facilities opened on or
after October 1, 2004.
(four owned hospitals)
    
    LTCHs in this category
are subject to a payment
adjustment for
discharged Medicare
patients exceeding 25%
of the LTCHs total
Medicare population.
    
    LTCHs in this category
are subject to a
payment adjustment for
discharged Medicare
patients exceeding 25%
of the LTCHs total
Medicare population.
 One-Time Budget Neutrality Adjustment
  Short Stay Outlier Policy
  Moratorium on New LTCHs and New LTCH Beds
   34




---



##### Table of Contents



Medicare Quality Reporting
  Medicare Market Basket Adjustments
   Medicare Productivity Adjustment
  Hospital Wage Index
   35




---



##### Table of Contents



Independent Payment Advisory Board
  Physician-Owned Hospital Limitations
  Provider and Employee Screening
   Medicare Compliance Requirements and Penalties
   36




---



##### Table of Contents



Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2010
  Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2011
  Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2010
  Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2011
   37




---



##### Table of Contents



Reductions to the Medicare Physician Fee Schedule
  Medicare Payment of Outpatient Rehabilitation Services
    38




---



##### Table of Contents



Facility Licensure, Certification and Accreditation
    39




---



##### Table of Contents



Operating Statistics
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Specialty hospital data(1):Number of hospitals  start of period
    
    
    92
    
    
    
    94
    
    
    
    93
    
    
    
    94Number of hospital start-ups
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of hospitals acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of hospitals consolidated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of hospitals closed
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Number of hospitals owned  end of period
    
    
    92
    
    
    
    94
    
    
    
    92
    
    
    
    94Number of hospitals managed  end of period
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Total number of hospitals (all)  end of period
    
    
    92
    
    
    
    95
    
    
    
    92
    
    
    
    95Available licensed beds
    
    
    4,160
    
    
    
    4,250
    
    
    
    4,160
    
    
    
    4,250Admissions
    
    
    10,504
    
    
    
    10,616
    
    
    
    21,309
    
    
    
    21,717Patient days
    
    
    252,710
    
    
    
    264,898
    
    
    
    508,983
    
    
    
    532,746Average length of stay (days)
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,491
    
    
    $
    1,474
    
    
    $
    1,494
    
    
    $
    1,483Occupancy rate
    
    
    67
    %
    
    
    68
    %
    
    
    67
    %
    
    
    69
    %Percent patient days  Medicare
    
    
    64
    %
    
    
    63
    %
    
    
    64
    %
    
    
    64
    %Outpatient rehabilitation data:Number of clinics owned  start of period
    
    
    875
    
    
    
    885
    
    
    
    880
    
    
    
    883Number of clinics acquired
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Number of clinic start-ups
    
    
    7
    
    
    
    5
    
    
    
    7
    
    
    
    10Number of clinics closed/sold
    
    
    (7
    )
    
    
    (10
    )
    
    
    (13
    )
    
    
    (13
    )Number of clinics owned  end of period
    
    
    875
    
    
    
    880
    
    
    
    875
    
    
    
    880Number of clinics managed  end of period
    
    
    73
    
    
    
    73
    
    
    
    73
    
    
    
    73Total number of clinics (all)  end of period
    
    
    948
    
    
    
    953
    
    
    
    948
    
    
    
    953Number of visits
    
    
    1,163,341
    
    
    
    1,172,212
    
    
    
    2,259,637
    
    
    
    2,298,170Net revenue per visit (3)
    
    $
    101
    
    
    $
    101
    
    
    $
    102
    
    
    $
    101
 
 (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 direct inpatient
service revenues by the total number of patient days.(3)
    
    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.  40




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##### Table of Contents



Results of Operations
  Select Medical HoldingsCorporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    81.0
    
    
    
    81.0
    
    
    
    81.0
    
    
    
    81.0General and administrative
    
    
    2.3
    
    
    
    1.7
    
    
    
    2.3
    
    
    
    1.7Bad debt expense
    
    
    1.8
    
    
    
    1.9
    
    
    
    1.8
    
    
    
    1.9Depreciation and amortization
    
    
    3.2
    
    
    
    2.9
    
    
    
    3.2
    
    
    
    2.9Income from operations
    
    
    11.7
    
    
    
    12.5
    
    
    
    11.7
    
    
    
    12.5Gain on early retirement of debt
    
    
    0.6
    
    
    
    
    
    
    
    0.6
    
    
    
    Other income (expense)
    
    
    
    
    
    
    0.0
    
    
    
    (0.0
    )
    
    
    0.0Interest expense, net
    
    
    (6.0
    )
    
    
    (5.0
    )
    
    
    (4.4
    )
    
    
    (3.8
    )Income from operations before
income taxes
    
    
    6.3
    
    
    
    7.5
    
    
    
    7.9
    
    
    
    8.7Income tax expense
    
    
    2.7
    
    
    
    3.0
    
    
    
    3.3
    
    
    
    3.4Net income
    
    
    3.6
    
    
    
    4.5
    
    
    
    4.6
    
    
    
    5.3Net income attributable to
non-controlling interest
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.3Net income attributable to
Holdings and Select
    
    
    3.5
    %
    
    
    4.2
    %
    
    
    4.5
    %
    
    
    5.0
    %
 Select Medical HoldingsCorporation
    
    
    Select Medical CorporationSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    80.7
    
    
    
    80.9
    
    
    
    80.7
    
    
    
    80.9General and administrative
    
    
    2.3
    
    
    
    2.0
    
    
    
    2.3
    
    
    
    2.0Bad debt expense
    
    
    2.0
    
    
    
    1.7
    
    
    
    2.0
    
    
    
    1.7Depreciation and amortization
    
    
    3.2
    
    
    
    2.9
    
    
    
    3.2
    
    
    
    2.9Income from operations
    
    
    11.8
    
    
    
    12.5
    
    
    
    11.8
    
    
    
    12.5Gain on early retirement of debt
    
    
    1.4
    
    
    
    
    
    
    
    1.4
    
    
    
    Other income
    
    
    
    
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.0Interest expense, net
    
    
    (6.1
    )
    
    
    (5.1
    )
    
    
    (4.5
    )
    
    
    (3.9
    )Income from operations before
income taxes
    
    
    7.1
    
    
    
    7.4
    
    
    
    8.8
    
    
    
    8.6Income tax expense
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.6
    
    
    
    3.4Net income
    
    
    4.1
    
    
    
    4.4
    
    
    
    5.2
    
    
    
    5.2Net income attributable to
non-controlling interest
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2Net income attributable to
Holdings and Select
    
    
    4.0
    %
    
    
    4.2
    %
    
    
    5.1
    %
    
    
    5.0
    %
  41




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##### Table of Contents



Select Medical HoldingsCorporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    % Change
    
    
    2009
    
    
    2010
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    386,331
    
    
    $
    403,079
    
    
    
    4.3
    %
    
    $
    386,331
    
    
    $
    403,079
    
    
    
    4.3
    %Outpatient rehabilitation
    
    
    173,190
    
    
    
    176,785
    
    
    
    2.1
    
    
    
    173,190
    
    
    
    176,785
    
    
    
    2.1Other(3)
    
    
    14
    
    
    
    13
    
    
    
    (7.1
    )
    
    
    14
    
    
    
    13
    
    
    
    (7.1
    )Total company
    
    $
    559,535
    
    
    $
    579,877
    
    
    
    3.6
    %
    
    $
    559,535
    
    
    $
    579,877
    
    
    
    3.6
    %Income (loss) from operations:Specialty hospitals
    
    $
    60,170
    
    
    $
    62,445
    
    
    
    3.8
    %
    
    $
    60,170
    
    
    $
    62,445
    
    
    
    3.8
    %Outpatient rehabilitation
    
    
    19,030
    
    
    
    21,013
    
    
    
    10.4
    
    
    
    19,030
    
    
    
    21,013
    
    
    
    10.4Other(3)
    
    
    (13,812
    )
    
    
    (10,882
    )
    
    
    21.2
    
    
    
    (13,812
    )
    
    
    (10,882
    )
    
    
    21.2Total company
    
    $
    65,388
    
    
    $
    72,576
    
    
    
    11.0
    %
    
    $
    65,388
    
    
    $
    72,576
    
    
    
    11.0
    %Adjusted EBITDA:(2)Specialty hospitals
    
    $
    70,960
    
    
    $
    73,344
    
    
    
    3.4
    %
    
    $
    70,960
    
    
    $
    73,344
    
    
    
    3.4
    %Outpatient rehabilitation
    
    
    25,294
    
    
    
    25,956
    
    
    
    2.6
    
    
    
    25,294
    
    
    
    25,956
    
    
    
    2.6Other(3)
    
    
    (12,628
    )
    
    
    (9,677
    )
    
    
    23.4
    
    
    
    (12,628
    )
    
    
    (9,677
    )
    
    
    23.4Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    18.4
    %
    
    
    18.2
    %
    
    
    (1.1
    )%
    
    
    18.4
    %
    
    
    18.2
    %
    
    
    (1.1
    )%Outpatient rehabilitation
    
    
    14.6
    
    
    
    14.7
    
    
    
    0.7
    
    
    
    14.6
    
    
    
    14.7
    
    
    
    0.7Other(3)
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,920,040
    
    
    $
    1,969,566
    
    
    
    
    
    
    $
    1,920,040
    
    
    $
    1,969,566Outpatient rehabilitation
    
    
    492,936
    
    
    
    495,399
    
    
    
    
    
    
    
    492,936
    
    
    
    495,399Other(3)
    
    
    119,706
    
    
    
    195,158
    
    
    
    
    
    
    
    115,324
    
    
    
    192,375Total company
    
    $
    2,532,682
    
    
    $
    2,660,123
    
    
    
    
    
    
    $
    2,528,300
    
    
    $
    2,657,340Purchases of property and
equipment, net:Specialty hospitals
    
    $
    11,222
    
    
    $
    10,026
    
    
    
    
    
    
    $
    11,222
    
    
    $
    10,026Outpatient rehabilitation
    
    
    2,199
    
    
    
    3,133
    
    
    
    
    
    
    
    2,199
    
    
    
    3,133Other(3)
    
    
    524
    
    
    
    248
    
    
    
    
    
    
    
    524
    
    
    
    248Total company
    
    $
    13,945
    
    
    $
    13,407
    
    
    
    
    
    
    $
    13,945
    
    
    $
    13,407
  42




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##### Table of Contents



Select Medical HoldingsCorporation
    
    
    Select Medical CorporationSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    % Change
    
    
    2009
    
    
    2010
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    779,563
    
    
    $
    814,764
    
    
    
    4.5
    %
    
    $
    779,563
    
    
    $
    814,764
    
    
    
    4.5
    %Outpatient rehabilitation
    
    
    341,009
    
    
    
    349,850
    
    
    
    2.6
    
    
    
    341,009
    
    
    
    349,850
    
    
    
    2.6Other(3)
    
    
    135
    
    
    
    76
    
    
    
    (43.7
    )
    
    
    135
    
    
    
    76
    
    
    
    (43.7
    )Total company
    
    $
    1,120,707
    
    
    $
    1,164,690
    
    
    
    3.9
    %
    
    $
    1,120,707
    
    
    $
    1,164,690
    
    
    
    3.9
    %Income (loss) from operations:Specialty hospitals
    
    $
    126,204
    
    
    $
    134,383
    
    
    
    6.5
    %
    
    $
    126,204
    
    
    $
    134,383
    
    
    
    6.5
    %Outpatient rehabilitation
    
    
    34,181
    
    
    
    35,675
    
    
    
    4.4
    
    
    
    34,181
    
    
    
    35,675
    
    
    
    4.4Other(3)
    
    
    (27,371
    )
    
    
    (24,833
    )
    
    
    9.3
    
    
    
    (27,371
    )
    
    
    (24,833
    )
    
    
    9.3Total company
    
    $
    133,014
    
    
    $
    145,225
    
    
    
    9.2
    %
    
    $
    133,014
    
    
    $
    145,225
    
    
    
    9.2
    %Adjusted EBITDA:(2)Specialty hospitals
    
    $
    147,741
    
    
    $
    156,241
    
    
    
    5.8
    %
    
    $
    147,741
    
    
    $
    156,241
    
    
    
    5.8
    %Outpatient rehabilitation
    
    
    46,578
    
    
    
    46,474
    
    
    
    (0.2
    )
    
    
    46,578
    
    
    
    46,474
    
    
    
    (0.2
    )Other(3)
    
    
    (25,041
    )
    
    
    (22,224
    )
    
    
    (11.2
    )
    
    
    (25,041
    )
    
    
    (22,224
    )
    
    
    (11.2
    )Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    19.0
    %
    
    
    19.2
    %
    
    
    1.1
    %
    
    
    19.0
    %
    
    
    19.2
    %
    
    
    1.1
    %Outpatient rehabilitation
    
    
    13.7
    
    
    
    13.3
    
    
    
    (2.9
    )
    
    
    13.7
    
    
    
    13.3
    
    
    
    (2.9
    )Other(3)
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,920,040
    
    
    $
    1,969,566
    
    
    
    
    
    
    $
    1,920,040
    
    
    $
    1,969,566Outpatient rehabilitation
    
    
    492,936
    
    
    
    495,399
    
    
    
    
    
    
    
    492,936
    
    
    
    495,399Other(3)
    
    
    119,706
    
    
    
    195,158
    
    
    
    
    
    
    
    115,324
    
    
    
    192,375Total company
    
    $
    2,532,682
    
    
    $
    2,660,123
    
    
    
    
    
    
    $
    2,528,300
    
    
    $
    2,657,340Purchases of property and
equipment, net:Specialty hospitals
    
    $
    15,377
    
    
    $
    20,624
    
    
    
    
    
    
    $
    15,377
    
    
    $
    20,624Outpatient rehabilitation
    
    
    5,009
    
    
    
    5,168
    
    
    
    
    
    
    
    5,009
    
    
    
    5,168Other(3)
    
    
    595
    
    
    
    662
    
    
    
    
    
    
    
    595
    
    
    
    662Total company
    
    $
    20,981
    
    
    $
    26,454
    
    
    
    
    
    
    $
    20,981
    
    
    $
    26,454
  43




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Select Medical HoldingsCorporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    386,331
    
    
    $
    403,079
    
    
    $
    386,331
    
    
    $
    403,079Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09
    
    
    2,550
    
    
    
    10,748
    
    
    
    2,550
    
    
    
    10,748Specialty hospitals same store net
operating revenue
    
    $
    383,781
    
    
    $
    392,331
    
    
    $
    383,781
    
    
    $
    392,331Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    70,960
    
    
    $
    73,344
    
    
    $
    70,960
    
    
    $
    73,344Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09
    
    
    338
    
    
    
    582
    
    
    
    338
    
    
    
    582Specialty hospitals same store Adjusted
EBITDA(2)
    
    $
    70,622
    
    
    $
    72,762
    
    
    $
    70,622
    
    
    $
    72,762All specialty hospitals Adjusted EBITDA
margin(2)
    
    
    18.4
    %
    
    
    18.2
    %
    
    
    18.4
    %
    
    
    18.2
    %Specialty hospitals same store Adjusted
EBITDA margin(2)
    
    
    18.4
    %
    
    
    18.5
    %
    
    
    18.4
    %
    
    
    18.5
    %
 Select Medical HoldingsCorporation
    
    
    Select Medical CorporationSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    779,563
    
    
    $
    814,764
    
    
    $
    779,563
    
    
    $
    814,764Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09
    
    
    5,572
    
    
    
    19,575
    
    
    
    5,572
    
    
    
    19,575Specialty hospitals same store net
operating revenue
    
    $
    773,991
    
    
    $
    795,189
    
    
    $
    773,991
    
    
    $
    795,189Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    147,741
    
    
    $
    156,241
    
    
    $
    147,741
    
    
    $
    156,241Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09
    
    
    392
    
    
    
    (490
    )
    
    
    392
    
    
    
    (490
    )Specialty hospitals same store Adjusted
EBITDA(2)
    
    $
    147,349
    
    
    $
    156,731
    
    
    $
    147,349
    
    
    $
    156,731All specialty hospitals Adjusted EBITDA
margin(2)
    
    
    19.0
    %
    
    
    19.2
    %
    
    
    19.0
    %
    
    
    19.2
    %Specialty hospitals same store Adjusted
EBITDA margin(2)
    
    
    19.0
    %
    
    
    19.7
    %
    
    
    19.0
    %
    
    
    19.7
    %
 N/M
    
     Not Meaningful.(1)
    
    Cost of services includes salaries, wages and benefits, operating supplies, lease and
rent expense and other operating costs.  44




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(2)
    
    We define Adjusted EBITDA as net income before interest, income taxes, depreciation and
amortization, gain on early retirement of debt, stock compensation expense and other income
(expense). We believe that the presentation of Adjusted EBITDA is important to investors
because Adjusted EBITDA is commonly used as an analytical indicator of performance by
investors within the healthcare industry. 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 9 to our interim unaudited consolidated
financial statements for the period ended June 30, 2010 for a reconciliation of income from
operations before income taxes to Adjusted EBITDA as utilized by us in reporting our
segment performance.(3)
    
    Other includes our general and administrative services and non-healthcare services.
 Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
  Net Operating Revenues
  Specialty Hospitals.
  45




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Outpatient Rehabilitation.
 Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
  46




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Outpatient Rehabilitation
 Other Operating Expenses.
 Income from Operations
  Gain on Early Retirement of Debt
 5 8
 Interest Expense
 Select Medical Corporation. 5 8
 Select Medical Holdings Corporation . 5 8
 Income Taxes
 Select Medical Corporation.
  47




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##### Table of Contents



Select Medical Holdings Corporation.
 Non-Controlling Interests
  Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
  Net Operating Revenues
  Specialty Hospitals.
  48




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##### Table of Contents



Outpatient Rehabilitation.
 Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
  49




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##### Table of Contents



Outpatient Rehabilitation
 Other Operating Expenses
 Income from Operations
  Gain on Early Retirement of Debt
 5 8
 Interest Expense
 Select Medical Corporation. 5 8
 Select Medical Holdings Corporation . 5 8
 Income Taxes
 Select Medical Corporation.
  50




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Select Medical Holdings Corporation.
 Non-Controlling Interests
  Liquidity and Capital Resources
 Six Months Ended June 30, 2010 and Six Months Ended June 30, 2009
 Select Medical HoldingsCorporation
    
    
    Select Medical CorporationSix Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Cash flows provided by operating activities
    
    $
    57,235
    
    
    $
    58,719
    
    
    $
    73,645
    
    
    $
    71,602Cash flows used in investing activities
    
    
    (19,640
    )
    
    
    (26,454
    )
    
    
    (19,640
    )
    
    
    (26,454
    )Cash flows provided by (used in) financing
activities
    
    
    (74,166
    )
    
    
    12,808
    
    
    
    (90,576
    )
    
    
    (75
    )Net increase (decrease) in cash and cash
equivalents
    
    
    (36,571
    )
    
    
    45,073
    
    
    
    (36,571
    )
    
    
    45,073Cash and cash equivalents at beginning of period
    
    
    64,260
    
    
    
    83,680
    
    
    
    64,260
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    27,689
    
    
    $
    128,753
    
    
    $
    27,689
    
    
    $
    128,753
     51




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5 8
  Capital Resources
 Select Medical Corporation .
 Select Medical Holdings Corporation .
  
    
    a $300.0 million revolving loan facility that will terminate on August 22, 2013,
including both a letter of credit sub-facility and a swingline loan sub-facility, and
    
    $191.8 million in term loans that mature on February 24, 2012 (the Tranche B Term
Loans), and
    
    $291.3 million in term loans that mature on August 22, 2014 (the Tranche B-1 Term
Loans).
    52




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5 8
  53




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Inflation
   54




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##### Table of Contents



Recent Accounting Pronouncements
  
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4T.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   55




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Internal Control Over Financial Reporting
  
 PART II OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
       56




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##### Table of Contents



ITEM 1A.
    
    RISK FACTORS.
   
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    REMOVED AND RESERVED
 
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
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SIGNATURES
  SELECT MEDICAL CORPORATIONBy:
    /s/        Martin F. JacksonMartin F. JacksonExecutive Vice President and Chief Financial Officer
(Duly Authorized Officer)By:
    /s/        Scott A. RombergerScott A. RombergerSenior Vice President, Chief Accounting Officer and
Controller
(Principal Accounting Officer) Dated: August 12, 2010
 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 12, 2010
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Exhibit
    
    Description2.1
    
    
    Purchase and Sale Agreement by and among Regency Hospital Company,
L.L.C., the Sellers named therein, the Representative named
therein, Intensiva Healthcare Corporation and Select Medical
Corporation, dated June 18, 2010, incorporated herein by reference
to Exhibit 2.1 of the Current Report on Form 8-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on June
23, 2010 (Reg. Nos. 001-34465 and 001-34465)10.1
    
    
    Assignment and Assumption and Amendment No. 4, dated June 7, 2010,
to Credit Agreement dated as of February 24, 2005, as amended, by
and among Select Medical Holdings Corporation, Select Medical
Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent and
Collateral Agent, Wachovia Bank, National Association as
Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and CIBC Inc. as Co-Documentation Agents, and the
Lenders named therein.10.2
    
    
    Amendment No. 4-A, dated June 7, 2010, to Credit Agreement dated
as of February 24, 2005, as amended, by and among Select Medical
Holdings Corporation, Select Medical Corporation, JPMorgan Chase
Bank, N.A. as Administrative Agent and Collateral Agent, Wachovia
Bank, National Association as Syndication Agent, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc. as
Co-Documentation Agents, and the Lenders named therein.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, and 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.
  59