##### 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 September 30, 2009
 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
 
  o þ
  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 STATEMENTS
    
    
    3Consolidated balance sheets
    
    
    3Consolidated statements of operations
    
    
    4Consolidated statements of changes in stockholders equity and comprehensive income
    
    
    6Consolidated statements of cash flows
    
    
    7Notes to consolidated financial statements
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    29ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    56ITEM 4. CONTROLS AND PROCEDURES
    
    
    56PART II OTHER INFORMATION
    
    
    57ITEM 1. LEGAL PROCEEDINGS
    
    
    57ITEM 1A. RISK FACTORS
    
    
    57ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    57ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    58ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    58ITEM 5. OTHER INFORMATION
    
    
    59ITEM 6. EXHIBITS
    
    
    59SIGNATURES
    
    
    60Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationDecember 31,
    
    
    September 30,
    
    
    December 31,
    
    
    September 30,2008 (1)
    
    
    2009
    
    
    2008 (1)
    
    
    2009ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    64,260
    
    
    $
    280,492
    
    
    $
    64,260
    
    
    $
    280,492Accounts receivable, net of allowance for doubtful accounts
of $57,052 and $47,343 in 2008 and 2009, respectively
    
    
    312,418
    
    
    
    310,855
    
    
    
    312,418
    
    
    
    310,855Current deferred tax asset
    
    
    61,925
    
    
    
    51,426
    
    
    
    48,594
    
    
    
    51,426Prepaid income taxes
    
    
    7,362
    
    
    
    13,338
    
    
    
    7,362
    
    
    
    13,338Other current assets
    
    
    20,897
    
    
    
    22,152
    
    
    
    20,897
    
    
    
    22,152Total Current Assets
    
    
    466,862
    
    
    
    678,263
    
    
    
    453,531
    
    
    
    678,263Property and equipment, net
    
    
    471,065
    
    
    
    458,897
    
    
    
    471,065
    
    
    
    458,897Goodwill
    
    
    1,506,661
    
    
    
    1,507,223
    
    
    
    1,506,661
    
    
    
    1,507,223Other identifiable intangibles
    
    
    74,078
    
    
    
    67,473
    
    
    
    74,078
    
    
    
    67,473Assets held for sale
    
    
    12,542
    
    
    
    11,342
    
    
    
    12,542
    
    
    
    11,342Other assets
    
    
    48,261
    
    
    
    41,544
    
    
    
    44,548
    
    
    
    38,355Total Assets
    
    $
    2,579,469
    
    
    $
    2,764,742
    
    
    $
    2,562,425
    
    
    $
    2,761,553LIABILITIES AND EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    21,130
    
    
    $
    
    
    
    $
    21,130
    
    
    $
    Current portion of long-term debt and notes payable
    
    
    9,046
    
    
    
    141,667
    
    
    
    9,046
    
    
    
    141,667Accounts payable
    
    
    72,496
    
    
    
    64,103
    
    
    
    72,496
    
    
    
    64,103Accrued payroll
    
    
    66,380
    
    
    
    64,991
    
    
    
    66,380
    
    
    
    64,991Accrued vacation
    
    
    37,109
    
    
    
    38,082
    
    
    
    37,109
    
    
    
    38,082Accrued interest
    
    
    37,032
    
    
    
    15,293
    
    
    
    25,444
    
    
    
    12,345Accrued restructuring
    
    
    8,108
    
    
    
    4,740
    
    
    
    8,108
    
    
    
    4,740Accrued other
    
    
    91,482
    
    
    
    115,846
    
    
    
    107,982
    
    
    
    115,846Due to third party payors
    
    
    5,709
    
    
    
    2,179
    
    
    
    5,709
    
    
    
    2,179Total Current Liabilities
    
    
    348,492
    
    
    
    446,901
    
    
    
    353,404
    
    
    
    443,953Long-term debt, net of current portion
    
    
    1,770,879
    
    
    
    1,521,394
    
    
    
    1,460,276
    
    
    
    1,217,252Non-current deferred tax liability
    
    
    42,918
    
    
    
    54,733
    
    
    
    42,918
    
    
    
    54,733Other non-current liabilities
    
    
    67,709
    
    
    
    60,648
    
    
    
    67,709
    
    
    
    60,648Total Liabilities
    
    
    2,229,998
    
    
    
    2,083,676
    
    
    
    1,924,307
    
    
    
    1,776,586Commitments and ContingenciesPreferred stock  Authorized shares (liquidation preference is $515,872 in 2008)
    
    
    515,872
    
    
    
    
    
    
    
    
    
    
    
    Stockholders Equity:Common stock
of Holdings, $0.001 par value, 250,000,000 shares authorized, 61,466,000
shares and
156,093,000 shares issued and outstanding in 2008 and 2009, respectively
    
    
    61
    
    
    
    156
    
    
    
    
    
    
    
    Common stock
of Select, $0.01 par value, 100 shares issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    (289,238
    )
    
    
    544,772
    
    
    
    481,094
    
    
    
    786,304Retained earnings
    
    
    128,185
    
    
    
    139,183
    
    
    
    160,657
    
    
    
    201,708Accumulated other comprehensive loss
    
    
    (13,212
    )
    
    
    (10,680
    )
    
    
    (11,436
    )
    
    
    (10,680
    )Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders Equity
    
    
    (174,204
    )
    
    
    673,431
    
    
    
    630,315
    
    
    
    977,332Non-controlling interest
    
    
    7,803
    
    
    
    7,635
    
    
    
    7,803
    
    
    
    7,635Total Equity
    
    
    (166,401
    )
    
    
    681,066
    
    
    
    638,118
    
    
    
    984,967Total Liabilities and Equity
    
    $
    2,579,469
    
    
    $
    2,764,742
    
    
    $
    2,562,425
    
    
    $
    2,761,553
 (1)
    
    Adjusted for the adoption of an amendment issued by the
Financial Accounting Standards Board in December 2007 to ASC
topic 810, Consolidation. See Note 2, Accounting Policies  Recent Accounting Pronouncements, for additional
information. The accompanying notes are an integral part of this statement.
  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 September 30,
    
    
    For the Quarter Ended September 30,2008 (1) (2)
    
    
    2009
    
    
    2008 (1)
    
    
    2009Net operating revenues
    
    $
    519,179
    
    
    $
    545,621
    
    
    $
    519,179
    
    
    $
    545,621Costs and expenses:Cost of services
    
    
    441,395
    
    
    
    448,702
    
    
    
    441,395
    
    
    
    448,702General and administrative
    
    
    11,538
    
    
    
    34,618
    
    
    
    11,538
    
    
    
    34,618Bad debt expense
    
    
    12,240
    
    
    
    11,720
    
    
    
    12,240
    
    
    
    11,720Depreciation and amortization
    
    
    17,848
    
    
    
    17,676
    
    
    
    17,848
    
    
    
    17,676Total costs and expenses
    
    
    483,021
    
    
    
    512,716
    
    
    
    483,021
    
    
    
    512,716Income from operations
    
    
    36,158
    
    
    
    32,905
    
    
    
    36,158
    
    
    
    32,905Other income and expense:Gain on early retirement of debt
    
    
    
    
    
    
    1,129
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    1,322
    
    
    
    2,215Interest income
    
    
    93
    
    
    
    2
    
    
    
    93
    
    
    
    2Interest expense
    
    
    (36,153
    )
    
    
    (33,451
    )
    
    
    (27,420
    )
    
    
    (25,114
    )Income from operations before income taxes
    
    
    98
    
    
    
    585
    
    
    
    10,153
    
    
    
    10,008Income tax expense (benefit)
    
    
    (111
    )
    
    
    (804
    )
    
    
    3,408
    
    
    
    2,494Net income
    
    
    209
    
    
    
    1,389
    
    
    
    6,745
    
    
    
    7,514Less: Net income attributable to non-controlling interests
    
    
    1,032
    
    
    
    806
    
    
    
    1,032
    
    
    
    806Net income (loss) attributable to Select Medical
Holdings Corporation
and Select Medical Corporation
    
    
    (823
    )
    
    
    583
    
    
    $
    5,713
    
    
    $
    6,708Less: Preferred dividends
    
    
    6,290
    
    
    
    6,667Net loss available to common stockholders
    
    $
    (7,113
    )
    
    $
    (6,084
    )Loss per common share:Basic
    
    $
    (0.11
    )
    
    $
    (0.09
    )Diluted
    
    $
    (0.11
    )
    
    $
    (0.09
    )
 (1)
    
    Adjusted for the adoption of an amendment issued by the
Financial Accounting Standards Board in December 2007 to ASC
topic 810, Consolidation. See Note 2, Accounting Policies  Recent Accounting Pronouncements, for
additional information.(2)
    
    Adjusted for the clarification by the Financial Accounting
Standards Board that stated share based payment awards that have not
vested meet the definition of a participating security provided the
right to receive the dividend is non-forfeitable and non-contingent.
See Note 11 for additional information. The accompanying notes are an integral part of this statement.
  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 Nine Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2008 (1) (2)
    
    
    2009
    
    
    2008 (1)
    
    
    2009Net operating revenues
    
    $
    1,606,263
    
    
    $
    1,666,328
    
    
    $
    1,606,263
    
    
    $
    1,666,328Costs and expenses:Cost of services
    
    
    1,343,022
    
    
    
    1,353,107
    
    
    
    1,343,022
    
    
    
    1,353,107General and administrative
    
    
    35,843
    
    
    
    60,278
    
    
    
    35,843
    
    
    
    60,278Bad debt expense
    
    
    35,300
    
    
    
    33,678
    
    
    
    35,300
    
    
    
    33,678Depreciation and amortization
    
    
    53,175
    
    
    
    53,346
    
    
    
    53,175
    
    
    
    53,346Total costs and expenses
    
    
    1,467,340
    
    
    
    1,500,409
    
    
    
    1,467,340
    
    
    
    1,500,409Income from operations
    
    
    138,923
    
    
    
    165,919
    
    
    
    138,923
    
    
    
    165,919Other income and expense:Gain on early retirement of debt
    
    
    
    
    
    
    16,445
    
    
    
    
    
    
    
    15,316Other income (expense)
    
    
    
    
    
    
    
    
    
    
    (1,180
    )
    
    
    3,836Interest income
    
    
    275
    
    
    
    82
    
    
    
    275
    
    
    
    82Interest expense
    
    
    (109,603
    )
    
    
    (101,781
    )
    
    
    (83,428
    )
    
    
    (75,936
    )Income from operations before income taxes
    
    
    29,595
    
    
    
    80,665
    
    
    
    54,590
    
    
    
    109,217Income tax expense
    
    
    13,862
    
    
    
    33,076
    
    
    
    22,610
    
    
    
    43,069Net income
    
    
    15,733
    
    
    
    47,589
    
    
    
    31,980
    
    
    
    66,148Less: Net income attributable to non-controlling interests
    
    
    2,103
    
    
    
    2,218
    
    
    
    2,103
    
    
    
    2,218Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation
    
    
    13,630
    
    
    
    45,371
    
    
    $
    29,877
    
    
    $
    63,930Less: Preferred dividends
    
    
    18,569
    
    
    
    19,537Net income (loss) available to common stockholders
    
    $
    (4,939
    )
    
    $
    25,834Income (loss) per common share:Basic
    
    $
    (0.07
    )
    
    $
    0.38Diluted
    
    $
    (0.07
    )
    
    $
    0.37
 (1)
    
    Adjusted for the adoption of an amendment issued by the
Financial Accounting Standards Board in December 2007 to ASC
topic 810, Consolidation. See Note 2, Accounting Policies  Recent Accounting Pronouncements, for additional
information.(2)
    
    Adjusted for the clarification by the Financial Accounting
Standards Board that stated share based payment awards that have not
vested meet the definition of a participating security provided the
right to receive the dividend is non-forfeitable and non-contingent.
See Note 11 for additional information. The accompanying notes are an integral part of this statement.
  5




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##### Table of Contents



Select Medical Holdings Corporation
 
 Consolidated Statement of Changes in Equity and Comprehensive Income (Loss)
 (unaudited)
 (in thousands)
 Select Medical Holdings Corporation StockholdersCommon
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherComprehensive
    
    
    Common
    
    
    Stock Par
    
    
    Capital in
    
    
    Retained
    
    
    Comprehensive
    
    
    Non-controllingTotal
    
    
    Income
    
    
    Stock Issued
    
    
    Value
    
    
    Excess of Par
    
    
    Earnings
    
    
    Income (Loss)
    
    
    InterestsBalance at December 31, 2008 (1)
    
    $
    (166,401
    )
    
    
    
    
    
    
    61,466
    
    
    $
    61
    
    
    $
    (289,238
    )
    
    $
    128,185
    
    
    $
    (13,212
    )
    
    $
    7,803Net income
    
    
    47,589
    
    
    $
    47,589
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,371
    
    
    
    
    
    
    
    2,218Unrealized gain on interest rate swap, net of tax
    
    
    2,532
    
    
    
    2,532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,532Total comprehensive income
    
    $
    50,121
    
    
    $
    50,121Issuance of common stock in connection with initial public
offering, net of issuance costs
    
    
    279,124
    
    
    
    
    
    
    
    30,000
    
    
    
    30
    
    
    
    279,094Conversion of preferred stock
    
    
    535,407
    
    
    
    
    
    
    
    64,277
    
    
    
    65
    
    
    
    535,342Deemed dividend on conversion of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,836
    
    
    
    (14,836
    )Issuance and vesting of restricted stock
    
    
    4,697
    
    
    
    
    
    
    
    364
    
    
    
    
    
    
    
    4,697Exercise of stock options
    
    
    24
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    24Stock option expense
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98Repurchase of common shares
    
    
    (81
    )
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    (81
    )Distributions to non-controlling interests
    
    
    (2,486
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,486
    )Equity contribution from non-controlling interests
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Accretion of dividends on preferred stock
    
    
    (19,537
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,537
    )Balance at September 30, 2009
    
    $
    681,066
    
    
    
    
    
    
    
    156,093
    
    
    $
    156
    
    
    $
    544,772
    
    
    $
    139,183
    
    
    $
    (10,680
    )
    
    $
    7,635
 Select Medical Corporation
Consolidated Statement of Changes in Equity and Comprehensive Income (Loss)
(unaudited)
(in thousands)
 Select Medical Corporation StockholdersCommon
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherComprehensive
    
    
    Common
    
    
    Stock Par
    
    
    Capital in
    
    
    Retained
    
    
    Comprehensive
    
    
    Non-controllingTotal
    
    
    Income
    
    
    Stock Issued
    
    
    Value
    
    
    Excess of Par
    
    
    Earnings
    
    
    Income (Loss)
    
    
    InterestsBalance at December 31, 2008 (1)
    
    $
    638,118
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    481,094
    
    
    $
    160,657
    
    
    $
    (11,436
    )
    
    $
    7,803Net income
    
    
    66,148
    
    
    $
    66,148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,930
    
    
    
    
    
    
    
    2,218Unrealized gain on interest rate swap, net of tax
    
    
    756
    
    
    
    756
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756Total comprehensive income
    
    $
    66,904
    
    
    $
    66,904Federal tax benefit of losses contributed by Holdings
    
    
    21,267
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,267Additional investment by Holdings
    
    
    279,148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279,148Settlement of dividends paid to Holdings
    
    
    (22,879
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,879
    )Distributions to non-controlling interests
    
    
    (2,486
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,486
    )Equity contribution from non-controlling interests
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Contribution related to restricted stock awards and stock option
issuances by Holdings
    
    
    4,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,795Balance at September 30, 2009
    
    $
    984,967
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    786,304
    
    
    $
    201,708
    
    
    $
    (10,680
    )
    
    $
    7,635
 (1)
    
    Adjusted for the adoption of an amendment issued by the
Financial Accounting Standards Board in December 2007 to ASC
topic 810, Consolidation. See Note 2, Accounting Policies  Recent Accounting Pronouncements, for
additional information. The accompanying notes are an integral part of this statement.
  6




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##### Table of Contents



Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Nine Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2008 (1)
    
    
    2009
    
    
    2008 (1)
    
    
    2009Operating activitiesNet income
    
    $
    15,733
    
    
    $
    47,589
    
    
    $
    31,980
    
    
    $
    66,148Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    53,175
    
    
    
    53,346
    
    
    
    53,175
    
    
    
    53,346Provision for bad debts
    
    
    35,300
    
    
    
    33,678
    
    
    
    35,300
    
    
    
    33,678Gain on early retirement of debt
    
    
    
    
    
    
    (16,445
    )
    
    
    
    
    
    
    (15,316
    )Loss (gain) from disposal of assets
    
    
    (316
    )
    
    
    550
    
    
    
    (316
    )
    
    
    550Non-cash loss (gain) from interest rate swaps
    
    
    
    
    
    
    
    
    
    
    1,180
    
    
    
    (3,836
    )Non-cash stock compensation expense
    
    
    1,697
    
    
    
    4,795
    
    
    
    1,697
    
    
    
    4,795Amortization of debt discount
    
    
    1,101
    
    
    
    1,239
    
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (74,975
    )
    
    
    (32,033
    )
    
    
    (74,975
    )
    
    
    (32,033
    )Other current assets
    
    
    5,465
    
    
    
    (982
    )
    
    
    5,465
    
    
    
    (982
    )Other assets
    
    
    11,375
    
    
    
    4,018
    
    
    
    10,959
    
    
    
    3,589Accounts payable
    
    
    (4,917
    )
    
    
    (8,366
    )
    
    
    (4,917
    )
    
    
    (8,366
    )Due to third-party payors
    
    
    (9,328
    )
    
    
    (3,530
    )
    
    
    (9,328
    )
    
    
    (3,530
    )Accrued expenses
    
    
    (9,541
    )
    
    
    (1,024
    )
    
    
    (1,391
    )
    
    
    7,615Income and deferred taxes
    
    
    9,204
    
    
    
    10,612
    
    
    
    17,950
    
    
    
    20,608Net cash provided by operating activities
    
    
    33,973
    
    
    
    93,447
    
    
    
    66,779
    
    
    
    126,266Investing activitiesPurchases of property and equipment
    
    
    (35,770
    )
    
    
    (35,250
    )
    
    
    (35,770
    )
    
    
    (35,250
    )Proceeds from sale of business units
    
    
    1,851
    
    
    
    
    
    
    
    1,851
    
    
    
    Proceeds from sale of property
    
    
    743
    
    
    
    1,341
    
    
    
    743
    
    
    
    1,341Acquisition of businesses, net of cash acquired
    
    
    (7,402
    )
    
    
    (381
    )
    
    
    (7,402
    )
    
    
    (381
    )Net cash used in investing activities
    
    
    (40,578
    )
    
    
    (34,290
    )
    
    
    (40,578
    )
    
    
    (34,290
    )Financing activitiesProceeds from initial public offering, net of fees
    
    
    
    
    
    
    282,000
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    282,024Payment of initial public offering costs
    
    
    
    
    
    
    (584
    )
    
    
    
    
    
    
    (584
    )Borrowings on revolving credit facility
    
    
    387,000
    
    
    
    193,000
    
    
    
    387,000
    
    
    
    193,000Payments on revolving credit facility
    
    
    (357,000
    )
    
    
    (253,000
    )
    
    
    (357,000
    )
    
    
    (253,000
    )Payment on credit facility term loan
    
    
    (5,100
    )
    
    
    (5,033
    )
    
    
    (5,100
    )
    
    
    (5,033
    )Repurchase of 7 5/8% senior subordinated notes
    
    
    
    
    
    
    (30,114
    )
    
    
    
    
    
    
    (30,114
    )Repurchase of senior floating rate notes
    
    
    
    
    
    
    (6,468
    )
    
    
    
    
    
    
    Borrowings of other debt
    
    
    
    
    
    
    5,184
    
    
    
    
    
    
    
    5,184Principal payments on seller and other debt
    
    
    (4,015
    )
    
    
    (5,738
    )
    
    
    (4,015
    )
    
    
    (5,738
    )Dividends paid to Holdings
    
    
    
    
    
    
    
    
    
    
    (33,418
    )
    
    
    (39,367
    )Repurchase of common and preferred stock
    
    
    (612
    )
    
    
    (80
    )
    
    
    
    
    
    
    Exercise of stock options
    
    
    90
    
    
    
    24
    
    
    
    
    
    
    
    Repayment of bank overdrafts
    
    
    (7,217
    )
    
    
    (21,130
    )
    
    
    (7,217
    )
    
    
    (21,130
    )Equity contribution and loans from non-controlling interests
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    1,500Distributions to non-controlling interests
    
    
    (1,703
    )
    
    
    (2,486
    )
    
    
    (1,703
    )
    
    
    (2,486
    )Net cash provided by (used in) financing activities
    
    
    11,443
    
    
    
    157,075
    
    
    
    (21,363
    )
    
    
    124,256Net increase in cash and cash equivalents
    
    
    4,838
    
    
    
    216,232
    
    
    
    4,838
    
    
    
    216,232Cash and cash equivalents at beginning of period
    
    
    4,529
    
    
    
    64,260
    
    
    
    4,529
    
    
    
    64,260Cash and cash equivalents at end of period
    
    $
    9,367
    
    
    $
    280,492
    
    
    $
    9,367
    
    
    $
    280,492Supplemental Cash Flow InformationCash paid for interest
    
    $
    123,285
    
    
    $
    115,901
    
    
    $
    90,404
    
    
    $
    83,082Cash paid for taxes
    
    $
    4,704
    
    
    $
    22,441
    
    
    $
    4,704
    
    
    $
    22,441
 (1)
    
    Adjusted for the adoption of an amendment issued by the
Financial Accounting Standards Board in December 2007 to ASC
topic 810, Consolidation. See Note 2, Accounting Policies  Recent Accounting Pronouncements, for
additional information. The accompanying notes are an integral part of this statement.
  7




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##### Table of Contents



SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Basis of Presentation
 Initial Public
Offering,
   2. Accounting Policies
 Use of Estimates
   8




---



##### Table of Contents



Recent Accounting Pronouncements
        9




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##### Table of Contents



3. Intangible Assets
  As of September 30, 2009Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (18,751
    )Non-compete agreements
    
    
    25,909
    
    
    
    (19,513
    )Total
    
    $
    46,365
    
    
    $
    (38,264
    )Indefinite-lived intangible assetsGoodwill
    
    $
    1,507,223Trademarks
    
    
    47,858Certificates of need
    
    
    10,175Accreditations
    
    
    1,339Total
    
    $
    1,566,595
   10




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009(in thousands)Amortization expense
    
    $
    2,208
    
    
    $
    2,207
    
    
    $
    6,623
    
    
    $
    6,623
   2009
    
    $
    8,8312010
    
    
    4,2472011
    
    
    1,3062012
    
    
    3402013
    
    
    0
  Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    Total(in thousands)Balance as of December 31, 2008
    
    $
    1,227,848
    
    
    $
    278,813
    
    
    $
    1,506,661Goodwill acquired during year
    
    
    
    
    
    
    562
    
    
    
    562Balance as of September 30,
2009
    
    $
    1,227,848
    
    
    $
    279,375
    
    
    $
    1,507,223
 4. Restructuring Reserves
   11




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##### Table of Contents



LeaseTerminationCosts
    
    
    Severance
    
    
    Other
    
    
    Total(in thousands)December 31, 2008
    
    $
    7,047
    
    
    $
    992
    
    
    $
    69
    
    
    $
    8,108Amounts paid in 2009
    
    
    (2,925
    )
    
    
    (443
    )
    
    
    
    
    
    
    (3,368
    )Revision of estimate
    
    
    565
    
    
    
    (496
    )
    
    
    (69
    )
    
    
    September 30, 2009
    
    $
    4,687
    
    
    $
    53
    
    
    $
    
    
    
    $
    4,740
  5. Amendment to Senior Secured Credit Facility
  6. Fair Value
 Fair Value Measurements
   12




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##### Table of Contents



Fair Value of Financial Instruments
 5 8 5 8
 Interest Rate Swaps
    Accumulated Other Comprehensive Loss.
  13




---



##### Table of Contents



7. Accumulated Other Comprehensive Loss
 Holdings
  Select
  8. Initial Public Offering
   9. 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.
  14




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##### Table of Contents



Common Stock
  10. Segment Information
   Three Months Ended September 30, 2008Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    358,838
    
    
    $
    160,303
    
    
    $
    38
    
    
    $
    519,179Adjusted EBITDA
    
    
    49,137
    
    
    
    16,405
    
    
    
    (11,031
    )
    
    
    54,511Total assets:Select Medical Corporation
    
    
    1,900,485
    
    
    
    502,943
    
    
    
    105,881
    
    
    
    2,509,309Select Medical Holdings Corporation
    
    
    1,900,485
    
    
    
    502,943
    
    
    
    109,733
    
    
    
    2,513,161Capital expenditures
    
    
    5,997
    
    
    
    3,235
    
    
    
    431
    
    
    
    9,663
 Three Months Ended September 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    376,859
    
    
    $
    168,751
    
    
    $
    11
    
    
    $
    545,621Adjusted EBITDA
    
    
    64,381
    
    
    
    20,898
    
    
    
    (12,236
    )
    
    
    73,043Total assets:Select Medical Corporation
    
    
    1,898,494
    
    
    
    484,703
    
    
    
    378,356
    
    
    
    2,761,553Select Medical Holdings
Corporation
    
    
    1,898,494
    
    
    
    484,703
    
    
    
    381,545
    
    
    
    2,764,742Capital expenditures
    
    
    12,371
    
    
    
    1,566
    
    
    
    332
    
    
    
    14,269
  15




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##### Table of Contents



Nine Months Ended September 30, 2008Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    1,104,731
    
    
    $
    501,375
    
    
    $
    157
    
    
    $
    1,606,263Adjusted EBITDA
    
    
    167,617
    
    
    
    60,248
    
    
    
    (34,070
    )
    
    
    193,795Total assets:Select Medical Corporation
    
    
    1,900,485
    
    
    
    502,943
    
    
    
    105,881
    
    
    
    2,509,309Select Medical Holdings
Corporation
    
    
    1,900,485
    
    
    
    502,943
    
    
    
    109,733
    
    
    
    2,513,161Capital expenditures
    
    
    23,385
    
    
    
    10,048
    
    
    
    2,337
    
    
    
    35,770
 Nine Months Ended September 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    1,156,422
    
    
    $
    509,760
    
    
    $
    146
    
    
    $
    1,666,328Adjusted EBITDA
    
    
    212,122
    
    
    
    67,476
    
    
    
    (37,277
    )
    
    
    242,321Total assets:Select Medical Corporation
    
    
    1,898,494
    
    
    
    484,703
    
    
    
    378,356
    
    
    
    2,761,553Select Medical Holdings Corporation
    
    
    1,898,494
    
    
    
    484,703
    
    
    
    381,545
    
    
    
    2,764,742Capital expenditures
    
    
    27,748
    
    
    
    6,575
    
    
    
    927
    
    
    
    35,250
  Three Months Ended September 30, 2008Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    49,137
    
    
    $
    16,405
    
    
    $
    (11,031
    )Depreciation and amortization
    
    
    (10,756
    )
    
    
    (6,193
    )
    
    
    (899
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (505
    )Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    38,381
    
    
    $
    10,212
    
    
    $
    (12,435
    )
    
    $
    36,158
    
    
    $
    36,158Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,322Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,060
    )
    
    
    (27,327
    )Income from operations before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    98
    
    
    $
    10,153
  16




---



##### Table of Contents



Three Months Ended September 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    64,381
    
    
    $
    20,898
    
    
    $
    (12,236
    )Depreciation and amortization
    
    
    (10,485
    )
    
    
    (6,282
    )
    
    
    (909
    )Long term incentive compensation
    
    
    
    
    
    
    
    
    
    
    (18,261
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (4,201
    )Select MedicalHoldings
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    53,896
    
    
    $
    14,616
    
    
    $
    (35,607
    )
    
    $
    32,905
    
    
    $
    32,905Gain on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,129
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,215Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,449
    )
    
    
    (25,112
    )Income from operations before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    585
    
    
    $
    10,008
 Nine Months Ended September 30, 2008Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    167,617
    
    
    $
    60,248
    
    
    $
    (34,070
    )Depreciation and amortization
    
    
    (32,632
    )
    
    
    (17,894
    )
    
    
    (2,649
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (1,697
    )Select MedicalHoldings
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    134,985
    
    
    $
    42,354
    
    
    $
    (38,416
    )
    
    $
    138,923
    
    
    $
    138,923Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,180
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109,328
    )
    
    
    (83,153
    )Income from operations before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    29,595
    
    
    $
    54,590
 Nine Months Ended September 30, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    212,122
    
    
    $
    67,476
    
    
    $
    (37,277
    )Depreciation and amortization
    
    
    (32,022
    )
    
    
    (18,679
    )
    
    
    (2,645
    )Long term incentive compensation
    
    
    
    
    
    
    
    
    
    
    (18,261
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (4,795
    )Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    180,100
    
    
    $
    48,797
    
    
    $
    (62,978
    )
    
    $
    165,919
    
    
    $
    165,919Gain on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,445
    
    
    
    15,316Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,836Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,699
    )
    
    
    (75,854
    )Income from operations before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,665
    
    
    $
    109,217
  17




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##### Table of Contents



11. Net Income (Loss) per Share
   For the Quarter Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009(in thousands, except per share data)Numerator:Net income (loss) attributable to
Select Medical Holdings
Corporation
    
    $
    (823
    )
    
    $
    583
    
    
    $
    13,630
    
    
    $
    45,371Less: Preferred stock dividends
    
    
    6,290
    
    
    
    6,667
    
    
    
    18,569
    
    
    
    19,537Less: Earnings (loss) allocated
to preferred stockholders
    
    
    (712
    )
    
    
    (582
    )
    
    
    (497
    )
    
    
    2,497Less: Earnings allocated to
unvested restricted stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315Income (loss) available to common
and preferred stockholders 
basic and diluted
    
    $
    (6,401
    )
    
    $
    (5,502
    )
    
    $
    (4,442
    )
    
    $
    23,022Denominator:Weighted average shares  basic
    
    
    59,769
    
    
    
    62,078
    
    
    
    59,378
    
    
    
    61,030Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470Weighted average shares  diluted
    
    
    59,769
    
    
    
    62,078
    
    
    
    59,378
    
    
    
    61,500Basic income (loss) per common
share
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.07
    )
    
    $
    0.38Diluted income (loss) per common
share
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.07
    )
    
    $
    0.37
  18




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##### Table of Contents



For the Quarter Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009(in thousands)Stock options
    
    
    55
    
    
    
    469
    
    
    
    852
    
    
    
    Restricted stock
    
    
    1,518
    
    
    
    
    
    
    
    1,674
    
    
    
    
 12. Early Retirement of Debt
 5 8
 13. Commitments and Contingencies
 Litigation
      19




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##### Table of Contents



Construction Commitments
  14. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under
Selects 7 5/8% Senior Subordinated Notes
 5 8 7 5/8%
    
  20




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetSeptember 30, 2009(unaudited)Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    277,458
    
    
    $
    2,612
    
    
    $
    422
    
    
    $
    
    
    
    $
    280,492Accounts receivable, net
    
    
    118
    
    
    
    291,971
    
    
    
    18,766
    
    
    
    
    
    
    
    310,855Current deferred tax asset
    
    
    28,645
    
    
    
    20,564
    
    
    
    2,217
    
    
    
    
    
    
    
    51,426Prepaid income taxes
    
    
    13,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,338Other current assets
    
    
    3,459
    
    
    
    15,800
    
    
    
    2,893
    
    
    
    
    
    
    
    22,152Total Current Assets
    
    
    323,018
    
    
    
    330,947
    
    
    
    24,298
    
    
    
    
    
    
    
    678,263Property and equipment, net
    
    
    6,936
    
    
    
    405,743
    
    
    
    46,218
    
    
    
    
    
    
    
    458,897Investment in affiliates
    
    
    2,109,416
    
    
    
    45,574
    
    
    
    
    
    
    
    (2,154,990
    )(a) (b)
    
    
    Goodwill
    
    
    
    
    
    
    1,507,223
    
    
    
    
    
    
    
    
    
    
    
    1,507,223Other identifiable intangibles
    
    
    
    
    
    
    67,473
    
    
    
    
    
    
    
    
    
    
    
    67,473Assets held for sale
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,342Other assets
    
    
    26,896
    
    
    
    9,218
    
    
    
    2,241
    
    
    
    
    
    
    
    38,355Total Assets
    
    $
    2,477,608
    
    
    $
    2,366,178
    
    
    $
    72,757
    
    
    $
    (2,154,990
    )
    
    $
    2,761,553Liabilities and EquityCurrent Liabilities:Current portion of long-term debt
and notes payable
    
    $
    140,902
    
    
    $
    759
    
    
    $
    6
    
    
    $
    
    
    
    $
    141,667Accounts payable
    
    
    1,548
    
    
    
    55,556
    
    
    
    6,999
    
    
    
    
    
    
    
    64,103Intercompany accounts
    
    
    474,737
    
    
    
    (441,705
    )
    
    
    (33,032
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    1,658
    
    
    
    63,165
    
    
    
    168
    
    
    
    
    
    
    
    64,991Accrued vacation
    
    
    2,782
    
    
    
    32,153
    
    
    
    3,147
    
    
    
    
    
    
    
    38,082Accrued interest
    
    
    12,308
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    12,345Accrued restructuring
    
    
    
    
    
    
    4,740
    
    
    
    
    
    
    
    
    
    
    
    4,740Accrued other
    
    
    72,660
    
    
    
    40,407
    
    
    
    2,779
    
    
    
    
    
    
    
    115,846Due to third party payors
    
    
    
    
    
    
    12,842
    
    
    
    (10,663
    )
    
    
    
    
    
    
    2,179Total Current Liabilities
    
    
    706,595
    
    
    
    (232,046
    )
    
    
    (30,596
    )
    
    
    
    
    
    
    443,953Long-term debt, net of current portion
    
    
    733,810
    
    
    
    439,417
    
    
    
    44,025
    
    
    
    
    
    
    
    1,217,252Non-current deferred tax liability
    
    
    (777
    )
    
    
    49,409
    
    
    
    6,101
    
    
    
    
    
    
    
    54,733Other non-current liabilities
    
    
    60,648
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,648Total Liabilities
    
    
    1,500,276
    
    
    
    256,780
    
    
    
    19,530
    
    
    
    
    
    
    
    1,776,586Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    786,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    786,304Retained earnings
    
    
    201,708
    
    
    
    374,733
    
    
    
    17,116
    
    
    
    (391,849
    )(b)
    
    
    201,708Subsidiary investment
    
    
    
    
    
    
    1,734,665
    
    
    
    28,476
    
    
    
    (1,763,141
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (10,680
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,680
    )Total Select Medical Corporation
Stockholders Equity
    
    
    977,332
    
    
    
    2,109,398
    
    
    
    45,592
    
    
    
    (2,154,990
    )
    
    
    977,332Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    7,635
    
    
    
    
    
    
    
    7,635Total Equity
    
    
    977,332
    
    
    
    2,109,398
    
    
    
    53,227
    
    
    
    (2,154,990
    )
    
    
    984,967Total Liabilities and Equity
    
    $
    2,477,608
    
    
    $
    2,366,178
    
    
    $
    72,757
    
    
    $
    (2,154,990
    )
    
    $
    2,761,553
 (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 September 30, 2009(unaudited)Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    11
    
    
    $
    486,958
    
    
    $
    58,652
    
    
    $
    
    
    
    $
    545,621Costs and expenses:Cost of services
    
    
    90
    
    
    
    399,316
    
    
    
    49,296
    
    
    
    
    
    
    
    448,702General and administrative
    
    
    34,594
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    34,618Bad debt expense
    
    
    
    
    
    
    8,440
    
    
    
    3,280
    
    
    
    
    
    
    
    11,720Depreciation and amortization
    
    
    831
    
    
    
    15,297
    
    
    
    1,548
    
    
    
    
    
    
    
    17,676Total costs and expenses
    
    
    35,515
    
    
    
    423,077
    
    
    
    54,124
    
    
    
    
    
    
    
    512,716Income (loss) from operations
    
    
    (35,504
    )
    
    
    63,881
    
    
    
    4,528
    
    
    
    
    
    
    
    32,905Other income and expense:Intercompany interest and royalty fees
    
    
    (1,141
    )
    
    
    1,138
    
    
    
    3
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    31,929
    
    
    
    (29,286
    )
    
    
    (2,643
    )
    
    
    
    
    
    
    Other income
    
    
    2,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,215Interest income
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Interest expense
    
    
    (15,513
    )
    
    
    (8,726
    )
    
    
    (875
    )
    
    
    
    
    
    
    (25,114
    )Income (loss) from operations before income taxes
    
    
    (18,012
    )
    
    
    27,007
    
    
    
    1,013
    
    
    
    
    
    
    
    10,008Income tax expense (benefit)
    
    
    (3,768
    )
    
    
    5,318
    
    
    
    944
    
    
    
    
    
    
    
    2,494Equity in earnings of subsidiaries
    
    
    20,952
    
    
    
    (429
    )
    
    
    
    
    
    
    (20,523
    )(a)
    
    
    Net income
    
    
    6,708
    
    
    
    21,260
    
    
    
    69
    
    
    
    (20,523
    )
    
    
    7,514Less: Net income attributable to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    806
    
    
    
    
    
    
    
    806Net income (loss) attributable to Select Medical
Corporation
    
    $
    6,708
    
    
    $
    21,260
    
    
    $
    (737
    )
    
    $
    (20,523
    )
    
    $
    6,708
 (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 Nine Months Ended September 30, 2009(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    146
    
    
    $
    1,487,899
    
    
    $
    178,283
    
    
    $
    
    
    
    $
    1,666,328Costs and expenses:Cost of services
    
    
    201
    
    
    
    1,202,007
    
    
    
    150,899
    
    
    
    
    
    
    
    1,353,107General and administrative
    
    
    60,210
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    60,278Bad debt expense
    
    
    
    
    
    
    27,862
    
    
    
    5,816
    
    
    
    
    
    
    
    33,678Depreciation and amortization
    
    
    2,408
    
    
    
    46,315
    
    
    
    4,623
    
    
    
    
    
    
    
    53,346Total costs and expenses
    
    
    62,819
    
    
    
    1,276,252
    
    
    
    161,338
    
    
    
    
    
    
    
    1,500,409Income (loss) from operations
    
    
    (62,673
    )
    
    
    211,647
    
    
    
    16,945
    
    
    
    
    
    
    
    165,919Other income and expense:Intercompany interest and royalty fees
    
    
    (6,292
    )
    
    
    6,252
    
    
    
    40
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    95,063
    
    
    
    (87,810
    )
    
    
    (7,253
    )
    
    
    
    
    
    
    Gain on early retirement of debt
    
    
    15,316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,316Other income
    
    
    3,836
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,836Interest income
    
    
    65
    
    
    
    16
    
    
    
    1
    
    
    
    
    
    
    
    82Interest expense
    
    
    (47,914
    )
    
    
    (25,670
    )
    
    
    (2,352
    )
    
    
    
    
    
    
    (75,936
    )Income (loss) from operations before income taxes
    
    
    (2,599
    )
    
    
    104,435
    
    
    
    7,381
    
    
    
    
    
    
    
    109,217Income tax expense
    
    
    3,420
    
    
    
    38,833
    
    
    
    816
    
    
    
    
    
    
    
    43,069Equity in earnings of subsidiaries
    
    
    69,949
    
    
    
    4,767
    
    
    
    
    
    
    
    (74,716
    )(a)
    
    
    Net income
    
    
    63,930
    
    
    
    70,369
    
    
    
    6,565
    
    
    
    (74,716
    )
    
    
    66,148Less: Net income attributable to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    2,218
    
    
    
    
    
    
    
    2,218Net income attributable to Select Medical Corporation
    
    $
    63,930
    
    
    $
    70,369
    
    
    $
    4,347
    
    
    $
    (74,716
    )
    
    $
    63,930
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  23




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Nine Months Ended September 30, 2009(unaudited)Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    63,930
    
    
    $
    70,369
    
    
    $
    6,565
    
    
    $
    (74,716
    )(a)
    
    $
    66,148Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,408
    
    
    
    46,315
    
    
    
    4,623
    
    
    
    
    
    
    
    53,346Provision for bad debts
    
    
    
    
    
    
    27,862
    
    
    
    5,816
    
    
    
    
    
    
    
    33,678Gain on early retirement of debt
    
    
    (15,316
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,316
    )Loss from disposal of assets and sale of business units
    
    
    15
    
    
    
    506
    
    
    
    29
    
    
    
    
    
    
    
    550Non-cash gain from interest rate swaps
    
    
    (3,836
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,836
    )Non-cash stock compensation expense
    
    
    4,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,795Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (69,949
    )
    
    
    (4,767
    )
    
    
    
    
    
    
    74,716
    (a)
    
    
    Intercompany
    
    
    132,270
    
    
    
    (125,875
    )
    
    
    (6,395
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    (111
    )
    
    
    (26,654
    )
    
    
    (5,268
    )
    
    
    
    
    
    
    (32,033
    )Other current assets
    
    
    (765
    )
    
    
    1,681
    
    
    
    (1,898
    )
    
    
    
    
    
    
    (982
    )Other assets
    
    
    5,724
    
    
    
    (2,235
    )
    
    
    100
    
    
    
    
    
    
    
    3,589Accounts payable
    
    
    (3,105
    )
    
    
    (4,253
    )
    
    
    (1,008
    )
    
    
    
    
    
    
    (8,366
    )Due to third-party payors
    
    
    
    
    
    
    (8,118
    )
    
    
    4,588
    
    
    
    
    
    
    
    (3,530
    )Accrued expenses
    
    
    8,002
    
    
    
    (1,211
    )
    
    
    824
    
    
    
    
    
    
    
    7,615Income and deferred taxes
    
    
    20,608
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,608Net cash provided by (used in) operating activities
    
    
    144,670
    
    
    
    (26,380
    )
    
    
    7,976
    
    
    
    
    
    
    
    126,266Investing activitiesPurchases of property and equipment
    
    
    (1,117
    )
    
    
    (23,644
    )
    
    
    (10,489
    )
    
    
    
    
    
    
    (35,250
    )Proceeds from sale of property
    
    
    
    
    
    
    1,341
    
    
    
    
    
    
    
    
    
    
    
    1,341Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (381
    )
    
    
    
    
    
    
    
    
    
    
    (381
    )Net cash used in investing activities
    
    
    (1,117
    )
    
    
    (22,684
    )
    
    
    (10,489
    )
    
    
    
    
    
    
    (34,290
    )Financing activitiesBorrowings on revolving credit facility
    
    
    193,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193,000Payments on revolving credit facility
    
    
    (253,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (253,000
    )Payments on credit facility term loan
    
    
    (5,033
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,033
    )Repurchase of 7 5/8% senior subordianted notes
    
    
    (30,114
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,114
    )Borrowings of other debt
    
    
    5,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,184Principal payments on seller and other debt
    
    
    (4,892
    )
    
    
    (837
    )
    
    
    (9
    )
    
    
    
    
    
    
    (5,738
    )Dividends paid to Holdings
    
    
    (39,367
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,367
    )Payment of initial public offering costs
    
    
    (584
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (584
    )Equity investment by Holdings
    
    
    282,024
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282,024Repayment of bank overdrafts
    
    
    (21,130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,130
    )Intercompany debt reallocation
    
    
    (50,515
    )
    
    
    47,405
    
    
    
    3,110
    
    
    
    
    
    
    
    Equity contribution and loans from non-controlling interests
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    
    
    
    
    1,500Distributions to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    (2,486
    )
    
    
    
    
    
    
    (2,486
    )Net cash provided by financing activities
    
    
    75,573
    
    
    
    46,568
    
    
    
    2,115
    
    
    
    
    
    
    
    124,256Net increase (decrease) in cash and cash equivalents
    
    
    219,126
    
    
    
    (2,496
    )
    
    
    (398
    )
    
    
    
    
    
    
    216,232Cash and cash equivalents at beginning of period
    
    
    58,332
    
    
    
    5,108
    
    
    
    820
    
    
    
    
    
    
    
    64,260Cash and cash equivalents at end of period
    
    $
    277,458
    
    
    $
    2,612
    
    
    $
    422
    
    
    $
    
    
    
    $
    280,492
 (a)
    
    Elimination of equity in earnings of subsidiary.  24




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetDecember 31, 2008Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    58,332
    
    
    $
    5,108
    
    
    $
    820
    
    
    $
    
    
    
    $
    64,260Accounts receivable, net
    
    
    7
    
    
    
    293,097
    
    
    
    19,314
    
    
    
    
    
    
    
    312,418Current deferred tax asset
    
    
    18,653
    
    
    
    27,930
    
    
    
    2,011
    
    
    
    
    
    
    
    48,594Prepaid income taxes
    
    
    7,362
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,362Other current assets
    
    
    2,694
    
    
    
    17,208
    
    
    
    995
    
    
    
    
    
    
    
    20,897Total Current Assets
    
    
    87,048
    
    
    
    343,343
    
    
    
    23,140
    
    
    
    
    
    
    
    453,531Property and equipment, net
    
    
    8,431
    
    
    
    422,067
    
    
    
    40,567
    
    
    
    
    
    
    
    471,065Investment in affiliates
    
    
    2,035,591
    
    
    
    47,911
    
    
    
    
    
    
    
    (2,083,502
    )(a)(b)
    
    
    Goodwill
    
    
    
    
    
    
    1,506,661
    
    
    
    
    
    
    
    
    
    
    
    1,506,661Other identifiable intangibles
    
    
    
    
    
    
    74,078
    
    
    
    
    
    
    
    
    
    
    
    74,078Assets held for sale
    
    
    12,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,542Other assets
    
    
    32,620
    
    
    
    9,587
    
    
    
    2,341
    
    
    
    
    
    
    
    44,548Total Assets
    
    $
    2,176,232
    
    
    $
    2,403,647
    
    
    $
    66,048
    
    
    $
    (2,083,502
    )
    
    $
    2,562,425Liabilities and EquityCurrent Liabilities:Bank overdrafts
    
    $
    21,130
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,130Current portion of long-term debt
and notes payable
    
    
    8,063
    
    
    
    971
    
    
    
    12
    
    
    
    
    
    
    
    9,046Accounts payable
    
    
    4,653
    
    
    
    59,836
    
    
    
    8,007
    
    
    
    
    
    
    
    72,496Intercompany accounts
    
    
    335,903
    
    
    
    (301,905
    )
    
    
    (33,998
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    1,193
    
    
    
    65,118
    
    
    
    69
    
    
    
    
    
    
    
    66,380Accrued vacation
    
    
    2,781
    
    
    
    31,134
    
    
    
    3,194
    
    
    
    
    
    
    
    37,109Accrued interest
    
    
    25,410
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    25,444Accrued restructuring
    
    
    
    
    
    
    8,108
    
    
    
    
    
    
    
    
    
    
    
    8,108Accrued other
    
    
    52,022
    
    
    
    53,953
    
    
    
    2,007
    
    
    
    
    
    
    
    107,982Due to third party payors
    
    
    
    
    
    
    20,960
    
    
    
    (15,251
    )
    
    
    
    
    
    
    5,709Total Current Liabilities
    
    
    451,155
    
    
    
    (61,791
    )
    
    
    (35,960
    )
    
    
    
    
    
    
    353,404Long-term debt, net of current portion
    
    
    1,035,208
    
    
    
    385,549
    
    
    
    39,519
    
    
    
    
    
    
    
    1,460,276Non-current deferred tax liability
    
    
    (8,155
    )
    
    
    45,769
    
    
    
    5,304
    
    
    
    
    
    
    
    42,918Other non-current liabilities
    
    
    67,709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,709Total Liabilities
    
    
    1,545,917
    
    
    
    369,527
    
    
    
    8,863
    
    
    
    
    
    
    
    1,924,307Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    481,094
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481,094Retained earnings
    
    
    160,657
    
    
    
    304,364
    
    
    
    21,269
    
    
    
    (325,633
    )(b)
    
    
    160,657Subsidiary investment
    
    
    
    
    
    
    1,729,756
    
    
    
    28,113
    
    
    
    (1,757,869
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (11,436
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,436
    )Total Select Medical Corporation
Stockholders Equity
    
    
    630,315
    
    
    
    2,034,120
    
    
    
    49,382
    
    
    
    (2,083,502
    )
    
    
    630,315Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    7,803
    
    
    
    
    
    
    
    7,803Total Equity
    
    
    630,315
    
    
    
    2,034,120
    
    
    
    57,185
    
    
    
    (2,083,502
    )
    
    
    638,118Total Liabilities and Equity
    
    $
    2,176,232
    
    
    $
    2,403,647
    
    
    $
    66,048
    
    
    $
    (2,083,502
    )
    
    $
    2,562,425
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings.  25




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Quarter Ended September 30, 2008(unaudited)Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    39
    
    
    $
    468,232
    
    
    $
    50,908
    
    
    $
    
    
    
    $
    519,179Costs and expenses:Cost of services
    
    
    36
    
    
    
    399,202
    
    
    
    42,157
    
    
    
    
    
    
    
    441,395General and administrative
    
    
    11,387
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    11,538Bad debt expense
    
    
    
    
    
    
    10,883
    
    
    
    1,357
    
    
    
    
    
    
    
    12,240Depreciation and amortization
    
    
    821
    
    
    
    15,752
    
    
    
    1,275
    
    
    
    
    
    
    
    17,848Total costs and expenses
    
    
    12,244
    
    
    
    425,988
    
    
    
    44,789
    
    
    
    
    
    
    
    483,021Income (loss) from operations
    
    
    (12,205
    )
    
    
    42,244
    
    
    
    6,119
    
    
    
    
    
    
    
    36,158Other income and expense:Intercompany interest and royalty fees
    
    
    (8,289
    )
    
    
    8,219
    
    
    
    70
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    35,102
    
    
    
    (33,228
    )
    
    
    (1,874
    )
    
    
    
    
    
    
    Other income
    
    
    1,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,322Interest income
    
    
    48
    
    
    
    40
    
    
    
    5
    
    
    
    
    
    
    
    93Interest expense
    
    
    (18,830
    )
    
    
    (7,865
    )
    
    
    (725
    )
    
    
    
    
    
    
    (27,420
    )Income (loss) from operations before income taxes
    
    
    (2,852
    )
    
    
    9,410
    
    
    
    3,595
    
    
    
    
    
    
    
    10,153Income tax expense (benefit)
    
    
    (487
    )
    
    
    3,893
    
    
    
    2
    
    
    
    
    
    
    
    3,408Equity in earnings of subsidiaries
    
    
    8,078
    
    
    
    2,493
    
    
    
    
    
    
    
    (10,571
    )
    
    
    Net income
    
    
    5,713
    
    
    
    8,010
    
    
    
    3,593
    
    
    
    (10,571
    )
    
    
    6,745Less: Net income attributable to non-controlling interest
    
    
    
    
    
    
    
    
    
    
    1,032
    
    
    
    
    
    
    
    1,032Net income attributable to Select Medical Corporation
    
    $
    5,713
    
    
    $
    8,010
    
    
    $
    2,561
    
    
    $
    (10,571
    )
    
    $
    5,713
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  26




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##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Nine Months Ended September 30, 2008(unaudited)Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    158
    
    
    $
    1,457,422
    
    
    $
    148,683
    
    
    $
    
    
    
    $
    1,606,263Costs and expenses:Cost of services
    
    
    81
    
    
    
    1,216,488
    
    
    
    126,453
    
    
    
    
    
    
    
    1,343,022General and administrative
    
    
    35,636
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    35,843Bad debt expense
    
    
    
    
    
    
    32,066
    
    
    
    3,234
    
    
    
    
    
    
    
    35,300Depreciation and amortization
    
    
    2,407
    
    
    
    47,040
    
    
    
    3,728
    
    
    
    
    
    
    
    53,175Total costs and expenses
    
    
    38,124
    
    
    
    1,295,801
    
    
    
    133,415
    
    
    
    
    
    
    
    1,467,340Income (loss) from operations
    
    
    (37,966
    )
    
    
    161,621
    
    
    
    15,268
    
    
    
    
    
    
    
    138,923Other income and expense:Intercompany interest and royalty fees
    
    
    (29,766
    )
    
    
    29,489
    
    
    
    277
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    129,767
    
    
    
    (124,412
    )
    
    
    (5,355
    )
    
    
    
    
    
    
    Other expense
    
    
    (1,180
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,180
    )Interest income
    
    
    154
    
    
    
    116
    
    
    
    5
    
    
    
    
    
    
    
    275Interest expense
    
    
    (58,512
    )
    
    
    (22,875
    )
    
    
    (2,041
    )
    
    
    
    
    
    
    (83,428
    )Income from operations before income taxes
    
    
    2,497
    
    
    
    43,939
    
    
    
    8,154
    
    
    
    
    
    
    
    54,590Income tax expense
    
    
    2,605
    
    
    
    19,155
    
    
    
    850
    
    
    
    
    
    
    
    22,610Equity in earnings of subsidiaries
    
    
    29,985
    
    
    
    5,712
    
    
    
    
    
    
    
    (35,697
    )
    
    
    Net income
    
    
    29,877
    
    
    
    30,496
    
    
    
    7,304
    
    
    
    (35,697
    )
    
    
    31,980Less: Net income attributable to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    2,103
    
    
    
    
    
    
    
    2,103Net income attributable to Select Medical Corporation
    
    $
    29,877
    
    
    $
    30,496
    
    
    $
    5,201
    
    
    $
    (35,697
    )
    
    $
    29,877
 (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 Nine Months Ended September 30, 2008(unaudited)Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    29,877
    
    
    $
    30,496
    
    
    $
    7,304
    
    
    $
    (35,697
    )(a)
    
    $
    31,980Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,407
    
    
    
    47,040
    
    
    
    3,728
    
    
    
    
    
    
    
    53,175Provision for bad debts
    
    
    
    
    
    
    32,066
    
    
    
    3,234
    
    
    
    
    
    
    
    35,300Loss (gain) from disposal of assets and sale of business units
    
    
    19
    
    
    
    (336
    )
    
    
    1
    
    
    
    
    
    
    
    (316
    )Non-cash loss from interest rate swaps
    
    
    1,180
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,180Non-cash stock compensation expense
    
    
    1,697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,697Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (29,985
    )
    
    
    (5,712
    )
    
    
    
    
    
    
    35,697
    (a)
    
    
    Intercompany
    
    
    48,454
    
    
    
    (40,859
    )
    
    
    (7,595
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    32
    
    
    
    (70,196
    )
    
    
    (4,811
    )
    
    
    
    
    
    
    (74,975
    )Other current assets
    
    
    (110
    )
    
    
    5,975
    
    
    
    (400
    )
    
    
    
    
    
    
    5,465Other assets
    
    
    (16,364
    )
    
    
    27,461
    
    
    
    (138
    )
    
    
    
    
    
    
    10,959Accounts payable
    
    
    380
    
    
    
    (5,367
    )
    
    
    70
    
    
    
    
    
    
    
    (4,917
    )Due to third-party payors
    
    
    
    
    
    
    (4,622
    )
    
    
    (4,706
    )
    
    
    
    
    
    
    (9,328
    )Accrued expenses
    
    
    (9,096
    )
    
    
    7,675
    
    
    
    30
    
    
    
    
    
    
    
    (1,391
    )Income and deferred taxes
    
    
    17,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,950Net cash provided by (used in) operating activities
    
    
    46,441
    
    
    
    23,621
    
    
    
    (3,283
    )
    
    
    
    
    
    
    66,779Investing activitiesPurchases of property and equipment
    
    
    (2,338
    )
    
    
    (31,710
    )
    
    
    (1,722
    )
    
    
    
    
    
    
    (35,770
    )Proceeds from sale of business units
    
    
    
    
    
    
    1,851
    
    
    
    
    
    
    
    
    
    
    
    1,851Sale of real property
    
    
    
    
    
    
    743
    
    
    
    
    
    
    
    
    
    
    
    743Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (4,687
    )
    
    
    (2,715
    )
    
    
    
    
    
    
    (7,402
    )Net cash used in investing activities
    
    
    (2,338
    )
    
    
    (33,803
    )
    
    
    (4,437
    )
    
    
    
    
    
    
    (40,578
    )Financing activitiesBorrowings on revolving credit facility
    
    
    387,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387,000Payments on revolving credit facility
    
    
    (357,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (357,000
    )Payments on credit facility term loan
    
    
    (5,100
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,100
    )Principal payments on seller and other debt
    
    
    (3,818
    )
    
    
    (194
    )
    
    
    (3
    )
    
    
    
    
    
    
    (4,015
    )Repayment of bank overdrafts
    
    
    (7,217
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,217
    )Dividends paid to Holdings
    
    
    (33,418
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,418
    )Intercompany debt reallocation
    
    
    (19,325
    )
    
    
    10,111
    
    
    
    9,214
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90Distributions to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    (1,703
    )
    
    
    
    
    
    
    (1,703
    )Net cash provided by (used in) financing activities
    
    
    (38,788
    )
    
    
    9,917
    
    
    
    7,508
    
    
    
    
    
    
    
    (21,363
    )Net increase (decrease) in cash and cash equivalents
    
    
    5,315
    
    
    
    (265
    )
    
    
    (212
    )
    
    
    
    
    
    
    4,838Cash and cash equivalents at beginning of period
    
    
    161
    
    
    
    3,102
    
    
    
    1,266
    
    
    
    
    
    
    
    4,529Cash and cash equivalents at end of period
    
    $
    5,476
    
    
    $
    2,837
    
    
    $
    1,054
    
    
    $
    
    
    
    $
    9,367
 (a)
    
    Elimination of equity in earnings of subsidiary.  28




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read this discussion together with our unaudited consolidated financial statements
and accompanying notes. Unless indicated otherwise, any reference in this report to Holdings
refers to Select Medical Holdings Corporation and any reference to Select refers to Select
Medical Corporation, the wholly-owned operating subsidiary of Holdings. References to the
Company, we, us, and our refer collectively to Select Medical Holdings Corporation and
Select Medical Corporation.
 Forward Looking Statements
  
    
    additional changes in government reimbursement for our services may result in a reduction
in net operating revenues, an increase in costs and a reduction in profitability;
 
    
    the failure of our long term acute care hospitals to maintain their status as such may
cause our net operating revenues and profitability to decline;
 
    
    the failure of our facilities operated as hospitals within hospitals to qualify as
hospitals separate from their host hospitals may cause our net operating revenues and
profitability to decline;
 
    
    implementation of modifications to the admissions policies for our inpatient
rehabilitation facilities, as required to achieve compliance with Medicare guidelines, may
result in a loss of patient volume at these hospitals and, as a result, may reduce our
future net operating revenues and profitability;
 
    
    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 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;
 
    
    the effect of claims asserted against us or lack of adequate available insurance could
subject us to substantial uninsured liabilities;
 
    
    the ability to obtain any necessary or desired waiver or amendment from our lenders may
be difficult due to the current uncertainty in the credit markets; and
 
    
    the inability to draw funds under our senior secured credit facility because of lender
defaults.
  29




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##### Table of Contents



Overview
   Recent Trends and Events
 Initial Public Offering of Common Stock
    30




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##### Table of Contents



Third Quarter Ended September 30, 2009
    Regulatory Changes
 Medicare Reimbursement of Long Term Acute Care Hospital Services
   31




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##### Table of Contents



August 2004 Final Rule.
 May 2007 Final Rule.
   32




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##### Table of Contents



33




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##### Table of Contents



August 2007 Final Rule.
  Medicare, Medicaid, and SCHIP Extension Act of 2007.
    34




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##### Table of Contents



May 6, 2008 Interim Final Rule.
 May 9, 2008 Final Rule.
 May 22, 2008 Interim Final Rule.
 August 2008 Final Rule.
 The American Recovery and Reinvestment Act of 2009.
  35




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##### Table of Contents



June 3, 2009 Interim Final Rule.
 July 31, 2009 Final Rule.
   Medicare Reimbursement of Outpatient Rehabilitation Services
   36




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##### Table of Contents



Medicare Reimbursement of Inpatient Rehabilitation Facility Services
  August 2008 Final Rule.
 July 31, 2009 Final Rule.
   Professional Licensure and Corporate Practice
    37




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##### Table of Contents



Facility Licensure, Certification and Accreditation
   Federal Health Care Reform Proposals
    38




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##### Table of Contents



Operating Statistics
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009Specialty hospital data(1):Hospitals  start of period
    
    
    92
    
    
    
    92
    
    
    
    87
    
    
    
    93Hospital start-ups
    
    
    
    
    
    
    1
    
    
    
    5
    
    
    
    1Hospitals acquired
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Hospitals consolidated
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Hospitals closed
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )Hospitals owned  end of period
    
    
    92
    
    
    
    93
    
    
    
    92
    
    
    
    93Hospitals managed  end of period
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Total hospitals (all)  end of period
    
    
    92
    
    
    
    94
    
    
    
    92
    
    
    
    94Available licensed beds
    
    
    4,144
    
    
    
    4,173
    
    
    
    4,144
    
    
    
    4,173Admissions
    
    
    9,977
    
    
    
    10,466
    
    
    
    30,891
    
    
    
    31,775Patient days
    
    
    243,807
    
    
    
    248,504
    
    
    
    756,093
    
    
    
    757,487Average length of stay (days)
    
    
    25
    
    
    
    24
    
    
    
    25
    
    
    
    24Net revenue per patient day(2)
    
    $
    1,446
    
    
    $
    1,489
    
    
    $
    1,434
    
    
    $
    1,500Occupancy rate
    
    
    64
    %
    
    
    65
    %
    
    
    68
    %
    
    
    66
    %Percent patient days  Medicare
    
    
    65
    %
    
    
    65
    %
    
    
    66
    %
    
    
    65
    %Outpatient rehabilitation data:Clinics owned  start of period
    
    
    894
    
    
    
    875
    
    
    
    918
    
    
    
    880Clinics acquired
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    3Clinic start-ups
    
    
    3
    
    
    
    2
    
    
    
    12
    
    
    
    9Clinics closed/sold
    
    
    (13
    )
    
    
    (6
    )
    
    
    (46
    )
    
    
    (19
    )Clinics owned  end of period
    
    
    887
    
    
    
    873
    
    
    
    887
    
    
    
    873Clinics managed  end of period
    
    
    78
    
    
    
    74
    
    
    
    78
    
    
    
    74Total clinics (all)  end of period
    
    
    965
    
    
    
    947
    
    
    
    965
    
    
    
    947Visits
    
    
    1,106,529
    
    
    
    1,126,096
    
    
    
    3,430,138
    
    
    
    3,385,733Net revenue per visit(3)
    
    $
    101
    
    
    $
    101
    
    
    $
    102
    
    
    $
    102
 
 (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 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.  39




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##### Table of Contents



Results of Operations
  Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    85.0
    
    
    
    82.3
    
    
    
    85.0
    
    
    
    82.3General and administrative(2)
    
    
    2.2
    
    
    
    6.3
    
    
    
    2.2
    
    
    
    6.3Bad debt expense
    
    
    2.4
    
    
    
    2.2
    
    
    
    2.4
    
    
    
    2.2Depreciation and amortization
    
    
    3.4
    
    
    
    3.2
    
    
    
    3.4
    
    
    
    3.2Income from operations
    
    
    7.0
    
    
    
    6.0
    
    
    
    7.0
    
    
    
    6.0Gain on early retirement of debt
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    0.4Interest expense, net
    
    
    (6.9
    )
    
    
    (6.1
    )
    
    
    (5.3
    )
    
    
    (4.6
    )Income from operations before income taxes
    
    
    0.1
    
    
    
    0.1
    
    
    
    2.0
    
    
    
    1.8Income tax expense (benefit)
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    0.7
    
    
    
    0.4Net income
    
    
    0.1
    
    
    
    0.3
    
    
    
    1.3
    
    
    
    1.4Net income attributable to non-controlling interest
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Net income (loss) attributable to Holdings and Select
    
    
    (0.1
    )%
    
    
    0.1
    %
    
    
    1.1
    %
    
    
    1.2
    %
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    83.6
    
    
    
    81.2
    
    
    
    83.6
    
    
    
    81.2General and administrative(2)
    
    
    2.2
    
    
    
    3.6
    
    
    
    2.2
    
    
    
    3.6Bad debt expense
    
    
    2.2
    
    
    
    2.0
    
    
    
    2.2
    
    
    
    2.0Depreciation and amortization
    
    
    3.3
    
    
    
    3.2
    
    
    
    3.3
    
    
    
    3.2Income from operations
    
    
    8.7
    
    
    
    10.0
    
    
    
    8.7
    
    
    
    10.0Gain on early retirement of debt
    
    
    
    
    
    
    1.0
    
    
    
    
    
    
    
    0.9Other income (expense)
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    0.2Interest expense, net
    
    
    (6.8
    )
    
    
    (6.1
    )
    
    
    (5.2
    )
    
    
    (4.5
    )Income from operations before
income taxes
    
    
    1.9
    
    
    
    4.9
    
    
    
    3.4
    
    
    
    6.6Income tax expense
    
    
    0.9
    
    
    
    2.0
    
    
    
    1.4
    
    
    
    2.6Net income
    
    
    1.0
    
    
    
    2.9
    
    
    
    2.0
    
    
    
    4.0Net income attributable to
non-controlling interest
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Net income attributable to
Holdings and Select
    
    
    0.9
    %
    
    
    2.8
    %
    
    
    1.9
    %
    
    
    3.9
    %
  40




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    % Change
    
    
    2008
    
    
    2009
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    358,838
    
    
    $
    376,859
    
    
    
    5.0
    %
    
    $
    358,838
    
    
    $
    376,859
    
    
    
    5.0
    %Outpatient rehabilitation
    
    
    160,303
    
    
    
    168,751
    
    
    
    5.3
    
    
    
    160,303
    
    
    
    168,751
    
    
    
    5.3Other
    
    
    38
    
    
    
    11
    
    
    
    (71.1
    )
    
    
    38
    
    
    
    11
    
    
    
    (71.1
    )Total company
    
    $
    519,179
    
    
    $
    545,621
    
    
    
    5.1
    %
    
    $
    519,179
    
    
    $
    545,621
    
    
    
    5.1
    %Income (loss) from operations:Specialty hospitals
    
    $
    38,381
    
    
    $
    53,896
    
    
    
    40.4
    %
    
    $
    38,381
    
    
    $
    53,896
    
    
    
    40.4
    %Outpatient rehabilitation
    
    
    10,212
    
    
    
    14,616
    
    
    
    43.1
    
    
    
    10,212
    
    
    
    14,616
    
    
    
    43.1Other (2)
    
    
    (12,435
    )
    
    
    (35,607
    )
    
    
    N/M
    
    
    
    (12,435
    )
    
    
    (35,607
    )
    
    
    N/MTotal company
    
    $
    36,158
    
    
    $
    32,905
    
    
    
    (9.0
    )%
    
    $
    36,158
    
    
    $
    32,905
    
    
    
    (9.0
    )%Adjusted EBITDA:(3)Specialty hospitals
    
    $
    49,137
    
    
    $
    64,381
    
    
    
    31.0
    %
    
    $
    49,137
    
    
    $
    64,381
    
    
    
    31.0
    %Outpatient rehabilitation
    
    
    16,405
    
    
    
    20,898
    
    
    
    27.4
    
    
    
    16,405
    
    
    
    20,898
    
    
    
    27.4Other
    
    
    (11,031
    )
    
    
    (12,236
    )
    
    
    (10.9
    )
    
    
    (11,031
    )
    
    
    (12,236
    )
    
    
    (10.9
    )Adjusted EBITDA margins:(3)Specialty hospitals
    
    
    13.7
    %
    
    
    17.1
    %
    
    
    24.8
    %
    
    
    13.7
    %
    
    
    17.1
    %
    
    
    24.8
    %Outpatient rehabilitation
    
    
    10.2
    
    
    
    12.4
    
    
    
    21.6
    
    
    
    10.2
    
    
    
    12.4
    
    
    
    21.6Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,900,485
    
    
    $
    1,898,494
    
    
    
    
    
    
    $
    1,900,485
    
    
    $
    1,898,494Outpatient rehabilitation
    
    
    502,943
    
    
    
    484,703
    
    
    
    
    
    
    
    502,943
    
    
    
    484,703Other
    
    
    109,733
    
    
    
    381,545
    
    
    
    
    
    
    
    105,881
    
    
    
    378,356Total company
    
    $
    2,513,161
    
    
    $
    2,764,742
    
    
    
    
    
    
    $
    2,509,309
    
    
    $
    2,761,553Purchases of property and
equipment, net:Specialty hospitals
    
    $
    5,997
    
    
    $
    12,371
    
    
    
    
    
    
    $
    5,997
    
    
    $
    12,371Outpatient rehabilitation
    
    
    3,235
    
    
    
    1,566
    
    
    
    
    
    
    
    3,235
    
    
    
    1,566Other
    
    
    431
    
    
    
    332
    
    
    
    
    
    
    
    431
    
    
    
    332Total company
    
    $
    9,663
    
    
    $
    14,269
    
    
    
    
    
    
    $
    9,663
    
    
    $
    14,269
  41




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    % Change
    
    
    2008
    
    
    2009
    
    
    % Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    1,104,731
    
    
    $
    1,156,422
    
    
    
    4.7
    %
    
    $
    1,104,731
    
    
    $
    1,156,422
    
    
    
    4.7
    %Outpatient rehabilitation
    
    
    501,375
    
    
    
    509,760
    
    
    
    1.7
    
    
    
    501,375
    
    
    
    509,760
    
    
    
    1.7Other
    
    
    157
    
    
    
    146
    
    
    
    (7.0
    )
    
    
    157
    
    
    
    146
    
    
    
    (7.0
    )Total company
    
    $
    1,606,263
    
    
    $
    1,666,328
    
    
    
    3.7
    %
    
    $
    1,606,263
    
    
    $
    1,666,328
    
    
    
    3.7
    %Income (loss) from operations:Specialty hospitals
    
    $
    134,985
    
    
    $
    180,100
    
    
    
    33.4
    %
    
    $
    134,985
    
    
    $
    180,100
    
    
    
    33.4
    %Outpatient rehabilitation
    
    
    42,354
    
    
    
    48,797
    
    
    
    15.2
    
    
    
    42,354
    
    
    
    48,797
    
    
    
    15.2Other (2)
    
    
    (38,416
    )
    
    
    (62,978
    )
    
    
    (63.9
    )
    
    
    (38,416
    )
    
    
    (62,978
    )
    
    
    (63.9
    )Total company
    
    $
    138,923
    
    
    $
    165,919
    
    
    
    19.4
    %
    
    $
    138,923
    
    
    $
    165,919
    
    
    
    19.4
    %Adjusted EBITDA:(3)Specialty hospitals
    
    $
    167,617
    
    
    $
    212,122
    
    
    
    26.6
    %
    
    $
    167,617
    
    
    $
    212,122
    
    
    
    26.6
    %Outpatient rehabilitation
    
    
    60,248
    
    
    
    67,476
    
    
    
    12.0
    
    
    
    60,248
    
    
    
    67,476
    
    
    
    12.0Other
    
    
    (34,070
    )
    
    
    (37,277
    )
    
    
    (9.4
    )
    
    
    (34,070
    )
    
    
    (37,277
    )
    
    
    (9.4
    )Adjusted EBITDA margins:(3)Specialty hospitals
    
    
    15.2
    %
    
    
    18.3
    %
    
    
    20.4
    %
    
    
    15.2
    %
    
    
    18.3
    %
    
    
    20.4
    %Outpatient rehabilitation
    
    
    12.0
    
    
    
    13.2
    
    
    
    10.0
    
    
    
    12.0
    
    
    
    13.2
    
    
    
    10.0Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,900,485
    
    
    $
    1,898,494
    
    
    
    
    
    
    $
    1,900,485
    
    
    $
    1,898,494Outpatient rehabilitation
    
    
    502,943
    
    
    
    484,703
    
    
    
    
    
    
    
    502,943
    
    
    
    484,703Other
    
    
    109,733
    
    
    
    381,545
    
    
    
    
    
    
    
    105,881
    
    
    
    378,356Total company
    
    $
    2,513,161
    
    
    $
    2,764,742
    
    
    
    
    
    
    $
    2,509,309
    
    
    $
    2,761,553Purchases of property and
equipment, net:Specialty hospitals
    
    $
    23,385
    
    
    $
    27,748
    
    
    
    
    
    
    $
    23,385
    
    
    $
    27,748Outpatient rehabilitation
    
    
    10,048
    
    
    
    6,575
    
    
    
    
    
    
    
    10,048
    
    
    
    6,575Other
    
    
    2,337
    
    
    
    927
    
    
    
    
    
    
    
    2,337
    
    
    
    927Total company
    
    $
    35,770
    
    
    $
    35,250
    
    
    
    
    
    
    $
    35,770
    
    
    $
    35,250
  42




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    358,838
    
    
    $
    376,859
    
    
    $
    358,838
    
    
    $
    376,859Less: Specialty hospitals in
development, opened or closed after
1/1/08
    
    
    13,386
    
    
    
    27,995
    
    
    
    13,386
    
    
    
    27,995Specialty hospitals same store net
operating revenue
    
    $
    345,452
    
    
    $
    348,864
    
    
    $
    345,452
    
    
    $
    348,864Adjusted EBITDA(3)Specialty hospitals Adjusted EBITDA(3)
    
    $
    49,137
    
    
    $
    64,381
    
    
    $
    49,137
    
    
    $
    64,381Less: Specialty hospitals in
development, opened or closed after
1/1/08
    
    
    (6,161
    )
    
    
    1,265
    
    
    
    (6,161
    )
    
    
    1,265Specialty hospitals same store Adjusted
EBITDA(3)
    
    $
    55,298
    
    
    $
    63,116
    
    
    $
    55,298
    
    
    $
    63,116All specialty hospitals Adjusted EBITDA
margin(3)
    
    
    13.7
    %
    
    
    17.1
    %
    
    
    13.7
    %
    
    
    17.1
    %Specialty hospitals same store Adjusted
EBITDA margin(3)
    
    
    16.0
    %
    
    
    18.1
    %
    
    
    16.0
    %
    
    
    18.1
    %
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    1,104,731
    
    
    $
    1,156,422
    
    
    $
    1,104,731
    
    
    $
    1,156,422Less: Specialty hospitals in
development, opened or closed after
1/1/08
    
    
    36,456
    
    
    
    79,885
    
    
    
    36,456
    
    
    
    79,885Specialty hospitals same store net
operating revenue
    
    $
    1,068,275
    
    
    $
    1,076,537
    
    
    $
    1,068,275
    
    
    $
    1,076,537Adjusted EBITDA(3)Specialty hospitals Adjusted EBITDA(3)
    
    $
    167,617
    
    
    $
    212,122
    
    
    $
    167,617
    
    
    $
    212,122Less: Specialty hospitals in
development, opened or closed after
1/1/08
    
    
    (17,587
    )
    
    
    (992
    )
    
    
    (17,587
    )
    
    
    (992
    )Specialty hospitals same store Adjusted
EBITDA(3)
    
    $
    185,204
    
    
    $
    213,114
    
    
    $
    185,204
    
    
    $
    213,114All specialty hospitals Adjusted EBITDA
margin(3)
    
    
    15.2
    %
    
    
    18.3
    %
    
    
    15.2
    %
    
    
    18.3
    %Specialty hospitals same store Adjusted
EBITDA margin(3)
    
    
    17.3
    %
    
    
    19.8
    %
    
    
    17.3
    %
    
    
    19.8
    %
 
 N/M
    
     Not Meaningful.(1)
    
    Cost of services include salaries, wages and benefits, operating supplies, lease and
rent expense and other operating costs.  43




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##### Table of Contents



(2)
    
    Includes non-recurring charges related to Holdings initial public offering of $18.3
million in long term incentive compensation and $3.7 million in stock compensation expense
related to the grant of restricted stock that vested in connection
with our initial public offering.(3)
    
    We define Adjusted EBITDA as net income before interest, income taxes, depreciation and
amortization, gain on early retirement of debt, other income (expense), stock compensation
expense, long term incentive compensation and non-controlling interest. We believe that the
presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is used
by management to evaluate financial performance and determine resource allocation for each
of our operating units. Adjusted EBITDA is not a measure of financial performance under
generally accepted accounting principles. Items excluded from Adjusted EBITDA are
significant components in understanding and assessing financial performance. Adjusted
EBITDA should not be considered in isolation or as an alternative to, or substitute for,
net income, cash flows generated by operations, investing or financing activities, or other
financial statement data presented in the consolidated financial statements as indicators
of financial performance or liquidity. Because Adjusted EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and is thus
susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to
other similarly titled measures of other companies. See footnote 10 to our interim
unaudited consolidated financial statements for the period ended September 30, 2009 for a
reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our segment
performance. Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
  Net Operating Revenues
  Specialty Hospitals.
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Outpatient Rehabilitation.
 Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
  45




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Outpatient Rehabilitation
 Other
 Income from Operations
  Gain on Early Retirement of Debt
 Select
Medical Holdings Corporation.
 Interest Expense
 Select Medical Corporation.
 Select Medical Holdings Corporation .
 Income Taxes
 Select Medical Corporation.
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Select Medical Holdings Corporation .
 Non-Controlling Interests
  Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
  Net Operating Revenues
  Specialty Hospitals.
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Outpatient Rehabilitation.
 Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
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Outpatient Rehabilitation
 Other
 Income from Operations
  Gain on Early Retirement of Debt
 Select
Medical Corporation. 5 8
 Select
Medical Holdings Corporation. 5 8
 Interest Expense
 Select Medical Corporation.
 Select Medical Holdings Corporation .
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Income Taxes
 Select Medical Corporation.
 Select Medical Holdings Corporation .
 Non-Controlling Interests
  Liquidity and Capital Resources
  Select Medical Holdings Corporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2009
    
    
    2008
    
    
    2009(in thousands)
    
    
    (in thousands)Cash flows provided by operating activities
    
    $
    33,973
    
    
    $
    93,447
    
    
    $
    66,779
    
    
    $
    126,266Cash flows used in investing activities
    
    
    (40,578
    )
    
    
    (34,290
    )
    
    
    (40,578
    )
    
    
    (34,290
    )Cash flows provided by (used in) financing
activities
    
    
    11,443
    
    
    
    157,075
    
    
    
    (21,363
    )
    
    
    124,256Net increase in cash and cash equivalents
    
    
    4,838
    
    
    
    216,232
    
    
    
    4,838
    
    
    
    216,232Cash and cash equivalents at beginning of period
    
    
    4,529
    
    
    
    64,260
    
    
    
    4,529
    
    
    
    64,260Cash and cash equivalents at end of period
    
    $
    9,367
    
    
    $
    280,492
    
    
    $
    9,367
    
    
    $
    280,492
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5 8
  Capital Resources
 Select Medical Corporation .
 Select Medical Holdings Corporation .
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
    
    a $300.0 million revolving loan facility that will terminate on February 24, 2011,
including both a letter of credit sub-facility and a swingline loan sub-facility, and
 
    
    $268.6 million in term loans that mature on February 24, 2012 (the Tranche B Term
Loans), and
 
    
    $384.5 million in term loans that mature on August 22, 2014 (the Tranche B-1 Term
Loans).
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5 8
 7 5/8%
  53




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Inflation
   54




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Recent Accounting Pronouncements
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4T. CONTROLS AND PROCEDURES
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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
     
 ITEM 1A. RISK FACTORS.
 There have been no material changes from our risk factors as previously reported in our
Registration Statement on Form S-1 originally filed on July 24, 2008, as amended (Registration No.
333-152514).
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Unregistered Sales of Equity Securities
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Use of Proceeds from Initial Public Offering
    
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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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:
November 13, 2009SELECT 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:
November 13, 2009
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Exhibit
    
    Description1.1
    
    
    Underwriting Agreement, dated September 25, 2009, by and among
Select Medical Holdings Corporation and Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and J.P. Morgan Securities Inc., as
representatives of the several underwriters named therein,
incorporated by reference to Exhibit 1.1 of Select Medical
Holdings Corporation and Select Medical Corporations Current
Report on Form 8-K filed October 1, 2009.31.1
    
    
    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.
  61