##### 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 March 31, 2010
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition Period From  to .
 Commission File Numbers: 001 - 34465 and 001 - 31441
 SELECT MEDICAL HOLDINGS CORPORATION
 SELECT MEDICAL CORPORATION
  Delaware
    
    20-1764048Delaware
    
    23-2872718(State or other jurisdiction of
    
    (I.R.S. employer identificationincorporation or organization)
    
    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
 YES o NO þ




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##### 



TABLE
OF CONTENTS
 PART I FINANCIAL INFORMATIONITEM 1. CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheets
    
    
    3Consolidated statements of operations
    
    
    4Consolidated statements of changes in stockholders equity and income (loss)
    
    
    5Consolidated statements of cash flows
    
    
    6Notes to consolidated financial statements
    
    
    7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    23ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    43ITEM 4. CONTROLS AND PROCEDURES
    
    
    43PART II OTHER INFORMATION
    
    
    43ITEM 1. LEGAL PROCEEDINGS
    
    
    43ITEM 1A. RISK FACTORS
    
    
    44ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    44ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    44ITEM 4. REMOVED AND RESERVED
    
    
    44ITEM 5. OTHER INFORMATION
    
    
    44ITEM 6. EXHIBITS
    
    
    44SIGNATURES
    
    
    45Exhibit 31.1Exhibit 31.2Exhibit 32.1
   2




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##### Table of Contents



Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationDecember 31,
    
    
    March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2010
    
    
    2009
    
    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    83,680
    
    
    $
    73,173
    
    
    $
    83,680
    
    
    $
    73,173Accounts receivable, net of allowance for doubtful accounts
of $43,357 and $39,921 in 2009 and 2010, respectively
    
    
    307,079
    
    
    
    360,997
    
    
    
    307,079
    
    
    
    360,997Current deferred tax asset
    
    
    48,535
    
    
    
    47,377
    
    
    
    48,535
    
    
    
    47,377Prepaid income taxes
    
    
    11,179
    
    
    
    
    
    
    
    11,179
    
    
    
    Other current assets
    
    
    24,240
    
    
    
    26,303
    
    
    
    24,240
    
    
    
    26,303Total Current Assets
    
    
    474,713
    
    
    
    507,850
    
    
    
    474,713
    
    
    
    507,850Property and equipment, net
    
    
    466,131
    
    
    
    462,035
    
    
    
    466,131
    
    
    
    462,035Goodwill
    
    
    1,548,269
    
    
    
    1,548,269
    
    
    
    1,548,269
    
    
    
    1,548,269Other identifiable intangibles
    
    
    65,297
    
    
    
    64,648
    
    
    
    65,297
    
    
    
    64,648Assets held for sale
    
    
    11,342
    
    
    
    11,342
    
    
    
    11,342
    
    
    
    11,342Other assets
    
    
    36,481
    
    
    
    34,826
    
    
    
    33,427
    
    
    
    31,910Total Assets
    
    $
    2,602,233
    
    
    $
    2,628,970
    
    
    $
    2,599,179
    
    
    $
    2,626,054LIABILITIES AND EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    
    
    
    $
    17,314
    
    
    $
    
    
    
    $
    17,314Current portion of long-term debt and notes payable
    
    
    4,145
    
    
    
    55,784
    
    
    
    4,145
    
    
    
    55,784Accounts payable
    
    
    73,434
    
    
    
    71,628
    
    
    
    73,434
    
    
    
    71,628Accrued payroll
    
    
    62,035
    
    
    
    62,285
    
    
    
    62,035
    
    
    
    62,285Accrued vacation
    
    
    41,013
    
    
    
    42,582
    
    
    
    41,013
    
    
    
    42,582Accrued interest
    
    
    32,919
    
    
    
    14,759
    
    
    
    23,473
    
    
    
    11,774Accrued restructuring
    
    
    4,256
    
    
    
    3,763
    
    
    
    4,256
    
    
    
    3,763Accrued other
    
    
    84,234
    
    
    
    75,547
    
    
    
    97,134
    
    
    
    75,547Income taxes payable
    
    
    
    
    
    
    2,649
    
    
    
    
    
    
    
    2,649Due to third party payors
    
    
    1,905
    
    
    
    1,962
    
    
    
    1,905
    
    
    
    1,962Total Current Liabilities
    
    
    303,941
    
    
    
    348,273
    
    
    
    307,395
    
    
    
    345,288Long-term debt, net of current portion
    
    
    1,401,426
    
    
    
    1,353,420
    
    
    
    1,096,842
    
    
    
    1,048,386Non-current deferred tax liability
    
    
    66,768
    
    
    
    68,187
    
    
    
    66,768
    
    
    
    68,187Other non-current liabilities
    
    
    60,543
    
    
    
    61,043
    
    
    
    60,543
    
    
    
    61,043Total Liabilities
    
    
    1,832,678
    
    
    
    1,830,923
    
    
    
    1,531,548
    
    
    
    1,522,904Stockholders Equity:Common stock
of Holdings, $0.001 par value, 700,000,000 shares authorized, 159,981,000 shares and
160,005,000 shares issued and outstanding in 2009 and 2010, respectively
    
    
    160
    
    
    
    160Common stock
of Select, $0.01 par value, 100 shares issued and outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    578,648
    
    
    
    579,266
    
    
    
    822,664
    
    
    
    825,733Retained earnings
    
    
    169,094
    
    
    
    193,320
    
    
    
    223,314
    
    
    
    252,116Accumulated other comprehensive loss
    
    
    (8,914
    )
    
    
    (4,926
    )
    
    
    (8,914
    )
    
    
    (4,926
    )Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders Equity
    
    
    738,988
    
    
    
    767,820
    
    
    
    1,037,064
    
    
    
    1,072,923Non-controlling interest
    
    
    30,567
    
    
    
    30,227
    
    
    
    30,567
    
    
    
    30,227Total Equity
    
    
    769,555
    
    
    
    798,047
    
    
    
    1,067,631
    
    
    
    1,103,150Total Liabilities and Equity
    
    $
    2,602,233
    
    
    $
    2,628,970
    
    
    $
    2,599,179
    
    
    $
    2,626,054
 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 March 31,
    
    
    For the Quarter Ended March 31,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    $
    561,172
    
    
    $
    584,813
    
    
    $
    561,172
    
    
    $
    584,813Costs and expenses:Cost of services
    
    
    451,394
    
    
    
    472,377
    
    
    
    451,394
    
    
    
    472,377General and administrative
    
    
    12,775
    
    
    
    12,789
    
    
    
    12,775
    
    
    
    12,789Bad debt expense
    
    
    11,646
    
    
    
    9,287
    
    
    
    11,646
    
    
    
    9,287Depreciation and amortization
    
    
    17,731
    
    
    
    17,711
    
    
    
    17,731
    
    
    
    17,711Total costs and expenses
    
    
    493,546
    
    
    
    512,164
    
    
    
    493,546
    
    
    
    512,164Income from operations
    
    
    67,626
    
    
    
    72,649
    
    
    
    67,626
    
    
    
    72,649Other income and expense:Gain on early retirement of debt
    
    
    11,754
    
    
    
    
    
    
    
    11,754
    
    
    
    Other income
    
    
    
    
    
    
    134
    
    
    
    1,653
    
    
    
    134Interest income
    
    
    52
    
    
    
    
    
    
    
    52
    
    
    
    Interest expense
    
    
    (34,672
    )
    
    
    (30,042
    )
    
    
    (25,969
    )
    
    
    (23,038
    )Income from operations before income taxes
    
    
    44,760
    
    
    
    42,741
    
    
    
    55,116
    
    
    
    49,745Income tax expense
    
    
    18,743
    
    
    
    17,109
    
    
    
    22,368
    
    
    
    19,560Net income
    
    
    26,017
    
    
    
    25,632
    
    
    
    32,748
    
    
    
    30,185Less: Net income attributable to non-controlling interests
    
    
    1,021
    
    
    
    1,406
    
    
    
    1,021
    
    
    
    1,406Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation
    
    
    24,996
    
    
    
    24,226
    
    
    $
    31,727
    
    
    $
    28,779Less: Preferred dividends
    
    
    6,362
    
    
    
    Net income available to common stockholders
    
    $
    18,634
    
    
    $
    24,226Income per common share:Basic
    
    $
    0.27
    
    
    $
    0.15Diluted
    
    $
    0.27
    
    
    $
    0.15
 The accompanying notes are an integral part of this statement.
  4




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##### Table of Contents



Select Medical Holdings Corporation
Consolidated Statement of Changes in Equity and Income (Loss)
(unaudited)
(in thousands)
 Select Medical Holdings Corporation StockholdersCommon
    
    
    
    
    
    
    
    
    
    
    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, 2009
    
    $
    769,555
    
    
    
    
    
    
    
    159,981
    
    
    $
    160
    
    
    $
    578,648
    
    
    $
    169,094
    
    
    $
    (8,914
    )
    
    $
    30,567Net income
    
    
    25,632
    
    
    $
    25,632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,226
    
    
    
    
    
    
    
    1,406Unrealized gain on interest rate swap, net of tax
    
    
    3,988
    
    
    
    3,988
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,988Total comprehensive income
    
    $
    29,620
    
    
    $
    29,620Issuance and vesting of restricted stock
    
    
    224
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224Exercise of stock options
    
    
    110
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    110Stock option expense
    
    
    284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    284Distributions to non-controlling interests
    
    
    (1,746
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,746
    )Balance at March 31, 2010
    
    $
    798,047
    
    
    
    
    
    
    
    160,005
    
    
    $
    160
    
    
    $
    579,266
    
    
    $
    193,320
    
    
    $
    (4,926
    )
    
    $
    30,227
 Select Medical Corporation
Consolidated Statement of Changes in Equity and 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, 2009
    
    $
    1,067,631
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    822,664
    
    
    $
    223,314
    
    
    $
    (8,914
    )
    
    $
    30,567Net income
    
    
    30,185
    
    
    $
    30,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,779
    
    
    
    
    
    
    
    1,406Unrealized gain on interest rate swap, net of tax
    
    
    3,988
    
    
    
    3,988
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,988Total comprehensive income
    
    $
    34,173
    
    
    $
    34,173Federal tax benefit of losses contributed by Holdings
    
    
    2,451
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,451Additional investment by Holdings
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Settlement of dividends paid to Holdings
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Distributions to non-controlling interests
    
    
    (1,746
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,746
    )Contribution related to restricted stock awards and stock option
issuances by Holdings
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    508Balance at March 31, 2010
    
    $
    1,103,150
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    825,733
    
    
    $
    252,116
    
    
    $
    (4,926
    )
    
    $
    30,227
 The accompanying notes are an integral part of this statement.
  5




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##### Table of Contents



Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationFor the Three Months Ended March 31,
    
    
    For the Three Months Ended March 31,2009
    
    
    2010
    
    
    2009
    
    
    2010Operating activitiesNet income
    
    $
    26,017
    
    
    $
    25,632
    
    
    $
    32,748
    
    
    $
    30,185Adjustments to reconcile net income to net cash
used in operating activities:Depreciation and amortization
    
    
    17,731
    
    
    
    17,711
    
    
    
    17,731
    
    
    
    17,711Provision for bad debts
    
    
    11,646
    
    
    
    9,287
    
    
    
    11,646
    
    
    
    9,287Gain on early retirement of debt
    
    
    (11,754
    )
    
    
    
    
    
    
    (11,754
    )
    
    
    Loss from disposal of assets
    
    
    140
    
    
    
    133
    
    
    
    140
    
    
    
    133Non-cash gain from interest rate swaps
    
    
    
    
    
    
    (134
    )
    
    
    (1,653
    )
    
    
    (134
    )Non-cash stock compensation expense
    
    
    295
    
    
    
    508
    
    
    
    295
    
    
    
    508Amortization of debt discount
    
    
    400
    
    
    
    450
    
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (65,545
    )
    
    
    (63,205
    )
    
    
    (65,545
    )
    
    
    (63,205
    )Other current assets
    
    
    (4,354
    )
    
    
    (2,066
    )
    
    
    (4,354
    )
    
    
    (2,066
    )Other assets
    
    
    2,129
    
    
    
    2,130
    
    
    
    1,987
    
    
    
    1,992Accounts payable
    
    
    (3,473
    )
    
    
    (1,802
    )
    
    
    (3,473
    )
    
    
    (1,802
    )Due to third-party payors
    
    
    (109
    )
    
    
    57
    
    
    
    (109
    )
    
    
    57Accrued expenses
    
    
    (12,523
    )
    
    
    (20,633
    )
    
    
    (4,275
    )
    
    
    (14,172
    )Income and deferred taxes
    
    
    18,673
    
    
    
    16,136
    
    
    
    22,299
    
    
    
    18,587Net cash used in operating activities
    
    
    (20,727
    )
    
    
    (15,796
    )
    
    
    (4,317
    )
    
    
    (2,919
    )Investing activitiesPurchases of property and equipment
    
    
    (7,036
    )
    
    
    (13,047
    )
    
    
    (7,036
    )
    
    
    (13,047
    )Net cash used in investing activities
    
    
    (7,036
    )
    
    
    (13,047
    )
    
    
    (7,036
    )
    
    
    (13,047
    )Financing activitiesBorrowings on revolving credit facility
    
    
    53,000
    
    
    
    
    
    
    
    53,000
    
    
    
    Payments on revolving credit facility
    
    
    (53,000
    )
    
    
    
    
    
    
    (53,000
    )
    
    
    Payment on credit facility term loan
    
    
    (1,700
    )
    
    
    
    
    
    
    (1,700
    )
    
    
    Repurchase of 7 5/8% senior subordinated notes
    
    
    (19,014
    )
    
    
    
    
    
    
    (19,014
    )
    
    
    Borrowings of other debt
    
    
    5,184
    
    
    
    5,015
    
    
    
    5,184
    
    
    
    5,015Principal payments on seller and other debt
    
    
    (2,362
    )
    
    
    (2,357
    )
    
    
    (2,362
    )
    
    
    (2,357
    )Dividends paid to Holdings
    
    
    
    
    
    
    
    
    
    
    (16,490
    )
    
    
    (12,877
    )Payment of initial public offering costs
    
    
    (106
    )
    
    
    
    
    
    
    (106
    )
    
    
    Repurchase of common and preferred stock
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    4
    
    
    
    110
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    110Proceeds from (repayment of) bank overdrafts
    
    
    (4,786
    )
    
    
    17,314
    
    
    
    (4,786
    )
    
    
    17,314Distributions to non-controlling interests
    
    
    (951
    )
    
    
    (1,746
    )
    
    
    (951
    )
    
    
    (1,746
    )Net cash provided by (used in) financing activities
    
    
    (23,811
    )
    
    
    18,336
    
    
    
    (40,221
    )
    
    
    5,459Net decrease in cash and cash equivalents
    
    
    (51,574
    )
    
    
    (10,507
    )
    
    
    (51,574
    )
    
    
    (10,507
    )Cash and cash equivalents at beginning of period
    
    
    64,260
    
    
    
    83,680
    
    
    
    64,260
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    12,686
    
    
    $
    73,173
    
    
    $
    12,686
    
    
    $
    73,173Supplemental Cash Flow InformationCash paid for interest
    
    $
    53,491
    
    
    $
    46,038
    
    
    $
    37,082
    
    
    $
    33,162Cash paid for taxes
    
    $
    7
    
    
    $
    980
    
    
    $
    7
    
    
    $
    980
 The accompanying notes are an integral part of this statement.
  6




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##### Table of Contents



SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Basis of Presentation
    2. Accounting Policies
 Use of Estimates
   7




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##### Table of Contents



Recent Accounting Pronouncements
  3. Intangible Assets
  As of March 31, 2010Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assetsContract therapy relationships
    
    $
    20,456
    
    
    $
    (20,456
    )Non-compete agreements
    
    
    25,909
    
    
    
    (21,883
    )Total
    
    $
    46,365
    
    
    $
    (42,339
    )Indefinite-lived intangible assetsGoodwill
    
    $
    1,548,269Trademarks
    
    
    47,858Certificates of need
    
    
    11,425Accreditations
    
    
    1,339Total
    
    $
    1,608,891
   8




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##### Table of Contents



Three Months Ended March 31,2009
    
    
    2010(in thousands)Amortization expense
    
    $
    2,208
    
    
    $
    1,867
  2010
    
    $
    4,2472011
    
    
    1,3062012
    
    
    3402013
    
    
    02014
    
    
    0
 4. Restructuring Reserves
   Lease Termination Costs(in thousands)December 31, 2009
    
    $
    4,256Amounts paid in 2010
    
    
    (368
    )Revision of estimate
    
    
    (125
    )March 31, 2010
    
    $
    3,763
  5. Fair Value
 Fair Value Measurements
   9




---



##### Table of Contents



Fair Value of Financial Instruments
   5 8 5 8
  Interest Rate Swaps
     10




---



##### Table of Contents



Accumulated
Other Comprehensive Loss.
 6. Accumulated Other Comprehensive Loss
  7. 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.
 Common Stock
  8. Segment Information
   11




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##### Table of Contents



Three Months Ended March 31, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    393,232
    
    
    $
    167,819
    
    
    $
    121
    
    
    $
    561,172Adjusted EBITDA
    
    
    76,781
    
    
    
    21,284
    
    
    
    (12,413
    )
    
    
    85,652Total assets:Select Medical Corporation
    
    
    1,943,006
    
    
    
    504,047
    
    
    
    104,225
    
    
    
    2,551,278Select Medical Holdings Corporation
    
    
    1,943,006
    
    
    
    504,047
    
    
    
    111,844
    
    
    
    2,558,897Capital expenditures
    
    
    4,155
    
    
    
    2,810
    
    
    
    71
    
    
    
    7,036
 Three Months Ended March 31, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    411,685
    
    
    $
    173,065
    
    
    $
    63
    
    
    $
    584,813Adjusted EBITDA
    
    
    82,897
    
    
    
    20,518
    
    
    
    (12,547
    )
    
    
    90,868Total assets:Select Medical Corporation
    
    
    1,991,456
    
    
    
    502,346
    
    
    
    132,252
    
    
    
    2,626,054Select Medical Holdings
Corporation
    
    
    1,991,456
    
    
    
    502,346
    
    
    
    135,168
    
    
    
    2,628,970Capital expenditures
    
    
    10,598
    
    
    
    2,035
    
    
    
    414
    
    
    
    13,047
  12




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##### Table of Contents



Three Months Ended March 31, 2009Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    76,781
    
    
    $
    21,284
    
    
    $
    (12,413
    )Depreciation and amortization
    
    
    (10,747
    )
    
    
    (6,133
    )
    
    
    (851
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (295
    )Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    66,034
    
    
    $
    15,151
    
    
    $
    (13,559
    )
    
    $
    67,626
    
    
    $
    67,626Gain on early retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,754
    
    
    
    11,754Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,653Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,620
    )
    
    
    (25,917
    )Income from operations before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,760
    
    
    $
    55,116Three Months Ended March 31, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    82,897
    
    
    $
    20,518
    
    
    $
    (12,547
    )Depreciation and amortization
    
    
    (10,959
    )
    
    
    (5,856
    )
    
    
    (896
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (508
    )Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    71,938
    
    
    $
    14,662
    
    
    $
    (13,951
    )
    
    $
    72,649
    
    
    $
    72,649Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    134Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,042
    )
    
    
    (23,038
    )Income from operations before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    42,741
    
    
    $
    49,745
 9. Income per Common Share
   13




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##### Table of Contents



For the Three Months EndedMarch 31,2009
    
    
    2010(in thousands, except per share data)Numerator:Net income attributable to Select Medical Holdings
Corporation
    
    $
    24,996
    
    
    $
    24,226Less: Preferred stock dividends
    
    
    6,362
    
    
    
    Less: Earnings allocated to preferred stockholders
    
    
    1,818
    
    
    
    Less: Earnings allocated to unvested restricted
stockholders
    
    
    295
    
    
    
    50Income available to common and preferred stockholders 
basic and diluted
    
    $
    16,521
    
    
    $
    24,176Denominator:Weighted average shares  basic
    
    
    60,386
    
    
    
    159,670Effect of dilutive securities:Stock options
    
    
    483
    
    
    
    351Weighted average shares  diluted
    
    
    60,869
    
    
    
    160,021Basic income per common share
    
    $
    0.27
    
    
    $
    0.15Diluted income per common share
    
    $
    0.27
    
    
    $
    0.15
  Three Months Ended March 31,2009
    
    
    2010(in thousands)Stock options
    
    
    131
    
    
    
    1,581
  14




---



##### Table of Contents



10. Early Retirement of Debt
 7
5/8%
 11. Commitments and Contingencies
 Litigation
      Construction Commitments
   15




---



##### Table of Contents



12. Financial Information for Subsidiary Guarantors and
Non-Guarantor Subsidiaries under Selects  7 5/8% Senior Subordinated Notes
 5 8 5 8
    
  16




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Balance Sheet
March 31, 2010
(unaudited)
 Select MedicalCorporation(Parent Company
    
    
    Subsidiary
    
    
    Non-GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    68,404
    
    
    $
    4,282
    
    
    $
    487
    
    
    $
    
    
    
    $
    73,173Accounts receivable, net
    
    
    
    
    
    
    326,647
    
    
    
    34,350
    
    
    
    
    
    
    
    360,997Current deferred tax asset
    
    
    13,000
    
    
    
    29,175
    
    
    
    5,202
    
    
    
    
    
    
    
    47,377Other current assets
    
    
    6,780
    
    
    
    16,562
    
    
    
    2,961
    
    
    
    
    
    
    
    26,303Total Current Assets
    
    
    88,184
    
    
    
    376,666
    
    
    
    43,000
    
    
    
    
    
    
    
    507,850Property and equipment, net
    
    
    6,222
    
    
    
    406,362
    
    
    
    49,451
    
    
    
    
    
    
    
    462,035Investment in affiliates
    
    
    2,176,251
    
    
    
    79,788
    
    
    
    
    
    
    
    (2,256,039
    )(a)(b)
    
    
    Goodwill
    
    
    
    
    
    
    1,548,269
    
    
    
    
    
    
    
    
    
    
    
    1,548,269Other identifiable intangibles
    
    
    
    
    
    
    64,648
    
    
    
    
    
    
    
    
    
    
    
    64,648Assets held for sale
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,342Other assets
    
    
    20,646
    
    
    
    8,397
    
    
    
    2,867
    
    
    
    
    
    
    
    31,910Total Assets
    
    $
    2,302,645
    
    
    $
    2,484,130
    
    
    $
    95,318
    
    
    $
    (2,256,039
    )
    
    $
    2,626,054Liabilities and EquityCurrent Liabilities:Bank overdrafts
    
    $
    17,314
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,314Current portion of long-term debt and
notes payable
    
    
    54,316
    
    
    
    802
    
    
    
    666
    
    
    
    
    
    
    
    55,784Accounts payable
    
    
    6,336
    
    
    
    56,141
    
    
    
    9,151
    
    
    
    
    
    
    
    71,628Intercompany accounts
    
    
    482,964
    
    
    
    (406,110
    )
    
    
    (76,854
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    77
    
    
    
    62,040
    
    
    
    168
    
    
    
    
    
    
    
    62,285Accrued vacation
    
    
    2,947
    
    
    
    34,300
    
    
    
    5,335
    
    
    
    
    
    
    
    42,582Accrued interest
    
    
    11,594
    
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    11,774Accrued restructuring
    
    
    
    
    
    
    3,763
    
    
    
    
    
    
    
    
    
    
    
    3,763Accrued other
    
    
    38,890
    
    
    
    34,452
    
    
    
    2,205
    
    
    
    
    
    
    
    75,547Income taxes payable
    
    
    2,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,649Due to third party payors
    
    
    
    
    
    
    19,925
    
    
    
    (17,963
    )
    
    
    
    
    
    
    1,962Total Current Liabilities
    
    
    617,087
    
    
    
    (194,507
    )
    
    
    (77,292
    )
    
    
    
    
    
    
    345,288Long-term debt, net of current portion
    
    
    550,919
    
    
    
    442,077
    
    
    
    55,390
    
    
    
    
    
    
    
    1,048,386Non-current deferred tax liability
    
    
    673
    
    
    
    59,964
    
    
    
    7,550
    
    
    
    
    
    
    
    68,187Other non-current liabilities
    
    
    61,043
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,043Total Liabilities
    
    
    1,229,722
    
    
    
    307,534
    
    
    
    (14,352
    )
    
    
    
    
    
    
    1,522,904Stockholders Equity:Capital in excess of par
    
    
    825,733
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    825,733Retained earnings
    
    
    252,116
    
    
    
    441,931
    
    
    
    25,425
    
    
    
    (467,356
    )(b)
    
    
    252,116Subsidiary investment
    
    
    
    
    
    
    1,734,665
    
    
    
    54,018
    
    
    
    (1,788,683
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (4,926
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,926
    )Total Select Medical Corporation
Stockholders Equity
    
    
    1,072,923
    
    
    
    2,176,596
    
    
    
    79,443
    
    
    
    (2,256,039
    )
    
    
    1,072,923Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    30,227
    
    
    
    
    
    
    
    30,227Total Equity
    
    
    1,072,923
    
    
    
    2,176,596
    
    
    
    109,670
    
    
    
    (2,256,039
    )
    
    
    1,103,150Total Liabilities and Equity
    
    $
    2,302,645
    
    
    $
    2,484,130
    
    
    $
    95,318
    
    
    $
    (2,256,039
    )
    
    $
    2,626,054
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings.  17




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Quarter Ended March 31, 2010
(unaudited)
 Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    63
    
    
    $
    502,327
    
    
    $
    82,423
    
    
    $
    
    
    
    $
    584,813Costs and expenses:Cost of services
    
    
    328
    
    
    
    405,265
    
    
    
    66,784
    
    
    
    
    
    
    
    472,377General and administrative
    
    
    12,774
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    12,789Bad debt expense
    
    
    
    
    
    
    7,671
    
    
    
    1,616
    
    
    
    
    
    
    
    9,287Depreciation and amortization
    
    
    818
    
    
    
    14,650
    
    
    
    2,243
    
    
    
    
    
    
    
    17,711Total costs and expenses
    
    
    13,920
    
    
    
    427,601
    
    
    
    70,643
    
    
    
    
    
    
    
    512,164Income (loss) from operations
    
    
    (13,857
    )
    
    
    74,726
    
    
    
    11,780
    
    
    
    
    
    
    
    72,649Other income and expense:Intercompany interest and royalty fees
    
    
    (1,074
    )
    
    
    1,070
    
    
    
    4
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    22,816
    
    
    
    (19,311
    )
    
    
    (3,505
    )
    
    
    
    
    
    
    Other income
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134Interest expense
    
    
    (13,448
    )
    
    
    (8,527
    )
    
    
    (1,063
    )
    
    
    
    
    
    
    (23,038
    )Income (loss) from operations before income taxes
    
    
    (5,429
    )
    
    
    47,958
    
    
    
    7,216
    
    
    
    
    
    
    
    49,745Income tax expense (benefit)
    
    
    88
    
    
    
    19,492
    
    
    
    (20
    )
    
    
    
    
    
    
    19,560Equity in earnings of subsidiaries
    
    
    34,296
    
    
    
    5,596
    
    
    
    
    
    
    
    (39,892
    )(a)
    
    
    Net income
    
    
    28,779
    
    
    
    34,062
    
    
    
    7,236
    
    
    
    (39,892
    )
    
    
    30,185Less: Net income attributable to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    1,406
    
    
    
    
    
    
    
    1,406Net income attributable to Select Medical Corporation
    
    $
    28,779
    
    
    $
    34,062
    
    
    $
    5,830
    
    
    $
    (39,892
    )
    
    $
    28,779
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  18




---



##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Quarter Ended March 31, 2010
(unaudited)
 Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    28,779
    
    
    $
    34,062
    
    
    $
    7,236
    
    
    $
    (39,892
    )(a)
    
    $
    30,185Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    818
    
    
    
    14,650
    
    
    
    2,243
    
    
    
    
    
    
    
    17,711Provision for bad debts
    
    
    
    
    
    
    7,671
    
    
    
    1,616
    
    
    
    
    
    
    
    9,287Loss from disposal of assets
    
    
    
    
    
    
    96
    
    
    
    37
    
    
    
    
    
    
    
    133Non-cash gain from interest rate swaps
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134
    )Non-cash stock compensation expense
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    508Changes in operating assets and liabilities, net
of effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (34,296
    )
    
    
    (5,596
    )
    
    
    
    
    
    
    39,892
    (a)
    
    
    Intercompany
    
    
    2,808
    
    
    
    (6,753
    )
    
    
    3,945
    
    
    
    
    
    
    
    Accounts receivable
    
    
    
    
    
    
    (51,648
    )
    
    
    (11,557
    )
    
    
    
    
    
    
    (63,205
    )Other current assets
    
    
    (1,394
    )
    
    
    (2,977
    )
    
    
    2,305
    
    
    
    
    
    
    
    (2,066
    )Other assets
    
    
    1,754
    
    
    
    794
    
    
    
    (556
    )
    
    
    
    
    
    
    1,992Accounts payable
    
    
    3,107
    
    
    
    (5,070
    )
    
    
    161
    
    
    
    
    
    
    
    (1,802
    )Due to third-party payors
    
    
    
    
    
    
    8,606
    
    
    
    (8,549
    )
    
    
    
    
    
    
    57Accrued expenses
    
    
    (22,991
    )
    
    
    11,603
    
    
    
    (2,784
    )
    
    
    
    
    
    
    (14,172
    )Income and deferred taxes
    
    
    18,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,587Net cash provided by (used in) operating activities
    
    
    (2,454
    )
    
    
    5,438
    
    
    
    (5,903
    )
    
    
    
    
    
    
    (2,919
    )Investing activitiesPurchases of property and equipment
    
    
    (413
    )
    
    
    (11,146
    )
    
    
    (1,488
    )
    
    
    
    
    
    
    (13,047
    )Net cash used in investing activities
    
    
    (413
    )
    
    
    (11,146
    )
    
    
    (1,488
    )
    
    
    
    
    
    
    (13,047
    )Financing activitiesBorrowings of other debt
    
    
    5,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,015Principal payments on seller and other debt
    
    
    (1,798
    )
    
    
    (270
    )
    
    
    (289
    )
    
    
    
    
    
    
    (2,357
    )Dividends paid to Holdings
    
    
    (12,877
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,877
    )Equity investment by Holdings
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Proceeds from bank overdrafts
    
    
    17,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,314Intercompany debt reallocation
    
    
    (17,433
    )
    
    
    7,962
    
    
    
    9,471
    
    
    
    
    
    
    
    Distributions to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    (1,746
    )
    
    
    
    
    
    
    (1,746
    )Net cash provided by (used in) financing activities
    
    
    (9,669
    )
    
    
    7,692
    
    
    
    7,436
    
    
    
    
    
    
    
    5,459Net increase (decrease) in cash and cash equivalents
    
    
    (12,536
    )
    
    
    1,984
    
    
    
    45
    
    
    
    
    
    
    
    (10,507
    )Cash and cash equivalents at beginning of period
    
    
    80,940
    
    
    
    2,298
    
    
    
    442
    
    
    
    
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    68,404
    
    
    $
    4,282
    
    
    $
    487
    
    
    $
    
    
    
    $
    73,173
 (a)
    
    Elimination of equity in earnings of subsidiaries.  19




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2009
(unaudited)
 Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated( in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    80,940
    
    
    $
    2,298
    
    
    $
    442
    
    
    $
    
    
    
    $
    83,680Accounts receivable, net
    
    
    
    
    
    
    282,670
    
    
    
    24,409
    
    
    
    
    
    
    
    307,079Current deferred tax asset
    
    
    13,677
    
    
    
    29,854
    
    
    
    5,004
    
    
    
    
    
    
    
    48,535Prepaid income taxes
    
    
    11,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,179Other current assets
    
    
    5,386
    
    
    
    13,588
    
    
    
    5,266
    
    
    
    
    
    
    
    24,240Total Current Assets
    
    
    111,182
    
    
    
    328,410
    
    
    
    35,121
    
    
    
    
    
    
    
    474,713Property and equipment, net
    
    
    6,649
    
    
    
    409,258
    
    
    
    50,224
    
    
    
    
    
    
    
    466,131Investment in affiliates
    
    
    2,142,189
    
    
    
    72,628
    
    
    
    
    
    
    
    (2,214,817
    )(a)(b)
    
    
    Goodwill
    
    
    
    
    
    
    1,548,269
    
    
    
    
    
    
    
    
    
    
    
    1,548,269Other identifiable intangibles
    
    
    
    
    
    
    65,297
    
    
    
    
    
    
    
    
    
    
    
    65,297Assets held for sale
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,342Other assets
    
    
    22,400
    
    
    
    8,716
    
    
    
    2,311
    
    
    
    
    
    
    
    33,427Total Assets
    
    $
    2,293,762
    
    
    $
    2,432,578
    
    
    $
    87,656
    
    
    $
    (2,214,817
    )
    
    $
    2,599,179Liabilities and EquityCurrent Liabilities:Current portion of long-term debt
and notes payable
    
    $
    2,545
    
    
    $
    803
    
    
    $
    797
    
    
    $
    
    
    
    $
    4,145Accounts payable
    
    
    3,229
    
    
    
    61,215
    
    
    
    8,990
    
    
    
    
    
    
    
    73,434Intercompany accounts
    
    
    495,981
    
    
    
    (416,944
    )
    
    
    (79,037
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    81
    
    
    
    61,860
    
    
    
    94
    
    
    
    
    
    
    
    62,035Accrued vacation
    
    
    2,942
    
    
    
    33,024
    
    
    
    5,047
    
    
    
    
    
    
    
    41,013Accrued interest
    
    
    23,354
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    23,473Accrued restructuring
    
    
    
    
    
    
    4,256
    
    
    
    
    
    
    
    
    
    
    
    4,256Accrued other
    
    
    50,122
    
    
    
    41,661
    
    
    
    5,351
    
    
    
    
    
    
    
    97,134Due to third party payors
    
    
    
    
    
    
    11,319
    
    
    
    (9,414
    )
    
    
    
    
    
    
    1,905Total Current Liabilities
    
    
    578,254
    
    
    
    (202,687
    )
    
    
    (68,172
    )
    
    
    
    
    
    
    307,395Long-term debt, net of current portion
    
    
    616,906
    
    
    
    434,384
    
    
    
    45,552
    
    
    
    
    
    
    
    1,096,842Non-current deferred tax liability
    
    
    995
    
    
    
    58,346
    
    
    
    7,427
    
    
    
    
    
    
    
    66,768Other non-current liabilities
    
    
    60,543
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,543Total Liabilities
    
    
    1,256,698
    
    
    
    290,043
    
    
    
    (15,193
    )
    
    
    
    
    
    
    1,531,548Stockholders Equity:Capital in excess of par
    
    
    822,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    822,664Retained earnings
    
    
    223,314
    
    
    
    407,870
    
    
    
    21,075
    
    
    
    (428,945
    )(b)
    
    
    223,314Subsidiary investment
    
    
    
    
    
    
    1,734,665
    
    
    
    51,207
    
    
    
    (1,785,872
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (8,914
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,914
    )Total Select Medical Corporation
Stockholders Equity
    
    
    1,037,064
    
    
    
    2,142,535
    
    
    
    72,282
    
    
    
    (2,214,817
    )
    
    
    1,037,064Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    30,567
    
    
    
    
    
    
    
    30,567Total Equity
    
    
    1,037,064
    
    
    
    2,142,535
    
    
    
    102,849
    
    
    
    (2,214,817
    )
    
    
    1,067,631Total Liabilities and Equity
    
    $
    2,293,762
    
    
    $
    2,432,578
    
    
    $
    87,656
    
    
    $
    (2,214,817
    )
    
    $
    2,599,179
 (a)
    
    Elimination of investments in subsidiaries.(b)
    
    Elimination of investments in subsidiaries earnings.  20




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2009
(unaudited)
 Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    121
    
    
    $
    500,735
    
    
    $
    60,316
    
    
    $
    
    
    
    $
    561,172Costs and expenses:Cost of services
    
    
    53
    
    
    
    400,836
    
    
    
    50,505
    
    
    
    
    
    
    
    451,394General and administrative
    
    
    12,744
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    12,775Bad debt expense
    
    
    
    
    
    
    10,377
    
    
    
    1,269
    
    
    
    
    
    
    
    11,646Depreciation and amortization
    
    
    772
    
    
    
    15,463
    
    
    
    1,496
    
    
    
    
    
    
    
    17,731Total costs and expenses
    
    
    13,569
    
    
    
    426,707
    
    
    
    53,270
    
    
    
    
    
    
    
    493,546Income (loss) from operations
    
    
    (13,448
    )
    
    
    74,028
    
    
    
    7,046
    
    
    
    
    
    
    
    67,626Other income and expense:Intercompany interest and royalty fees
    
    
    (3,702
    )
    
    
    3,674
    
    
    
    28
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    39,250
    
    
    
    (37,097
    )
    
    
    (2,153
    )
    
    
    
    
    
    
    Gain on early retirement of debt
    
    
    11,754
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,754Other income
    
    
    1,653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,653Interest income
    
    
    51
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    52Interest expense
    
    
    (17,343
    )
    
    
    (7,932
    )
    
    
    (694
    )
    
    
    
    
    
    
    (25,969
    )Income from operations before income taxes
    
    
    18,215
    
    
    
    32,674
    
    
    
    4,227
    
    
    
    
    
    
    
    55,116Income tax expense
    
    
    7,742
    
    
    
    14,526
    
    
    
    100
    
    
    
    
    
    
    
    22,368Equity in earnings of subsidiaries
    
    
    21,254
    
    
    
    3,095
    
    
    
    
    
    
    
    (24,349
    )(a)
    
    
    Net income
    
    
    31,727
    
    
    
    21,243
    
    
    
    4,127
    
    
    
    (24,349
    )
    
    
    32,748Less: Net income attributable to non-controlling
interests
    
    
    
    
    
    
    
    
    
    
    1,021
    
    
    
    
    
    
    
    1,021Net income attributable to Select Medical Corporation
    
    $
    31,727
    
    
    $
    21,243
    
    
    $
    3,106
    
    
    $
    (24,349
    )
    
    $
    31,727
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  21




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##### Table of Contents



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2009
(unaudited)
 Select MedicalCorporation
    
    
    
    
    
    
    Non-(Parent Company
    
    
    Subsidiary
    
    
    GuarantorOnly)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    31,727
    
    
    $
    21,243
    
    
    $
    4,127
    
    
    $
    (24,349
    )(a)
    
    $
    32,748Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    772
    
    
    
    15,463
    
    
    
    1,496
    
    
    
    
    
    
    
    17,731Provision for bad debts
    
    
    
    
    
    
    10,377
    
    
    
    1,269
    
    
    
    
    
    
    
    11,646Gain on early retirement of debt
    
    
    (11,754
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,754
    )Loss from disposal of assets
    
    
    1
    
    
    
    136
    
    
    
    3
    
    
    
    
    
    
    
    140Non-cash gain from interest rate swaps
    
    
    (1,653
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,653
    )Non-cash stock compensation expense
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295Changes in operating assets and liabilities, net
of effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (21,254
    )
    
    
    (3,095
    )
    
    
    
    
    
    
    24,349
    (a)
    
    
    Intercompany
    
    
    (16,450
    )
    
    
    13,835
    
    
    
    2,615
    
    
    
    
    
    
    
    Accounts receivable
    
    
    (189
    )
    
    
    (63,606
    )
    
    
    (1,750
    )
    
    
    
    
    
    
    (65,545
    )Other current assets
    
    
    (3,698
    )
    
    
    330
    
    
    
    (986
    )
    
    
    
    
    
    
    (4,354
    )Other assets
    
    
    2,653
    
    
    
    (818
    )
    
    
    152
    
    
    
    
    
    
    
    1,987Accounts payable
    
    
    (696
    )
    
    
    (1,264
    )
    
    
    (1,513
    )
    
    
    
    
    
    
    (3,473
    )Due to third-party payors
    
    
    
    
    
    
    3,174
    
    
    
    (3,283
    )
    
    
    
    
    
    
    (109
    )Accrued expenses
    
    
    (10,629
    )
    
    
    6,026
    
    
    
    328
    
    
    
    
    
    
    
    (4,275
    )Income and deferred taxes
    
    
    22,299
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,299Net cash provided by (used in) operating activities
    
    
    (8,576
    )
    
    
    1,801
    
    
    
    2,458
    
    
    
    
    
    
    
    (4,317
    )Investing activitiesPurchases of property and equipment
    
    
    (262
    )
    
    
    (5,331
    )
    
    
    (1,443
    )
    
    
    
    
    
    
    (7,036
    )Net cash used in investing activities
    
    
    (262
    )
    
    
    (5,331
    )
    
    
    (1,443
    )
    
    
    
    
    
    
    (7,036
    )Financing activitiesBorrowings on revolving credit facility
    
    
    53,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,000Payments on revolving credit facility
    
    
    (53,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,000
    )Payments on credit facility term loan
    
    
    (1,700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,700
    )Repurchase of 7 5/8% senior subordianted notes
    
    
    (19,014
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,014
    )Borrowings of other debt
    
    
    5,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,184Principal payments on seller and other debt
    
    
    (1,961
    )
    
    
    (398
    )
    
    
    (3
    )
    
    
    
    
    
    
    (2,362
    )Dividends paid to Holdings
    
    
    (16,490
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,490
    )Payment of initial public offering costs
    
    
    (106
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106
    )Equity investment by Holdings
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Repayment of bank overdrafts
    
    
    (4,786
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,786
    )Intercompany debt reallocation
    
    
    (1,103
    )
    
    
    1,142
    
    
    
    (39
    )
    
    
    
    
    
    
    Distributions to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    (951
    )
    
    
    
    
    
    
    (951
    )Net cash provided by (used in) financing activities
    
    
    (39,972
    )
    
    
    744
    
    
    
    (993
    )
    
    
    
    
    
    
    (40,221
    )Net increase (decrease) in cash and cash equivalents
    
    
    (48,810
    )
    
    
    (2,786
    )
    
    
    22
    
    
    
    
    
    
    
    (51,574
    )Cash and cash equivalents at beginning of period
    
    
    58,332
    
    
    
    5,108
    
    
    
    820
    
    
    
    
    
    
    
    64,260Cash and cash equivalents at end of period
    
    $
    9,522
    
    
    $
    2,322
    
    
    $
    842
    
    
    $
    
    
    
    $
    12,686
 (a)
    
    Elimination of equity in earnings of subsidiaries.  22




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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.
 Forward Looking Statements
   
    
    additional changes in government reimbursement for our services, including changes that
will result from the expiration of the moratorium for long term acute care hospitals
established by the SCHIP Extension Act of 2007, the American Recovery and Reinvestment Act,
and the Patient Protection and Affordable Care Act may result in a reduction in net
operating revenues, an increase in costs and a reduction in profitability;
 
    
    the failure of our specialty hospitals to maintain their
Medicare certifications as such may
cause our net operating revenues and profitability to decline;
 
    
    the failure of our facilities operated as hospitals within hospitals to qualify as
hospitals separate from their host hospitals may cause our net operating revenues and
profitability to decline;
 
    
    a government investigation or assertion that we have violated applicable regulations may
result in sanctions or reputational harm and increased costs;
 
    
    future acquisitions or joint ventures 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;
  23




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##### Table of Contents




    
    the effect of claims asserted against us or lack of adequate available insurance could
subject us to substantial uninsured liabilities;
 
    
    the ability to refinance our outstanding indebtedness before it comes due;
 
    
    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;
 
    
    the inability to draw funds under our senior secured credit facility because of lender
defaults; and
 
    
    other factors discussed from time to time in our filings with the SEC, including factors
discussed under the heading Risk Factors of our Annual Report on Form 10-K for the year
ended December 31, 2009.
   Overview
    24




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##### Table of Contents



Recent Trends and Events
 Summary Financial Results
 First Quarter Ended March 31, 2010
   Regulatory Changes
  Health Reform Legislation
   25




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##### Table of Contents



Extension of Changes Made by the Medicare, Medicaid, and SCHIP Extension Act of 2007
  25% Rule
  Type of LTCH
    
    Non Co-located Admissions
    
    Co-located AdmissionsNon-grandfathered HIHs
opened before October 1, 2004
(54 owned hospitals)
    
    Not subject to any
extensions of the
admissions thresholds under the 25% Rule. LTCHs in this category are
subject to a payment adjustment for discharged Medicare patients
exceeding 25% of the LTCHs total Medicare population.
    
    Percentage admissions threshold was raised from 25%
to 50%. This relief is now effective for five years starting with cost reporting
periods beginning on or after October 1, 2007. In the special
case of rural LTCHs, LTCHs co-located with an urban single hospital, or
LTCHs co-located with an MSA-dominate hospital the referral
percentage was raised to 75%.Non-grandfathered
satellite facilities opened before October 1, 2004
(five owned hospitals)
    
    Not subject to any
extensions of the
admissions thresholds under the 25% Rule. LTCHs in this category are
subject to a payment adjustment for discharged Medicare patients
exceeding 25% of the LTCHs total Medicare population.
    
    Percentage admissions threshold was raised from 25%
to 50%. This relief is now effective for five years starting with cost reporting
periods beginning on or after October 1, 2007.  In the special
case of rural LTCHs, LTCHs co-located with an urban single hospital, or
LTCHs co-located with an MSA-dominate hospital the referral
percentage was raised to 75%.Grandfathered HIHs
(two owned hospitals)
    
    Percentage admissions threshold is
suspended for five years starting with cost reporting periods beginning on or after
July 1, 2007.
    
    Percentage admission threshold is suspended
for five years starting with cost reporting periods beginning on or after July 1, 2007.
  26




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##### Table of Contents



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

(four owned hospitals)
    
    LTCHs in this category are subject
to a payment adjustment for discharged Medicare patients exceeding
25% of the LTCHs total Medicare population.
    
    LTCHs in this category are subject
to a payment adjustment for discharged Medicare patients exceeding
25% of the LTCHs total Medicare population.
 One-Time Budget Neutrality Adjustment
  Short Stay Outlier Policy
  Moratorium on New LTCHs and New LTCH Beds
   27




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##### Table of Contents



Medicare Quality Reporting
  Medicare Market Basket Adjustments
   Medicare Productivity Adjustment
  Hospital Wage Index
   28




---



##### Table of Contents



Independent Payment Advisory Board
  Physician-Owned Hospital Limitations
  Provider and Employee Screening
   Medicare Compliance Requirements and Penalties
   29




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##### Table of Contents



Additional Medicare Rulemaking
  Reductions to the Medicare Physician Fee Schedule
  Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2011
  Medicare Payment of Outpatient Rehabilitation Services
   30




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##### Table of Contents



Facility Licensure, Certification and Accreditation
    31




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##### Table of Contents



Operating Statistics
  Three MonthsEndedMarch 31,2009
    
    
    2010Specialty hospital data(1):Number of hospitals  start of period
    
    
    93
    
    
    
    94Number of hospital start-ups
    
    
    
    
    
    
    Number of hospitals acquired
    
    
    
    
    
    
    Number of hospitals consolidated
    
    
    
    
    
    
    Number of hospitals closed
    
    
    (1
    )
    
    
    Number of hospitals owned  end of period
    
    
    92
    
    
    
    94Number of hospitals managed  end of period
    
    
    
    
    
    
    1Total number of hospitals (all)  end of period
    
    
    92
    
    
    
    95Available licensed beds
    
    
    4,172
    
    
    
    4,245Admissions
    
    
    10,805
    
    
    
    11,101Patient days
    
    
    256,273
    
    
    
    267,848Average length of stay (days)
    
    
    24
    
    
    
    25Net revenue per patient day(2)
    
    $
    1,508
    
    
    $
    1,511Occupancy rate
    
    
    68
    %
    
    
    70
    %Percent patient days  Medicare
    
    
    65
    %
    
    
    65
    %Outpatient rehabilitation data:Number of clinics owned  start of period
    
    
    880
    
    
    
    883Number of clinics acquired
    
    
    1
    
    
    
    Number of clinic start-ups
    
    
    
    
    
    
    5Number of clinics closed/sold
    
    
    (6
    )
    
    
    (3
    )Number of clinics owned  end of period
    
    
    875
    
    
    
    885Number of clinics managed  end of period
    
    
    73
    
    
    
    74Total number of clinics (all)  end of period
    
    
    948
    
    
    
    959Number of visits
    
    
    1,096,296
    
    
    
    1,125,958Net revenue per visit (3)
    
    $
    103
    
    
    $
    101
 
 (1)
    
    Specialty hospitals consist of long term acute care hospitals and inpatient rehabilitation
facilities.(2)
    
    Net revenue per patient day is calculated by dividing specialty hospital 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.  32




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##### Table of Contents



Results of Operations
  Select Medical Holdings Corporation
    
    

Select Medical CorporationThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    80.4
    
    
    
    80.8
    
    
    
    80.4
    
    
    
    80.8General and administrative
    
    
    2.3
    
    
    
    2.2
    
    
    
    2.3
    
    
    
    2.2Bad debt expense
    
    
    2.1
    
    
    
    1.6
    
    
    
    2.1
    
    
    
    1.6Depreciation and amortization
    
    
    3.2
    
    
    
    3.0
    
    
    
    3.2
    
    
    
    3.0Income from operations
    
    
    12.0
    
    
    
    12.4
    
    
    
    12.0
    
    
    
    12.4Gain on early retirement of debt
    
    
    2.1
    
    
    
    
    
    
    
    2.1
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    Interest expense, net
    
    
    (6.1
    )
    
    
    (5.1
    )
    
    
    (4.6
    )
    
    
    (4.0
    )Income from operations before income taxes
    
    
    8.0
    
    
    
    7.3
    
    
    
    9.8
    
    
    
    8.4Income tax expense
    
    
    3.3
    
    
    
    2.9
    
    
    
    4.0
    
    
    
    3.3Net income
    
    
    4.7
    
    
    
    4.4
    
    
    
    5.8
    
    
    
    5.1Net income attributable to non-controlling interest
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Net income attributable to Holdings and Select
    
    
    4.5
    %
    
    
    4.2
    %
    
    
    5.6
    %
    
    
    4.9
    %
  33




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2010
    
    
    %Change
    
    
    2009
    
    
    2010
    
    
    %Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    393,232
    
    
    $
    411,685
    
    
    
    4.7
    %
    
    $
    393,232
    
    
    $
    411,685
    
    
    
    4.7
    %Outpatient rehabilitation
    
    
    167,819
    
    
    
    173,065
    
    
    
    3.1
    
    
    
    167,819
    
    
    
    173,065
    
    
    
    3.1Other(3)
    
    
    121
    
    
    
    63
    
    
    
    (47.9
    )
    
    
    121
    
    
    
    63
    
    
    
    (47.9
    )Total company
    
    $
    561,172
    
    
    $
    584,813
    
    
    
    4.2
    %
    
    $
    561,172
    
    
    $
    584,813
    
    
    
    4.2
    %Income (loss) from operations:Specialty hospitals
    
    $
    66,034
    
    
    $
    71,938
    
    
    
    8.9
    %
    
    $
    66,034
    
    
    $
    71,938
    
    
    
    8.9
    %Outpatient rehabilitation
    
    
    15,151
    
    
    
    14,662
    
    
    
    (3.2
    )
    
    
    15,151
    
    
    
    14,662
    
    
    
    (3.2
    )Other(3)
    
    
    (13,559
    )
    
    
    (13,951
    )
    
    
    ( 2.9
    )
    
    
    (13,559
    )
    
    
    (13,951
    )
    
    
    (2.9
    )Total company
    
    $
    67,626
    
    
    $
    72,649
    
    
    
    7.4
    %
    
    $
    67,626
    
    
    $
    72,649
    
    
    
    7.4
    %Adjusted EBITDA:(2)Specialty hospitals
    
    $
    76,781
    
    
    $
    82,897
    
    
    
    8.0
    %
    
    $
    76,781
    
    
    $
    82,897
    
    
    
    8.0
    %Outpatient rehabilitation
    
    
    21,284
    
    
    
    20,518
    
    
    
    (3.6
    )
    
    
    21,284
    
    
    
    20,518
    
    
    
    (3.6
    )Other(3)
    
    
    (12,413
    )
    
    
    (12,547
    )
    
    
    (1.1
    )
    
    
    (12,413
    )
    
    
    (12,547
    )
    
    
    (1.1
    )Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    19.5
    %
    
    
    20.1
    %
    
    
    3.1
    %
    
    
    19.5
    %
    
    
    20.1
    %
    
    
    3.1
    %Outpatient rehabilitation
    
    
    12.7
    
    
    
    11.9
    
    
    
    (6.3
    )
    
    
    12.7
    
    
    
    11.9
    
    
    
    (6.3
    )Other(3)
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,943,006
    
    
    $
    1,991,456
    
    
    
    
    
    
    $
    1,943,006
    
    
    $
    1,991,456Outpatient rehabilitation
    
    
    504,047
    
    
    
    502,346
    
    
    
    
    
    
    
    504,047
    
    
    
    502,346Other(3)
    
    
    111,844
    
    
    
    135,168
    
    
    
    
    
    
    
    104,225
    
    
    
    132,252Total company
    
    $
    2,558,897
    
    
    $
    2,628,970
    
    
    
    
    
    
    $
    2,551,278
    
    
    $
    2,626,054Purchases of property and
equipment, net:Specialty hospitals
    
    $
    4,155
    
    
    $
    10,598
    
    
    
    
    
    
    $
    4,155
    
    
    $
    10,598Outpatient rehabilitation
    
    
    2,810
    
    
    
    2,035
    
    
    
    
    
    
    
    2,810
    
    
    
    2,035Other(3)
    
    
    71
    
    
    
    414
    
    
    
    
    
    
    
    71
    
    
    
    414Total company
    
    $
    7,036
    
    
    $
    13,047
    
    
    
    
    
    
    $
    7,036
    
    
    $
    13,047
  34




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##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    393,232
    
    
    $
    411,685
    
    
    $
    393,232
    
    
    $
    411,685Less: Specialty hospitals in
development, opened, acquired or closed after
1/1/09
    
    
    3,022
    
    
    
    8,826
    
    
    
    3,022
    
    
    
    8,826Specialty hospitals same store net
operating revenue
    
    $
    390,210
    
    
    $
    402,859
    
    
    $
    390,210
    
    
    $
    402,859Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    76,781
    
    
    $
    82,897
    
    
    $
    76,781
    
    
    $
    82,897Less: Specialty hospitals in
development, opened, acquired or closed after
1/1/09
    
    
    53
    
    
    
    (1,071
    )
    
    
    53
    
    
    
    (1,071
    )Specialty hospitals same store Adjusted
EBITDA(2)
    
    $
    76,728
    
    
    $
    83,968
    
    
    $
    76,728
    
    
    $
    83,968All specialty hospitals Adjusted EBITDA
margin(2)
    
    
    19.5
    %
    
    
    20.1
    %
    
    
    19.5
    %
    
    
    20.1
    %Specialty hospitals same store Adjusted
EBITDA margin(2)
    
    
    19.7
    %
    
    
    20.8
    %
    
    
    19.7
    %
    
    
    20.8
    %
 
  (1)
    
    Cost of services includes salaries, wages and benefits, operating supplies, lease and
rent expense and other operating costs.(2)
    
    We define Adjusted EBITDA as net income before interest, income taxes, depreciation and
amortization, gain (loss) on early retirement of debt, stock compensation expense, other
income (expense), long term incentive and compensation. We believe that the presentation of
Adjusted EBITDA is important to investors because Adjusted EBITDA is commonly used as an
analytical indicator of performance by investors within the healthcare industry. Adjusted
EBITDA is used by management to evaluate financial performance and determine resource
allocation for each of our operating units. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles. Items excluded from Adjusted
EBITDA are significant components in understanding and assessing financial performance.
Adjusted EBITDA should not be considered in isolation or as an alternative to, or
substitute for, net income, cash flows generated by operations, investing or
financing activities, or other financial statement data presented in the consolidated
financial statements as indicators of financial performance or liquidity. Because Adjusted
EBITDA is not a measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, Adjusted EBITDA as presented
may not be comparable to other similarly titled measures of other companies. See footnote 8
to our interim unaudited consolidated financial statements for the period ended March 31,
2010 for a reconciliation of income from operations before income taxes to Adjusted EBITDA
as utilized by us in reporting our segment performance.(3)
    
    Other includes our general and administrative services and non-healthcare services.  35




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##### Table of Contents



Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
  Net Operating Revenues
  Specialty
Hospitals.
 Outpatient
Rehabilitation.
  36




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##### Table of Contents



Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals
 Outpatient Rehabilitation
 Other
 Income from Operations
   37




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##### Table of Contents



Gain on Early Retirement of Debt
 Select
Medical Corporation. 5 8
 Interest Expense
 Select
Medical Corporation. 5 8
 Select
Medical Holdings Corporation . 5 8
 Income Taxes
 Select Medical Corporation.
 Select
Medical Holdings Corporation
 Non-Controlling Interests
   38




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##### Table of Contents



Liquidity and Capital Resources
 Three Months Ended March 31, 2010 and Three Months Ended March 31, 2009
 Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Cash flows used in operating activities
    
    $
    (20,727
    )
    
    $
    (15,796
    )
    
    $
    (4,317
    )
    
    $
    (2,919
    )Cash flows used in investing activities
    
    
    (7,036
    )
    
    
    (13,047
    )
    
    
    (7,036
    )
    
    
    (13,047
    )Cash flows provided by (used in) financing
activities
    
    
    (23,811
    )
    
    
    18,336
    
    
    
    (40,221
    )
    
    
    5,459Net decrease in cash and cash equivalents
    
    
    (51,574
    )
    
    
    (10,507
    )
    
    
    (51,574
    )
    
    
    (10,507
    )Cash and cash equivalents at beginning of period
    
    
    64,260
    
    
    
    83,680
    
    
    
    64,260
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    12,686
    
    
    $
    73,173
    
    
    $
    12,686
    
    
    $
    73,173
    5 8
   39




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##### Table of Contents



Capital Resources
 Select
Medical Corporation .
 Select
Medical Holdings Corporation .
  
    
    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
 
    
    $191.8 million in term loans that mature on February 24, 2012 (the Tranche B Term
Loans), and
 
    
    $291.3 million in term loans that mature on August 22, 2014 (the Tranche B-1 Term
Loans).
    40




---



##### Table of Contents



5 8
      41




---



##### Table of Contents



Inflation
  Recent Accounting Pronouncements
   42




---



##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4T.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Internal Control Over Financial Reporting
  
 PART II OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
   43




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##### Table of Contents



ITEM 1A.
    
    RISK FACTORS.
 Form 10-K
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    REMOVED AND RESERVED
 
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
   44




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##### Table of Contents



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:
May 14, 2010
 SELECT MEDICAL HOLDINGS CORPORATIONBy:

/s/ Martin F. JacksonMartin F. JacksonExecutive Vice President and Chief Financial Officer
(Duly Authorized Officer)By:

/s/ Scott A. RombergerScott A. RombergerSenior Vice President, Chief Accounting Officer and
Controller
(Principal Accounting Officer) Dated:
May 14, 2010
  45




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##### Table of Contents



Exhibit
    
    Description31.1
    
    
    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.
  46