##### 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, 2010
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition Period From to .
 Commission File Numbers: 001  34465 and 001  31441
 SELECT MEDICAL HOLDINGS CORPORATION
 SELECT MEDICAL CORPORATION
  Delaware 
Delaware
    
    20-1764048
23-2872718(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. employer identification number)
 4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
 
  þ o
  o o
  Large accelerated filers o
    
    Accelerated filers o
    
    Non-accelerated filers þ
    
    Smaller reporting company o
  o þ




---



##### 



TABLE OF CONTENTS
 PART I FINANCIAL INFORMATION
    
    
    3ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
    
    
    3Consolidated balance sheets
    
    
    3Consolidated statements of operations
    
    
    4Consolidated
statements of changes in equity and comprehensive income (loss)
    
    
    6Consolidated statements of cash flows
    
    
    7Notes to consolidated financial statements
    
    
    8ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
    
    
    30ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    58ITEM 4T. CONTROLS AND PROCEDURES
    
    
    58PART II OTHER INFORMATION
    
    
    58ITEM 1. LEGAL PROCEEDINGS
    
    
    58ITEM 1A. RISK FACTORS
    
    
    59ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    59ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    59ITEM 4. REMOVED AND RESERVED
    
    
    60ITEM 5. OTHER INFORMATION
    
    
    60ITEM 6. EXHIBITS
    
    
    60SIGNATURES
    
    
    60Exhibit 3.1Exhibit 3.2Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 31.1Exhibit 31.2Exhibit 32.1




---



##### 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 30,2009
    
    
    2010
    
    
    2009
    
    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    83,680
    
    
    $
    15,343
    
    
    $
    83,680
    
    
    $
    15,343Accounts receivable, net of allowance for doubtful accounts
of $43,357 and $46,332 in 2009 and 2010, respectively
    
    
    307,079
    
    
    
    325,338
    
    
    
    307,079
    
    
    
    325,338Current deferred tax asset
    
    
    48,535
    
    
    
    38,949
    
    
    
    48,535
    
    
    
    38,949Prepaid income taxes
    
    
    11,179
    
    
    
    12,966
    
    
    
    11,179
    
    
    
    12,966Other current assets
    
    
    24,240
    
    
    
    25,897
    
    
    
    24,240
    
    
    
    25,897Total Current Assets
    
    
    474,713
    
    
    
    418,493
    
    
    
    474,713
    
    
    
    418,493Property and equipment, net
    
    
    466,131
    
    
    
    538,026
    
    
    
    466,131
    
    
    
    538,026Goodwill
    
    
    1,548,269
    
    
    
    1,646,698
    
    
    
    1,548,269
    
    
    
    1,646,698Other identifiable intangibles
    
    
    65,297
    
    
    
    67,719
    
    
    
    65,297
    
    
    
    67,719Assets held for sale
    
    
    11,342
    
    
    
    11,342
    
    
    
    11,342
    
    
    
    11,342Other assets
    
    
    36,481
    
    
    
    38,330
    
    
    
    33,427
    
    
    
    35,682Total Assets
    
    $
    2,602,233
    
    
    $
    2,720,608
    
    
    $
    2,599,179
    
    
    $
    2,717,960LIABILITIES AND EQUITYCurrent Liabilities:Bank overdrafts
    
    $
    
    
    
    $
    10,971
    
    
    $
    
    
    
    $
    10,971Current portion of long-term debt and notes payable
    
    
    4,145
    
    
    
    149,116
    
    
    
    4,145
    
    
    
    149,116Accounts payable
    
    
    73,434
    
    
    
    76,447
    
    
    
    73,434
    
    
    
    76,447Accrued payroll
    
    
    62,035
    
    
    
    72,450
    
    
    
    62,035
    
    
    
    72,450Accrued vacation
    
    
    41,013
    
    
    
    46,152
    
    
    
    41,013
    
    
    
    46,152Accrued interest
    
    
    32,919
    
    
    
    13,191
    
    
    
    23,473
    
    
    
    10,256Accrued restructuring
    
    
    4,256
    
    
    
    2,831
    
    
    
    4,256
    
    
    
    2,831Accrued other
    
    
    84,234
    
    
    
    95,538
    
    
    
    97,134
    
    
    
    95,538Due to third party payors
    
    
    1,905
    
    
    
    6,445
    
    
    
    1,905
    
    
    
    6,445Total Current Liabilities
    
    
    303,941
    
    
    
    473,141
    
    
    
    307,395
    
    
    
    470,206Long-term debt, net of current portion
    
    
    1,401,426
    
    
    
    1,276,816
    
    
    
    1,096,842
    
    
    
    970,836Non-current deferred tax liability
    
    
    66,768
    
    
    
    66,269
    
    
    
    66,768
    
    
    
    66,269Other non-current liabilities
    
    
    60,543
    
    
    
    67,266
    
    
    
    60,543
    
    
    
    67,266Total Liabilities
    
    
    1,832,678
    
    
    
    1,883,492
    
    
    
    1,531,548
    
    
    
    1,574,577Stockholders Equity:Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 159,980,544
shares and
161,040,060 shares issued and outstanding in 2009 and 2010, respectively
    
    
    160
    
    
    
    161
    
    
    
    
    
    
    
    Common stock
of Select, $0.01 par value, 100 shares issued and outstanding
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    578,648
    
    
    
    565,342
    
    
    
    822,664
    
    
    
    831,479Retained earnings
    
    
    169,094
    
    
    
    240,627
    
    
    
    223,314
    
    
    
    280,918Accumulated other comprehensive loss
    
    
    (8,914
    )
    
    
    (414
    )
    
    
    (8,914
    )
    
    
    (414
    )Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders Equity
    
    
    738,988
    
    
    
    805,716
    
    
    
    1,037,064
    
    
    
    1,111,983Non-controlling interests
    
    
    30,567
    
    
    
    31,400
    
    
    
    30,567
    
    
    
    31,400Total Equity
    
    
    769,555
    
    
    
    837,116
    
    
    
    1,067,631
    
    
    
    1,143,383Total Liabilities and Equity
    
    $
    2,602,233
    
    
    $
    2,720,608
    
    
    $
    2,599,179
    
    
    $
    2,717,960
 The accompanying notes are an integral part of this statement.
  3




---



##### 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 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    $
    545,621
    
    
    $
    588,250
    
    
    $
    545,621
    
    
    $
    588,250Costs and expenses:Cost of services
    
    
    448,702
    
    
    
    498,739
    
    
    
    448,702
    
    
    
    498,739General and administrative
    
    
    34,618
    
    
    
    19,228
    
    
    
    34,618
    
    
    
    19,228Bad debt expense
    
    
    11,720
    
    
    
    11,317
    
    
    
    11,720
    
    
    
    11,317Depreciation and amortization
    
    
    17,676
    
    
    
    17,012
    
    
    
    17,676
    
    
    
    17,012Total costs and expenses
    
    
    512,716
    
    
    
    546,296
    
    
    
    512,716
    
    
    
    546,296Income from operations
    
    
    32,905
    
    
    
    41,954
    
    
    
    32,905
    
    
    
    41,954Other income and expense:Gain on early retirement of debt
    
    
    1,129
    
    
    
    
    
    
    
    
    
    
    
    Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    (186
    )
    
    
    
    
    
    
    (186
    )Other income
    
    
    
    
    
    
    148
    
    
    
    2,215
    
    
    
    148Interest income
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Interest expense
    
    
    (33,451
    )
    
    
    (27,677
    )
    
    
    (25,114
    )
    
    
    (20,821
    )Income from operations before income taxes
    
    
    585
    
    
    
    14,239
    
    
    
    10,008
    
    
    
    21,095Income tax expense (benefit)
    
    
    (804
    )
    
    
    5,574
    
    
    
    2,494
    
    
    
    7,974Net income
    
    
    1,389
    
    
    
    8,665
    
    
    
    7,514
    
    
    
    13,121Less: Net income attributable to non-controlling interests
    
    
    806
    
    
    
    656
    
    
    
    806
    
    
    
    656Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation
    
    
    583
    
    
    
    8,009
    
    
    $
    6,708
    
    
    $
    12,465Less: Preferred dividends
    
    
    6,667
    
    
    
    Net income (loss) available to common stockholders
and participating securities
    
    $
    (6,084
    )
    
    $
    8,009Income (loss) per common share:Basic
    
    $
    (0.09
    )
    
    $
    0.05Diluted
    
    $
    (0.09
    )
    
    $
    0.05
 The accompanying notes are an integral part of this statement.
  4




---



##### 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 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    $
    1,666,328
    
    
    $
    1,752,940
    
    
    $
    1,666,328
    
    
    $
    1,752,940Costs and expenses:Cost of services
    
    
    1,353,107
    
    
    
    1,441,160
    
    
    
    1,353,107
    
    
    
    1,441,160General and administrative
    
    
    60,278
    
    
    
    41,819
    
    
    
    60,278
    
    
    
    41,819Bad debt expense
    
    
    33,678
    
    
    
    31,449
    
    
    
    33,678
    
    
    
    31,449Depreciation and amortization
    
    
    53,346
    
    
    
    51,333
    
    
    
    53,346
    
    
    
    51,333Total costs and expenses
    
    
    1,500,409
    
    
    
    1,565,761
    
    
    
    1,500,409
    
    
    
    1,565,761Income from operations
    
    
    165,919
    
    
    
    187,179
    
    
    
    165,919
    
    
    
    187,179Other income and expense:Gain on early retirement of debt
    
    
    16,445
    
    
    
    
    
    
    
    15,316
    
    
    
    Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    (186
    )
    
    
    
    
    
    
    (186
    )Other income
    
    
    
    
    
    
    464
    
    
    
    3,836
    
    
    
    464Interest income
    
    
    82
    
    
    
    
    
    
    
    82
    
    
    
    Interest expense
    
    
    (101,781
    )
    
    
    (86,998
    )
    
    
    (75,936
    )
    
    
    (66,184
    )Income from operations before income taxes
    
    
    80,665
    
    
    
    100,459
    
    
    
    109,217
    
    
    
    121,273Income tax expense
    
    
    33,076
    
    
    
    39,989
    
    
    
    43,069
    
    
    
    47,274Net income
    
    
    47,589
    
    
    
    60,470
    
    
    
    66,148
    
    
    
    73,999Less: Net income attributable to non-controlling interests
    
    
    2,218
    
    
    
    3,773
    
    
    
    2,218
    
    
    
    3,773Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation
    
    
    45,371
    
    
    
    56,697
    
    
    $
    63,930
    
    
    $
    70,226Less: Preferred dividends
    
    
    19,537
    
    
    
    Net income available to common stockholders
and participating securities
    
    $
    25,834
    
    
    $
    56,697Income per common share:Basic
    
    $
    0.38
    
    
    $
    0.35Diluted
    
    $
    0.37
    
    
    $
    0.35
 The accompanying notes are an integral part of this statement.
  5




---



##### Table of Contents



Select Medical Holdings Corporation
Consolidated Statement of Changes in Equity and Comprehensive Income (Loss)
(unaudited)
(in thousands)
 Select Medical Holdings Corporation StockholdersAccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    Other
    
    
    Non-Comprehensive
    
    
    Stock
    
    
    Stock Par
    
    
    Excess of
    
    
    Retained
    
    
    Comprehensive
    
    
    controllingTotal
    
    
    Income
    
    
    Issued
    
    
    Value
    
    
    Par
    
    
    Earnings
    
    
    Income (Loss)
    
    
    InterestsBalance at December 31, 2009
    
    $
    769,555
    
    
    
    
    
    
    
    159,981
    
    
    $
    160
    
    
    $
    578,648
    
    
    $
    169,094
    
    
    $
    (8,914
    )
    
    $
    30,567Net income
    
    
    60,470
    
    
    $
    60,470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,697
    
    
    
    
    
    
    
    3,773Unrealized gain on interest rate swap, net of tax
    
    
    8,500
    
    
    
    8,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,500Total comprehensive income
    
    
    68,970
    
    
    $
    68,970Issuance and vesting of restricted stock
    
    
    530
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    529Exercise of stock options
    
    
    125
    
    
    
    
    
    
    
    1,059
    
    
    
    
    
    
    
    125Stock option expense
    
    
    876
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    876Reclassification of deemed dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,836
    )
    
    
    14,836Distributions to non-controlling interests
    
    
    (3,618
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,618
    )Other
    
    
    678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678Balance at September 30, 2010
    
    $
    837,116
    
    
    
    
    
    
    
    161,040
    
    
    $
    161
    
    
    $
    565,342
    
    
    $
    240,627
    
    
    $
    (414
    )
    
    $
    31,400
 Select Medical Corporation
Consolidated Statement of Changes in Equity and Comprehensive Income (Loss)
(unaudited)
(in thousands)
 Select Medical Corporation StockholdersAccumulatedCommon
    
    
    Common
    
    
    Capital in
    
    
    
    
    
    
    Other
    
    
    Non-Comprehensive
    
    
    Stock
    
    
    Stock Par
    
    
    Excess of
    
    
    Retained
    
    
    Comprehensive
    
    
    controllingTotal
    
    
    Income
    
    
    Issued
    
    
    Value
    
    
    Par
    
    
    Earnings
    
    
    Income (Loss)
    
    
    InterestsBalance at December 31, 2009
    
    $
    1,067,631
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    822,664
    
    
    $
    223,314
    
    
    $
    (8,914
    )
    
    $
    30,567Net income
    
    
    73,999
    
    
    $
    73,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,226
    
    
    
    
    
    
    
    3,773Unrealized gain on interest rate swap, net of tax
    
    
    8,500
    
    
    
    8,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,500Total comprehensive income
    
    
    82,499
    
    
    $
    82,499Federal tax benefit of losses contributed by Holdings
    
    
    7,285
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,285Additional investment by Holdings
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Settlement of dividends paid to Holdings
    
    
    (12,622
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,622
    )Distributions to non-controlling interests
    
    
    (3,618
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,618
    )Other
    
    
    678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678Contribution related to restricted stock awards
and stock option issuances by Holdings
    
    
    1,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,405Balance at September 30, 2010
    
    $
    1,143,383
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    831,479
    
    
    $
    280,918
    
    
    $
    (414
    )
    
    $
    31,400
 The accompanying notes are an integral part of this statement.
  6




---



##### 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 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Operating activitiesNet income
    
    $
    47,589
    
    
    $
    60,470
    
    
    $
    66,148
    
    
    $
    73,999Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    53,346
    
    
    
    51,333
    
    
    
    53,346
    
    
    
    51,333Provision for bad debts
    
    
    33,678
    
    
    
    31,449
    
    
    
    33,678
    
    
    
    31,449Gain on early retirement of debt
    
    
    (16,445
    )
    
    
    
    
    
    
    (15,316
    )
    
    
    Loss from disposal of assets
    
    
    550
    
    
    
    612
    
    
    
    550
    
    
    
    612Non-cash gain from interest rate swaps
    
    
    
    
    
    
    (464
    )
    
    
    (3,836
    )
    
    
    (464
    )Non-cash stock compensation expense
    
    
    4,795
    
    
    
    1,405
    
    
    
    4,795
    
    
    
    1,405Amortization of debt discount
    
    
    1,239
    
    
    
    1,396
    
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Accounts receivable
    
    
    (32,033
    )
    
    
    (26,668
    )
    
    
    (32,033
    )
    
    
    (26,668
    )Other current assets
    
    
    (982
    )
    
    
    3,571
    
    
    
    (982
    )
    
    
    3,571Other assets
    
    
    4,018
    
    
    
    494
    
    
    
    3,589
    
    
    
    88Accounts payable
    
    
    (8,366
    )
    
    
    (3,469
    )
    
    
    (8,366
    )
    
    
    (3,469
    )Due to third-party payors
    
    
    (3,530
    )
    
    
    (756
    )
    
    
    (3,530
    )
    
    
    (756
    )Accrued expenses
    
    
    (1,024
    )
    
    
    (13,038
    )
    
    
    7,615
    
    
    
    (6,527
    )Income and deferred taxes
    
    
    10,612
    
    
    
    3,930
    
    
    
    20,608
    
    
    
    11,214Net cash provided by operating activities
    
    
    93,447
    
    
    
    110,265
    
    
    
    126,266
    
    
    
    135,787Investing activitiesPurchases of property and equipment
    
    
    (35,250
    )
    
    
    (38,626
    )
    
    
    (35,250
    )
    
    
    (38,626
    )Proceeds from sale of property
    
    
    1,341
    
    
    
    
    
    
    
    1,341
    
    
    
    Acquisition of businesses, net of cash acquired
    
    
    (381
    )
    
    
    (165,802
    )
    
    
    (381
    )
    
    
    (165,802
    )Net cash used in investing activities
    
    
    (34,290
    )
    
    
    (204,428
    )
    
    
    (34,290
    )
    
    
    (204,428
    )Financing activitiesProceeds from initial public offering, net of fees
    
    
    282,000
    
    
    
    
    
    
    
    
    
    
    
    Equity investment by Holdings
    
    
    
    
    
    
    
    
    
    
    282,024
    
    
    
    125Payment of initial public offering costs
    
    
    (584
    )
    
    
    
    
    
    
    (584
    )
    
    
    Borrowings on revolving credit facility
    
    
    193,000
    
    
    
    90,000
    
    
    
    193,000
    
    
    
    90,000Payments on revolving credit facility
    
    
    (253,000
    )
    
    
    (70,000
    )
    
    
    (253,000
    )
    
    
    (70,000
    )Payment on credit facility term loan
    
    
    (5,033
    )
    
    
    
    
    
    
    (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
    
    
    
    5,015
    
    
    
    5,184
    
    
    
    5,015Principal payments on seller and other debt
    
    
    (5,738
    )
    
    
    (6,667
    )
    
    
    (5,738
    )
    
    
    (6,667
    )Dividends paid to Holdings
    
    
    
    
    
    
    
    
    
    
    (39,367
    )
    
    
    (25,522
    )Repurchase of common and preferred stock
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    24
    
    
    
    125
    
    
    
    
    
    
    
    Borrowings (repayment) of bank overdrafts
    
    
    (21,130
    )
    
    
    10,971
    
    
    
    (21,130
    )
    
    
    10,971Equity contribution and loans from non-controlling
interests
    
    
    1,500
    
    
    
    
    
    
    
    1,500
    
    
    
    Distributions to non-controlling interests
    
    
    (2,486
    )
    
    
    (3,618
    )
    
    
    (2,486
    )
    
    
    (3,618
    )Net cash provided by financing activities
    
    
    157,075
    
    
    
    25,826
    
    
    
    124,256
    
    
    
    304Net increase (decrease) in cash and cash equivalents
    
    
    216,232
    
    
    
    (68,337
    )
    
    
    216,232
    
    
    
    (68,337
    )Cash and cash equivalents at beginning of period
    
    
    64,260
    
    
    
    83,680
    
    
    
    64,260
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    280,492
    
    
    $
    15,343
    
    
    $
    280,492
    
    
    $
    15,343Supplemental Cash Flow InformationCash paid for interest
    
    $
    115,901
    
    
    $
    99,897
    
    
    $
    83,082
    
    
    $
    74,381Cash paid for taxes
    
    $
    22,441
    
    
    $
    36,424
    
    
    $
    22,441
    
    
    $
    36,424
 The accompanying notes are an integral part of this statement.
  7




---



##### Table of Contents



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




---



##### Table of Contents



Recent Accounting Pronouncements
  3. Purchase of Regency Hospital Company, L.L.C.
    Cash paid, net of cash acquired of $11.3 million
    
    $
    165,616Fair value of net tangible assets acquired:Accounts receivable
    
    
    22,526Other current assets
    
    
    5,194Property and equipment
    
    
    83,976Other assets
    
    
    506Current liabilities
    
    
    (43,615
    )Other liabilities
    
    
    (6,313
    )Net tangible assets acquired
    
    
    62,274Tradename
    
    
    5,000Goodwill
    
    
    98,342$
    165,616
  9




---



##### Table of Contents



For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands except per share amounts)Net revenue
    
    $
    636,126
    
    
    $
    645,300
    
    
    $
    1,944,487
    
    
    $
    1,987,885Net income:Select Medical Corporation
    
    $
    8,044
    
    
    $
    12,250
    
    
    $
    71,288
    
    
    $
    71,985Select Medical Holdings
Corporation
    
    $
    1,919
    
    
    $
    7,444
    
    
    $
    52,595
    
    
    $
    58,484Income (loss) per common
share of Select Medical
Holdings Corporation:Basic
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    0.44
    
    
    $
    0.34Diluted
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    0.44
    
    
    $
    0.34
 4. Intangible Assets
  As of September 30, 2010Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization(in thousands)Amortized intangible assets:Contract therapy relationships
    
    $
    20,456
    
    
    $
    (20,456
    )Non-compete agreements
    
    
    25,909
    
    
    
    (23,937
    )Total
    
    $
    46,365
    
    
    $
    (44,393
    )Indefinite-lived intangible assets:Goodwill
    
    $
    1,646,698Trademarks
    
    
    52,858Certificates of need
    
    
    11,550Accreditations
    
    
    1,339Total
    
    $
    1,712,445
   10




---



##### Table of Contents



For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)Amortization expense
    
    $
    2,207
    
    
    $
    869
    
    
    $
    6,623
    
    
    $
    3,921
  2010
    
    $
    4,2472011
    
    
    1,3062012
    
    
    3402013
    
    
    02014
    
    
    0
  Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    Total(in thousands)Balance as of December 31, 2009
    
    $
    1,247,713
    
    
    $
    300,556
    
    
    $
    1,548,269Goodwill acquired during the year
    
    
    98,342
    
    
    
    87
    
    
    
    98,429Balance as of September 30, 2010
    
    $
    1,346,055
    
    
    $
    300,643
    
    
    $
    1,646,698
 5. Restructuring Reserves
   11




---



##### Table of Contents



Lease Termination Costs(in thousands)December 31, 2009
    
    $
    4,256Amounts paid in 2010
    
    
    (1,050
    )Revision of estimate
    
    
    (375
    )September 30, 2010
    
    $
    2,831
  6. Extension of Revolving Credit Facility
  7. Fair Value
 Fair Value Measurements
  Fair Value of Financial Instruments
    12




---



##### Table of Contents



5 8 5 8
  Interest Rate Swaps
  Accumulated Other
Comprehensive Loss.
 8. Accumulated Other Comprehensive Loss
  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.
  13




---



##### Table of Contents



Common Stock
  10. Segment Information
   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
  14




---



##### Table of Contents



Three Months Ended September 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    419,798
    
    
    $
    168,438
    
    
    $
    14
    
    
    $
    588,250Adjusted EBITDA
    
    
    58,282
    
    
    
    20,339
    
    
    
    (19,195
    )
    
    
    59,426Total assets:Select Medical Corporation
    
    
    2,051,238
    
    
    
    487,171
    
    
    
    179,551
    
    
    
    2,717,960Select Medical Holdings
Corporation
    
    
    2,051,238
    
    
    
    487,171
    
    
    
    182,199
    
    
    
    2,720,608Capital expenditures
    
    
    9,339
    
    
    
    2,019
    
    
    
    814
    
    
    
    12,172
 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
 Nine Months Ended September 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All Other
    
    
    Total(in thousands)Net operating revenue
    
    $
    1,234,562
    
    
    $
    518,288
    
    
    $
    90
    
    
    $
    1,752,940Adjusted EBITDA
    
    
    214,523
    
    
    
    66,813
    
    
    
    (41,419
    )
    
    
    239,917Total assets:Select Medical Corporation
    
    
    2,051,238
    
    
    
    487,171
    
    
    
    179,551
    
    
    
    2,717,960Select Medical Holdings
Corporation
    
    
    2,051,238
    
    
    
    487,171
    
    
    
    182,199
    
    
    
    2,720,608Capital expenditures
    
    
    29,963
    
    
    
    7,187
    
    
    
    1,476
    
    
    
    38,626
  15




---



##### 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 expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,215Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,449
    )
    
    
    (25,112
    )Income from operations before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    585
    
    
    $
    10,008
 Three Months Ended September 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    58,282
    
    
    $
    20,339
    
    
    $
    (19,195
    )Depreciation and amortization
    
    
    (11,237
    )
    
    
    (4,953
    )
    
    
    (822
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (460
    )Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    47,045
    
    
    $
    15,386
    
    
    $
    (20,477
    )
    
    $
    41,954
    
    
    $
    41,954Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (186
    )
    
    
    (186
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    148Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,677
    )
    
    
    (20,821
    )Income from operations before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,239
    
    
    $
    21,095
  16




---



##### Table of Contents



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
 Nine Months Ended September 30, 2010Specialty
    
    
    OutpatientHospitals
    
    
    Rehabilitation
    
    
    All OtherAdjusted EBITDA
    
    $
    214,523
    
    
    $
    66,813
    
    
    $
    (41,419
    )Depreciation and amortization
    
    
    (33,095
    )
    
    
    (15,752
    )
    
    
    (2,486
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    (1,405
    )Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationIncome (loss) from operations
    
    $
    181,428
    
    
    $
    51,061
    
    
    $
    (45,310
    )
    
    $
    187,179
    
    
    $
    187,179Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (186
    )
    
    
    (186
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    464Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86,998
    )
    
    
    (66,184
    )Income from operations before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    100,459
    
    
    $
    121,273
 11. Income (loss) per Common Share
   17




---



##### Table of Contents



For the Quarter Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands, except per share amounts)Numerator:Net income attributable to
Select Medical Holdings
Corporation
    
    $
    583
    
    
    $
    8,009
    
    
    $
    45,371
    
    
    $
    56,697Less: Preferred stock dividends
    
    
    6,667
    
    
    
    
    
    
    
    19,537
    
    
    
    Less: Earnings (loss)
allocated to preferred
stockholders
    
    
    (582
    )
    
    
    
    
    
    
    2,497
    
    
    
    Less: Earnings allocated to
unvested restricted
stockholders
    
    
    
    
    
    
    25
    
    
    
    315
    
    
    
    135Income (loss) available to
common and preferred
stockholders  basic and
diluted
    
    $
    (5,502
    )
    
    $
    7,984
    
    
    $
    23,022
    
    
    $
    56,562Denominator:Weighted average shares  basic
    
    
    62,078
    
    
    
    159,717
    
    
    
    61,030
    
    
    
    159,698Effect of dilutive securities:Stock options
    
    
    
    
    
    
    238
    
    
    
    470
    
    
    
    266Weighted average shares 
diluted
    
    
    62,078
    
    
    
    159,955
    
    
    
    61,500
    
    
    
    159,964Basic income (loss) per common
share
    
    $
    (0.09
    )
    
    $
    0.05
    
    
    $
    0.38
    
    
    $
    0.35Diluted income (loss) per
common share
    
    $
    (0.09
    )
    
    $
    0.05
    
    
    $
    0.37
    
    
    $
    0.35
  For the Quarter Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)Stock options
    
    
    469
    
    
    
    2,392
    
    
    
    
    
    
    
    2,383
  18




---



##### Table of Contents



12. Early Retirement of Debt
 5 8
 13. Commitments and Contingencies
 Litigation
      19




---



##### Table of Contents



Construction Commitments
   20




---



##### Table of Contents



14. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Selects
7 5/8% Senior Subordinated Notes
 5 8 5 8
    
  21




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetSeptember 30, 2010(unaudited)Select MedicalCorporation (Parent
    
    
    Subsidiary
    
    
    Non-GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    8,185
    
    
    $
    6,614
    
    
    $
    544
    
    
    $
    
    
    
    $
    15,343Accounts receivable, net
    
    
    
    
    
    
    276,189
    
    
    
    49,149
    
    
    
    
    
    
    
    325,338Current deferred tax asset
    
    
    7,307
    
    
    
    26,248
    
    
    
    5,394
    
    
    
    
    
    
    
    38,949Prepaid income taxes
    
    
    12,966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,966Other current assets
    
    
    2,793
    
    
    
    20,775
    
    
    
    2,329
    
    
    
    
    
    
    
    25,897Total Current Assets
    
    
    31,251
    
    
    
    329,826
    
    
    
    57,416
    
    
    
    
    
    
    
    418,493Property and equipment, net
    
    
    5,901
    
    
    
    473,360
    
    
    
    58,765
    
    
    
    
    
    
    
    538,026Investment in affiliates
    
    
    2,964,610
    
    
    
    80,797
    
    
    
    
    
    
    
    (3,045,407
    )(a) (b)
    
    
    Goodwill
    
    
    
    
    
    
    1,646,698
    
    
    
    
    
    
    
    
    
    
    
    1,646,698Other identifiable intangibles
    
    
    
    
    
    
    67,719
    
    
    
    
    
    
    
    
    
    
    
    67,719Assets held for sale
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,342Other assets
    
    
    22,172
    
    
    
    9,438
    
    
    
    4,072
    
    
    
    
    
    
    
    35,682Total Assets
    
    $
    3,035,276
    
    
    $
    2,607,838
    
    
    $
    120,253
    
    
    $
    (3,045,407
    )
    
    $
    2,717,960Liabilities and EquityCurrent Liabilities:Bank overdrafts
    
    $
    10,971
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,971Current portion of long-term debt and notes payable
    
    
    147,955
    
    
    
    858
    
    
    
    303
    
    
    
    
    
    
    
    149,116Accounts payable
    
    
    7,808
    
    
    
    59,469
    
    
    
    9,170
    
    
    
    
    
    
    
    76,447Intercompany accounts
    
    
    1,153,988
    
    
    
    (1,079,892
    )
    
    
    (74,096
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    147
    
    
    
    72,114
    
    
    
    189
    
    
    
    
    
    
    
    72,450Accrued vacation
    
    
    3,072
    
    
    
    37,645
    
    
    
    5,435
    
    
    
    
    
    
    
    46,152Accrued interest
    
    
    9,936
    
    
    
    320
    
    
    
    
    
    
    
    
    
    
    
    10,256Accrued restructuring
    
    
    
    
    
    
    2,831
    
    
    
    
    
    
    
    
    
    
    
    2,831Accrued other
    
    
    32,615
    
    
    
    56,254
    
    
    
    6,669
    
    
    
    
    
    
    
    95,538Due to third party payors
    
    
    
    
    
    
    6,445
    
    
    
    
    
    
    
    
    
    
    
    6,445Total Current Liabilities
    
    
    1,366,492
    
    
    
    (843,956
    )
    
    
    (52,330
    )
    
    
    
    
    
    
    470,206Long-term debt, net of current portion
    
    
    494,627
    
    
    
    422,363
    
    
    
    53,846
    
    
    
    
    
    
    
    970,836Non-current deferred tax liability
    
    
    (620
    )
    
    
    60,074
    
    
    
    6,815
    
    
    
    
    
    
    
    66,269Other non-current liabilities
    
    
    62,794
    
    
    
    4,472
    
    
    
    
    
    
    
    
    
    
    
    67,266Total Liabilities
    
    
    1,923,293
    
    
    
    (357,047
    )
    
    
    8,331
    
    
    
    
    
    
    
    1,574,577Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    831,479
    

  
    
    
    

   
    
  
    

   

    
    
    

    
    
    831,479Retained earnings
    
    
    280,918
    
    
    
    494,448
    
    
    
    25,957
    
    
    
    (520,405
    )(b)
    
    
    280,918Subsidiary investment
    
    
    
    
    
    
    2,470,437
    
    
    
    54,565
    
    
    
    (2,525,002
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (414
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (414
    )Total Select Medical Corporation Stockholders Equity
    
    
    1,111,983
    
    
    
    2,964,885
    
    
    
    80,522
    
    
    
    (3,045,407
    )
    
    
    1,111,983Non-controlling interests
    
    
    
    
    
    
    
    
    
    
    31,400
    
    
    
    
    
    
    
    31,400Total Equity
    
    
    1,111,983
    
    
    
    2,964,885
    
    
    
    111,922
    
    
    
    (3,045,407
    )
    
    
    1,143,383Total Liabilities and Equity
    
    $
    3,035,276
    
    
    $
    2,607,838
    
    
    $
    120,253
    
    
    $
    (3,045,407
    )
    
    $
    2,717,960
 (a)
    
    Elimination of investments in consolidated subsidiaries.(b)
    
    Elimination of investments in consolidated subsidiaries earnings.  22




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Quarter Ended September 30, 2010(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    14
    
    
    $
    507,589
    
    
    $
    80,647
    
    
    $
    
    
    
    $
    588,250Costs and expenses:Cost of services
    
    
    440
    
    
    
    427,761
    
    
    
    70,538
    
    
    
    
    
    
    
    498,739General and administrative
    
    
    17,031
    
    
    
    2,197
    
    
    
    
    
    
    
    
    
    
    
    19,228Bad debt expense
    
    
    
    
    
    
    9,661
    
    
    
    1,656
    
    
    
    
    
    
    
    11,317Depreciation and amortization
    
    
    662
    
    
    
    14,249
    
    
    
    2,101
    
    
    
    
    
    
    
    17,012Total costs and expenses
    
    
    18,133
    
    
    
    453,868
    
    
    
    74,295
    
    
    
    
    
    
    
    546,296Income (loss) from operations
    
    
    (18,119
    )
    
    
    53,721
    
    
    
    6,352
    
    
    
    
    
    
    
    41,954Other income and expense:Intercompany interest and royalty fees
    
    
    (888
    )
    
    
    877
    
    
    
    11
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    22,773
    
    
    
    (18,937
    )
    
    
    (3,836
    )
    
    
    
    
    
    
    Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    (186
    )
    
    
    
    
    
    
    
    
    
    
    (186
    )Other income
    
    
    148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148Interest expense
    
    
    (11,330
    )
    
    
    (8,462
    )
    
    
    (1,029
    )
    
    
    
    
    
    
    (20,821
    )Income from operations before income taxes
    
    
    (7,416
    )
    
    
    27,013
    
    
    
    1,498
    
    
    
    
    
    
    
    21,095Income tax expense
    
    
    366
    
    
    
    7,600
    
    
    
    8
    
    
    
    
    
    
    
    7,974Equity in earnings of subsidiaries
    
    
    20,247
    
    
    
    965
    
    
    
    
    
    
    
    (21,212
    )(a)
    
    
    Net income
    
    
    12,465
    
    
    
    20,378
    
    
    
    1,490
    
    
    
    (21,212
    )
    
    
    13,121Less: Net income attributable to non-controlling
interests
    
    
    
    
    
    
    
    
    
    
    656
    
    
    
    
    
    
    
    656Net income attributable to Select Medical Corporation
    
    $
    12,465
    
    
    $
    20,378
    
    
    $
    834
    
    
    $
    (21,212
    )
    
    $
    12,465
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  23




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Nine Months Ended September 30, 2010(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Net operating revenues
    
    $
    90
    
    
    $
    1,509,246
    
    
    $
    243,604
    
    
    $
    
    
    
    $
    1,752,940Costs and expenses:Cost of services
    
    
    1,094
    
    
    
    1,236,392
    
    
    
    203,674
    
    
    
    
    
    
    
    1,441,160General and administrative
    
    
    39,590
    
    
    
    2,229
    
    
    
    
    
    
    
    
    
    
    
    41,819Bad debt expense
    
    
    
    
    
    
    26,402
    
    
    
    5,047
    
    
    
    
    
    
    
    31,449Depreciation and amortization
    
    
    2,160
    
    
    
    42,787
    
    
    
    6,386
    
    
    
    
    
    
    
    51,333Total costs and expenses
    
    
    42,844
    
    
    
    1,307,810
    
    
    
    215,107
    
    
    
    
    
    
    
    1,565,761Income (loss) from operations
    
    
    (42,754
    )
    
    
    201,436
    
    
    
    28,497
    
    
    
    
    
    
    
    187,179Other income and expense:Intercompany interest and royalty fees
    
    
    (2,849
    )
    
    
    2,829
    
    
    
    20
    
    
    
    
    
    
    
    Intercompany management fees
    
    
    68,002
    
    
    
    (56,706
    )
    
    
    (11,296
    )
    
    
    
    
    
    
    Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    (186
    )
    
    
    
    
    
    
    
    
    
    
    (186
    )Other income
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464Interest expense
    
    
    (37,430
    )
    
    
    (25,466
    )
    
    
    (3,288
    )
    
    
    
    
    
    
    (66,184
    )Income (loss) from operations before income taxes
    
    
    (14,567
    )
    
    
    121,907
    
    
    
    13,933
    
    
    
    
    
    
    
    121,273Income tax expense (benefit)
    
    
    1,856
    
    
    
    46,159
    
    
    
    (741
    )
    
    
    
    
    
    
    47,274Equity in earnings of subsidiaries
    
    
    86,649
    
    
    
    10,831
    
    
    
    
    
    
    
    (97,480
    )(a)
    
    
    Net income
    
    
    70,226
    
    
    
    86,579
    
    
    
    14,674
    
    
    
    (97,480
    )
    
    
    73,999Less: Net income attributable to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    3,773
    
    
    
    
    
    
    
    3,773Net income attributable to Select Medical Corporation
    
    $
    70,226
    
    
    $
    86,579
    
    
    $
    10,901
    
    
    $
    (97,480
    )
    
    $
    70,226
 (a)
    
    Elimination of equity in net income from consolidated subsidiaries.  24




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Nine Months Ended September 30, 2010(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Operating activitiesNet income
    
    $
    70,226
    
    
    $
    86,579
    
    
    $
    14,674
    
    
    $
    (97,480
    )(a)
    
    $
    73,999Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,160
    
    
    
    42,787
    
    
    
    6,386
    
    
    
    
    
    
    
    51,333Provision for bad debts
    
    
    
    
    
    
    26,402
    
    
    
    5,047
    
    
    
    
    
    
    
    31,449Loss from disposal of assets
    
    
    127
    
    
    
    352
    
    
    
    133
    
    
    
    
    
    
    
    612Non-cash gain from interest rate swaps
    
    
    (464
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (464
    )Non-cash stock compensation expense
    
    
    1,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,405Changes in operating assets and liabilities, net of
effects from acquisition of businesses:Equity in earnings of subsidiaries
    
    
    (86,649
    )
    
    
    (10,831
    )
    
    
    
    
    
    
    97,480
    (a)
    
    
    Intercompany
    
    
    (54,741
    )
    
    
    62,368
    
    
    
    (7,627
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    
    
    
    
    3,119
    
    
    
    (29,787
    )
    
    
    
    
    
    
    (26,668
    )Other current assets
    
    
    2,593
    
    
    
    (1,959
    )
    
    
    2,937
    
    
    
    
    
    
    
    3,571Other assets
    
    
    228
    
    
    
    1,621
    
    
    
    (1,761
    )
    
    
    
    
    
    
    88Accounts payable
    
    
    4,579
    
    
    
    (8,228
    )
    
    
    180
    
    
    
    
    
    
    
    (3,469
    )Due to third-party payors
    
    
    
    
    
    
    (10,170
    )
    
    
    9,414
    
    
    
    
    
    
    
    (756
    )Accrued expenses
    
    
    (30,729
    )
    
    
    22,401
    
    
    
    1,801
    
    
    
    
    
    
    
    (6,527
    )Income and deferred taxes
    
    
    11,214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,214Net cash provided by (used in) operating activities
    
    
    (80,051
    )
    
    
    214,441
    
    
    
    1,397
    
    
    
    
    
    
    
    135,787Investing activitiesPurchases of property and equipment
    
    
    (1,475
    )
    
    
    (30,107
    )
    
    
    (7,044
    )
    
    
    
    
    
    
    (38,626
    )Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (165,802
    )
    
    
    
    
    
    
    
    
    
    
    (165,802
    )Net cash used in investing activities
    
    
    (1,475
    )
    
    
    (195,909
    )
    
    
    (7,044
    )
    
    
    
    
    
    
    (204,428
    )Financing activitiesBorrowings on revolving credit facility
    
    
    90,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,000Payments on revolving credit facility
    
    
    (70,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,000
    )Borrowings of other debt
    
    
    5,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,015Principal payments on seller and other debt
    
    
    (5,181
    )
    
    
    (1,428
    )
    
    
    (58
    )
    
    
    
    
    
    
    (6,667
    )Dividends paid to Holdings
    
    
    (25,522
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,522
    )Equity investment by Holdings
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Proceeds from bank overdrafts
    
    
    10,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,971Intercompany debt reallocation
    
    
    3,363
    
    
    
    (12,788
    )
    
    
    9,425
    
    
    
    
    
    
    
    Distributions to non-controlling interests
    
    
    
    
    
    
    
    
    
    
    (3,618
    )
    
    
    
    
    
    
    (3,618
    )Net cash provided by (used in) financing activities
    
    
    8,771
    
    
    
    (14,216
    )
    
    
    5,749
    
    
    
    
    
    
    
    304Net increase (decrease) in cash and cash equivalents
    
    
    (72,755
    )
    
    
    4,316
    
    
    
    102
    
    
    
    
    
    
    
    (68,337
    )Cash and cash equivalents at beginning of period
    
    
    80,940
    
    
    
    2,298
    
    
    
    442
    
    
    
    
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    8,185
    
    
    $
    6,614
    
    
    $
    544
    
    
    $
    
    
    
    $
    15,343
 (a)
    
    Elimination of equity in earnings of consolidated subsidiaries.  25




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Balance SheetDecember 31, 2009Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    80,940
    
    
    $
    2,298
    
    
    $
    442
    
    
    $
    
    
    
    $
    83,680Accounts receivable, net
    
    
    
    
    
    
    282,670
    
    
    
    24,409
    
    
    
    
    
    
    
    307,079Current deferred tax asset
    
    
    13,677
    
    
    
    29,854
    
    
    
    5,004
    
    
    
    
    
    
    
    48,535Prepaid income taxes
    
    
    11,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,179Other current assets
    
    
    5,386
    
    
    
    13,588
    
    
    
    5,266
    
    
    
    
    
    
    
    24,240Total Current Assets
    
    
    111,182
    
    
    
    328,410
    
    
    
    35,121
    
    
    
    
    
    
    
    474,713Property and equipment, net
    
    
    6,649
    
    
    
    409,258
    
    
    
    50,224
    
    
    
    
    
    
    
    466,131Investment in affiliates
    
    
    2,142,189
    
    
    
    72,628
    
    
    
    
    
    
    
    (2,214,817
    )(a) (b)
    
    
    Goodwill
    
    
    
    
    
    
    1,548,269
    
    
    
    
    
    
    
    
    
    
    
    1,548,269Other identifiable intangibles
    
    
    
    
    
    
    65,297
    
    
    
    
    
    
    
    
    
    
    
    65,297Assets held for sale
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,342Other assets
    
    
    22,400
    
    
    
    8,716
    
    
    
    2,311
    
    
    
    
    
    
    
    33,427Total Assets
    
    $
    2,293,762
    
    
    $
    2,432,578
    
    
    $
    87,656
    
    
    $
    (2,214,817
    )
    
    $
    2,599,179Liabilities and EquityCurrent Liabilities:Current portion of long-term debt and notes payable
    
    $
    2,545
    
    
    $
    803
    
    
    $
    797
    
    
    $
    
    
    
    $
    4,145Accounts payable
    
    
    3,229
    
    
    
    61,215
    
    
    
    8,990
    
    
    
    
    
    
    
    73,434Intercompany accounts
    
    
    495,981
    
    
    
    (416,944
    )
    
    
    (79,037
    )
    
    
    
    
    
    
    Accrued payroll
    
    
    81
    
    
    
    61,860
    
    
    
    94
    
    
    
    
    
    
    
    62,035Accrued vacation
    
    
    2,942
    
    
    
    33,024
    
    
    
    5,047
    
    
    
    
    
    
    
    41,013Accrued interest
    
    
    23,354
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    23,473Accrued restructuring
    
    
    
    
    
    
    4,256
    
    
    
    
    
    
    
    
    
    
    
    4,256Accrued other
    
    
    50,122
    
    
    
    41,661
    
    
    
    5,351
    
    
    
    
    
    
    
    97,134Due to third party payors
    
    
    
    
    
    
    11,319
    
    
    
    (9,414
    )
    
    
    
    
    
    
    1,905Total Current Liabilities
    
    
    578,254
    
    
    
    (202,687
    )
    
    
    (68,172
    )
    
    
    
    
    
    
    307,395Long-term debt, net of current portion
    
    
    616,906
    
    
    
    434,384
    
    
    
    45,552
    
    
    
    
    
    
    
    1,096,842Non-current deferred tax liability
    
    
    995
    
    
    
    58,346
    
    
    
    7,427
    
    
    
    
    
    
    
    66,768Other non-current liabilities
    
    
    60,543
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,543Total Liabilities
    
    
    1,256,698
    
    
    
    290,043
    
    
    
    (15,193
    )
    
    
    
    
    
    
    1,531,548Stockholders Equity:Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital in excess of par
    
    
    822,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    822,664Retained earnings
    
    
    223,314
    
    
    
    407,870
    
    
    
    21,075
    
    
    
    (428,945
    )(b)
    
    
    223,314Subsidiary investment
    
    
    
    
    
    
    1,734,665
    
    
    
    51,207
    
    
    
    (1,785,872
    )(a)
    
    
    Accumulated other comprehensive loss
    
    
    (8,914
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,914
    )Total Select Medical Corporation Stockholders Equity
    
    
    1,037,064
    
    
    
    2,142,535
    
    
    
    72,282
    
    
    
    (2,214,817
    )
    
    
    1,037,064Non-controlling interests
    
    
    
    
    
    
    
    
    
    
    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 consolidated subsidiaries.(b)
    
    Elimination of investments in consolidated subsidiaries earnings.  26




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Quarter Ended September 30, 2009(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    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.  27




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of OperationsFor the Nine Months Ended September 30, 2009(unaudited)Select Medical
Corporation (Parent
    
    
    Subsidiary
    
    
    Non-
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.  28




---



##### Table of Contents



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Nine Months Ended September 30, 2009(unaudited)Select Medical
    
    
    
    
    
    
    Non-Corporation (Parent
    
    
    Subsidiary
    
    
    GuarantorCompany Only)
    
    
    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 consolidated subsidiaries.  29




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read this discussion together with our unaudited consolidated financial statements
and accompanying notes.
 Forward Looking Statements
   
    
    additional changes in government reimbursement for our services, including changes that
will result from the expiration of the moratorium for long term acute care hospitals
established by the SCHIP Extension Act of 2007, the American Recovery and Reinvestment Act,
and the Patient Protection and Affordable Care Act may result in a reduction in net
operating revenues, an increase in costs and a reduction in profitability;
 
    
    the failure of our specialty hospitals to maintain their Medicare certifications as such
may cause our net operating revenues and profitability to decline;
 
    
    the failure of our facilities operated as hospitals within hospitals to qualify as
hospitals separate from their host hospitals may cause our net operating revenues and
profitability to decline;
 
    
    a government investigation or assertion that we have violated applicable regulations may
result in sanctions or reputational harm and increased costs;
 
    
    future acquisitions or joint ventures (such as the acquisition of Regency Hospital
Company, LLC) may prove difficult or unsuccessful, use significant resources or expose us to
unforeseen liabilities;
 
    
    private third-party payors for our services may undertake future cost containment
initiatives that limit our future net operating revenues and profitability;
 
    
    the failure to maintain established relationships with the physicians in the areas we
serve could reduce our net operating revenues and profitability;
 
    
    shortages in qualified nurses or therapists could increase our operating costs
significantly;
 
    
    competition may limit our ability to grow and result in a decrease in our net operating
revenues and profitability;
 
    
    the loss of key members of our management team could significantly disrupt our
operations;
  30




---



##### Table of Contents



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




---



##### Table of Contents



Recent Trends and Events
 Purchase of Regency Hospital Company, L.L.C.
   Extension of Revolving Credit Facility
  Summary Financial Results
 Third Quarter Ended September 30, 2010
 .
  32




---



##### Table of Contents



Regulatory Changes
  Health Reform Legislation
  Extension of Changes Made by the Medicare, Medicaid, and SCHIP Extension Act of 2007
   33




---



##### Table of Contents



25% Rule
  Type of LTCH
    
    Non Co-located Admissions
    
    Co-located AdmissionsNon-grandfathered HIHs 
opened before October 
1, 2004
(63 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
(nine 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.
  34




---



##### 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
(29 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.
(seven 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
   35




---



##### Table of Contents



Moratorium on New LTCHs and New LTCH Beds
  Medicare Quality Reporting
  Medicare Market Basket Adjustments
   Medicare Productivity Adjustment
   36




---



##### Table of Contents



Hospital Wage Index
  Independent Payment Advisory Board
  Physician-Owned Hospital Limitations
  Provider and Employee Screening
   37




---



##### Table of Contents



Medicare Compliance Requirements and Penalties
  Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2010
  Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2011
  Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2010
   38




---



##### Table of Contents



Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2011
  Reductions to the Medicare Physician Fee Schedule
   Medicare Payment of Outpatient Rehabilitation Services
    39




---



##### Table of Contents



Facility Licensure, Certification and Accreditation
    40




---



##### Table of Contents



Operating Statistics
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Specialty hospital data(1):Number of hospitals  start of period
    
    
    92
    
    
    
    94
    
    
    
    93
    
    
    
    94Number of hospital start-ups
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Number of hospitals acquired
    
    
    1
    
    
    
    23
    
    
    
    1
    
    
    
    23Number of hospitals closed
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Number of hospitals owned  end of period
    
    
    93
    
    
    
    115
    
    
    
    93
    
    
    
    115Number of hospitals managed  end of period
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    2Total number of hospitals (all)  end of
period
    
    
    94
    
    
    
    117
    
    
    
    94
    
    
    
    117Available licensed beds  end of period
    
    
    4,173
    
    
    
    5,117
    
    
    
    4,173
    
    
    
    5,117Admissions
    
    
    10,466
    
    
    
    11,305
    
    
    
    31,775
    
    
    
    33,022Patient days
    
    
    248,504
    
    
    
    275,387
    
    
    
    757,487
    
    
    
    808,133Average length of stay (days)
    
    
    24
    
    
    
    24
    
    
    
    24
    
    
    
    24Net revenue per patient day(2)
    
    $
    1,479
    
    
    $
    1,478
    
    
    $
    1,489
    
    
    $
    1,481Occupancy rate
    
    
    65
    %
    
    
    65
    %
    
    
    66
    %
    
    
    68
    %Percent patient days  Medicare
    
    
    65
    %
    
    
    64
    %
    
    
    65
    %
    
    
    64
    %Outpatient rehabilitation data:Number of clinics owned  start of period
    
    
    875
    
    
    
    880
    
    
    
    880
    
    
    
    883Number of clinics acquired
    
    
    2
    
    
    
    1
    
    
    
    3
    
    
    
    1Number of clinic start-ups
    
    
    2
    
    
    
    7
    
    
    
    9
    
    
    
    17Number of clinics closed/sold
    
    
    (6
    )
    
    
    (9
    )
    
    
    (19
    )
    
    
    (22
    )Number of clinics owned  end of period
    
    
    873
    
    
    
    879
    
    
    
    873
    
    
    
    879Number of clinics managed  end of period
    
    
    74
    
    
    
    71
    
    
    
    74
    
    
    
    71Total number of clinics (all)  end of period
    
    
    947
    
    
    
    950
    
    
    
    947
    
    
    
    950Number of visits
    
    
    1,126,096
    
    
    
    1,144,096
    
    
    
    3,385,733
    
    
    
    3,442,266Net revenue per visit (3)
    
    $
    101
    
    
    $
    101
    
    
    $
    102
    
    
    $
    101
 
 (1)
    
    Specialty hospitals consist of long term acute care hospitals and inpatient rehabilitation
facilities.(2)
    
    Net revenue per patient day is calculated by dividing specialty hospital direct inpatient
service revenues by the total number of patient days.(3)
    
    Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by
the total number of visits. For purposes of this computation, outpatient rehabilitation clinic
revenue does not include contract services revenue.  41




---



##### Table of Contents



Results of Operations
  Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    82.3
    
    
    
    84.8
    
    
    
    82.3
    
    
    
    84.8General and administrative
    
    
    6.3
    
    
    
    3.3
    
    
    
    6.3
    
    
    
    3.3Bad debt expense
    
    
    2.2
    
    
    
    1.9
    
    
    
    2.2
    
    
    
    1.9Depreciation and amortization
    
    
    3.2
    
    
    
    2.9
    
    
    
    3.2
    
    
    
    2.9Income from operations
    
    
    6.0
    
    
    
    7.1
    
    
    
    6.0
    
    
    
    7.1Gain on early retirement of debt
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Other income
    
    
    
    
    
    
    0.0
    
    
    
    0.4
    
    
    
    0.0Interest expense, net
    
    
    (6.1
    )
    
    
    (4.7
    )
    
    
    (4.6
    )
    
    
    (3.5
    )Income from operations before income taxes
    
    
    0.1
    
    
    
    2.4
    
    
    
    1.8
    
    
    
    3.6Income tax expense (benefit)
    
    
    (0.2
    )
    
    
    0.9
    
    
    
    0.4
    
    
    
    1.4Net income
    
    
    0.3
    
    
    
    1.5
    
    
    
    1.4
    
    
    
    2.2Net income attributable to non-controlling interests
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Net income attributable to Holdings and Select
    
    
    0.1
    %
    
    
    1.4
    %
    
    
    1.2
    %
    
    
    2.1
    %
 Select MedicalHoldings
    
    
    Select MedicalCorporation
    
    
    CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of services(1)
    
    
    81.2
    
    
    
    82.2
    
    
    
    81.2
    
    
    
    82.2General and administrative
    
    
    3.6
    
    
    
    2.4
    
    
    
    3.6
    
    
    
    2.4Bad debt expense
    
    
    2.0
    
    
    
    1.8
    
    
    
    2.0
    
    
    
    1.8Depreciation and amortization
    
    
    3.2
    
    
    
    2.9
    
    
    
    3.2
    
    
    
    2.9Income from operations
    
    
    10.0
    
    
    
    10.7
    
    
    
    10.0
    
    
    
    10.7Gain on early retirement of debt
    
    
    1.0
    
    
    
    
    
    
    
    0.9
    
    
    
    Equity in losses of unconsolidated subsidiaries
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Other income
    
    
    
    
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.0Interest expense, net
    
    
    (6.1
    )
    
    
    (5.0
    )
    
    
    (4.5
    )
    
    
    (3.8
    )Income from operations before income taxes
    
    
    4.9
    
    
    
    5.7
    
    
    
    6.6
    
    
    
    6.9Income tax expense
    
    
    2.0
    
    
    
    2.3
    
    
    
    2.6
    
    
    
    2.7Net income
    
    
    2.9
    
    
    
    3.4
    
    
    
    4.0
    
    
    
    4.2Net income attributable to non-controlling interests
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2Net income attributable to Holdings and Select
    
    
    2.8
    %
    
    
    3.2
    %
    
    
    3.9
    %
    
    
    4.0
    %
  42




---



##### Table of Contents



Select Medical Holdings Corporation
    
    
    Select Medical CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,%
    
    
    
    
    
    
    
    
    
    
    %2009
    
    
    2010
    
    
    Change
    
    
    2009
    
    
    2010
    
    
    Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    376,859
    
    
    $
    419,798
    
    
    
    11.4
    %
    
    $
    376,859
    
    
    $
    419,798
    
    
    
    11.4
    %Outpatient rehabilitation
    
    
    168,751
    
    
    
    168,438
    
    
    
    (0.2
    )
    
    
    168,751
    
    
    
    168,438
    
    
    
    (0.2
    )Other(3)
    
    
    11
    
    
    
    14
    
    
    
    27.3
    
    
    
    11
    
    
    
    14
    
    
    
    27.3Total company
    
    $
    545,621
    
    
    $
    588,250
    
    
    
    7.8
    %
    
    $
    545,621
    
    
    $
    588,250
    
    
    
    7.8
    %Income (loss) from operations:Specialty hospitals
    
    $
    53,896
    
    
    $
    47,045
    
    
    
    (12.7
    %)
    
    $
    53,896
    
    
    $
    47,045
    
    
    
    (12.7
    %)Outpatient rehabilitation
    
    
    14,616
    
    
    
    15,386
    
    
    
    5.3
    
    
    
    14,616
    
    
    
    15,386
    
    
    
    5.3Other(3)
    
    
    (35,607
    )
    
    
    (20,477
    )
    
    
    42.5
    
    
    
    (35,607
    )
    
    
    (20,477
    )
    
    
    42.5Total company
    
    $
    32,905
    
    
    $
    41,954
    
    
    
    27.5
    %
    
    $
    32,905
    
    
    $
    41,954
    
    
    
    27.5
    %Adjusted EBITDA:(2)Specialty hospitals
    
    $
    64,381
    
    
    $
    58,282
    
    
    
    (9.5
    )%
    
    $
    64,381
    
    
    $
    58,282
    
    
    
    (9.5
    )%Outpatient rehabilitation
    
    
    20,898
    
    
    
    20,339
    
    
    
    (2.7
    )
    
    
    20,898
    
    
    
    20,339
    
    
    
    (2.7
    )Other(3)
    
    
    (12,236
    )
    
    
    (19,195
    )
    
    
    (56.9
    )
    
    
    (12,236
    )
    
    
    (19,195
    )
    
    
    (56.9
    )Adjusted EBITDA margins:(2)
Specialty hospitals
    
    
    17.1
    %
    
    
    13.9
    %
    
    
    
    
    
    
    17.1
    %
    
    
    13.9
    %Outpatient rehabilitation
    
    
    12.4
    
    
    
    12.1
    
    
    
    
    
    
    
    12.4
    
    
    
    12.1Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,898,494
    
    
    $
    2,051,238
    
    
    
    
    
    
    $
    1,898,494
    
    
    $
    2,051,238Outpatient rehabilitation
    
    
    484,703
    
    
    
    487,171
    
    
    
    
    
    
    
    484,703
    
    
    
    487,171Other(3)
    
    
    381,545
    
    
    
    182,199
    
    
    
    
    
    
    
    378,356
    
    
    
    179,551Total company
    
    $
    2,764,742
    
    
    $
    2,720,608
    
    
    
    
    
    
    $
    2,761,553
    
    
    $
    2,717,960Purchases of property and
equipment, net:Specialty hospitals
    
    $
    12,371
    
    
    $
    9,339
    
    
    
    
    
    
    $
    12,371
    
    
    $
    9,339Outpatient rehabilitation
    
    
    1,566
    
    
    
    2,019
    
    
    
    
    
    
    
    1,566
    
    
    
    2,019Other(3)
    
    
    332
    
    
    
    814
    
    
    
    
    
    
    
    332
    
    
    
    814Total company
    
    $
    14,269
    
    
    $
    12,172
    
    
    
    
    
    
    $
    14,269
    
    
    $
    12,172
  43




---



##### Table of Contents



Select Medical HoldingsCorporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,%
    
    
    
    
    
    
    
    
    
    
    %2009
    
    
    2010
    
    
    Change
    
    
    2009
    
    
    2010
    
    
    Change(in thousands)
    
    
    (in thousands)Net operating revenues:Specialty hospitals
    
    $
    1,156,422
    
    
    $
    1,234,562
    
    
    
    6.8
    %
    
    $
    1,156,422
    
    
    $
    1,234,562
    
    
    
    6.8
    %Outpatient rehabilitation
    
    
    509,760
    
    
    
    518,288
    
    
    
    1.7
    
    
    
    509,760
    
    
    
    518,288
    
    
    
    1.7Other(3)
    
    
    146
    
    
    
    90
    
    
    
    (38.4
    )
    
    
    146
    
    
    
    90
    
    
    
    (38.4
    )Total company
    
    $
    1,666,328
    
    
    $
    1,752,940
    
    
    
    5.2
    %
    
    $
    1,666,328
    
    
    $
    1,752,940
    
    
    
    5.2
    %Income (loss) from operations:Specialty hospitals
    
    $
    180,100
    
    
    $
    181,428
    
    
    
    0.7
    %
    
    $
    180,100
    
    
    $
    181,428
    
    
    
    0.7
    %Outpatient rehabilitation
    
    
    48,797
    
    
    
    51,061
    
    
    
    4.6
    
    
    
    48,797
    
    
    
    51,061
    
    
    
    4.6Other(3)
    
    
    (62,978
    )
    
    
    (45,310
    )
    
    
    28.1
    
    
    
    (62,978
    )
    
    
    (45,310
    )
    
    
    28.1Total company
    
    $
    165,919
    
    
    $
    187,179
    
    
    
    12.8
    %
    
    $
    165,919
    
    
    $
    187,179
    
    
    
    12.8
    %Adjusted EBITDA:(2)Specialty hospitals
    
    $
    212,122
    
    
    $
    214,523
    
    
    
    1.1
    %
    
    $
    212,122
    
    
    $
    214,523
    
    
    
    1.1
    %Outpatient rehabilitation
    
    
    67,476
    
    
    
    66,813
    
    
    
    (1.0
    )
    
    
    67,476
    
    
    
    66,813
    
    
    
    (1.0
    )Other(3)
    
    
    (37,277
    )
    
    
    (41,419
    )
    
    
    (11.1
    )
    
    
    (37,277
    )
    
    
    (41,419
    )
    
    
    (11.1
    )Adjusted EBITDA margins:(2)Specialty hospitals
    
    
    18.3
    %
    
    
    17.4
    %
    
    
    
    
    
    
    18.3
    %
    
    
    17.4
    %Outpatient rehabilitation
    
    
    13.2
    
    
    
    12.9
    
    
    
    
    
    
    
    13.2
    
    
    
    12.9Other
    
    
    N/M
    
    
    
    N/M
    
    
    
    
    
    
    
    N/M
    
    
    
    N/MTotal assets:Specialty hospitals
    
    $
    1,898,494
    
    
    $
    2,051,238
    
    
    
    
    
    
    $
    1,898,494
    
    
    $
    2,051,238Outpatient rehabilitation
    
    
    484,703
    
    
    
    487,171
    
    
    
    
    
    
    
    484,703
    
    
    
    487,171Other(3)
    
    
    381,545
    
    
    
    182,199
    
    
    
    
    
    
    
    378,356
    
    
    
    179,551Total company
    
    $
    2,764,742
    
    
    $
    2,720,608
    
    
    
    
    
    
    $
    2,761,553
    
    
    $
    2,717,960Purchases of property and
equipment, net:Specialty hospitals
    
    $
    27,748
    
    
    $
    29,963
    
    
    
    
    
    
    $
    27,748
    
    
    $
    29,963Outpatient rehabilitation
    
    
    6,575
    
    
    
    7,187
    
    
    
    
    
    
    
    6,575
    
    
    
    7,187Other(3)
    
    
    927
    
    
    
    1,476
    
    
    
    
    
    
    
    927
    
    
    
    1,476Total company
    
    $
    35,250
    
    
    $
    38,626
    
    
    
    
    
    
    $
    35,250
    
    
    $
    38,626
  44




---



##### Table of Contents



Select Medical Holdings
    
    
    Select MedicalCorporation
    
    
    CorporationThree Months Ended
    
    
    Three Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    376,859
    
    
    $
    419,798
    
    
    $
    376,859
    
    
    $
    419,798Less: Specialty hospitals in development, opened,
acquired or closed after 1/1/09
    
    
    3,482
    
    
    
    34,965
    
    
    
    3,482
    
    
    
    34,965Specialty hospitals same store net operating revenue
    
    $
    373,377
    
    
    $
    384,833
    
    
    $
    373,377
    
    
    $
    384,833Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    64,381
    
    
    $
    58,282
    
    
    $
    64,381
    
    
    $
    58,282Less: Specialty hospitals in development, opened,
acquired or closed after 1/1/09
    
    
    (1,779
    )
    
    
    (2,231
    )
    
    
    (1,779
    )
    
    
    (2,231
    )Specialty hospitals same store Adjusted EBITDA(2)
    
    $
    66,160
    
    
    $
    60,513
    
    
    $
    66,160
    
    
    $
    60,513All specialty hospitals Adjusted EBITDA margin(2)
    
    
    17.1
    %
    
    
    13.9
    %
    
    
    17.1
    %
    
    
    13.9
    %Specialty hospitals same store Adjusted EBITDA
margin(2)
    
    
    17.7
    %
    
    
    15.7
    %
    
    
    17.7
    %
    
    
    15.7
    %
 Select Medical Holdings
    
    
    Select MedicalCorporation
    
    
    CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Net operating revenueSpecialty hospitals net operating revenue
    
    $
    1,156,422
    
    
    $
    1,234,562
    
    
    $
    1,156,422
    
    
    $
    1,234,562Less: Specialty hospitals in development, opened,
acquired or closed after 1/1/09
    
    
    10,711
    
    
    
    58,366
    
    
    
    10,711
    
    
    
    58,366Specialty hospitals same store net operating revenue
    
    $
    1,145,711
    
    
    $
    1,176,196
    
    
    $
    1,145,711
    
    
    $
    1,176,196Adjusted EBITDA(2)Specialty hospitals Adjusted EBITDA(2)
    
    $
    212,122
    
    
    $
    214,523
    
    
    $
    212,122
    
    
    $
    214,523Less: Specialty hospitals in development, opened,
acquired or closed after 1/1/09
    
    
    (3,698
    )
    
    
    (3,321
    )
    
    
    (3,698
    )
    
    
    (3,321
    )Specialty hospitals same store Adjusted EBITDA(2)
    
    $
    215,820
    
    
    $
    217,844
    
    
    $
    215,820
    
    
    $
    217,844All specialty hospitals Adjusted EBITDA margin(2)
    
    
    18.3
    %
    
    
    17.4
    %
    
    
    18.3
    %
    
    
    17.4
    %Specialty hospitals same store Adjusted EBITDA
margin(2)
    
    
    18.8
    %
    
    
    18.5
    %
    
    
    18.8
    %
    
    
    18.5
    %
 N/M
    
     Not Meaningful.(1)
    
    Cost of services includes salaries, wages and benefits, operating supplies, lease and
rent expense and other operating costs.  45




---



##### Table of Contents



(2)
    
    We define Adjusted EBITDA as net income before interest, income taxes, depreciation and
amortization, gain on early retirement of debt, stock compensation expense, other income,
equity in losses of unconsolidated subsidiaries and long term incentive 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 10 to our
interim unaudited consolidated financial statements for the period ended September 30, 2010
for a reconciliation of income from operations before income taxes to Adjusted EBITDA as
utilized by us in reporting our segment performance.(3)
    
    Other includes our general and administrative services and non-healthcare services. Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
  Net Operating Revenues
  Specialty Hospitals.
  46




---



##### Table of Contents



Outpatient Rehabilitation.
 Operating Expenses
   47




---



##### Table of Contents



Adjusted EBITDA
 Specialty Hospitals Operating Expenses
 Outpatient Rehabilitation
 Other Operating Expenses.
 Income from Operations
  Gain on Early Retirement of Debt
 Select Medical Holdings Corporation.
  48




---



##### Table of Contents



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
  Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
   49




---



##### Table of Contents



Net Operating Revenues
  Specialty Hospitals.
 Outpatient Rehabilitation.
  50




---



##### Table of Contents



Operating Expenses
  Adjusted EBITDA
 Specialty Hospitals Operating Expenses
  51




---



##### Table of Contents



Outpatient Rehabilitation
 Other Operating Expenses
 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. 5 8
  52




---



##### Table of Contents



Select Medical Holdings Corporation . 5 8
 Income Taxes
 Select Medical Corporation.
 Select Medical Holdings Corporation.
 Non-Controlling Interests
   53




---



##### Table of Contents



Liquidity and Capital Resources
 Nine Months Ended September 30, 2010 and Nine Months Ended September 30, 2009
 Select Medical HoldingsCorporation
    
    
    Select Medical CorporationNine Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(in thousands)
    
    
    (in thousands)Cash flows provided by operating activities
    
    $
    93,447
    
    
    $
    110,265
    
    
    $
    126,266
    
    
    $
    135,787Cash flows used in investing activities
    
    
    (34,290
    )
    
    
    (204,428
    )
    
    
    (34,290
    )
    
    
    (204,428
    )Cash flows provided by financing activities
    
    
    157,075
    
    
    
    25,826
    
    
    
    124,256
    
    
    
    304Net increase (decrease) in cash and cash
equivalents
    
    
    216,232
    
    
    
    (68,337
    )
    
    
    216,232
    
    
    
    (68,337
    )Cash and cash equivalents at beginning of period
    
    
    64,260
    
    
    
    83,680
    
    
    
    64,260
    
    
    
    83,680Cash and cash equivalents at end of period
    
    $
    280,492
    
    
    $
    15,343
    
    
    $
    280,492
    
    
    $
    15,343
    5 8
   54




---



##### Table of Contents



Capital Resources
 Select Medical Corporation .
 Select Medical Holdings Corporation .
  
    
    a $300.0 million revolving loan facility that will terminate on August 22, 2013,
including both a letter of credit sub-facility and a swingline loan sub-facility, and
 
    
    $191.8 million in term loans that mature on February 24, 2012 (the Tranche B Term
Loans), and
 
    
    $291.3 million in term loans that mature on August 22, 2014 (the Tranche B-1 Term
Loans).
     55




---



##### Table of Contents



5 8
    56




---



##### Table of Contents



Inflation
  Recent Accounting Pronouncements
   57




---



##### 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
   58




---



##### Table of Contents



ITEM 1A. RISK FACTORS.
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
   59




---



##### Table of Contents



ITEM 4. REMOVED AND RESERVED
 
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  
 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 12, 2010
 SELECT MEDICAL HOLDINGS CORPORATIONBy:
    /s/        Martin F. JacksonMartin F. JacksonExecutive Vice President and Chief Financial Officer
(Duly Authorized Officer)By:
    /s/        Scott A. RombergerScott A. RombergerSenior Vice President, Chief
Accounting Officer and Controller (Principal Accounting Officer) Dated: November 12, 2010
  60




---



##### Table of Contents



Exhibit
    
    Description3.1
    
    
    Amended and Restated Bylaws of Select Medical Holdings Corporation,
as amended.3.2
    
    
    Amended and Restated Bylaws of Select Medical Corporation, as amended.10.1
    
    
    Second Addendum to Lease Agreement, dated August 1, 2010, by and
between Old Gettysburg Associates II and Select Medical Corporation.10.2
    
    
    Restricted Stock Award Agreement, dated August 11, 2010, by and
between Select Medical Holdings Corporation and Bryan C. Cressey.10.3
    
    
    Restricted Stock Award Agreement, dated August 11, 2010, by and
between Select Medical Holdings Corporation and James E. Dalton, Jr.10.4
    
    
    Restricted Stock Award Agreement, dated August 11, 2010, by and
between Select Medical Holdings Corporation and James S. Ely, III.10.5
    
    
    Restricted Stock Award Agreement, dated August 11, 2010, by and
between Select Medical Holdings Corporation and William H. Frist,
M.D.10.6
    
    
    Restricted Stock Award Agreement, dated August 11, 2010, by and
between Select Medical Holdings Corporation and Leopold Swergold.10.7
    
    
    Employment Agreement, dated September 13, 2010, by and between Select
Medical Corporation and David S. Chernow, incorporated herein by
reference to Exhibit 10.1 of the Current Report on Form 8-K of Select
Medical Holdings Corporation and Select Medical Corporation filed on
September 15, 2010.10.8
    
    
    Restricted Stock Award Agreement, dated September 13, 2010, by and
between Select Medical Holdings Corporation and David S. Chernow,
incorporated herein by reference to Exhibit 10.2 of the Current
Report on Form 8-K of Select Medical Holdings Corporation and Select
Medical Corporation filed on September 15, 2010.31.1
    
    
    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