UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended ~~September~~June 30, ~~2009~~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

(Exact name of Registrants as specified in their charters)


Delaware Delaware (State or other jurisdiction of incorporation or organization)		20-1764048 23-2872718 (I.R.S. employer identification number)

4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
(Address of principal executive offices and zip code)

(717) 972-1100
(Registrants’ telephone number, including area code)

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

YESoþ NOþo

Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).

~~Yes~~YESo NoNOo

Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filerso		Accelerated filerso		Non-accelerated filersþ		Smaller reporting companyo

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

YESo NOþ

As of ~~October~~July 31, ~~2009,~~2010, Select Medical Holdings Corporation had outstanding ~~159,714,865~~160,010,060 shares of common stock.

This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly-owned operating subsidiary of Holdings. References to the “Company,” “we,” “us,” and “our” refer collectively to Select Medical Holdings Corporation and Select Medical Corporation.

~~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 Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	December 31,			September 30,			December 31,			September 30,			December 31,			June 30,			December 31,			June 30,
	2008 (1)			2009			2008 (1)			2009			2009			2010			2009			2010

ASSETS
Current Assets:
Cash and cash equivalents	$	64,260		$	280,492		$	64,260		$	280,492		$	83,680		$	128,753		$	83,680		$	128,753
Accounts receivable, net of allowance for doubtful accounts of $57,052 and $47,343 in 2008 and 2009, respectively		312,418			310,855			312,418			310,855
Accounts receivable, net of allowance for doubtful accounts of $43,357 and $39,392 in 2009 and 2010, respectively														307,079			338,320			307,079			338,320
Current deferred tax asset		61,925			51,426			48,594			51,426			48,535			40,808			48,535			40,808
Prepaid income taxes		7,362			13,338			7,362			13,338			11,179			6,841			11,179			6,841
Other current assets		20,897			22,152			20,897			22,152			24,240			24,730			24,240			24,730

Total Current Assets		466,862			678,263			453,531			678,263			474,713			539,452			474,713			539,452

Property and equipment, net		471,065			458,897			471,065			458,897			466,131			459,567			466,131			459,567
Goodwill		1,506,661			1,507,223			1,506,661			1,507,223			1,548,269			1,548,269			1,548,269			1,548,269
Other identifiable intangibles		74,078			67,473			74,078			67,473			65,297			63,468			65,297			63,468
Assets held for sale		12,542			11,342			12,542			11,342			11,342			11,342			11,342			11,342
Other assets		48,261			41,544			44,548			38,355			36,481			38,025			33,427			35,242


Total Assets	$	2,579,469		$	2,764,742		$	2,562,425		$	2,761,553		$	2,602,233		$	2,660,123		$	2,599,179		$	2,657,340


LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	21,130		$	—		$	21,130		$	—		$	—		$	14,201		$	—		$	14,201
Current portion of long-term debt and notes payable		9,046			141,667			9,046			141,667			4,145			102,410			4,145			102,410
Accounts payable		72,496			64,103			72,496			64,103			73,434			64,634			73,434			64,634
Accrued payroll		66,380			64,991			66,380			64,991			62,035			58,269			62,035			58,269
Accrued vacation		37,109			38,082			37,109			38,082			41,013			43,692			41,013			43,692
Accrued interest		37,032			15,293			25,444			12,345			32,919			31,947			23,473			22,608
Accrued restructuring		8,108			4,740			8,108			4,740			4,256			3,232			4,256			3,232
Accrued other		91,482			115,846			107,982			115,846			84,234			78,505			97,134			91,144
Due to third party payors		5,709			2,179			5,709			2,179			1,905			2,492			1,905			2,492

Total Current Liabilities		348,492			446,901			353,404			443,953			303,941			399,382			307,395			402,682

Long-term debt, net of current portion		1,770,879			1,521,394			1,460,276			1,217,252			1,401,426			1,305,069			1,096,842			999,567
Non-current deferred tax liability		42,918			54,733			42,918			54,733			66,768			66,604			66,768			66,604
Other non-current liabilities		67,709			60,648			67,709			60,648			60,543			61,712			60,543			61,712


Total Liabilities		2,229,998			2,083,676			1,924,307			1,776,586			1,832,678			1,832,767			1,531,548			1,530,565

Commitments and Contingencies

Preferred stock — Authorized shares (liquidation preference is $515,872 in 2008)		515,872			—			—			—

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 250,000,000 shares authorized, 61,466,000 shares and 156,093,000 shares issued and outstanding in 2008 and 2009, respectively		61			156			—			—
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 159,981,000 shares and 160,010,060 shares issued and outstanding in 2009 and 2010, respectively														160			160
Common stock of Select, $0.01 par value, 100 shares issued and outstanding		—			—			—			—									—			—
Capital in excess of par		(289,238	)		544,772			481,094			786,304			578,648			579,719			822,664			828,621
Retained earnings		128,185			139,183			160,657			201,708			169,094			217,782			223,314			268,459
Accumulated other comprehensive loss		(13,212	)		(10,680	)		(11,436	)		(10,680	)		(8,914	)		(1,898	)		(8,914	)		(1,898	)

Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity		(174,204	)		673,431			630,315			977,332			738,988			795,763			1,037,064			1,095,182
Non-controlling interest		7,803			7,635			7,803			7,635			30,567			31,593			30,567			31,593

Total Equity		(166,401	)		681,066			638,118			984,967			769,555			827,356			1,067,631			1,126,775


Total Liabilities and Equity	$	2,579,469		$	2,764,742		$	2,562,425		$	2,761,553		$	2,602,233		$	2,660,123		$	2,599,179		$	2,657,340

The accompanying notes are an integral part of this statement.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Quarter Ended September 30,						For the Quarter Ended September 30,						For the Quarter Ended June 30,						For the Quarter Ended June 30,
	2008 (1) (2)			2009			2008 (1)			2009			2009			2010			2009			2010

Net operating revenues	$	519,179		$	545,621		$	519,179		$	545,621		$	559,535		$	579,877		$	559,535		$	579,877


Costs and expenses:
Cost of services		441,395			448,702			441,395			448,702			453,011			470,044			453,011			470,044
General and administrative		11,538			34,618			11,538			34,618			12,885			9,802			12,885			9,802
Bad debt expense		12,240			11,720			12,240			11,720			10,312			10,845			10,312			10,845
Depreciation and amortization		17,848			17,676			17,848			17,676			17,939			16,610			17,939			16,610

Total costs and expenses		483,021			512,716			483,021			512,716			494,147			507,301			494,147			507,301


Income from operations		36,158			32,905			36,158			32,905			65,388			72,576			65,388			72,576

Other income and expense:
Gain on early retirement of debt		—			1,129			—			—			3,562			—			3,562			—
Other income		—			—			1,322			2,215
Other income (expense)														—			182			(32	)		182
Interest income		93			2			93			2			28			—			28			—
Interest expense		(36,153	)		(33,451	)		(27,420	)		(25,114	)		(33,658	)		(29,279	)		(24,853	)		(22,325	)


Income from operations before income taxes		98			585			10,153			10,008			35,320			43,479			44,093			50,433

Income tax expense (benefit)		(111	)		(804	)		3,408			2,494
Income tax expense														15,137			17,306			18,207			19,740


Net income		209			1,389			6,745			7,514			20,183			26,173			25,886			30,693

Less: Net income attributable to non-controlling interests		1,032			806			1,032			806			391			1,711			391			1,711


Net income (loss) attributable to Select Medical Holdings Corporation and Select Medical Corporation		(823	)		583		$	5,713		$	6,708
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation														19,792			24,462		$	25,495		$	28,982


Less: Preferred dividends		6,290			6,667									6,508			—


Net loss available to common stockholders	$	(7,113	)	$	(6,084	)
Net income available to common stockholders and participating securities													$	13,284		$	24,462


Loss per common share:
Income per common share:
Basic	$	(0.11	)	$	(0.09	)							$	0.20		$	0.15
Diluted	$	(0.11	)	$	(0.09	)							$	0.19		$	0.15

The accompanying notes are an integral part of this statement.

Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)


	Select Medical Holdings Corporation						Select Medical Corporation						Select Medical Holdings Corporation						Select Medical Corporation
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,						For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2008 (1) (2)			2009			2008 (1)			2009			2009			2010			2009			2010

Net operating revenues	$	1,606,263		$	1,666,328		$	1,606,263		$	1,666,328		$	1,120,707		$	1,164,690		$	1,120,707		$	1,164,690


Costs and expenses:
Cost of services		1,343,022			1,353,107			1,343,022			1,353,107			904,405			942,421			904,405			942,421
General and administrative		35,843			60,278			35,843			60,278			25,660			22,591			25,660			22,591
Bad debt expense		35,300			33,678			35,300			33,678			21,958			20,132			21,958			20,132
Depreciation and amortization		53,175			53,346			53,175			53,346			35,670			34,321			35,670			34,321

Total costs and expenses		1,467,340			1,500,409			1,467,340			1,500,409			987,693			1,019,465			987,693			1,019,465


Income from operations		138,923			165,919			138,923			165,919			133,014			145,225			133,014			145,225

Other income and expense:
Gain on early retirement of debt		—			16,445			—			15,316			15,316			—			15,316			—
Other income (expense)		—			—			(1,180	)		3,836
Other income														—			316			1,621			316
Interest income		275			82			275			82			80			—			80			—
Interest expense		(109,603	)		(101,781	)		(83,428	)		(75,936	)		(68,330	)		(59,321	)		(50,822	)		(45,363	)


Income from operations before income taxes		29,595			80,665			54,590			109,217			80,080			86,220			99,209			100,178

Income tax expense		13,862			33,076			22,610			43,069			33,880			34,415			40,575			39,300


Net income		15,733			47,589			31,980			66,148			46,200			51,805			58,634			60,878

Less: Net income attributable to non-controlling interests		2,103			2,218			2,103			2,218			1,412			3,117			1,412			3,117


Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation		13,630			45,371		$	29,877		$	63,930			44,788			48,688		$	57,222		$	57,761


Less: Preferred dividends		18,569			19,537									12,870			—


Net income (loss) available to common stockholders	$	(4,939	)	$	25,834
Net income available to common stockholders and participating securities													$	31,918		$	48,688


Income (loss) per common share:
Income per common share:
Basic	$	(0.07	)	$	0.38								$	0.47		$	0.30
Diluted	$	(0.07	)	$	0.37								$	0.47		$	0.30

The accompanying notes are an integral part of this statement.

Select Medical Holdings Corporation

Consolidated Statement of Changes in Equity and ~~Comprehensive~~ Income (Loss)

(unaudited)

(in thousands)

Select Medical Holdings Corporation Stockholders
Common Accumulated Other
Comprehensive Common Stock Par Capital in Retained Comprehensive Non-controlling
Total Income Stock Issued Value Excess of Par Earnings Income (Loss) Interests
Balance at December 31, 2008 (1) $ (166,401 ) 61,466 $ 61 $ (289,238 ) $ 128,185 $ (13,212 ) $ 7,803
Net income 47,589 $ 47,589 45,371 2,218
Unrealized gain on interest rate swap, net of tax 2,532 2,532 2,532

Total comprehensive income $ 50,121 $ 50,121

Issuance of common stock in connection with initial public offering, net of issuance costs 279,124 30,000 30 279,094
Conversion of preferred stock 535,407 64,277 65 535,342
Deemed dividend on conversion of preferred stock — 14,836 (14,836 )
Issuance and vesting of restricted stock 4,697 364 — 4,697
Exercise of stock options 24 2 — 24
Stock option expense 98 98
Repurchase of common shares (81 ) (16 ) — (81 )
Distributions to non-controlling interests (2,486 ) (2,486 )
Equity contribution from non-controlling interests 100 100
Accretion of dividends on preferred stock (19,537 ) (19,537 )

Balance at September 30, 2009 $ 681,066 156,093 $ 156 $ 544,772 $ 139,183 $ (10,680 ) $ 7,635

Select Medical Holdings Corporation Stockholders
Common Common Accumulated Other Non-
Comprehensive Stock Stock Par Capital in Retained Comprehensive controlling
Total Income Issued Value Excess of Par Earnings Income (Loss) Interests
Balance at December 31, 2009 $ 769,555 159,981 $ 160 $ 578,648 $ 169,094 $ (8,914 ) $ 30,567
Net income 51,805 $ 51,805 48,688 3,117
Unrealized gain on interest rate swap, net of tax 7,016 7,016 7,016

Total comprehensive income $ 58,821 $ 58,821

Issuance and vesting of restricted stock 371 371
Exercise of stock options 125 29 — 125
Stock option expense 575 575
Distributions to non-controlling interests (2,091 ) (2,091 )

Balance at June 30, 2010 $ 827,356 160,010 $ 160 $ 579,719 $ 217,782 $ (1,898 ) $ 31,593

Select Medical Corporation
Consolidated Statement of Changes in Equity and ~~Comprehensive~~ Income (Loss)
(unaudited)
(in thousands)


						Select Medical Corporation Stockholders																				Select Medical Corporation Stockholders
								Common							Accumulated Other											Common		Common							Accumulated Other			Non-
				Comprehensive		Common		Stock Par		Capital in		Retained			Comprehensive			Non-controlling						Comprehensive		Stock		Stock Par		Capital in		Retained			Comprehensive			controlling
	Total			Income		Stock Issued		Value		Excess of Par		Earnings			Income (Loss)			Interests			Total			Income		Issued		Value		Excess of Par		Earnings			Income (Loss)			Interests
Balance at December 31, 2008 (1)	$	638,118					—	$	—	$	481,094	$	160,657		$	(11,436	)	$	7,803
Balance at December 31, 2009																					$	1,067,631					—	$	—	$	822,664	$	223,314		$	(8,914	)	$	30,567
Net income		66,148		$	66,148								63,930						2,218			60,878		$	60,878								57,761						3,117
Unrealized gain on interest rate swap, net of tax		756			756											756						7,016			7,016											7,016

Total comprehensive income	$	66,904		$	66,904																$	67,894		$	67,894

Federal tax benefit of losses contributed by Holdings		21,267									21,267											4,887									4,887
Additional investment by Holdings		279,148									279,148											125									125
Dividends declared to Holdings																						(12,639	)										(12,639	)
Settlement of dividends paid to Holdings		(22,879	)										(22,879	)								23											23
Distributions to non-controlling interests		(2,486	)																(2,486	)		(2,091	)																(2,091	)
Equity contribution from non-controlling interests		100																	100
Contribution related to restricted stock awards and stock option issuances by Holdings		4,795									4,795											945									945

Balance at September 30, 2009	$	984,967					—	$	—	$	786,304	$	201,708		$	(10,680	)	$	7,635
Balance at June 30, 2010																					$	1,126,775					—	$	—	$	828,621	$	268,459		$	(1,898	)	$	31,593

The accompanying notes are an integral part of this statement.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Select Medical Holdings Corporation						Select Medical Corporation
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,						Select Medical Holdings Corporation						Select Medical Corporation
	2008 (1)			2009			2008 (1)			2009			For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2009			2010			2009			2010
Operating activities
Net income	$	15,733		$	47,589		$	31,980		$	66,148		$	46,200		$	51,805		$	58,634		$	60,878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		53,175			53,346			53,175			53,346			35,670			34,321			35,670			34,321
Provision for bad debts		35,300			33,678			35,300			33,678			21,958			20,132			21,958			20,132
Gain on early retirement of debt		—			(16,445	)		—			(15,316	)		(15,316	)		—			(15,316	)		—
Loss (gain) from disposal of assets		(316	)		550			(316	)		550
Non-cash loss (gain) from interest rate swaps		—			—			1,180			(3,836	)
Loss from disposal of assets														117			660			117			660
Non-cash gain from interest rate swaps														—			(316	)		(1,621	)		(316	)
Non-cash stock compensation expense		1,697			4,795			1,697			4,795			594			945			594			945
Amortization of debt discount		1,101			1,239			—			—			815			918			—			—
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable		(74,975	)		(32,033	)		(74,975	)		(32,033	)		(49,155	)		(51,373	)		(49,155	)		(51,373	)
Other current assets		5,465			(982	)		5,465			(982	)		(667	)		(495	)		(667	)		(495	)
Other assets		11,375			4,018			10,959			3,589			4,242			(1,140	)		3,959			(1,410	)
Accounts payable		(4,917	)		(8,366	)		(4,917	)		(8,366	)		(3,693	)		(8,796	)		(3,693	)		(8,796	)
Due to third-party payors		(9,328	)		(3,530	)		(9,328	)		(3,530	)		(216	)		587			(216	)		587
Accrued expenses		(9,541	)		(1,024	)		(1,391	)		7,615			(5,927	)		1,546			(5,927	)		1,659
Income and deferred taxes		9,204			10,612			17,950			20,608			22,613			9,925			29,308			14,810

Net cash provided by operating activities		33,973			93,447			66,779			126,266			57,235			58,719			73,645			71,602


Investing activities
Purchases of property and equipment		(35,770	)		(35,250	)		(35,770	)		(35,250	)		(20,981	)		(26,454	)		(20,981	)		(26,454	)
Proceeds from sale of business units		1,851			—			1,851			—
Proceeds from sale of property		743			1,341			743			1,341			1,341			—			1,341			—
Acquisition of businesses, net of cash acquired		(7,402	)		(381	)		(7,402	)		(381	)

Net cash used in investing activities		(40,578	)		(34,290	)		(40,578	)		(34,290	)		(19,640	)		(26,454	)		(19,640	)		(26,454	)


Financing activities
Proceeds from initial public offering, net of fees		—			282,000			—			—
Equity investment by Holdings		—			—			90			282,024
Payment of initial public offering costs		—			(584	)		—			(584	)
Borrowings on revolving credit facility		387,000			193,000			387,000			193,000			138,000			—			138,000			—
Payments on revolving credit facility		(357,000	)		(253,000	)		(357,000	)		(253,000	)		(173,000	)		—			(173,000	)		—
Payment on credit facility term loan		(5,100	)		(5,033	)		(5,100	)		(5,033	)		(3,400	)		—			(3,400	)		—
Repurchase of 7 5/8% senior subordinated notes		—			(30,114	)		—			(30,114	)		(30,114	)		—			(30,114	)		—
Repurchase of senior floating rate notes		—			(6,468	)		—			—
Borrowings of other debt		—			5,184			—			5,184			5,184			5,015			5,184			5,015
Principal payments on seller and other debt		(4,015	)		(5,738	)		(4,015	)		(5,738	)		(3,891	)		(4,442	)		(3,891	)		(4,442	)
Dividends paid to Holdings		—			—			(33,418	)		(39,367	)		—			—			(16,490	)		(12,883	)
Payment of initial public offering costs														(417	)		—			(417	)		—
Repurchase of common and preferred stock		(612	)		(80	)		—			—			(80	)		—			—			—
Exercise of stock options		90			24			—			—
Repayment of bank overdrafts		(7,217	)		(21,130	)		(7,217	)		(21,130	)
Equity contribution and loans from non-controlling interests		—			1,500			—			1,500
Proceeds from issuance of common stock														24			125			—			—
Equity investment by Holdings														—			—			24			125
Proceeds from (repayment of) bank overdrafts														(4,658	)		14,201			(4,658	)		14,201
Distributions to non-controlling interests		(1,703	)		(2,486	)		(1,703	)		(2,486	)		(1,814	)		(2,091	)		(1,814	)		(2,091	)

Net cash provided by (used in) financing activities		11,443			157,075			(21,363	)		124,256			(74,166	)		12,808			(90,576	)		(75	)


Net increase in cash and cash equivalents		4,838			216,232			4,838			216,232
Net increase (decrease) in cash and cash equivalents														(36,571	)		45,073			(36,571	)		45,073

Cash and cash equivalents at beginning of period		4,529			64,260			4,529			64,260			64,260			83,680			64,260			83,680

Cash and cash equivalents at end of period	$	9,367		$	280,492		$	9,367		$	280,492		$	27,689		$	128,753		$	27,689		$	128,753


Supplemental Cash Flow Information
Cash paid for interest	$	123,285		$	115,901		$	90,404		$	83,082		$	64,710		$	55,928		$	48,301		$	43,055
Cash paid for taxes	$	4,704		$	22,441		$	4,704		$	22,441		$	11,090		$	24,664		$	11,090		$	24,664

The accompanying notes are an integral part of this statement.

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

Select Medical Corporation (“Select”) was formed in December 1996 and commenced operations during February 1997 upon the completion of its first acquisition. Select Medical Holdings Corporation (“Holdings”) was formed in October 2004 for the purpose of effecting a leveraged buyout of Select, which was a publicly traded entity. Holdings was originally owned by an investor group that ~~includes~~included Welsh, Carson, Anderson, & Stowe, IX, LP (“Welsh Carson”), Thoma Cressey Bravo (“Thoma Cressey”) and members of the Company’s senior management. On February 24, 2005, Select ~~Medical Corporation (“Select”)~~ merged with a subsidiary of Holdings, which resulted in Select ~~Medical Holdings Corporation (“Holdings”), formerly known as EGL Holding Company, and became~~becoming a wholly-owned subsidiary of Holdings ~~(“Merger”~~(the “Merger”). On September 30, 2009 Holdings completed its initial public offering of common stock at a price to the public of $10.00 per share. ~~Refer to Note 8,~~~~Initial Public Offering,~~~~for additional information.~~ Generally accepted accounting principles (“GAAP”) require that any amounts recorded or incurred (such as goodwill and compensation expense) by the parent as a result of the Merger or for the benefit of the subsidiary be “pushed down” and recorded in Select’s consolidated financial statements. Holdings and Select and their subsidiaries are collectively referred to as the “Company.” The consolidated financial statements of Holdings include the accounts of its wholly-owned subsidiary Select. Holdings conducts substantially all of its business through Select and its subsidiaries.

The unaudited condensed consolidated financial statements of the Company as of ~~September~~June 30, ~~2009~~2010 and for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2008~~2009 and ~~2009~~2010 have been prepared in accordance with generally accepted accounting principles. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2009.~~2010.

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted consistent with the rules and regulations of the Securities and Exchange Commission (the “SEC”), although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, ~~2008 available on~~2009 contained in the Company’s ~~website: www.selectmedicalcorp.com under~~Annual Report on Form 10-K filed with the ~~Investor Relations section of the website. Please note that none of the information~~Securities and Exchange Commission on ~~the Company’s website is incorporated by reference into this report.~~March 17, 2010.

2. Accounting Policies

Use of Estimates

The preparation of ~~consolidated~~ financial statements in conformity with ~~generally accepted accounting principles~~GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results ~~may~~could differ materially from those ~~estimates, in some cases materially.~~estimates.

Recent Accounting Pronouncements

In ~~August 2009,~~January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ~~2009-05,~~(“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — ~~Measuring Liabilities at~~Improving Disclosures about Fair ~~Value”~~Value Measurements” (“Update ~~2009-05”~~2010-06”)~~. Update 2009-05 provides clarification that in circumstances in~~, which ~~a quoted price in an active market~~amends the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the ~~identical liability is not available, a reporting entity is required~~level of disaggregation and about inputs and valuation techniques used to measure fair ~~value~~value. The Company adopted update 2010-06 on January 1, 2010, except for the requirement to provide the Level 3 activity of ~~such liability using one or more of the techniques prescribed by the update. Update 2009-05 is~~purchases, sales, issuances, and settlements on a gross basis, which will be effective for ~~the first annual or interim period~~fiscal years beginning after ~~the issuance of this update.~~December 15, 2010, and for interim periods within those fiscal years. The adoption of Update ~~2009-05 is~~2010-06 did not ~~anticipated to~~ have ~~a material~~an impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued an amendment to Accounting Standards Codification (“ASC”) topic 105, “Generally Accepted Accounting Principles.” The amendment stipulates the FASB Accounting Standards Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The amendment was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

In June 2009, FASB issued an amendment to ASC topic 810, “Consolidation.” The amendment changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights should be consolidated. The amendment will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure related to that involvement. The amendment is effective for annual and interim reporting periods beginning after November 15, 2009. The adoption of the amendment is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued an amendment to ASC topic 860, “Transfers and Servicing.” The amendment will require additional disclosure about the transfers of financial assets, including securitization transactions, and additional disclosure in cases where entities have continuing exposure to the risks related to transferred financial assets. The amendment eliminates the concept of “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The amendment is effective for annual and interim reporting periods beginning after November 15, 2009. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued an amendment to ASC topic 855, “Subsequent Events.” The amendment provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The amendment sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The amendment also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. Furthermore, this amendment identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company ~~adopted this amendment during the second quarter of 2009 and evaluated subsequent events through November 13, 2009, the issuance date of this report.~~

In April 2009, FASB issued an amendment to ASC topic 805, “Business Combinations.” This amendment changes the provisions for the initial recognition and measurement, subsequent measurement and accounting and disclosures for assets and liabilities arising from contingencies in business combinations. The amendment eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria. The amendment is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an amendment to ASC topic 820, “Fair Value Measurements and Disclosures.” This amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have decreased significantly. The amendment also provides guidance on identifying circumstances that indicate a transaction is not orderly. The amendment was effective for the Company’s interim period ending on June 30, 2009. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2009, the Company adopted an amendment issued by the FASB in December 2007 to ASC topic 810, “Consolidation.” Upon adoption of this amendment, minority interest is now referred to as non-controlling interest andcurrently has been reclassified from the mezzanine section of the balance sheet to the equity section. The balance sheet as of December 31, 2008 has been revised to show this change in presentation. In addition, non-controlling interest is now deducted from net income to obtain net income attributable to each of Holdings and Select.no Level 3 measurements.

3. Intangible Assets

The Company’s intangible assets consist of the following:


	As of September 30, 2009					As of June 30, 2010
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
	(in thousands)					(in thousands)
Amortized intangible assets
Contract therapy relationships	$	20,456	$	(18,751	)	$	20,456	$	(20,456	)
Non-compete agreements		25,909		(19,513	)		25,909		(23,068	)

Total	$	46,365	$	(38,264	)	$	46,365	$	(43,524	)


Indefinite-lived intangible assets
Goodwill	$	1,507,223				$	1,548,269
Trademarks		47,858					47,858
Certificates of need		10,175					11,430
Accreditations		1,339					1,339

Total	$	1,566,595				$	1,608,896

Amortization expense for the Company’s intangible assets with finite lives follows:

Three Months Ended September 30, Nine Months Ended September 30,
2008 2009 2008 2009
(in thousands)
Amortization expense $ 2,208 $ 2,207 $ 6,623 $ 6,623

Three Months Ended June 30, Six Months Ended June 30,
2009 2010 2009 2010
(in thousands)
Amortization expense $ 2,208 $ 1,185 $ 4,416 $ 3,052

Amortization expense for the Company’s intangible assets primarily relates to the amortization of the value associated with the non-compete agreements entered into in connection with the acquisitions of the outpatient rehabilitation division of HealthSouth Corporation, ~~(the “Division”),~~ Kessler Rehabilitation Corporation and SemperCare Inc. and the value assigned to the Company’s contract therapy relationships. The useful lives of the ~~Division’s~~outpatient rehabilitation division of HealthSouth Corporation’s non-compete, the Kessler Rehabilitation Corporation non-compete, the SemperCare Inc. non-compete and the Company’s contract therapy relationships are approximately five, ~~six,~~seven, seven and five years, respectively.

Amortization expense related to these intangible assets for each of the next five years commencing January 1, ~~2009~~2010 is approximately as follows (in thousands):

2009 $ 8,831
2010 4,247
2011 1,306
2012 340
2013 0

~~The changes in the carrying amount of goodwill for the Company’s reportable segments for the nine months ended September 30, 2009 are as follows:~~

Specialty Outpatient
Hospitals Rehabilitation Total
(in thousands)
Balance as of December 31, 2008 $ 1,227,848 $ 278,813 $ 1,506,661
Goodwill acquired during year — 562 562

Balance as of September 30, 2009 $ 1,227,848 $ 279,375 $ 1,507,223

2010 $ 4,247
2011 1,306
2012 340
2013 0
2014 0

4. Restructuring Reserves

In connection with the acquisition of the outpatient rehabilitation division of HealthSouth Corporation, the Company recorded aan estimated liability of $18.7 million in 2007 for business restructuring which was accounted for as additional purchase price. This reserve primarily included costs associated with workforce reductions and lease termination costs in accordance with the Company’s restructuring plan.

The following summarizes the Company’s restructuring activity:

Lease
Termination
Costs Severance Other Total
(in thousands)
December 31, 2008 $ 7,047 $ 992 $ 69 $ 8,108
Amounts paid in 2009 (2,925 ) (443 ) — (3,368 )
Revision of estimate 565 (496 ) (69 ) —

September 30, 2009 $ 4,687 $ 53 $ — $ 4,740

Lease Termination Costs
(in thousands)
December 31, 2009 $ 4,256
Amounts paid in 2010 (699 )
Revision of estimate (325 )

June 30, 2010 $ 3,232

The Company expects to pay out the remaining lease termination costs through ~~2016 and severance costs in 2009.~~2014.

5. ~~Amendment to Senior Secured~~Extension of Revolving Credit Facility

On ~~August 5, 2009 Select~~June 7, 2010, the Company entered into an ~~Amendment No. 3 (“Amendment No. 3”)~~amendment to its senior secured credit facility. Amendment No. 3 extended the maturity of $384.5 million principal amount of Tranche B term loans from February 24, 2012 to August 22, 2014, and made related technical changes to the senior secured credit facility. Holders of Tranche B term loansfacility that extended the maturity of ~~their Tranche B term loans now hold Tranche B-1 term loans that mature on~~its $300.0 million revolving credit facility from February 24, 2011 to August 22, ~~2014, and holders of Tranche B term loans that did not extend the maturity of their Tranche B term loans continue to hold Tranche B term loans that mature on February 24, 2012.~~2013. The applicable margin percentage and commitment fee for revolving loans have increased and are determined based on a pricing grid whereby changes in the ~~Tranche B-1 term loans under~~leverage ratio, as defined in the ~~senior secured~~ credit ~~facility is 3.75% for adjusted LIBOR loans and 2.75% for alternate base rate loans.~~agreement, results in changes to the applicable margin percentage. Under the ~~terms of Amendment No. 3, if, prior to August 5, 2011, the senior secured credit facility is amended to reduce~~pricing grid, the applicable margin percentage for ~~the Tranche B-1 term~~revolving ABR loans ~~then Select will be required~~ranges from 2% per annum to ~~pay a fee in an amount equal to 1% of the outstanding Tranche B-1 term loans held by those holders of Tranche B-1 term loans that agree to amend the senior secured credit facility to reduce~~3% per annum, the applicable margin ~~percentage. In addition, if, prior~~percentage for revolving Eurodollar loans ranges from 3% per annum to ~~August 5, 2011, Select makes any prepayment of Tranche B-1 term loans with proceeds of any term loan indebtedness, then Select will be required~~4% per annum, and the commitment fee rate for extended revolving commitments ranges from 0.375% to ~~pay a fee to holders of Tranche B-1 term loans in an amount equal to 1% of the outstanding Tranche B-1 term loans that are being prepaid.~~0.75%.

6. Fair Value

Fair Value Measurements

The Company measures its interest rate swaps at fair value on a recurring basis. The Company determines the fair value of its interest rate swaps based on financial models that consider current and future market interest rates and adjustments for non-performance risk. The Company considers those inputs utilized in the valuation process to be Level 2 in the fair value hierarchy. Level 2 in the fair value hierarchy is defined as inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. The fair value of the Company’s interest rate swaps was a liability of ~~$18.5~~$3.8 million at ~~September~~June 30, ~~2009 of which $17.8~~2010 and $14.1 million ~~was~~at December 31, 2009. These liabilities are reported on the consolidated balance sheet as a current liability in accrued ~~other and $0.7 million was reported in other long-term liabilities.~~other.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, notes payable and long-term debt. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

The carrying ~~amount~~value of Select’s senior secured credit facility was ~~$741.5~~$483.1 million at ~~September 30,~~both December 31, 2009 and ~~the estimated~~June 30, 2010, respectively. The fair value of ~~the~~Select’s senior secured credit facility was ~~$721.8~~$471.0 million and $461.4 million at ~~September~~December 31, 2009 and June 30, ~~2009. At September 30, 2009~~2010, respectively. The fair value of Select’s senior secured credit facility was based on quoted market prices for this debt in the syndicated loan market.

The carrying value of the 7⁵/₈% senior subordinated notes was $611.5 million at both December 31, 2009 and ~~the estimated~~June 30, 2010, respectively. The fair value of the 7⁵/₈% senior subordinated notes was ~~$574.8 million. At September~~$593.2 million and $575.5 million at December 31, 2009 and June 30, ~~2009 the~~2010, respectively. The fair value of this registered debt was based on quoted market prices.

The carrying value of the senior floating rate notes was $167.3 million at both December 31, 2009 and ~~the estimated~~June 30, 2010, respectively. The fair value ~~was $156.0 million. The Company based~~of the ~~estimated the fair value for its senior secured credit facility, 7~~⁵/₈~~% senior subordinated notes and~~ senior floating rate notes was $155.6 million and $144.7 million at December 31, 2009 and June 30, 2010, respectively. The fair value of this registered debt was based on ~~quotes from financial institutions.~~quoted market prices.

Interest Rate Swaps

The Company is exposed to the impact of interest rate changes. The Company’s objective is to manage the impact of the interest rate changes on earnings and cash flows. On June 13, 2005, Select entered into two interest rate swap agreements to hedge Select’s interest rate risk for a portion of its term loans under its senior secured credit facility. The effective date of the swap transactions was August 22, 2005. The swaps are designated as a cash flow ~~hedges~~hedge of forecasted LIBOR based variable rate interest payments. The notional amount of the interest rate swaps is $200.0 million, and the underlying variable rate debt is associated with Select’s senior secured credit facility. The weighted average variable interest rate of the debt was ~~3.4%~~3.54% and the weighted average fixed rate of the ~~swap~~swaps was ~~7.3%~~7.34% at ~~September~~June 30, ~~2009.~~2010. The swaps are for a period of five years ~~with quarterly resets~~and mature on ~~February 22, May 22,~~ August ~~22 and November 22 of each year.~~

On March 8, 2007, Select entered into an additional interest rate swap agreement to hedge Select’s interest rate risk for a portion of its term loans under its senior secured credit facility. The effective date of the swap transaction was May 22, 2007. The swap is designated as a cash flow hedge of forecasted LIBOR based variable rate interest payments. The notional amount of the interest rate swap is $200.0 million, and the underlying variable rate debt is associated with Select’s senior secured credit facility. The variable interest rate of the debt was 3.4% and the fixed rate of the swap was 7.9% at September 30, 2009. The swap is for a period of three years, with quarterly resets on February 22, May 22, August 22 and November 22 of each year.23, 2010.

On November 16, 2007, Select entered into an additional interest rate swap agreement to hedge Select’s interest rate risk for a portion of its term loans under its senior secured credit facility. The effective date of the swap transaction was November 23, 2007. The swap is designated as a cash flow hedge of forecasted LIBOR based variable rate interest payments. The notional amount of the interest rate swap is $100.0 million, and the underlying variable rate debt is associated with Select’s senior secured credit facility. The weighted average variable interest rate of the debt was ~~3.4%~~3.54% and the weighted average fixed rate of the swap was ~~7.3%~~7.33% at ~~September~~June 30, ~~2009.~~2010. The swap is for a period of three years, ~~with quarterly resets~~and matures on ~~February 22, May 22, August 22 and~~ November 22, 2010.

For the portion of ~~each year.~~

~~The~~the swaps that qualify as a hedge, the interest rate swaps ~~have been designated~~are reflected at fair value in the consolidated balance sheet. A gain of $0.1 million, net of tax, was recorded in Holdings’ stockholders’ equity as ~~hedges and qualify as effective hedges, except~~a component of other comprehensive income (loss) for the swap that was associated with Holdings’ $175.0 million senior floating rate notes due 2015 as it relates to Select’s financial statements. This interest rate swap, which matured in September 2009, did not qualify as an effective hedge as the cash flow stream being hedged related to the amount of dividend payments to Holdings necessary to fund interest payments on Holdings’ $175.0 million senior floating rate notes. This resulted in asix months ended June 30, 2009. A gain of ~~$1.3~~$7.0 million, ~~and $2.2 million being recognized in the other income and expense section~~net of ~~Select’s consolidated statement of operations~~tax, was recorded for the ~~three~~six months ended ~~September~~June 30, ~~2008 and 2009, respectively, and~~2010. Select recorded a loss of ~~$1.2~~$0.4 million, net of tax, for the six months ended June 30, 2009, and a gain of ~~$3.8~~$7.0 million, ~~being recognized~~net of tax, for the ~~nine~~six months ended ~~September~~June 30, ~~2008 and 2009, respectively. On~~2010 related to the ~~consolidated~~swaps in Select’s stockholder’s equity as a component of other comprehensive income (loss). The Company tests for ineffectiveness whenever financial statements ~~of Holdings, this interest rate swap qualified as an effective hedge.~~are issued or at least every three months using the Hypothetical Derivative Method. See also Note 7,Accumulated Other Comprehensive Loss.

7. Accumulated Other Comprehensive Loss

~~Holdings~~

Included in accumulated other comprehensive loss at December 31, ~~2008~~2009 and ~~September~~June 30, ~~2009~~2010 were cumulative losses of ~~$13.2~~$8.9 million (net of tax) and ~~$10.7 million (net of tax), respectively, on interest rate swaps accounted for as cash flow hedges.~~

~~Select~~

~~Included in accumulated other comprehensive loss at December 31, 2008 and September 30, 2009 were cumulative losses of $11.4 million (net of tax) and $10.7~~$1.9 million (net of tax), respectively, on interest rate swaps accounted for as cash flow hedges.

8. ~~Initial Public Offering~~

On September 30, 2009, Holdings completed its initial public offering of common stock at a price to the public of $10.00 per share. Holdings sold 30,000,000 shares in the offering. The total net proceeds to Holdings from the offering after deducting underwriting discounts and commissions and offering expenses were approximately $279.1 million. The Company used the net proceeds from the offering to repay indebtedness and to make payments to its executive officers under our Long Term Cash Incentive Plan, and will use the remaining net proceeds from the offering to repay additional indebtedness or for general corporate purposes. The initial public offering of common stock triggered the mandatory prepayment obligation under the senior secured credit facility in the amount of 50% of the net proceeds received in the offering. The closing and receipt of cash occurred on September 30, 2009, however, the repayments of indebtedness and payment under the Long Term Cash Incentive Plan did not occur until October. As a result, the Company has reported a significant amount of cash on its September 30, 2009 balance sheet and has reflected the mandatory repayment under the credit facility as a current portion of long term debt.

On October 28, 2009, the underwriters purchased an additional 3,602,700 shares pursuant to their over-allotment option at a price to the public of $10.00 per share. The total net proceeds to Holdings from the exercise of the over-allotment option were approximately $33.9 million. A portion of the net proceeds from the exercise of the over-allotment option were used to repay indebtedness, including a mandatory prepayment obligation under the senior secured credit facility in the amount of 50% of the net proceeds, and any remaining proceeds will be used to repay additional indebtedness or for general corporate purposes.

9. Stockholders’ Equity

Participating Preferred Stock

Upon completion of Holdings’ initial public offering of common stock on September 30, 2009, Holdings’ outstanding participating preferred stock converted into a total of 64,276,974 common shares. Each share of preferred stock converted into a number of shares of common stock determined by:

•		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.~~

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.

1412

Common Stock

On September 25, 2009 Holdings effected a 1 for .30 reverse stock split of its common stock. Accordingly all common issued and outstanding share and per share information in this report has been retroactively restated to reflect the effects of this reverse stock split.

~~10.~~9. Segment Information

The Company’s reportable segments consist of (i) specialty hospitals and (ii) outpatient rehabilitation. All other represents amounts associated with corporate activities and non-healthcare related services. The outpatient rehabilitation reportable segment has two operating segments: outpatient rehabilitation clinics and contract therapy. These operating segments are aggregated for reporting purposes as they have common economic characteristics and provide a similar service to a similar patient base. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. ~~All other primarily includes the Company’s general and administrative services.~~ The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as net income before interest, income taxes, depreciation and amortization, gain on early retirement of debt, ~~other income (expense),~~ stock compensation expense ~~long term incentive compensation~~ and ~~non-controlling interest.~~other income (expense).

The following tables summarize selected financial data for the Company’s reportable segments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 and ~~2009.~~2010. The segment results of Holdings are identical to those of Select with the exception of total assets:

Three Months Ended September 30, 2008
Specialty Outpatient
Hospitals Rehabilitation All Other Total
(in thousands)

Net operating revenue $ 358,838 $ 160,303 $ 38 $ 519,179
Adjusted EBITDA 49,137 16,405 (11,031 ) 54,511
Total assets:
Select Medical Corporation 1,900,485 502,943 105,881 2,509,309
Select Medical Holdings Corporation 1,900,485 502,943 109,733 2,513,161
Capital expenditures 5,997 3,235 431 9,663


	Three Months Ended September 30, 2009									Three Months Ended June 30, 2009
	Specialty		Outpatient							Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total		Hospitals		Rehabilitation		All Other			Total
	(in thousands)									(in thousands)

Net operating revenue	$	376,859	$	168,751	$	11		$	545,621	$	386,331	$	173,190	$	14		$	559,535
Adjusted EBITDA		64,381		20,898		(12,236	)		73,043		70,960		25,294		(12,628	)		83,626
Total assets:
Select Medical Corporation		1,898,494		484,703		378,356			2,761,553		1,920,040		492,936		115,324			2,528,300
Select Medical Holdings Corporation		1,898,494		484,703		381,545			2,764,742		1,920,040		492,936		119,706			2,532,682
Capital expenditures		12,371		1,566		332			14,269		11,222		2,199		524			13,945


	Nine Months Ended September 30, 2008									Three Months Ended June 30, 2010
	Specialty		Outpatient							Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total		Hospitals		Rehabilitation		All Other			Total
	(in thousands)									(in thousands)

Net operating revenue	$	1,104,731	$	501,375	$	157		$	1,606,263	$	403,079	$	176,785	$	13		$	579,877
Adjusted EBITDA		167,617		60,248		(34,070	)		193,795		73,344		25,956		(9,677	)		89,623
Total assets:
Select Medical Corporation		1,900,485		502,943		105,881			2,509,309		1,969,566		495,399		192,375			2,657,340
Select Medical Holdings Corporation		1,900,485		502,943		109,733			2,513,161		1,969,566		495,399		195,158			2,660,123
Capital expenditures		23,385		10,048		2,337			35,770		10,026		3,133		248			13,407

Six Months Ended June 30, 2010
Specialty Outpatient
Hospitals Rehabilitation All Other Total
(in thousands)
Net operating revenue $ 814,764 $ 349,850 $ 76 $ 1,164,690
Adjusted EBITDA 156,241 46,474 (22,224 ) 180,491
Total assets:
Select Medical Corporation 1,969,566 495,399 192,375 2,657,340
Select Medical Holdings Corporation 1,969,566 495,399 195,158 2,660,123
Capital expenditures 20,624 5,168 662 26,454

A reconciliation of Adjusted EBITDA to income (loss) from operations before income taxes is as follows (in thousands):


	Three Months Ended September 30, 2008															Three Months Ended June 30, 2009
	Specialty			Outpatient												Specialty			Outpatient
	Hospitals			Rehabilitation			All Other									Hospitals			Rehabilitation			All Other
Adjusted EBITDA	$	49,137		$	16,405		$	(11,031	)							$	70,960		$	25,294		$	(12,628	)
Depreciation and amortization		(10,756	)		(6,193	)		(899	)								(10,790	)		(6,264	)		(885	)
Stock compensation expense		—			—			(505	)								—			—			(299	)

										Select Medical
										Holdings			Select Medical												Select Medical Holdings Corporation			Select Medical Corporation
										Corporation			Corporation

Income (loss) from operations	$	38,381		$	10,212		$	(12,435	)	$	36,158		$	36,158		$	60,170		$	19,030		$	(13,812	)	$	65,388		$	65,388
Other income											—			1,322
Gain on early retirement of debt																										3,562			3,562
Other expense																										—			(32	)
Interest expense, net											(36,060	)		(27,327	)											(33,630	)		(24,825	)


Income from operations before income taxes										$	98		$	10,153											$	35,320		$	44,093

Three Months Ended June 30, 2010
Specialty Outpatient
Hospitals Rehabilitation All Other
Adjusted EBITDA $ 73,344 $ 25,956 $ (9,677 )
Depreciation and amortization (10,899 ) (4,943 ) (768 )
Stock compensation expense — — (437 )

Select Medical Holdings Corporation Select Medical Corporation

Income (loss) from operations $ 62,445 $ 21,013 $ (10,882 ) $ 72,576 $ 72,576
Other income 182 182
Interest expense, net (29,279 ) (22,325 )

Income from operations before income taxes $ 43,479 $ 50,433

Six Months Ended June 30, 2009
Specialty Outpatient
Hospitals Rehabilitation All Other
Adjusted EBITDA $ 147,741 $ 46,578 $ (25,041 )
Depreciation and amortization (21,537 ) (12,397 ) (1,736 )
Stock compensation expense — — (594 )

Select Medical Holdings Corporation Select Medical Corporation

Income (loss) from operations $ 126,204 $ 34,181 $ (27,371 ) $ 133,014 $ 133,014
Gain on early retirement of debt 15,316 15,316
Other income — 1,621
Interest expense, net (68,250 ) (50,742 )

Income from operations before income taxes $ 80,080 $ 99,209


	Three Months Ended September 30, 2009															Six Months Ended June 30, 2010
	Specialty			Outpatient												Specialty			Outpatient
	Hospitals			Rehabilitation			All Other									Hospitals			Rehabilitation			All Other
Adjusted EBITDA	$	64,381		$	20,898		$	(12,236	)							$	156,241		$	46,474		$	(22,224	)
Depreciation and amortization		(10,485	)		(6,282	)		(909	)								(21,858	)		(10,799	)		(1,664	)
Long term incentive compensation		—			—			(18,261	)
Stock compensation expense		—			—			(4,201	)								—			—			(945	)

										Select Medical
										Holdings			Select Medical												Select Medical Holdings Corporation			Select Medical Corporation
										Corporation			Corporation

Income (loss) from operations	$	53,896		$	14,616		$	(35,607	)	$	32,905		$	32,905		$	134,383		$	35,675		$	(24,833	)	$	145,225		$	145,225
Gain on early retirement of debt											1,129			—
Other income											—			2,215												316			316
Interest expense, net											(33,449	)		(25,112	)											(59,321	)		(45,363	)


Income from operations before income taxes										$	585		$	10,008											$	86,220		$	100,178

Nine Months Ended September 30, 2008
Specialty Outpatient
Hospitals Rehabilitation All Other
Adjusted EBITDA $ 167,617 $ 60,248 $ (34,070 )
Depreciation and amortization (32,632 ) (17,894 ) (2,649 )
Stock compensation expense — — (1,697 )

Select Medical
Holdings
Select Medical
Corporation Corporation

Income (loss) from operations $ 134,985 $ 42,354 $ (38,416 ) $ 138,923 $ 138,923
Other expense — (1,180 )
Interest expense, net (109,328 ) (83,153 )

Income from operations before income taxes $ 29,595 $ 54,590

Nine Months Ended September 30, 2009
Specialty Outpatient
Hospitals Rehabilitation All Other
Adjusted 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 Medical
Holdings Select Medical
Corporation Corporation

Income (loss) from operations $ 180,100 $ 48,797 $ (62,978 ) $ 165,919 $ 165,919
Gain on early retirement of debt 16,445 15,316
Other income — 3,836
Interest expense, net (101,699 ) (75,854 )

Income from operations before income taxes $ 80,665 $ 109,217

~~11. Net~~10. Income ~~(Loss)~~ per Common Share

The Company applies the two-class method for calculating and presenting income ~~(loss)~~ per common share. The two-class method is an earnings ~~(loss)~~ allocation formula that determines earnings ~~(loss)~~ per share for each class of stock participation rights in undistributed ~~earnings (losses). Participating securities are defined as securities that participate in dividends with common stock according to a predetermined formula. In addition effective~~earnings. Effective January 1, 2009 ~~FASB~~the Financial Accounting Standards Board (“FASB”) clarified that share based payment awards that have not yet vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. ~~In applying~~Participating securities are defined as securities that participate in dividends with common stock according to a predetermined formula. These participating securities should be included in the ~~two-class method,~~computation of basic earnings per share under the two class method. Based upon the clarification made by FASB, the Company ~~determined~~concluded that ~~undistributed earnings should be allocated equally on a per share basis between common stock, unvested~~its non-vested restricted stock ~~and participating preferred stock due to~~awards meet the ~~equal participation rights~~definition of the common stock, unvested restricted stock and participating preferred stock (i.e., the voting conversion rights) and losses should be allocated equally on a per share basis between common stock and participating preferred stock. The calculations of earnings (loss) per share for the three and nine months ended September 30, 2008 have been revised to reflect the inclusion of the Company’s unvested restricted stock as a participating security ~~under~~and should be included in the ~~two-class method.~~Company’s computation of basic earnings per share.

The following table sets forth for the periods indicated the calculation of net income ~~(loss)~~ per share in the Company’s consolidated statement of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted earnings ~~(loss)~~ per share, respectively:


	For the Quarter Ended						For the Nine Months Ended					For the Quarter Ended				For the Six Months Ended
	September 30,						September 30,					June 30,				June 30,
	2008			2009			2008			2009		2009		2010		2009		2010
	(in thousands, except per share data)											(in thousands, except per share data)
Numerator:
Net income (loss) attributable to Select Medical Holdings Corporation	$	(823	)	$	583		$	13,630		$	45,371
Net income attributable to Select Medical Holdings Corporation												$	19,792	$	24,462	$	44,788	$	48,688
Less: Preferred stock dividends		6,290			6,667			18,569			19,537		6,508				12,870
Less: Earnings (loss) allocated to preferred stockholders		(712	)		(582	)		(497	)		2,497
Less: Earnings allocated to preferred stockholders													1,296				3,115
Less: Earnings allocated to unvested restricted stockholders		—			—			—			315		161		46		443		97

Income (loss) available to common and preferred stockholders — basic and diluted	$	(6,401	)	$	(5,502	)	$	(4,442	)	$	23,022
Income available to common and preferred stockholders — basic and diluted												$	11,827	$	24,416	$	28,360	$	48,591


Denominator:
Weighted average shares — basic		59,769			62,078			59,378			61,030		60,632		159,709		60,509		159,686
Effect of dilutive securities:
Stock options		—			—			—			470		482		266		482		298

Weighted average shares — diluted		59,769			62,078			59,378			61,500		61,114		159,975		60,991		159,984


Basic income (loss) per common share	$	(0.11	)	$	(0.09	)	$	(0.07	)	$	0.38
Diluted income (loss) per common share	$	(0.11	)	$	(0.09	)	$	(0.07	)	$	0.37
Basic income per common share												$	0.20	$	0.15	$	0.47	$	0.30
Diluted income per common share												$	0.19	$	0.15	$	0.47	$	0.30

The following share amounts are shown here for informational and comparative purposes only since their inclusion would be anti-dilutive:

For the Quarter Ended For the Nine Months Ended
September 30, September 30,
2008 2009 2008 2009
(in thousands)
Stock options 55 469 852 —
Restricted stock 1,518 — 1,674 —

For the Quarter Ended For the Six Months Ended
June 30, June 30,
2009 2010 2009 2010
(in thousands)
Stock options 141 2,399 136 1,620

~~12.~~11. Early Retirement of Debt

During the first ~~and second~~ quarter of 2009, the Company paid approximately ~~$30.1~~$19.0 million to repurchase and retire a portion of its 7⁵/₈% senior subordinated notes. These notes had a carrying value of ~~$46.5~~$31.5 million. A gain on early retirement of debt in the amount of ~~$15.3~~$11.8 million was recognized, which was net of the write-off of ~~$1.0~~$0.7 million in unamortized deferred financing costs related to the debt. In the ~~third~~second quarter of 2009, the Company paid approximately ~~$6.5~~$11.1 million to repurchase and retire ~~a portion of Holdings~~additional 7⁵/₈% senior ~~floating rate~~subordinated notes with a carrying value of ~~$7.7~~$15.0 million. A gain on the early retirement of debt in the amount of ~~$1.1~~$3.6 million was recognized in the ~~third~~second quarter of 2009 which was net of the ~~write off~~write-off of ~~$0.1~~$0.3 million in unamortized deferred financing ~~costs~~cost related to the debt.

~~13.~~12. Commitments and Contingencies

Litigation

To cover claims arising out of the operations of the Company’s specialty hospitals and outpatient rehabilitation facilities, the Company maintains professional malpractice liability insurance and general liability insurance. The Company also maintains umbrella liability insurance covering claims which, due to their ~~nature or~~ amount, are ~~not covered by or~~ not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions as well as the cost and possible lack of available insurance could subject the Company to substantial uninsured liabilities.

The Company is subject to legal proceedings and claims that arise in the ordinary course of business, which include malpractice claims covered under insurance policies, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. In the Company’s opinion, the outcome of these actions will not have a material adverse effect on its financial position or results of operations.

~~Health care~~Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.

During July 2009, the Company received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its hospitals in Columbus, Ohio. The Company ~~does not know whether~~believes that the subpoena has been issued in connection with a qui tam lawsuit, ~~or in connection with possible civil, criminal or administrative proceedings by~~and that the ~~government.~~government is currently investigating the matter to determine whether to intervene. The Company has produced documents in response to the subpoena and intends to fully cooperate with ~~this~~the government’s investigation. In addition, the Company has initiated an internal review of its policies and practices related to physician relationships in the Columbus market. At this time, the Company is unable to predict the timing and outcome of this matter.

1918

On March 8, 2010, the Company received a letter from the United States Senate Finance Committee in response to a New York Times article published February 10, 2010 focusing on our Company and the long term acute care hospital industry entitled “Long-Term Care Hospitals Face Little Scrutiny.” The letter from the Senate Finance Committee asked the Company to respond to a variety of questions regarding our long-term care hospitals. On March 23, 2010, the Company responded to the letter. On May 25, 2010 the Company received follow-up questions from the committee, which the Company responded to on June 4, 2010. The Company intends on fully cooperating and, at this time, the Company is unable to predict the timing and outcome of this matter.

Construction Commitments

At ~~September~~June 30, ~~2009,~~2010, the Company ~~has~~had outstanding commitments under construction contracts related to new construction, improvements and renovations at some of the Company’s long term acute care properties and inpatient rehabilitation facilities totaling approximately ~~$23.3~~$15.2 million.

13. Agreement to Purchase Regency Hospital Company, L.L.C.

On June 18, 2010, the Company entered into an agreement to acquire all the issued and outstanding equity securities of Regency Hospital Company, L.L.C. (“Regency”) an operator of long-term acute care hospitals, for approximately $210 million, including certain assumed liabilities. The purchase price is subject to adjustment based on Regency’s net working capital on the closing date. The Company anticipates financing the acquisition with cash and borrowings under its senior secured credit facility.

Regency operates a network of 23 long-term acute care hospitals located in 9 states. The transaction, which is expected to close in the third quarter of 2010, is subject to a number of closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and receipt of certain healthcare regulatory approvals.

14. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 7⁵/₈% Senior Subordinated Notes

Select’s 7⁵/₈% Senior Subordinated Notes are fully and unconditionally guaranteed on a senior subordinated basis by all of Select’s wholly-owned subsidiaries (the “Subsidiary Guarantors”). Certain of Select’s subsidiaries did not guarantee the 7⁵/₈% Senior Subordinated Notes (the “Non-Guarantor Subsidiaries”).

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at ~~September~~June 30, 2009 and 2010 and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 and ~~2009.~~2010.

The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.

The following table sets forth the Non-Guarantor Subsidiaries at ~~September~~June 30, ~~2009:~~2010:

~~Caritas Rehab Services, LLC~~
~~Elizabethtown Physical Therapy, P.S.C.~~
~~Great Lakes Specialty Hospital — Hackley, LLC~~
~~Great Lakes Specialty Hospital — Oak, LLC~~
~~Jeff Ayres, PT Therapy Center, Inc.~~
~~Jeffersontown Physical Therapy, LLC~~
~~Kentucky Orthopedic Rehabilitation, LLC~~
~~Kessler Core PT, OT and Speech Therapy at New York, LLC~~
~~Louisville Physical Therapy, P.S.C.~~
~~Metropolitan West Physical Therapy and Sports Medicine Services, Inc.~~
~~MKJ Physical Therapy, Inc.~~
~~New York Physician Services, P.C.~~
~~North Andover Physical Therapy, P.C.~~
~~Ohio Occupational Health, P.C., Inc.~~
~~Partners in Physical Therapy, PLLC~~
~~Penn State Hershey Rehabilitation, LLC~~
~~Philadelphia Occupational Health, P.C.~~
~~Rehabilitation Physician Services, P.C.~~
~~Select LifeCare Western Michigan, LLC~~
~~Select Physical Therapy of Las Vegas Limited Partnership~~
~~Select Specialty — Downriver, LLC~~
~~Select Specialty Hospital — Akron, LLC~~
~~Select Specialty Hospital — Evansville, LLC~~
~~Select Specialty Hospital — Central Pennsylvania, L.P.~~
~~Select Specialty Hospital — Houston, L.P.~~
~~Select Specialty Hospital — Gulf Coast, Inc.~~
~~Therex, P.C.~~
~~TJ Corporation I, LLC~~
~~U.S. Regional Occupational Health II, P.C.~~
Caritas Rehab Services, LLC
Elizabethtown Physical Therapy, P.S.C.
Great Lakes Specialty Hospital — Hackley, LLC
Great Lakes Specialty Hospital — Oak, LLC
Jeff Ayres, PT Therapy Center, Inc.
Jeffersontown Physical Therapy, LLC
Kentucky Orthopedic Rehabilitation, LLC
Kessler Core PT, OT and Speech Therapy at New York, LLC
Louisville Physical Therapy, P.S.C.
Metropolitan West Physical Therapy and Sports Medicine Services, Inc.
MKJ Physical Therapy, Inc.
New York Physician Services, P.C.
North Andover Physical Therapy, P.C.
Partners in Physical Therapy, PLLC
Penn State Hershey Rehabilitation, LLC
Philadelphia Occupational Health, P.C.
Rehabilitation Physician Services, P.C.
Select LifeCare Western Michigan, LLC
Select Physical Therapy/Baptist Rehabilitation Center, LLC
Select Physical Therapy of Las Vegas Limited Partnership
Select Specialty — Downriver, LLC
Select Specialty Hospital — Akron, LLC
Select Specialty Hospital — Evansville, LLC
Select Specialty Hospital — Central Pennsylvania, L.P.
Select Specialty Hospital — Houston, L.P.
Select Specialty Hospital — Gulf Coast, Inc.
SSM Select Rehab St. Louis, LLC
Therex, P.C.
TJ Corporation I, LLC
U.S. Regional Occupational Health II, P.C.
U.S. Regional Occupational Health II of New Jersey, P.C.


	Select Medical Corporation
	Condensed Consolidating Balance Sheet															Select Medical Corporation
	September 30, 2009															Condensed Consolidating Balance Sheet
	(unaudited)															June 30, 2010
	Select Medical															(unaudited)
	Corporation						Non-									Select Medical
	(Parent Company			Subsidiary			Guarantor									Corporation (Parent			Subsidiary			Non-Guarantor
	Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)															( in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	277,458		$	2,612		$	422		$	—		$	280,492		$	126,145		$	2,136		$	472		$	—		$	128,753
Accounts receivable, net		118			291,971			18,766			—			310,855			—			304,081			34,239			—			338,320
Current deferred tax asset		28,645			20,564			2,217			—			51,426			8,914			26,569			5,325			—			40,808
Prepaid income taxes		13,338			—			—			—			13,338
Other current assets		3,459			15,800			2,893			—			22,152			5,017			23,787			2,767			—			31,571

Total Current Assets		323,018			330,947			24,298			—			678,263			140,076			356,573			42,803			—			539,452

Property and equipment, net		6,936			405,743			46,218			—			458,897			5,770			403,892			49,905			—			459,567
Investment in affiliates		2,109,416			45,574			—			(2,154,990	)(a) (b)		—			2,208,389			83,661			—			(2,292,050	)(a)(b)		—
Goodwill		—			1,507,223			—			—			1,507,223			—			1,548,269			—			—			1,548,269
Other identifiable intangibles		—			67,473			—			—			67,473			—			63,468			—			—			63,468
Assets held for sale		11,342			—			—			—			11,342			11,342			—			—			—			11,342
Other assets		26,896			9,218			2,241			—			38,355			24,917			7,595			2,730			—			35,242


Total Assets	$	2,477,608		$	2,366,178		$	72,757		$	(2,154,990	)	$	2,761,553		$	2,390,494		$	2,463,458		$	95,438		$	(2,292,050	)	$	2,657,340


Liabilities and Equity
Current Liabilities:
Bank overdrafts																$	14,201		$	—		$	—		$	—		$	14,201
Current portion of long-term debt and notes payable	$	140,902		$	759		$	6		$	—		$	141,667			101,113			795			502			—			102,410
Accounts payable		1,548			55,556			6,999			—			64,103			5,947			51,074			7,613			—			64,634
Intercompany accounts		474,737			(441,705	)		(33,032	)		—			—			569,652			(484,442	)		(85,210	)		—			—
Accrued payroll		1,658			63,165			168			—			64,991			205			57,785			279			—			58,269
Accrued vacation		2,782			32,153			3,147			—			38,082			3,053			35,119			5,520			—			43,692
Accrued interest		12,308			37			—			—			12,345			22,354			254			—			—			22,608
Accrued restructuring		—			4,740			—			—			4,740			—			3,232			—			—			3,232
Accrued other		72,660			40,407			2,779			—			115,846			32,390			53,406			5,348			—			91,144
Due to third party payors		—			12,842			(10,663	)		—			2,179			—			18,369			(15,877	)		—			2,492

Total Current Liabilities		706,595			(232,046	)		(30,596	)		—			443,953			748,915			(264,408	)		(81,825	)		—			402,682

Long-term debt, net of current portion		733,810			439,417			44,025			—			1,217,252			511,062			431,475			57,030			—			999,567
Non-current deferred tax liability		(777	)		49,409			6,101			—			54,733			(306	)		61,585			5,325			—			66,604
Other non-current liabilities		60,648			—			—			—			60,648			35,641			26,071			—			—			61,712


Total Liabilities		1,500,276			256,780			19,530			—			1,776,586			1,295,312			254,723			(19,470	)		—			1,530,565

Stockholder’s Equity:
Common stock		—			—			—			—			—			—			—			—			—			—
Capital in excess of par		786,304			—			—			—			786,304			828,621			—			—			—			828,621
Retained earnings		201,708			374,733			17,116			(391,849	)(b)		201,708			268,459			474,070			29,293			(503,363	)(b)		268,459
Subsidiary investment		—			1,734,665			28,476			(1,763,141	)(a)		—			—			1,734,665			54,022			(1,788,687	)(a)		—
Accumulated other comprehensive loss		(10,680	)		—			—			—			(10,680	)		(1,898	)		—			—			—			(1,898	)

Total Select Medical Corporation Stockholder’s Equity		977,332			2,109,398			45,592			(2,154,990	)		977,332			1,095,182			2,208,735			83,315			(2,292,050	)		1,095,182

Non-controlling interest		—			—			7,635			—			7,635			—			—			31,593			—			31,593

Total Equity		977,332			2,109,398			53,227			(2,154,990	)		984,967			1,095,182			2,208,735			114,908			(2,292,050	)		1,126,775


Total Liabilities and Equity	$	2,477,608		$	2,366,178		$	72,757		$	(2,154,990	)	$	2,761,553		$	2,390,494		$	2,463,458		$	95,438		$	(2,292,050	)	$	2,657,340


	Select Medical Corporation
	Condensed Consolidating Statement of Operations															Select Medical Corporation
	For the Quarter Ended September 30, 2009															Condensed Consolidating Statement of Operations
	(unaudited)															For the Quarter Ended June 30, 2010
	Select Medical															(unaudited)
	Corporation						Non-									Select Medical						Non-
	(Parent Company			Subsidiary			Guarantor									Corporation (Parent			Subsidiary			Guarantor
	Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)															(in thousands)

Net operating revenues	$	11		$	486,958		$	58,652		$	—		$	545,621		$	13		$	499,330		$	80,534		$	—		$	579,877


Costs and expenses:
Cost of services		90			399,316			49,296			—			448,702			326			403,366			66,352			—			470,044
General and administrative		34,594			24			—			—			34,618			9,785			17			—			—			9,802
Bad debt expense		—			8,440			3,280			—			11,720			—			9,070			1,775			—			10,845
Depreciation and amortization		831			15,297			1,548			—			17,676			680			13,888			2,042			—			16,610

Total costs and expenses		35,515			423,077			54,124			—			512,716			10,791			426,341			70,169			—			507,301


Income (loss) from operations		(35,504	)		63,881			4,528			—			32,905			(10,778	)		72,989			10,365			—			72,576

Other income and expense:
Intercompany interest and royalty fees		(1,141	)		1,138			3			—			—			(887	)		882			5			—			—
Intercompany management fees		31,929			(29,286	)		(2,643	)		—			—			22,413			(18,458	)		(3,955	)		—			—
Other income		2,215			—			—			—			2,215			182			—			—			—			182
Interest income		2			—			—			—			2
Interest expense		(15,513	)		(8,726	)		(875	)		—			(25,114	)		(12,652	)		(8,477	)		(1,196	)		—			(22,325	)


Income (loss) from operations before income taxes		(18,012	)		27,007			1,013			—			10,008			(1,722	)		46,936			5,219			—			50,433

Income tax expense (benefit)		(3,768	)		5,318			944			—			2,494			1,402			19,067			(729	)		—			19,740
Equity in earnings of subsidiaries		20,952			(429	)		—			(20,523	)(a)		—			32,106			4,270			—			(36,376	)(a)		—


Net income		6,708			21,260			69			(20,523	)		7,514			28,982			32,139			5,948			(36,376	)		30,693

Less: Net income attributable to non-controlling interests		—			—			806			—			806			—			—			1,711			—			1,711


Net income (loss) attributable to Select Medical Corporation	$	6,708		$	21,260		$	(737	)	$	(20,523	)	$	6,708
Net income attributable to Select Medical Corporation																$	28,982		$	32,139		$	4,237		$	(36,376	)	$	28,982


	Select Medical Corporation															Select Medical Corporation
	Condensed Consolidating Statement of Operations															Condensed Consolidating Statement of Operations
	For the Nine Months Ended September 30, 2009															For the Six Months Ended June 30, 2010
	(unaudited)															(unaudited)
	Select Medical						Non-									Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor									Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)															(in thousands)

Net operating revenues	$	146		$	1,487,899		$	178,283		$	—		$	1,666,328		$	76		$	1,001,657		$	162,957		$	—		$	1,164,690


Costs and expenses:
Cost of services		201			1,202,007			150,899			—			1,353,107			654			808,631			133,136			—			942,421
General and administrative		60,210			68			—			—			60,278			22,559			32			—			—			22,591
Bad debt expense		—			27,862			5,816			—			33,678			—			16,741			3,391			—			20,132
Depreciation and amortization		2,408			46,315			4,623			—			53,346			1,498			28,538			4,285			—			34,321

Total costs and expenses		62,819			1,276,252			161,338			—			1,500,409			24,711			853,942			140,812			—			1,019,465


Income (loss) from operations		(62,673	)		211,647			16,945			—			165,919			(24,635	)		147,715			22,145			—			145,225

Other income and expense:
Intercompany interest and royalty fees		(6,292	)		6,252			40			—			—			(1,961	)		1,952			9			—			—
Intercompany management fees		95,063			(87,810	)		(7,253	)		—			—			45,229			(37,769	)		(7,460	)		—			—
Gain on early retirement of debt		15,316			—			—			—			15,316
Other income		3,836			—			—			—			3,836			316			—			—			—			316
Interest income		65			16			1			—			82
Interest expense		(47,914	)		(25,670	)		(2,352	)		—			(75,936	)		(26,100	)		(17,004	)		(2,259	)		—			(45,363	)


Income (loss) from operations before income taxes		(2,599	)		104,435			7,381			—			109,217			(7,151	)		94,894			12,435			—			100,178

Income tax expense		3,420			38,833			816			—			43,069
Income tax expense (benefit)																	1,490			38,559			(749	)		—			39,300
Equity in earnings of subsidiaries		69,949			4,767			—			(74,716	)(a)		—			66,402			9,866			—			(76,268	)(a)		—


Net income		63,930			70,369			6,565			(74,716	)		66,148			57,761			66,201			13,184			(76,268	)		60,878

Less: Net income attributable to non-controlling interests		—			—			2,218			—			2,218			—			—			3,117			—			3,117


Net income attributable to Select Medical Corporation	$	63,930		$	70,369		$	4,347		$	(74,716	)	$	63,930		$	57,761		$	66,201		$	10,067		$	(76,268	)	$	57,761


	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows															Select Medical Corporation
	For the Nine Months Ended September 30, 2009															Condensed Consolidating Statement of Cash Flows
	(unaudited)															For the Six Months Ended June 30, 2010
	Select Medical															(unaudited)
	Corporation						Non-									Select Medical						Non-
	(Parent Company			Subsidiary			Guarantor									Corporation (Parent			Subsidiary			Guarantor
	Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)															(in thousands)

Operating activities
Net income	$	63,930		$	70,369		$	6,565		$	(74,716	)(a)	$	66,148		$	57,761		$	66,201		$	13,184		$	(76,268	)(a)	$	60,878
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,408			46,315			4,623			—			53,346			1,498			28,538			4,285			—			34,321
Provision for bad debts		—			27,862			5,816			—			33,678			—			16,741			3,391			—			20,132
Gain on early retirement of debt		(15,316	)		—			—			—			(15,316	)
Loss from disposal of assets and sale of business units		15			506			29			—			550
Loss from disposal of assets																	—			643			17			—			660
Non-cash gain from interest rate swaps		(3,836	)		—			—			—			(3,836	)		(316	)		—			—			—			(316	)
Non-cash stock compensation expense		4,795			—			—			—			4,795			945			—			—			—			945
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		(69,949	)		(4,767	)		—			74,716	(a)		—			(66,402	)		(9,866	)		—			76,268	(a)		—
Intercompany		132,270			(125,875	)		(6,395	)		—			—			48,740			(38,047	)		(10,693	)		—			—
Accounts receivable		(111	)		(26,654	)		(5,268	)		—			(32,033	)		—			(38,152	)		(13,221	)		—			(51,373	)
Other current assets		(765	)		1,681			(1,898	)		—			(982	)		369			(3,363	)		2,499			—			(495	)
Other assets		5,724			(2,235	)		100			—			3,589			(2,517	)		1,526			(419	)		—			(1,410	)
Accounts payable		(3,105	)		(4,253	)		(1,008	)		—			(8,366	)		2,718			(10,137	)		(1,377	)		—			(8,796	)
Due to third-party payors		—			(8,118	)		4,588			—			(3,530	)		—			7,050			(6,463	)		—			587
Accrued expenses		8,002			(1,211	)		824			—			7,615			(13,018	)		14,022			655			—			1,659
Income and deferred taxes		20,608			—			—			—			20,608			14,810			—			—			—			14,810

Net cash provided by (used in) operating activities		144,670			(26,380	)		7,976			—			126,266			44,588			35,156			(8,142	)		—			71,602


Investing activities
Purchases of property and equipment		(1,117	)		(23,644	)		(10,489	)		—			(35,250	)		(662	)		(24,041	)		(1,751	)		—			(26,454	)
Proceeds from sale of property		—			1,341			—			—			1,341
Acquisition of businesses, net of cash acquired		—			(381	)		—			—			(381	)

Net cash used in investing activities		(1,117	)		(22,684	)		(10,489	)		—			(34,290	)		(662	)		(24,041	)		(1,751	)		—			(26,454	)


Financing activities
Borrowings on revolving credit facility		193,000			—			—			—			193,000
Payments 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			—			—			—			5,184			5,015			—			—			—			5,015
Principal payments on seller and other debt		(4,892	)		(837	)		(9	)		—			(5,738	)		3,556			(8,503	)		505			—			(4,442	)
Dividends paid to Holdings		(39,367	)		—			—			—			(39,367	)		(12,883	)		—			—			—			(12,883	)
Payment of initial public offering costs		(584	)		—			—			—			(584	)
Equity investment by Holdings		282,024			—			—			—			282,024			125			—			—			—			125
Repayment of bank overdrafts		(21,130	)		—			—			—			(21,130	)
Proceeds from bank overdrafts																	14,201			—			—			—			14,201
Intercompany debt reallocation		(50,515	)		47,405			3,110			—			—			(8,735	)		(2,429	)		11,164			—			—
Equity contribution and loans from non-controlling interests		—			—			1,500			—			1,500
Distributions to non-controlling interests		—			—			(2,486	)		—			(2,486	)		—			(345	)		(1,746	)		—			(2,091	)

Net cash provided by financing activities		75,573			46,568			2,115			—			124,256
Net cash provided by (used in) financing activities																	1,279			(11,277	)		9,923			—			(75	)


Net increase (decrease) in cash and cash equivalents		219,126			(2,496	)		(398	)		—			216,232			45,205			(162	)		30			—			45,073

Cash and cash equivalents at beginning of period		58,332			5,108			820			—			64,260			80,940			2,298			442			—			83,680

Cash and cash equivalents at end of period	$	277,458		$	2,612		$	422		$	—		$	280,492		$	126,145		$	2,136		$	472		$	—		$	128,753


	Select Medical Corporation
	Condensed Consolidating Balance Sheet															Select Medical Corporation
	December 31, 2008															Condensed Consolidating Balance Sheet
	Select Medical															December 31, 2009
	Corporation						Non-									Select Medical						Non-
	(Parent Company			Subsidiary			Guarantor									Corporation (Parent			Subsidiary			Guarantor
	Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)															( in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	58,332		$	5,108		$	820		$	—		$	64,260		$	80,940		$	2,298		$	442		$	—		$	83,680
Accounts receivable, net		7			293,097			19,314			—			312,418			—			282,670			24,409			—			307,079
Current deferred tax asset		18,653			27,930			2,011			—			48,594			13,677			29,854			5,004			—			48,535
Prepaid income taxes		7,362			—			—			—			7,362			11,179			—			—			—			11,179
Other current assets		2,694			17,208			995			—			20,897			5,386			13,588			5,266			—			24,240

Total Current Assets		87,048			343,343			23,140			—			453,531			111,182			328,410			35,121			—			474,713

Property and equipment, net		8,431			422,067			40,567			—			471,065			6,649			409,258			50,224			—			466,131
Investment in affiliates		2,035,591			47,911			—			(2,083,502	)(a)(b)		—			2,142,189			72,628			—			(2,214,817	)(a)(b)		—
Goodwill		—			1,506,661			—			—			1,506,661			—			1,548,269			—			—			1,548,269
Other identifiable intangibles		—			74,078			—			—			74,078			—			65,297			—			—			65,297
Assets held for sale		12,542			—			—			—			12,542			11,342			—			—			—			11,342
Other assets		32,620			9,587			2,341			—			44,548			22,400			8,716			2,311			—			33,427


Total Assets	$	2,176,232		$	2,403,647		$	66,048		$	(2,083,502	)	$	2,562,425		$	2,293,762		$	2,432,578		$	87,656		$	(2,214,817	)	$	2,599,179


Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	21,130		$	—		$	—		$	—		$	21,130
Current portion of long-term debt and notes payable		8,063			971			12			—			9,046		$	2,545		$	803		$	797		$	—		$	4,145
Accounts payable		4,653			59,836			8,007			—			72,496			3,229			61,215			8,990			—			73,434
Intercompany accounts		335,903			(301,905	)		(33,998	)		—			—			495,981			(416,944	)		(79,037	)		—			—
Accrued payroll		1,193			65,118			69			—			66,380			81			61,860			94			—			62,035
Accrued vacation		2,781			31,134			3,194			—			37,109			2,942			33,024			5,047			—			41,013
Accrued interest		25,410			34			—			—			25,444			23,354			119			—			—			23,473
Accrued restructuring		—			8,108			—			—			8,108			—			4,256			—			—			4,256
Accrued other		52,022			53,953			2,007			—			107,982			50,122			41,661			5,351			—			97,134
Due to third party payors		—			20,960			(15,251	)		—			5,709			—			11,319			(9,414	)		—			1,905

Total Current Liabilities		451,155			(61,791	)		(35,960	)		—			353,404			578,254			(202,687	)		(68,172	)		—			307,395

Long-term debt, net of current portion		1,035,208			385,549			39,519			—			1,460,276			616,906			434,384			45,552			—			1,096,842
Non-current deferred tax liability		(8,155	)		45,769			5,304			—			42,918			995			58,346			7,427			—			66,768
Other non-current liabilities		67,709			—			—			—			67,709			60,543			—			—			—			60,543


Total Liabilities		1,545,917			369,527			8,863			—			1,924,307			1,256,698			290,043			(15,193	)		—			1,531,548

Stockholder’s Equity:
Common stock		—			—			—			—			—			—			—			—			—			—
Capital in excess of par		481,094			—			—			—			481,094			822,664			—			—			—			822,664
Retained earnings		160,657			304,364			21,269			(325,633	)(b)		160,657			223,314			407,870			21,075			(428,945	)(b)		223,314
Subsidiary investment		—			1,729,756			28,113			(1,757,869	)(a)		—			—			1,734,665			51,207			(1,785,872	)(a)		—
Accumulated other comprehensive loss		(11,436	)		—			—			—			(11,436	)		(8,914	)		—			—			—			(8,914	)

Total Select Medical Corporation Stockholder’s Equity		630,315			2,034,120			49,382			(2,083,502	)		630,315			1,037,064			2,142,535			72,282			(2,214,817	)		1,037,064

Non-controlling interest		—			—			7,803			—			7,803			—			—			30,567			—			30,567

Total Equity		630,315			2,034,120			57,185			(2,083,502	)		638,118			1,037,064			2,142,535			102,849			(2,214,817	)		1,067,631


Total Liabilities and Equity	$	2,176,232		$	2,403,647		$	66,048		$	(2,083,502	)	$	2,562,425		$	2,293,762		$	2,432,578		$	87,656		$	(2,214,817	)	$	2,599,179


	Select Medical Corporation
	Condensed Consolidating Statement of Operations															Select Medical Corporation
	For the Quarter Ended September 30, 2008															Condensed Consolidating Statement of Operations
	(unaudited)															For the Quarter Ended June 30, 2009
	Select Medical															(unaudited)
	Corporation						Non-									Select Medical						Non-
	(Parent Company			Subsidiary			Guarantor									Corporation (Parent			Subsidiary			Guarantor
	Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)															(in thousands)

Net operating revenues	$	39		$	468,232		$	50,908		$	—		$	519,179		$	14		$	500,206		$	59,315		$	—		$	559,535


Costs and expenses:
Cost of services		36			399,202			42,157			—			441,395			58			401,855			51,098			—			453,011
General and administrative		11,387			151			—			—			11,538			12,872			13			—			—			12,885
Bad debt expense		—			10,883			1,357			—			12,240			—			9,045			1,267			—			10,312
Depreciation and amortization		821			15,752			1,275			—			17,848			805			15,555			1,579			—			17,939

Total costs and expenses		12,244			425,988			44,789			—			483,021			13,735			426,468			53,944			—			494,147


Income (loss) from operations		(12,205	)		42,244			6,119			—			36,158			(13,721	)		73,738			5,371			—			65,388

Other income and expense:
Intercompany interest and royalty fees		(8,289	)		8,219			70			—			—			(1,449	)		1,440			9			—			—
Intercompany management fees		35,102			(33,228	)		(1,874	)		—			—			23,884			(21,427	)		(2,457	)		—			—
Other income		1,322			—			—			—			1,322
Gain on early retirement of debt																	3,562			—			—			—			3,562
Other expense																	(32	)		—			—			—			(32	)
Interest income		48			40			5			—			93			12			15			1			—			28
Interest expense		(18,830	)		(7,865	)		(725	)		—			(27,420	)		(15,058	)		(9,012	)		(783	)		—			(24,853	)


Income (loss) from operations before income taxes		(2,852	)		9,410			3,595			—			10,153			(2,802	)		44,754			2,141			—			44,093

Income tax expense (benefit)		(487	)		3,893			2			—			3,408			(554	)		18,989			(228	)		—			18,207
Equity in earnings of subsidiaries		8,078			2,493			—			(10,571	)		—			27,743			2,101			—			(29,844	)(a)		—


Net income		5,713			8,010			3,593			(10,571	)		6,745			25,495			27,866			2,369			(29,844	)		25,886

Less: Net income attributable to non-controlling interest		—			—			1,032			—			1,032
Less: Net income attributable to non-controlling interests																	—			—			391			—			391


Net income attributable to Select Medical Corporation	$	5,713		$	8,010		$	2,561		$	(10,571	)	$	5,713		$	25,495		$	27,866		$	1,978		$	(29,844	)	$	25,495


	Select Medical Corporation
	Condensed Consolidating Statement of Operations															Select Medical Corporation
	For the Nine Months Ended September 30, 2008															Condensed Consolidating Statement of Operations
	(unaudited)															For the Six Months Ended June 30, 2009
	Select Medical															(unaudited)
	Corporation						Non-									Select Medical						Non-
	(Parent Company			Subsidiary			Guarantor									Corporation (Parent			Subsidiary			Guarantor
	Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)															(in thousands)

Net operating revenues	$	158		$	1,457,422		$	148,683		$	—		$	1,606,263		$	135		$	1,000,941		$	119,631		$	—		$	1,120,707


Costs and expenses:
Cost of services		81			1,216,488			126,453			—			1,343,022			111			802,691			101,603			—			904,405
General and administrative		35,636			207			—			—			35,843			25,616			44			—			—			25,660
Bad debt expense		—			32,066			3,234			—			35,300			—			19,422			2,536			—			21,958
Depreciation and amortization		2,407			47,040			3,728			—			53,175			1,577			31,018			3,075			—			35,670

Total costs and expenses		38,124			1,295,801			133,415			—			1,467,340			27,304			853,175			107,214			—			987,693


Income (loss) from operations		(37,966	)		161,621			15,268			—			138,923			(27,169	)		147,766			12,417			—			133,014

Other income and expense:
Intercompany interest and royalty fees		(29,766	)		29,489			277			—			—			(5,151	)		5,114			37			—			—
Intercompany management fees		129,767			(124,412	)		(5,355	)		—			—			63,134			(58,524	)		(4,610	)		—			—
Other expense		(1,180	)		—			—			—			(1,180	)
Gain on early retirement of debt																	15,316			—			—			—			15,316
Other income																	1,621			—			—			—			1,621
Interest income		154			116			5			—			275			63			16			1			—			80
Interest expense		(58,512	)		(22,875	)		(2,041	)		—			(83,428	)		(32,401	)		(16,944	)		(1,477	)		—			(50,822	)


Income from operations before income taxes		2,497			43,939			8,154			—			54,590			15,413			77,428			6,368			—			99,209

Income tax expense		2,605			19,155			850			—			22,610
Income tax expense (benefit)																	7,188			33,515			(128	)		—			40,575
Equity in earnings of subsidiaries		29,985			5,712			—			(35,697	)		—			48,997			5,196			—			(54,193	)(a)		—


Net income		29,877			30,496			7,304			(35,697	)		31,980			57,222			49,109			6,496			(54,193	)		58,634

Less: Net income attributable to non-controlling interests		—			—			2,103			—			2,103			—			—			1,412			—			1,412


Net income attributable to Select Medical Corporation	$	29,877		$	30,496		$	5,201		$	(35,697	)	$	29,877		$	57,222		$	49,109		$	5,084		$	(54,193	)	$	57,222


	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows
	For the Nine Months Ended September 30, 2008															Select Medical Corporation
	(unaudited)															Condensed Consolidating Statement of Cash Flows
	Select Medical															For the Six Months Ended June 30, 2009
	Corporation						Non-									(unaudited)
	(Parent Company			Subsidiary			Guarantor									Select Medical						Non-
	Only)			Guarantors			Subsidiaries			Eliminations			Consolidated			Corporation (Parent			Subsidiary			Guarantor
	(in thousands)															Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
																(in thousands)
Operating activities
Net income	$	29,877		$	30,496		$	7,304		$	(35,697	)(a)	$	31,980		$	57,222		$	49,109		$	6,496		$	(54,193	)(a)	$	58,634
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,407			47,040			3,728			—			53,175			1,577			31,018			3,075			—			35,670
Provision for bad debts		—			32,066			3,234			—			35,300			—			19,422			2,536			—			21,958
Loss (gain) from disposal of assets and sale of business units		19			(336	)		1			—			(316	)
Non-cash loss from interest rate swaps		1,180			—			—			—			1,180
Gain on early retirement of debt																	(15,316	)		—			—			—			(15,316	)
Loss from disposal of assets																	1			113			3			—			117
Non-cash gain from interest rate swaps																	(1,621	)		—			—			—			(1,621	)
Non-cash stock compensation expense		1,697			—			—			—			1,697			594			—			—			—			594
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		(29,985	)		(5,712	)		—			35,697	(a)		—			(48,997	)		(5,196	)		—			54,193	(a)		—
Intercompany		48,454			(40,859	)		(7,595	)		—			—			95,550			(94,903	)		(647	)		—			—
Accounts receivable		32			(70,196	)		(4,811	)		—			(74,975	)		(130	)		(45,637	)		(3,388	)		—			(49,155	)
Other current assets		(110	)		5,975			(400	)		—			5,465			(1,971	)		2,174			(870	)		—			(667	)
Other assets		(16,364	)		27,461			(138	)		—			10,959			4,358			(456	)		57			—			3,959
Accounts payable		380			(5,367	)		70			—			(4,917	)		(1,293	)		(2,666	)		266			—			(3,693	)
Due to third-party payors		—			(4,622	)		(4,706	)		—			(9,328	)		—			1,603			(1,819	)		—			(216	)
Accrued expenses		(9,096	)		7,675			30			—			(1,391	)		(2,101	)		(4,360	)		534			—			(5,927	)
Income and deferred taxes		17,950			—			—			—			17,950			29,308			—			—			—			29,308

Net cash provided by (used in) operating activities		46,441			23,621			(3,283	)		—			66,779			117,181			(49,779	)		6,243			—			73,645


Investing activities
Purchases of property and equipment		(2,338	)		(31,710	)		(1,722	)		—			(35,770	)		(785	)		(14,110	)		(6,086	)		—			(20,981	)
Proceeds from sale of business units		—			1,851			—			—			1,851
Sale of real property		—			743			—			—			743
Acquisition of businesses, net of cash acquired		—			(4,687	)		(2,715	)		—			(7,402	)
Proceeds from sale of property																	—			1,341			—			—			1,341

Net cash used in investing activities		(2,338	)		(33,803	)		(4,437	)		—			(40,578	)		(785	)		(12,769	)		(6,086	)		—			(19,640	)


Financing activities
Borrowings on revolving credit facility		387,000			—			—			—			387,000			138,000			—			—			—			138,000
Payments on revolving credit facility		(357,000	)		—			—			—			(357,000	)		(173,000	)		—			—			—			(173,000	)
Payments on credit facility term loan		(5,100	)		—			—			—			(5,100	)		(3,400	)		—			—			—			(3,400	)
Repurchase of 7 5/8% senior subordinated notes																	(30,114	)		—			—			—			(30,114	)
Borrowings of other debt																	5,184			—			—			—			5,184
Principal payments on seller and other debt		(3,818	)		(194	)		(3	)		—			(4,015	)		(3,330	)		(555	)		(6	)		—			(3,891	)
Dividends paid to Holdings																	(16,490	)		—			—			—			(16,490	)
Payment of initial public offering costs																	(417	)		—						—			(417	)
Equity investment by Holdings																	24			—			—			—			24
Repayment of bank overdrafts		(7,217	)		—			—			—			(7,217	)		(4,658	)		—			—			—			(4,658	)
Dividends paid to Holdings		(33,418	)		—			—			—			(33,418	)
Intercompany debt reallocation		(19,325	)		10,111			9,214			—			—			(61,872	)		60,504			1,368			—			—
Equity investment by Holdings		90			—			—			—			90
Distributions to non-controlling interests		—			—			(1,703	)		—			(1,703	)		—			—			(1,814	)		—			(1,814	)

Net cash provided by (used in) financing activities		(38,788	)		9,917			7,508			—			(21,363	)		(150,073	)		59,949			(452	)		—			(90,576	)


Net increase (decrease) in cash and cash equivalents		5,315			(265	)		(212	)		—			4,838
Net decrease in cash and cash equivalents																	(33,677	)		(2,599	)		(295	)		—			(36,571	)

Cash and cash equivalents at beginning of period		161			3,102			1,266			—			4,529			58,332			5,108			820			—			64,260

Cash and cash equivalents at end of period	$	5,476		$	2,837		$	1,054		$	—		$	9,367		$	24,655		$	2,509		$	525		$	—		$	27,689

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with our unaudited consolidated financial statements and accompanying notes. Unless indicated otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly-owned operating subsidiary of Holdings. References to the “Company,” “we,” “us,” and “our” refer collectively to Select Medical Holdings Corporation and Select Medical Corporation.

Forward Looking Statements

This ~~discussion~~report contains forward-looking statements ~~relating to~~within the ~~financial condition, results~~meaning of ~~operations, plans, objectives, future performance~~the federal securities laws. Statements that are not historical facts, including statements about our beliefs and ~~business of Select Medical Corporation and Select Medical Holdings Corporation. These~~expectations, are forward-looking statements. Forward-looking statements include ~~without limitation,~~ statements preceded by, followed by or that include the words ~~“believes,~~“may,” ~~“expects,~~“could,” ~~“anticipates,~~“would,” ~~“estimates” or~~“should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and ~~uncertainties. Actual~~uncertainties, which could cause actual results ~~may~~to differ materially from those ~~contemplated by the~~contained in any forward-looking ~~statements due~~statement. Many of these factors are beyond our ability to control or predict. Such factors ~~including~~include, but are not limited to, the following:

~~additional changes in government reimbursement for our services may result in a reduction in net operating revenues, an increase in costs and a reduction in profitability;~~

~~the failure of our long term acute care hospitals to maintain their status as such may cause our net operating revenues and profitability to decline;~~

~~the failure of our facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;~~

implementation of modifications to the admissions policies for our inpatient rehabilitation facilities, as required to achieve compliance with Medicare guidelines, may result in a loss of patient volume at these hospitals and, as a result, may reduce our future net operating revenues and profitability;

~~a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;~~

~~future acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities;~~

~~private third-party payors for our services may undertake future cost containment initiatives that limit our future net operating revenues and profitability;~~

~~the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;~~

~~shortages in qualified nurses or therapists could increase our operating costs significantly;~~

~~competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;~~

~~the loss of key members of our management team could significantly disrupt our operations;~~

~~the effect of claims asserted against us or lack of adequate available insurance could subject us to substantial uninsured liabilities;~~

~~the ability to obtain any necessary or desired waiver or amendment from our lenders may be difficult due to the current uncertainty in the credit markets; and~~

~~the inability to draw funds under our senior secured credit facility because of lender defaults.~~

	•		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;

	•		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.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to security analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Overview

We believe that we are one of the largest operators of both specialty hospitals and outpatient rehabilitation clinics in the United States based on number of facilities. As of ~~September~~June 30, ~~2009,~~2010, we operated 89 long term acute care hospitals and ~~five~~six inpatient rehabilitation facilities in 25 states, and ~~947~~953 outpatient rehabilitation clinics in 3736 states and the District of Columbia. We also provide medical rehabilitation services on a ~~contract~~contracted basis atto nursing homes, hospitals, assisted living and senior care centers, schools and ~~worksites.~~work sites. We began operations in 1997 under the leadership of our current management team.

We manage our ~~company~~Company through two business segments, our specialty hospital segment and our outpatient rehabilitation segment. We had net operating revenues of ~~$1,666.3~~$1,164.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009.~~2010. Of this total, we earned approximately ~~69%~~70% of our net operating revenues from our specialty hospitals and approximately ~~31%~~30% from our outpatient rehabilitation business. Our specialty hospital segment consists of hospitals designed to serve the needs of long term stay acute patients and hospitals designed to serve patients ~~who~~that require intensive inpatient medical rehabilitation care. Patients are typically admitted to our ~~specialty~~long term acute care hospitals from general acute care hospitals. These patients have specialized needs, and serious and often complex medical conditions such as respiratory failure, neuromuscular disorders, traumatic brain and spinal cord injuries, strokes, non-healing wounds, cardiac disorders, renal disorders and cancer. Our outpatient rehabilitation segment consists of clinics and contract services that provide physical, occupational and speech rehabilitation services. Our outpatient rehabilitation patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living.

Recent Trends and Events

~~Initial Public Offering of Common Stock~~Agreement to Purchase Regency Hospital Company, L.L.C.

On ~~September 30, 2009, Holdings completed its initial public offering~~June 18, 2010, we entered into an agreement to acquire all the issued and outstanding equity securities of ~~common stock at a~~Regency Hospital Company, L.L.C. (“Regency”) an operator of long-term acute care hospitals, for approximately $210 million, including certain assumed liabilities. The purchase price is subject to adjustment based on Regency’s net working capital on the ~~public of $10.00 per share. Holdings sold 30,000,000 shares in~~closing date. We anticipate financing the ~~offering. The total net proceeds to Holdings from the offering after deducting underwriting discounts~~acquisition with cash and ~~commissions and offering expenses were approximately $279.1 million. We used the net proceeds from the offering to repay indebtedness and to make payments to our executive officers~~borrowings under our Long Term Cash Incentive Plan, and will use the remaining net proceeds from the offering to repay additional indebtedness or for general corporate purposes. The closing and receipt of cash occurred on September 30, 2009, however, the repayments of indebtedness and payment under our Long Term Cash Incentive Plan were not made until October. As a result, we have reported a significant amount of cash on our September 30, 2009 balance sheet and we have reflected the mandatory repayment under our credit facility as a current portion of long term debt.

On October 28, 2009, the underwriters purchased an additional 3,602,700 shares pursuant to their over-allotment option at a price to the public of $10.00 per share. The total net proceeds to Holdings from the exercise of the over-allotment option were approximately $33.9 million. A portion of the net proceeds from the exercise of the over-allotment option were used to repay indebtedness, including a mandatory prepayment obligation under the senior secured credit ~~facility in the amount of 50% of the net proceeds, and any remaining proceeds will be used to repay additional indebtedness or for general corporate purposes.~~facility.

Extension of Revolving Credit Facility

On June 7, 2010, we entered into an amendment to our senior secured credit facility that extended the maturity of our $300.0 million revolving credit facility from February 24, 2011 to August 22, 2013. The applicable margin percentage and commitment fee for revolving loans have increased and are determined based on a pricing grid whereby changes in the leverage ratio, as defined in the credit agreement, results in changes to the applicable margin percentage. Under the pricing grid, the applicable margin percentage for revolving ABR loans ranges from 2% per annum to 3% per annum, the applicable margin percentage for revolving Eurodollar loans ranges from 3% per annum to 4% per annum, and the commitment fee rate for extended revolving commitments ranges from 0.375% to 0.75%.

Summary Financial Results

~~Third~~Second Quarter Ended ~~September~~June 30, ~~2009~~2010

For the three months ended ~~September~~June 30, ~~2009,~~2010, our net operating revenues increased ~~5.1%~~3.6% to ~~$545.6~~$579.9 million compared to ~~$519.2~~$559.5 million for the three months ended ~~September~~June 30, ~~2008.~~2009. This increase in net operating revenues resulted from a ~~5.0%~~4.3% increase in our specialty hospital net operating revenue and a ~~5.3%~~2.1% increase in our outpatient rehabilitation net operating revenue. The increase in our specialty hospital net operating revenue is principally due to the growth in the hospitals opened as of January 1, 2009 and operated by us throughout both periods and the hospitals acquired in 2009. The increase in our outpatient rehabilitation net operating revenue is due to an increase in both our contract services based revenue and revenue from our rehabilitation clinics. We had income from operations for the three months ended June 30, 2010 of $72.6 million compared to $65.4 million for the three months ended June 30, 2009. The increase in income from operations was related to (1) increase in profitability of our specialty hospitals opened as of January 1, 2009 and operated throughout both periods, and (2) growth in our outpatient operations, and (3) a reduction in our general and administrative expenses. Holdings’ interest expense for the three months ended June 30, 2010 was $29.3 million compared to $33.7 million for the three months ended June 30, 2009. Select’s interest expense for the three months ended June 30, 2010 was $22.3 million compared to $24.9 million for the three months ended June 30, 2009. The decrease in interest expense for both Holdings and Select was attributable to a reduction in outstanding debt balances that occurred throughout 2009.

For the six months ended June 30, 2010, our net operating revenues increased 3.9% to $1,164.7 million compared to $1,120.7 million for the six months ended June 30, 2009. This increase in net operating revenues resulted from a 4.5% increase in our specialty hospital net operating revenue and a 2.6% increase in our outpatient rehabilitation net operating revenue. The increase in our specialty hospital net operating revenue is principally due to the hospitals we opened ~~in 2008~~as of January 1, 2009 and ~~the~~operated by us throughout both periods. The increase in our outpatient rehabilitation net operating revenue is principally due to an increase in contract services based revenue. We had income from operations for the six months ended June 30, 2010 of $145.2 million compared to $133.0 million for the six months ended June 30, 2009. The increase in income from operations was principally related to an increase in ~~contracted services based revenues. We realized income from operations for the three months ended September 30, 2009~~profitability of $32.9 million compared to $36.2 million for the three months ended September 30, 2008. The decrease in income from operations is due to the compensation costs of $22.0 million we incurred associated with our initial public offering of common stock, which included an $18.3 million payment under our Long Term Cash Incentive Plan and $3.7 million in stock compensation expense related to the grant of restricted stock that vested in connection with our initial public offering of common stock. The decrease in income from operations caused by the increase in compensation costs was offset by increases in income from operations in thespecialty hospitals opened as of January 1, ~~2008~~2009 and operated ~~by us~~ throughout both periods ~~the hospitals we opened~~and a reduction in ~~2008~~our general and ~~our outpatient clinics.~~administrative expenses. Holdings’ interest expense for the ~~three~~six months ended ~~September~~June 30, ~~2009~~2010 was ~~$33.5~~$59.3 million compared to ~~$36.2~~$68.3 million for the ~~three~~six months ended ~~September~~June 30, ~~2008.~~2009. Select’s interest expense for the ~~three~~six months ended ~~September~~June 30, ~~2009~~2010 was ~~$25.1~~$45.4 million compared to ~~$27.4~~$50.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2008.~~2009. The decrease in interest expense for both Holdings and Select iswas attributable to a reduction in outstanding debt balances ~~and a decline in interest rates.~~

For the nine months ended September 30, 2009, our net operating revenues increased 3.7% to $1,666.3 million compared to $1,606.3 million for the nine months ended September 30, 2008. This increase in net operating revenues primarily resulted from a 4.7% increase in our specialty hospital net operating revenue. The increase in specialty hospital net operating revenue is principally due to the hospitals we opened in 2008. We had income from operations for the nine months ended September 30, 2009 of $165.9 million compared to $138.9 million for the nine months ended September 30, 2008. The increase in income from operations is principally related to an increase in the profitability of our specialty hospitals opened as of January 1, 2008 and operatedthat occurred throughout both periods and an improvement in the operating results of the hospitals opened in 2008, offset by the compensation costs of $22.0 million we incurred associated with our initial public offering of common stock. Holdings’ interest expense for the nine months ended September 30, 2009 was $101.8 million compared to $109.6 million for the nine months ended September 30, 2008. Select’s interest expense for the nine months ended September 30, 2009 was $75.9 million compared to $83.4 million for the nine months ended September 30, 2008. The decrease in interest expense for both Holdings and Select is attributable to a reduction in outstanding debt balances and a decline in interest rates.2009.

Cash flow from operations provided ~~$93.4~~$58.7 million of cash for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 for Holdings and ~~cash flow from operations provided $126.3~~$71.6 million of cash for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 for Select. The difference primarily relates to interest payments on Holdings’ senior subordinated notes and senior floating rate notes.

Regulatory Changes

~~Medicare Reimbursement of Long Term Acute Care Hospital Services~~

In the last few years, there have been significant regulatory changes ~~affecting long term acute care hospitals, or “LTCHs,”~~ that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. The following is a ~~summary~~discussion of ~~some of the more~~ significant ~~healthcare~~ regulatory changes that have ~~affected~~occurred since we filed our ~~financial performance in~~Annual Report on Form 10-K for the ~~past or are likely to~~year ended December 31, 2009 with the Securities and Exchange Commission (“SEC”) on March 17, 2010. Our Annual Report on Form 10-K for the year ended December 31, 2009 contains a more detailed discussion of the regulations that affect our ~~financial performance~~business in Part I — Business — Government Regulations, and the ~~future.~~information below should be read in connection with that more detailed discussion.

Health Reform Legislation

~~We have been subject~~On March 23, 2010, President Obama signed into law H.R. 3590, the “Patient Protection and Affordable Care Act” (“PPACA”). The PPACA expands access to ~~regulatory~~health insurance through subsidies, coverage mandates and other insurance market reforms. In addition, PPACA makes dramatic changes to the Medicare and Medicaid programs by adopting numerous initiatives addressing, among other things, reductions in healthcare spending, patient safety incentives, and protections against fraud and abuse of federal healthcare programs. The PPACA adopts significant changes to the Medicare program that occur through the rulemaking procedures of the Centers for Medicare & Medicaid Services, or “CMS.” Historically, rule updates occurred twice each year. All Medicare payments to our long term acute care hospitals are ~~made in accordance with a prospective payment system specifically applicable~~particularly relevant to long term acute care hospitals ~~referred to as “LTCH-PPS.~~(“LTCHs”), inpatient rehabilitation facilities (“IRFs”) and outpatient rehabilitation services. As part of health reform legislation, President Obama also signed H.R. 4872, the “Health Care and Education Affordability Reconciliation Act of 2010,” ~~Proposed rules specifically related to LTCHs were generally published in January, finalized in May and effective on July 1st of each year. Additionally, LTCHs are subject to annual updates~~which made some limited but important changes to the ~~rules related to the inpatient prospective payment system, or “IPPS,” that are typically proposed in May, finalized in August and effective on October 1st~~PPACA.

Extension of each year. In the annual payment rate update for the 2009 fiscal year, CMS consolidated the two historical annual updates into one annual update. The final rule adopted a 15-month rate update for fiscal year 2009 and moves the LTCH-PPS from a July-June update cycle to an October-September cycle. Beginning fiscal year 2010 the LTCH rate year will begin October 1, coinciding with the start of the federal fiscal year.

~~August 2004 Final Rule.~~On August 11, 2004, CMS published final regulations applicable to LTCHs that are operated as “hospital within hospitals” or as “satellites.” We collectively refer to hospital within hospitals and satellites as “HIHs,” and we refer to the CMS final regulations as the “final regulations.” HIHs are separate hospitals located in space leased from, and located in or on the same campus of, another hospital. We refer to such other hospitals as “host” hospitals. Effective for hospital cost reporting periods beginning on or after October 1, 2004, subject to certain exceptions, the final regulations provide lower rates of reimbursement to HIHs for those Medicare patients admitted from their host hospitals that are in excess of a specified percentage threshold. For HIHs opened after October 1, 2004, the Medicare admissions threshold has been established at 25% except for HIHs located in rural areas or co-located with “MSA dominant” hospitals or single urban hospitals where the percentage is no more than 50%, nor less than 25%. For HIHs that met specified criteria and were in existence as of October 1, 2004, including all but two of our then existing HIHs, the Medicare admissions thresholds were to have been phased in over a four year period starting with hospital cost reporting periods that began on or after October 1, 2004. However, as described below, many of these changes have been postponed for a three year periodChanges Made by the Medicare, Medicaid, and SCHIP Extension Act of 2007 ~~or “SCHIP~~

The PPACA includes a two-year extension to Sections 114(c) and (d) of the Medicare, Medicaid, and SCHIP Extension Act~~” and further clarified in~~ of 2007 (“SCHIP Extension Act”), as amended by the American Recovery and Reinvestment Act of 2009 ~~or “ARRA.”~~

~~May 2007 Final Rule.~~On May 11, 2007, CMS published its annual payment rate update for the 2008 LTCH-PPS rate year, or “RY 2008” (affecting discharges and cost reporting periods beginning on or after July 1, 2007 and before July 1, 2008)(Public Law 111-5) (“ARRA”). The ~~May 2007 final rule made several changes~~two-year extension applies the relief granted by Section 114(c) to ~~LTCH-PPS~~the “25% Rule” payment ~~methodologies~~adjustment, the one-time budget neutrality adjustment and ~~amounts during RY 2008 although, as described below, many~~the very short stay outlier payment adjustment. The two-year extension also applies to the moratorium on new LTCHs and new LTCH beds adopted in Section 114(d) of ~~these changes have been postponed for a three year period by~~ the SCHIP Extension Act.

For cost reporting periods beginning on or after July 1, 2007, the May 2007 final rule expanded the Medicare HIH admissions threshold to apply to Medicare patients admitted from any individual hospital. Previously, the admissions threshold was applicable only to Medicare HIH admissions from hospitals co-located with an LTCH or satellite of an LTCH. Under the May 2007 final rule, free-standing LTCHs and grandfathered HIHs would be subject to the Medicare admission thresholds, as well as HIHs and satellites that admit Medicare patients from non-co-located hospitals. To the extent that any LTCH’s or LTCH satellite facility’s discharges that These changes are admitted from an individual hospital (regardless of whether the referring hospital is co-located with the LTCH or LTCH satellite) exceed the applicable percentage threshold during a particular cost reporting period, the payment rate for those discharges would be subject to a downward payment adjustment. Cases admitted in excess of the applicable threshold would be reimbursed at a rate comparable to that under general acute care IPPS, which is generally lower than LTCH-PPS rates. Cases that reach outlier status in the discharging hospital would not count toward the limit and would be paid under LTCH-PPS. CMS estimated the impact of the expansion of the Medicare admission thresholds would result in a reduction of 2.2% of the aggregate payments to all LTCHs in RY 2008.described further below.

25% Rule

The ~~applicable percentage threshold~~25% Rule is ~~generally 25% after the completion of the phase-in period described below. The percentage threshold for LTCH discharges~~a downward payment adjustment that applies to Medicare patients discharged from LTCHs who were admitted from a ~~referring hospital that is an MSA dominant~~co-located (“host”) hospital or a ~~single urban~~non-co-located hospital isand who exceed applicable percentage thresholds of discharged Medicare patients. The following table describes the ~~percentage~~types of ~~total Medicare discharges in~~LTCHs and the ~~MSA that are from~~relief they have received under the referring hospital, but no less than 25% nor more than 50%. For Medicare discharges from LTCHs or LTCH satellites located in rural areas, as defined by the Office of Management and Budget, the percentage threshold is 50% from any individual referring hospital. The expanded 25% rule is being phased in over a three year period. The three year transition period starts with cost reporting periods beginning on or after July 1, 2007 and before July 1, 2008, when the threshold is the lesser of 75% or the percentage of the LTCH’s or LTCH satellite’s admissions discharged from the referring hospital during its cost reporting period beginning on or after July 1, 2004 and before July 1, 2005, or “RY 2005.” For cost reporting periods beginning on or after July 1, 2008 and before July 1, 2009, the threshold is the lesser of 50% or the percentage of the LTCH’s or LTCH satellite’s admissions from the referring hospital, during its RY 2005 cost reporting period. For cost reporting periods beginning on or after July 1, 2009, all LTCHs will be subject to the 25% threshold (or applicable threshold for rural, urban-single, or MSA dominant hospitals). The SCHIP Extension Act as amended by the ARRA ~~postponed~~and PPACA, from the ~~application~~payment adjustment for these discharges:


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

Non-grandfathered satellite facilities opened before October 1, 2004 (five owned hospitals)	Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population.	Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after October 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%.

Grandfathered HIHs (two owned hospitals)	Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007.	Percentage admission threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007.

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


Type of LTCH	Non Co-located Admissions	Co-located Admissions
Freestanding facilities (23 owned hospitals)	Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007.	25% Rule not applicable.

Facilities co-located with a provider-based, off-campus, non-inpatient location of an inpatient prospective payment system hospital (no owned hospitals)	Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007.	Percentage admission threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007.

HIHs and satellite facilities opened on or after October 1, 2004. (four owned hospitals)	LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population.	LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population.

One-Time Budget Neutrality Adjustment

The regulations governing the prospective payment system specifically applicable to LTCHs, referred to as “LTCH-PPS,” give the Centers for Medicare and Medicaid Services (“CMS”) the ability to make a one-time adjustment to the standard federal rate to correct any “significant difference between actual payments and estimated payments for the first year” of LTCH-PPS. In the ~~percentage threshold~~rate year 2009 LTCH-PPS final rule, CMS estimated this one-time adjustment would result in a negative adjustment of 3.75% to ~~all free-standing and grandfathered HIHs for a three year period commencing on an LTCH’s first cost reporting period on or after July 1, 2007. However,~~ the SCHIP Extension Act did not postpone the application of the percentage threshold, or the transition period stated above, to those Medicare patients discharged from an LTCH HIH or HIH satellite that were admitted from a non-co-located hospital.base rate. The SCHIP Extension Act ~~only postpones~~precluded CMS from implementing the ~~expansion~~one-time prospective adjustment to the LTCH standard amount for a period of three years. PPACA extends by two years the ~~admission threshold in the May 2007 final rule~~stay on CMS’s ability to ~~free-standing LTCHs and grandfathered HIHs.~~adopt a one-time budget neutrality adjustment to LTCH-PPS. PPACA prohibits such a one-time adjustment before December 29, 2012.

Short Stay Outlier Policy

The ~~May 2007 final rule further revised~~SCHIP Extension Act prevented CMS from applying the ~~payment adjustment formula for~~so-called very short stay outlier ~~or “SSO” cases. Beginning with discharges~~policy that was added to LTCH-PPS in the 2008 rate year update published on ~~or after July 1, 2007,~~May 11, 2007. This policy would result in a payment equivalent to the short-term care hospital rate for cases with a length of stay that is less than the average length of stay plus one standard deviation ~~for~~of a case with the same ~~DRG~~diagnosis related group under ~~IPPS, referred~~the inpatient prospective payment system, regardless of the clinical considerations for admission to ~~as the so-called “IPPS comparable threshold,” the rule effectively lowers~~ the LTCH ~~payment to a rate based on~~or the general acute care hospital IPPS. SSO cases with covered lengths of stay that exceed the IPPS comparable threshold would continue to be paid under the SSO payment policy described above under the May 2006 final rule. Cases with a covered length of stay less than or equal to the IPPS comparable threshold and less than five-sixths of the geometric average length of stay an LTCH must satisfy for ~~that LTC-DRG would be paid at an amount comparable to the IPPS per diem.~~Medicare certification. The SCHIP Extension Act ~~also postponed,~~precluded CMS from implementing the very short stay outlier policy for a period of three years. PPACA extends this prohibition by two years. CMS may not apply the ~~three year period beginning on~~very short stay outlier policy before December 29, ~~2007, the SSO policy changes made in the May 2007 final rule.~~2012.

The May 2007 final rule increased the standard federal rate by 0.71% for RY 2008. As a result, the federal rate for RY 2008 is equal to $38,356.45, compared to $38,086.04 for RY 2007. Subsequently, the SCHIP Extension Act eliminated the update to the standard federal rate that occurred for RY 2008 effective April 1, 2008. This adjustment to the standard federal rate was applied prospectivelyMoratorium on April 1, 2008 and reduced the federal rate back to $38,086.04. In a technical correction to the May 2007 final rule, CMS increased the fixed-loss amount for high cost outlier in RY 2008 to $20,738, compared to $14,887 in RY 2007. CMS projected an estimated 0.4% decrease in LTCH payments in RY 2008 due to this change in the fixed-loss amount and the overall impact of the May 2007 final rule to be a 1.2% decrease in total estimated LTCH-PPS payments for RY 2008.

The May 2007 final rule provided that beginning with the annual payment rate updates to the LTC-DRG classifications and relative weights for the fiscal year 2008, or “FY 2008” (affecting discharges beginning on or after October 1, 2007 and before September 30, 2008), annual updates to the LTC-DRG classification and relative weights are to have a budget neutral impact. Under the May 2007 final rule, future LTC-DRG reclassification and recalibrations, by themselves, should neither increase nor decrease the estimated aggregated LTCH-PPS payments.

The May 2007 final rule is complex and the SCHIP Extension Act postponed the implementation of certain portions of the May 2007 final rule. While we cannot predict the ultimate long-term impact of LTCH-PPS because the payment system remains subject to significant change, if the May 2007 final rule becomes effective as currently written, after the expiration of the applicable provisions of the SCHIP Extension Act, our future net operating revenues and profitability will be adversely affected.

~~August 2007 Final Rule.~~On August 22, 2007, CMS published the IPPS final rule for FY 2008, which created a new patient classification system with categories referred to as MS-DRGs and MS-LTC-DRGs, respectively, for hospitals reimbursed under IPPS and LTCH-PPS. Beginning with discharges on or after October 1, 2007, the new classification categories take into account the severity of the patient’s condition. CMS assigned proposed relative weights to each MS-DRG and MS-LTC-DRG to reflect their relative use of medical care resources.

The August 2007 final rule published a budget neutral update to the MS-LTC-DRG classification and relative weights. In the preamble to the IPPS final rule for FY 2008 CMS restated that it intends to continue to update the LTC-DRG weights annually in the IPPS rulemaking and those weights would be modified by a budget neutrality adjustment factor to ensure that estimated aggregate LTCH payments after reweighting are equal to estimated aggregate LTCH payments before reweighting.

~~Medicare, Medicaid, and SCHIP Extension Act of 2007.~~On December 29, 2007, President Bush signed into law the SCHIP Extension Act. Among other changes in the federal health care programs, the SCHIP Extension Act makes significant changes to Medicare policy for LTCHs including a new statutory definition of an LTCH, a report to Congress on new LTCH patient criteria, relief from certain LTCH-PPS payment policies for three years, a three year moratorium on the establishment and classification of newNew LTCHs and New LTCH ~~beds, elimination of the payment update for the last quarter of RY 2008 and new medical necessity reviews by Medicare contractors through at least October 1, 2010.~~Beds

The SCHIP Extension Act precludes the Secretary from implementing, during the three year moratorium period, the provisions added by the May 2007 final rule that extended the 25% rule to free-standing LTCHs and grandfathered HIHs. The SCHIP Extension Act also modifies, during the moratorium, the effect of the 25% rule for non-grandfathered LTCH HIHs, non-grandfathered satellites and grandfathered LTCH HIHs, as it applies to admissions from co-located hospitals. For HIHs and satellite facilities, the applicable percentage threshold is set at 50% and not phased in to the 25% level. For those HIHs and satellite facilities located in rural areas and those which receive referrals from MSA dominant hospitals or single urban hospitals, the percentage threshold is set at no more than 75%. The ARRA, as discussed below further revises the SCHIP Extension Act to postpone the percentage limitations established in the SCHIP Extension Act to the three cost reporting periods beginning on or after July 1, 2007 for freestanding LTCHs, grandfathered HIHs and grandfathered satellites and on or after October 1, 2007 for non-grandfathered LTCH HIHs and non-grandfathered satellites.

The SCHIP Extension Act also precludes the Secretary from implementing, for the three year period beginning on December 29, 2007, a one-time adjustment to the LTCH standard federal rate. This rule, established in the original LTCH-PPS regulations, permits CMS to restate the standard federal rate to reflect the effect of changes in coding since the LTCH-PPS base year. In the preamble to the May 2007 final rule, CMS discussed making a one-time prospective adjustment to the LTCH-PPS rates for the 2009 rate year. In addition, the SCHIP Extension Act reduced the Medicare payment update for the portion of RY 2008 from April 1, 2008 to June 30, 2008 to the same base rate applied to LTCH discharges during RY 2007.

~~For the three calendar years following December 29, 2007, the Secretary must impose~~imposed a moratorium on the establishment and classification of new LTCHs, LTCH satellite facilities and LTCH beds in existing ~~LTCH~~LTCHs or satellite facilities. PPACA extends this moratorium by two years. The moratorium will now expire on December 28, 2012.

Medicare Quality Reporting

The PPACA requires that CMS establish new quality data reporting programs for LTCHs and IRFs. By rate year 2014, CMS is required to select and implement quality measures for these providers. These programs are mandatory. If a provider fails to report on the selected quality measures, it will see its reimbursement reduced by 2% of the annual market basket update. The reduction can result in payment rates less than the prior year. However, the reduction will not carry over into the subsequent rate years. CMS is required to establish the quality measures applicable to rate year 2014 no later than October 1, 2012.

Medicare Market Basket Adjustments

The PPACA institutes a market basket payment adjustment to LTCHs. In rate year 2010, LTCHs are subject to a market basket reduction of minus 0.25% for discharges occurring after April 1, 2010. In rate year 2011, LTCHs are subject to a market basket reduction of minus 0.5%. There will be a slightly smaller 0.1% market basket reduction for LTCHs in rate years 2012 and 2013. Rate year 2014 the market basket update will be reduced by 0.3%. Rate years 2015 and 2016 the market basket update will be reduced by 0.2%. Finally, in rate years 2017-2019, the market basket update will be reduced by 0.75%. The PPACA specifically allows these market basket reductions to result in less than a 0% payment update and payment rates that are less than the prior year.

The PPACA also implements a market basket payment adjustment for IRFs. For fiscal years 2010 and 2011, IRFs are subject to a market basket reduction of minus 0.25%. For fiscal years 2012 and 2013, the reduction is 0.1%. For fiscal year 2014, the reduction is 0.3%. For fiscal years 2015 and 2016, the reduction is 0.2%. For fiscal years 2017 — 2019, the reduction is 0.75%.

Medicare Productivity Adjustment

PPACA implements a separate productivity adjustment for the first time for hospital inpatient services beginning in rate year 2012 for LTCHs and fiscal year 2012 for IRFs. This ~~moratorium~~provision will apply a negative productivity adjustment to the market basket that is used to update the standard federal rate on an annual basis. The adjustment will be applied each year. The market basket does not ~~apply~~currently account for increases in provider productivity that could reduce the actual cost of providing services (e.g., through new technology or fewer inputs). The productivity adjustment will equal the 10-year moving average of changes in the annual economy-wide private nonfarm business multi-factor productivity. This is a statistic reported by the Bureau of Labor Statistics and updated in the spring of each year. While this adjustment will change year-to-year, it is currently estimated that this adjustment to the market basket will be approximately minus 1.0% on average.

Hospital Wage Index

The PPACA abandons the current system of calculating the hospital wage index based on data submitted in hospital cost reports, which currently has a four year lag in data. In its place, CMS is required to develop a comprehensive reform plan to present to Congress by December 31, 2011 using Bureau of Labor Statistics data, or other data or methodologies, to calculate relative wages for each geographic area involved. Although the PPACA addresses the hospital wage index generally, this change presumably applies to LTCHs given that ~~before the date of enactment, (1) began the qualifying period for payment under~~ the LTCH-PPS ~~(2) have~~wage index is computed using wage data from inpatient acute care hospitals.

Independent Payment Advisory Board

The PPACA establishes an independent board called the “Independent Payment Advisory Board” that will develop and submit proposals to the President and Congress beginning in 2014. The Independent Payment Advisory Board’s proposals must be designed to reduce Medicare spending by targeted amounts compared to the trajectory of Medicare spending under current law. The Independent Payment Advisory Board’s first proposal with savings recommendations could be submitted by January 14, 2014, for implementation in 2015, if the Medicare per capita target growth rate is exceeded, as described in the PPACA. However, the Independent Payment Advisory Board is precluded from submitting proposals that reduce Medicare payments prior to December 31, 2019 for providers scheduled to receive a written agreement with an unrelated party for the construction, renovation, lease or demolition for a LTCH and have expended at least 10% of the estimated cost of the project or $2,500,000, or (3) have obtained an approved certificate of need. Asreduction in their payment updates as a result of the ~~SCHIP Extension Act’s three calendar year moratorium~~Medicare productivity adjustment (discussed above).

Physician-Owned Hospital Limitations

Under the transparency and program integrity provisions of the PPACA, the exception to the federal self-referral law (or “Stark law”) that currently permits physicians to refer patients to hospitals in which they have an ownership or investment interest will be dramatically curtailed. Only hospitals, including LTCHs, with physician ownership and a provider agreement in place on December 31, 2010 are exempt from the ~~development~~general ban on self-referral. Existing physician-owned hospitals are prohibited from increasing the percentage of physician ownership or investment interests held in the hospital after March 23, 2010. In addition, physician-owned hospitals are prohibited from increasing the number of licensed beds after March 23, 2010, unless meeting specific exceptions related to the hospital’s location and patient population. The Secretary of the Department of Health and Human Services is required to implement a process for allowing bed increases by August 1, 2011 and must promulgate regulations to carry out this process no later than January 1, 2012. In order to retain their exemption from the general ban on self-referrals, our physician-owned hospitals are required to adopt specific measures relating to conflicts of interest, bona fide investments and patient safety.

Provider and Employee Screening

The PPACA imposes new screening requirements on all Medicare providers. The screening must include a licensure check and may include other procedures such as a criminal background check, fingerprinting, unscheduled and unannounced site visits, database checks, and other screening techniques CMS deems appropriate to prevent fraud, waste and abuse. Medicare providers and suppliers will be required to pay a fee in connection with the screening procedures. The PPACA also imposes new disclosure requirements and authorizes surety bonds for the enrollment of new providers and suppliers.

In addition, the PPACA requires LTCHs weto conduct national and state criminal background checks, including fingerprint checks of their employees and contractors who have ~~stopped all~~(or may have) one-on-one contact with patients. Our LTCHs are prohibited from hiring or retaining workers with a finding of patient or resident abuse that is disqualifying.

Medicare Compliance Requirements and Penalties

The PPACA includes new ~~LTCH development.~~compliance requirements and increases existing penalties for non-compliance with federal law and the Medicare conditions of participation. In addition, Medicare claims will be paid only if submitted within 12 months. Penalties for submitting false claims and for submitting false statements material to a false claim will be increased. The Secretary will be granted the authority to suspend payments to a provider pending an investigation of credible allegations of fraud. Further, the Recovery Audit Contractor or RAC program will be extended to Medicare Parts C and D and Medicaid no later than December 31, 2010.

Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2010

~~May 6, 2008 Interim Final Rule.~~On ~~May 6, 2008,~~June 2, 2010, CMS published ~~an interim~~a notice of changes to the payment rates for LTCH-PPS during the portion of rate year 2010 occurring on or after April 1, 2010. The standard federal rate for discharges occurring on or after April 1, 2010 is revised to $39,795. This change reflects a decrease from $39,897 established in the original final rule ~~with comment period, which implemented portions of~~for RY 2010. This change to the ~~SCHIP Extension Act. The May 6, 2008 interim final rule addressed: (1) the payment adjustment for very short-stay outliers, (2) the~~LTCH-PPS standard federal rate for the ~~last three months~~remainder of ~~RY 2008, (3) adjustment~~FY 2010 is based on a market basket increase estimate of 2.5% less a reduction of 0.5% to account for what CMS attributes as an increase in case-mix resulting from changes in documentation and coding practices less an additional reduction of 0.25% as mandated by the ~~high cost outlier fixed-loss amount for the last three months of RY 2008, and (4) made references to the SCHIP Extension Act in the discussion of the basis and scope of the LTCH-PPS rules.~~

~~May 9, 2008 Final Rule.~~~~On May 9, 2008, CMS published its annual payment rate update for the 2009 LTCH-PPS rate year, or “RY 2009” (affecting discharges and cost reporting periods beginning on or after July 1, 2008).~~PPACA. The final rule adopts a 15-month rate update, from July 1, 2008 through September 30, 2009 and moves LTCH-PPS from a July-June update cycle to the same update cycle as the general acute care hospital inpatient rule (October — September). For RY 2009, the rule establishes a 2.7% update to the standard federal rate. The rule increasesnotice revises the fixed-loss amount for high cost outlier cases for RY 2010 discharges occurring on or after April 1, 2010 to ~~$22,960,~~$18,615, which is ~~$2,222~~ higher than the ~~2008 LTCH-PPS rate year. The final rule provides that CMS may make a one-time reduction~~RY 2010 fixed-loss amount of $18,425 in ~~the LTCH-PPS rates to reflect a budget neutrality adjustment no earlier than December 29, 2010 and no later than~~effect from October 1, ~~2012.~~2009 to March 31, 2010.

Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2011

On July 30, 2010, CMS ~~estimated this reduction will be approximately 3.75%.~~

~~May 22, 2008 Interim Final Rule.~~~~On May 22, 2008, CMS published an interim final rule with comment period, which implements portions of~~released the ~~SCHIP Extension Act not addressed in the May 6, 2008 interim final rule. Among other things, the May 22, 2008 interim final rule establishes a definition~~policies and payment rates for “free-standing” LTCHs as a hospital that: (1) has a Medicare provider agreement, (2) has an average length of stay of greater than 25 days, (3) does not occupy space in a building used by another hospital, (4) does not occupy space in one or more separate or entire buildings located on the same campus as buildings used by another hospital and (5) is not part of a hospital that provides inpatient services in a building also used by another hospital.

~~August 2008 Final Rule.~~~~On August 19, 2008, CMS published the IPPS final rule~~LTCH-PPS for FY 2009 (affecting discharges and cost reports beginning on or after October 1, 2008 and before October 1, 2009), which made limited revisions to the classifications of cases in MS-LTC-DRGs. The final rule also includes a number of hospital ownership and physician referral provisions, including expansion of a hospital’s disclosure obligations by requiring physician-owned hospitals to disclose ownership or investment interests held by immediate family members of a referring physician. The final rule requires physician-owned hospitals to furnish to patients, on request, a list of physicians or immediate family members who own or invest in the hospital. Moreover, a physician-owned hospital must require all physician owners or investors who are also active members of the hospital’s medical staff to disclose in writing their ownership or investment interests in the hospital to all patients they refer to the hospital. CMS can terminate the Medicare provider agreement of a physician-owned hospital if it fails to comply with these disclosure provisions or with the requirement that a hospital disclose in writing to all patients whether there is a physician on-site at the hospital 24 hours per day, 7 days per week.

~~The American Recovery and Reinvestment Act of 2009.~~On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, the “ARRA.” The ARRA makes several technical corrections to the SCHIP Extension Act, including a clarification that, during the moratorium period established by the SCHIP Extension Act, the percentage threshold for grandfathered satellites is set at 50% and not phased in to the 25% level for admissions from a co-located hospital. In addition, the ARRA clarifies that the application of the percentage threshold is postponed for a LTCH HIH or satellite that was co-located with a provider-based, off-campus location of an IPPS hospital that did not deliver services payable under IPPS. The ARRA also provides that the postponement of the percentage threshold established in the SCHIP Extension Act will be effective for cost reporting periods beginning on or after July 1, 2007 for freestanding LTCHs and grandfathered HIHs and satellites and on or after October 1, 2007 for other LTCH HIHs and satellites.

~~June 3, 2009 Interim Final Rule.~~~~On June 3, 2009, CMS published an interim final rule in which CMS adopted a new table of MS-LTC-DRG relative weights that will apply to the remainder of~~ fiscal year 2009 (through September 30, 2009). This interim final rule revises the MS-LTC-DRG relative weights for payment under the LTCH-PPS for FY 2009 due to CMS’s misapplication of its established methodology in the calculation of the budget neutrality factor. This error resulted in relative weights that are higher, by approximately 3.9 percent for all of FY 2009 (October 1, 2008 through September 30, 2009) which has the effect of reducing reimbursement by approximately 3.9%. However, CMS is only applying the corrected weights to the remainder of fiscal year 2009 (that is, from June 3, 2009 through September 30, 2009).

~~July 31, 2009 Final Rule.~~~~On July 31, 2009, CMS released its annual payment rate update for the LTCH PPS for “FY 2010”~~2011 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2009~~2010 and before September 30, ~~2010)~~2011). ~~For FY 2010 CMS adopted a 2.5% increase in payments under the LTCH PPS. As a result, the~~The standard federal rate for FY 2011 is $39,600, which is a decrease from the RY 2010 ~~is set at $39,896.65, an increase~~federal rate of $39,897 in effect from ~~$39,114.36 in FY 2009. The increase in~~October 1, 2009 to March 31, 2010 and the RY 2010 federal rate of $39,795 that went into effect on April 1, 2010. This update to the LTCH-PPS standard federal rate ~~uses a 2.0% update factor~~for FY 2011 is based on ~~the~~a market basket ~~update~~increase of 2.5% less ~~an adjustment~~a reduction of ~~0.5%~~2.5% to account for what CMS attributes as an increase in case-mix in prior periods (FYs 2008 and 2009) that resulted from changes in documentation and coding ~~practices.~~practices less an additional reduction of 0.5% as mandated by the PPACA. The ~~fixed loss~~final rule establishes a fixed-loss amount for high cost outlier cases for FY 2011 of $18,785, which is ~~set at $18,425. This is a decrease~~higher than the RY 2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010 and the ~~fixed loss amount in the 2009 rate year of $22,960.~~

$18,615 that went into effect on April 1, 2010. The ~~July 31, 2009 annual payment rate update also included an interim~~ final rule ~~with comment period implementing provisions of~~includes revisions to the ARRA discussed above, including amendments to provisions of the SCHIP Extension Act relating to payments to LTCHs and LTCH satellite facilities and increases in beds in existing LTCHs and LTCH satellite facilities under the LTCH PPS.

In the same federal register, CMS finalized three interim final rules with comment period that it previously published but had yet to respond to public comment. First, CMS finalized the June 3, 2009 interim final rule that adopted a new table of MS-LTC-DRG relative weights for the ~~period between June 3, 2009 and September 30, 2009. Second, CMS finalized~~MS-LTC-DRGs for FY 2011 based on the standard federal rate. Consistent with the May ~~6, 2008 interim final~~4, 2010 proposed rule for FY 2011, CMS replaced the term “rate year” for LTCHs with “fiscal year” in order to reflect the fact that ~~implemented~~the policies and payment rates for LTCHs are now revised on a fiscal year basis (from October 1st through September 30th).

Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2010

On July 22, 2010, CMS published a notice of changes to ~~LTCH PPS mandated by~~ the ~~SCHIP Extension Act addressing: (1)~~ payment ~~adjustments~~rates for ~~certain short-stay outliers, (2)~~IRF-PPS during the ~~federal standard rate for the last three months~~portion of rate year ~~2008,~~2010 occurring on or after April 1, 2010 and ~~(3) adjustment~~before October 1, 2010. As described above, the PPACA mandates a market basket reduction of 0.25% for FY 2010. The standard federal rate for discharges occurring on or after April 1, 2010 is revised to $13,627. This change reflects a decrease from $13,661 established in the high cost outlier fixed-loss amount. Finally, CMS finalized the May 22, 2008 interim final rule that implemented changes to LTCH PPS mandated by the SCHIP Extension Act modifying the percentage threshold policy for certain LTCHs and addressing the three-year moratorium on the establishment of new LTCHs and bed increases at existing LTCHs and LTCH satellites.

~~Medicare Reimbursement of Outpatient Rehabilitation Services~~

~~CMS released the~~original final rule for FY 2010. In the ~~2009 Medicare physician fee schedule on October 30, 2008. The final rule~~same notice, CMS increased the annual per beneficiary cap on outpatient therapy services for 2009 to $1,840 for combined physical therapy and speech language pathology services and $1,840 for occupational therapy services. The per beneficiary cap was $1,810 for calendar year 2008. The final rule also extended the therapy cap exceptions process through December 31, 2009 as authorized by Congress.

~~Medicare Reimbursement of Inpatient Rehabilitation Facility Services~~

~~The following is a summary of significant changes to the Medicare prospective payment system for inpatient rehabilitation facilities or “IRF-PPS” during 2008 and 2009.~~

~~August 2008 Final Rule.~~On August 8, 2008, CMS published the final rule for the inpatient rehabilitation facility prospective payment system (“IRF-PPS”) for FY 2009. The final rule included changes to the IRF-PPS regulations designed to implement portions of the SCHIP Extension Act. In particular, the patient classification criteria compliance threshold was established at 60 percent (with comorbidities counting toward this threshold). In addition to updating the various values that compose the IRF-PPS, the final rule updated the outlier threshold amount to ~~$10,250 from $7,362~~$10,721 for discharges occurring on or after April 1, 2010. The outlier threshold was $10,652 for discharges occurring on or after October 1, 2010 through March 31, 2010.

Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2011

On July 22, 2010, CMS published an update to the payment rates for IRF-PPS for fiscal year ~~2008.~~

~~July 31, 2009 Final Rule.~~~~On July 31, 2009, CMS released its final rule establishing the annual payment rate update for the IRF-PPS for FY 2010~~2011 (affecting discharges and cost reporting periods beginning on or after October 1, ~~2009 through~~2010 and before September 30, ~~2010)~~2011). The standard federal rate for discharges during FY 2011 is ~~established at $13,661 for FY 2010,~~revised to $13,860. This change reflects an increase from ~~$12,958~~$13,627 established in the revised final rule for the final months of FY ~~2009. The proposed~~2010, as well as the market basket reduction of 0.25% required by PPACA. CMS also increased the outlier threshold amount for FY 2011 to $11,410 from $10,721.

Reductions to the Medicare Physician Fee Schedule

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. The Medicare physician fee schedule rates are automatically updated annually based on a formula, called the sustainable growth rate (“SGR”) formula, contained in legislation. The SGR formula has resulted in automatic reductions in rates in every year since 2002; however, for each year through 2009 CMS or Congress has taken action to prevent the SGR formula reductions. On June 25, 2010, President Obama signed into law the “Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010,” which, among other things, provides a 2.2% increase to Medicare physician fee schedule payment rates, retroactive from June 1, 2010 through November 30, 2010, suspending a 21.3% reduction that briefly became effective on June 1, 2010.

Medicare Payment of Outpatient Rehabilitation Services

Beginning on January 1, 1999, the Balanced Budget Act of 1997 subjected certain outpatient therapy providers reimbursed under the Medicare physician fee schedule to annual limits for therapy expenses. Effective January 1, 2010, the annual limit on outpatient therapy services is ~~set at $10,652,~~$1,860 for combined physical and speech language pathology services and $1,860 for occupational therapy services. The per beneficiary caps were $1,840 for calendar year 2009. In the Deficit Reduction Act of 2005, Congress implemented an ~~increase~~exceptions process to the annual limit for therapy expenses. Under this process, a Medicare enrollee (or person acting on behalf of the Medicare enrollee) is able to request an exception from ~~$10,250~~the therapy caps if the provision of therapy services was deemed to be medically necessary. Therapy cap exceptions were available automatically for certain conditions and on a case-by-case basis upon submission of documentation of medical necessity. The PPACA extended the exceptions process through December 31, 2010.

On July 2, 2010 CMS published a proposed update to the Medicare Physician Fee Schedule for calendar year 2011, CMS discusses three specific short-term alternatives to the current therapy caps that could potentially reduce the number of patients impacted by the therapy cap in ~~FY 2009.~~

a given year. CMS requests public comments on the potential alternatives. In the same ~~final~~proposed rule, CMS ~~adopted new coverage criteria, including requirements for preadmission screening, post-admission evaluations, and individualized treatment planning~~suggests that ~~emphasize the role of physicians in ordering and overseeing beneficiaries’ IRF care. Among other things, the rule requires IRF~~it may adopt a Multiple Procedure Payment Reduction (“MPPR”) Policy to therapy services ~~to be ordered~~ by applying a rehabilitation physician with specialized training and experience in rehabilitation services and be coordinated by an interdisciplinary team meeting the rule’s specifications. The interdisciplinary team must meet weekly to review the patient’s progress and make any needed adjustments50% payment reduction to the ~~individualized plan~~practice expense component of ~~care. IRFs must use qualified personnel~~the second and subsequent therapy services for certain therapy services furnished to ~~provide required rehabilitation nursing, physical~~a single patient in a single day. The proposed MPPR policy would apply to multiple units of the same therapy occupational therapy, speech-language pathology, social services, psychological services, and prosthetic and orthotic services (CMS notes that it also is considering adopting specific standards on the use of group therapies at a future date). The rule also includes new documentation requirements, including a requirement that IRFs submit patient assessment data on Medicare Advantage patients.

~~While the final rule’s~~service, as well as to multiple different services. Full payment ~~rate updates are effective for IRF discharges on or after October 1, 2009, CMS has adopted a January 1, 2010 effective date~~would be made for the ~~new coverage requirements to provide facilities more time to comply~~service or unit with the ~~new framework. If we fail to implement the new coverage criteria, claims for our services may be denied in whole or part.~~

~~Professional Licensure and Corporate Practice~~

Healthcare professionals at our hospitals and outpatient rehabilitation clinics are required to be individually licensed or certified under applicable state law. We take steps to ensure that our employees and agents possess all necessary licenses and certifications.

~~Some states prohibit the “corporate~~highest practice of therapy” so that business corporations such as ours are restricted from practicing therapy through the direct employment of therapists. The laws relating to corporate practice vary from state to state, and are not fully developed in each state in which we have clinics. We believe that each of our outpatient therapy clinics complies with any current corporate practice prohibition of the state in which it is located. For example, in those states that apply the corporate practice prohibition, we either contract to obtain therapy services from an entity permitted to employ therapists or we manage the physical therapy practice owned by licensed therapists through which the therapy services are provided. However, in those states where we furnish our services through business corporations, future interpretations of the corporate practice prohibition, enactment of new legislation or adoption of new regulations could have a material adverse effect on the business and operations of our outpatient therapy clinics. If new legislation, regulations or interpretations establish that our clinics do not comply with state corporate practice prohibition, we could be subject to civil, and perhaps criminal, penalties, and may be required to restructure our business operations or close our clinics in any such state.expense.

3738

Facility Licensure, Certification and Accreditation

Our specialty hospitals and outpatient rehabilitation clinics are subject to extensive and changing federal, state and local regulations and private accreditation standards. Hospitals are required to comply with state hospital standards setting requirements related to patient rights, composition and responsibilities of the hospital governing body, medical staff, quality improvement, infection control, nursing services, food and nutrition, medical records, drug distribution, diagnostic and treatment services, surgical services, emergency services and social work. Our hospitals are also required to meet conditions of participation under Medicare programs in order to qualify to receive reimbursement under these programs. In addition, many of our hospitals and outpatient rehabilitation clinics are accredited by The Joint Commission, previously known as The Joint Commission on Accreditation of Healthcare Organizations, and The Commission on Accreditation of Rehabilitation Facilities, by voluntarily complying with a specific set of accreditation standards.

Our hospitals and outpatient rehabilitation clinics are subject to inspections, surveys and other reviews by governmental and private regulatory authorities, not only at scheduled intervals but also in response to complaints from patients and others. While our hospitals and outpatient rehabilitation clinics intend to comply with existing licensing, Medicare certification requirements and accreditation standards, there can be no assurance that regulatory authorities will determine that all applicable requirements are fully met at any given time. A determination by an applicable regulatory authority that a facility is not in compliance with these requirements could lead to the imposition of requirements that the facility takes corrective action, assessment of fines and penalties or loss of licensure, Medicare certification or accreditation. These consequences could have a material adverse effect on the Company.

~~Federal Health Care Reform Proposals~~

Additional changes in federal health care policy have been proposed by President Obama and are expected to be considered by Congress this year. Specifically, on February 26, 2009, the Obama Administration released its proposed federal budget for fiscal year 2010, which would establish a reserve fund of $633.8 billion over 10 years to finance comprehensive health reform. The reserve fund would be paid for by tax increases and health system savings. Among other things, the plan calls for bundled payments to hospitals that would cover not just the hospitalization, but care from certain post-acute providers for the 30 days after the hospitalization. A significant portion of the services furnished by our specialty hospitals and outpatient rehabilitation clinics are to patients discharged from acute care hospitals. Therefore, the proposal to bundle payments to hospitals could have a material impact on volume of referrals to our facilities by acute care hospitals and the payment rates that we receive for our services.

On June 15, 2009, the Obama Administration released new proposals to cut an additional $313 billion from Medicare and Medicaid over 10 years, in addition to the provisions included in the Administration’s proposed fiscal year 2010 budget. Among other things, the Administration endorses adopting the Medicare Payment Advisory Commission’s recommendations for reducing payments in 2010 to inpatient rehabilitation facilities and long term care hospitals, including a proposal to reduce payments to long term acute care hospitals by 1.8 percent. In addition, the Administration endorses implementing additional prepayment reviews in order to cut waste, fraud, and abuse in the federal health care programs.

3839

Operating Statistics

The following ~~table sets~~tables set forth operating statistics for our specialty hospitals and our outpatient rehabilitation clinics for each of the periods presented. The data in the ~~table~~tables reflect the changes in the number of specialty hospitals and outpatient rehabilitation clinics we operate that resulted from acquisitions, start-up activities, closures, sales and ~~closures.~~consolidations. The operating statistics reflect data for the period of time these operations were managed by us.

Three Months Ended Nine Months Ended
September 30, September 30,
2008 2009 2008 2009
Specialty hospital data(1):

Hospitals — start of period 92 92 87 93
Hospital start-ups — 1 5 1
Hospitals acquired 2 1 2 1
Hospitals consolidated (1 ) — (1 ) —
Hospitals closed (1 ) (1 ) (1 ) (2 )

Hospitals owned — end of period 92 93 92 93
Hospitals managed — end of period — 1 — 1

Total hospitals (all) — end of period 92 94 92 94

Available licensed beds 4,144 4,173 4,144 4,173
Admissions 9,977 10,466 30,891 31,775
Patient days 243,807 248,504 756,093 757,487
Average length of stay (days) 25 24 25 24
Net revenue per patient day(2) $ 1,446 $ 1,489 $ 1,434 $ 1,500
Occupancy rate 64 % 65 % 68 % 66 %
Percent patient days — Medicare 65 % 65 % 66 % 65 %
Outpatient rehabilitation data:

Clinics owned — start of period 894 875 918 880
Clinics acquired 3 2 3 3
Clinic start-ups 3 2 12 9
Clinics closed/sold (13 ) (6 ) (46 ) (19 )

Clinics owned — end of period 887 873 887 873
Clinics managed — end of period 78 74 78 74

Total clinics (all) — end of period 965 947 965 947

Visits 1,106,529 1,126,096 3,430,138 3,385,733
Net revenue per visit(3) $ 101 $ 101 $ 102 $ 102

Three Months Ended Six Months Ended
June 30, June 30,
2009 2010 2009 2010
Specialty hospital data(1):

Number of hospitals — start of period 92 94 93 94
Number of hospital start-ups — — — —
Number of hospitals acquired — — — —
Number of hospitals consolidated — — — —
Number of hospitals closed — — (1 ) —

Number of hospitals owned — end of period 92 94 92 94
Number of hospitals managed — end of period — 1 — 1

Total number of hospitals (all) — end of period 92 95 92 95

Available licensed beds 4,160 4,250 4,160 4,250
Admissions 10,504 10,616 21,309 21,717
Patient days 252,710 264,898 508,983 532,746
Average length of stay (days) 24 24 24 25
Net revenue per patient day(2) $ 1,491 $ 1,474 $ 1,494 $ 1,483
Occupancy rate 67 % 68 % 67 % 69 %
Percent patient days — Medicare 64 % 63 % 64 % 64 %
Outpatient rehabilitation data:

Number of clinics owned — start of period 875 885 880 883
Number of clinics acquired — — 1 —
Number of clinic start-ups 7 5 7 10
Number of clinics closed/sold (7 ) (10 ) (13 ) (13 )

Number of clinics owned — end of period 875 880 875 880
Number of clinics managed — end of period 73 73 73 73

Total number of clinics (all) — end of period 948 953 948 953

Number of visits 1,163,341 1,172,212 2,259,637 2,298,170
Net 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.

3940

Results of Operations

The following table outlines, for the periods indicated, selected operating data as a percentage of net operating revenues:


													Select Medical Holdings
	Select Medical Holdings Corporation						Select Medical Corporation						Corporation						Select Medical Corporation
	Three Months Ended						Three Months Ended						Three Months Ended						Three Months Ended
	September 30,						September 30,						June 30,						June 30,
	2008			2009			2008			2009			2009			2010			2009			2010
Net operating revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of services(1)		85.0			82.3			85.0			82.3			81.0			81.0			81.0			81.0
General and administrative(2)		2.2			6.3			2.2			6.3
General and administrative														2.3			1.7			2.3			1.7
Bad debt expense		2.4			2.2			2.4			2.2			1.8			1.9			1.8			1.9
Depreciation and amortization		3.4			3.2			3.4			3.2			3.2			2.9			3.2			2.9

Income from operations		7.0			6.0			7.0			6.0			11.7			12.5			11.7			12.5
Gain on early retirement of debt		—			0.2			—			—			0.6			—			0.6			—
Other income		—			—			0.3			0.4
Other income (expense)														—			0.0			(0.0	)		0.0
Interest expense, net		(6.9	)		(6.1	)		(5.3	)		(4.6	)		(6.0	)		(5.0	)		(4.4	)		(3.8	)

Income from operations before income taxes		0.1			0.1			2.0			1.8			6.3			7.5			7.9			8.7
Income tax expense (benefit)		0.0			(0.2	)		0.7			0.4
Income tax expense														2.7			3.0			3.3			3.4

Net income		0.1			0.3			1.3			1.4			3.6			4.5			4.6			5.3
Net income attributable to non-controlling interest		0.2			0.2			0.2			0.2			0.1			0.3			0.1			0.3

Net income (loss) attributable to Holdings and Select		(0.1	)%		0.1	%		1.1	%		1.2	%
Net income attributable to Holdings and Select														3.5	%		4.2	%		4.5	%		5.0	%


													Select Medical Holdings
	Select Medical Holdings Corporation						Select Medical Corporation						Corporation						Select Medical Corporation
	Nine Months Ended						Nine Months Ended						Six Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2008			2009			2008			2009			2009			2010			2009			2010
Net operating revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of services(1)		83.6			81.2			83.6			81.2			80.7			80.9			80.7			80.9
General and administrative(2)		2.2			3.6			2.2			3.6
General and administrative														2.3			2.0			2.3			2.0
Bad debt expense		2.2			2.0			2.2			2.0			2.0			1.7			2.0			1.7
Depreciation and amortization		3.3			3.2			3.3			3.2			3.2			2.9			3.2			2.9

Income from operations		8.7			10.0			8.7			10.0			11.8			12.5			11.8			12.5
Gain on early retirement of debt		—			1.0			—			0.9			1.4			—			1.4			—
Other income (expense)		—			—			(0.1	)		0.2
Other income														—			0.0			0.1			0.0
Interest expense, net		(6.8	)		(6.1	)		(5.2	)		(4.5	)		(6.1	)		(5.1	)		(4.5	)		(3.9	)

Income from operations before income taxes		1.9			4.9			3.4			6.6			7.1			7.4			8.8			8.6
Income tax expense		0.9			2.0			1.4			2.6			3.0			3.0			3.6			3.4

Net income		1.0			2.9			2.0			4.0			4.1			4.4			5.2			5.2
Net income attributable to non-controlling interest		0.1			0.1			0.1			0.1			0.1			0.2			0.1			0.2

Net income attributable to Holdings and Select		0.9	%		2.8	%		1.9	%		3.9	%		4.0	%		4.2	%		5.1	%		5.0	%

The following tables summarize selected financial data by business segment, for the periods indicated:


																			Select Medical Holdings
	Select Medical Holdings Corporation									Select Medical Corporation									Corporation									Select Medical Corporation
	Three Months Ended									Three Months Ended									Three Months Ended									Three Months Ended
	September 30,									September 30,									June 30,									June 30,
	2008			2009			% Change			2008			2009			% Change			2009			2010			% Change			2009			2010			% Change
	(in thousands)									(in thousands)									(in thousands)									(in thousands)
Net operating revenues:
Specialty hospitals	$	358,838		$	376,859			5.0	%	$	358,838		$	376,859			5.0	%	$	386,331		$	403,079			4.3	%	$	386,331		$	403,079			4.3	%
Outpatient rehabilitation		160,303			168,751			5.3			160,303			168,751			5.3			173,190			176,785			2.1			173,190			176,785			2.1
Other		38			11			(71.1	)		38			11			(71.1	)
Other(3)																				14			13			(7.1	)		14			13			(7.1	)

Total company	$	519,179		$	545,621			5.1	%	$	519,179		$	545,621			5.1	%	$	559,535		$	579,877			3.6	%	$	559,535		$	579,877			3.6	%


Income (loss) from operations:
Specialty hospitals	$	38,381		$	53,896			40.4	%	$	38,381		$	53,896			40.4	%	$	60,170		$	62,445			3.8	%	$	60,170		$	62,445			3.8	%
Outpatient rehabilitation		10,212			14,616			43.1			10,212			14,616			43.1			19,030			21,013			10.4			19,030			21,013			10.4
Other (2)		(12,435	)		(35,607	)		N/M			(12,435	)		(35,607	)		N/M
Other(3)																				(13,812	)		(10,882	)		21.2			(13,812	)		(10,882	)		21.2

Total company	$	36,158		$	32,905			(9.0	)%	$	36,158		$	32,905			(9.0	)%	$	65,388		$	72,576			11.0	%	$	65,388		$	72,576			11.0	%


Adjusted EBITDA:(3)
Adjusted EBITDA:(2)
Specialty hospitals	$	49,137		$	64,381			31.0	%	$	49,137		$	64,381			31.0	%	$	70,960		$	73,344			3.4	%	$	70,960		$	73,344			3.4	%
Outpatient rehabilitation		16,405			20,898			27.4			16,405			20,898			27.4			25,294			25,956			2.6			25,294			25,956			2.6
Other		(11,031	)		(12,236	)		(10.9	)		(11,031	)		(12,236	)		(10.9	)
Other(3)																				(12,628	)		(9,677	)		23.4			(12,628	)		(9,677	)		23.4

Adjusted EBITDA margins:(3)
Adjusted EBITDA margins:(2)
Specialty hospitals		13.7	%		17.1	%		24.8	%		13.7	%		17.1	%		24.8	%		18.4	%		18.2	%		(1.1	)%		18.4	%		18.2	%		(1.1	)%
Outpatient rehabilitation		10.2			12.4			21.6			10.2			12.4			21.6			14.6			14.7			0.7			14.6			14.7			0.7
Other		N/M			N/M			N/M			N/M			N/M			N/M
Other(3)																				N/M			N/M			N/M			N/M			N/M			N/M

Total assets:
Specialty hospitals	$	1,900,485		$	1,898,494					$	1,900,485		$	1,898,494					$	1,920,040		$	1,969,566					$	1,920,040		$	1,969,566
Outpatient rehabilitation		502,943			484,703						502,943			484,703						492,936			495,399						492,936			495,399
Other		109,733			381,545						105,881			378,356
Other(3)																				119,706			195,158						115,324			192,375

Total company	$	2,513,161		$	2,764,742					$	2,509,309		$	2,761,553					$	2,532,682		$	2,660,123					$	2,528,300		$	2,657,340


Purchases of property and equipment, net:
Specialty hospitals	$	5,997		$	12,371					$	5,997		$	12,371					$	11,222		$	10,026					$	11,222		$	10,026
Outpatient rehabilitation		3,235			1,566						3,235			1,566						2,199			3,133						2,199			3,133
Other		431			332						431			332
Other(3)																				524			248						524			248

Total company	$	9,663		$	14,269					$	9,663		$	14,269					$	13,945		$	13,407					$	13,945		$	13,407


																			Select Medical Holdings
	Select Medical Holdings Corporation									Select Medical Corporation									Corporation									Select Medical Corporation
	Nine Months Ended									Nine Months Ended									Six Months Ended									Six Months Ended
	September 30,									September 30,									June 30,									June 30,
	2008			2009			% Change			2008			2009			% Change			2009			2010			% Change			2009			2010			% Change
	(in thousands)									(in thousands)									(in thousands)									(in thousands)
Net operating revenues:
Specialty hospitals	$	1,104,731		$	1,156,422			4.7	%	$	1,104,731		$	1,156,422			4.7	%	$	779,563		$	814,764			4.5	%	$	779,563		$	814,764			4.5	%
Outpatient rehabilitation		501,375			509,760			1.7			501,375			509,760			1.7			341,009			349,850			2.6			341,009			349,850			2.6
Other		157			146			(7.0	)		157			146			(7.0	)
Other(3)																				135			76			(43.7	)		135			76			(43.7	)

Total company	$	1,606,263		$	1,666,328			3.7	%	$	1,606,263		$	1,666,328			3.7	%	$	1,120,707		$	1,164,690			3.9	%	$	1,120,707		$	1,164,690			3.9	%


Income (loss) from operations:
Specialty hospitals	$	134,985		$	180,100			33.4	%	$	134,985		$	180,100			33.4	%	$	126,204		$	134,383			6.5	%	$	126,204		$	134,383			6.5	%
Outpatient rehabilitation		42,354			48,797			15.2			42,354			48,797			15.2			34,181			35,675			4.4			34,181			35,675			4.4
Other (2)		(38,416	)		(62,978	)		(63.9	)		(38,416	)		(62,978	)		(63.9	)
Other(3)																				(27,371	)		(24,833	)		9.3			(27,371	)		(24,833	)		9.3

Total company	$	138,923		$	165,919			19.4	%	$	138,923		$	165,919			19.4	%	$	133,014		$	145,225			9.2	%	$	133,014		$	145,225			9.2	%


Adjusted EBITDA:(3)
Adjusted EBITDA:(2)
Specialty hospitals	$	167,617		$	212,122			26.6	%	$	167,617		$	212,122			26.6	%	$	147,741		$	156,241			5.8	%	$	147,741		$	156,241			5.8	%
Outpatient rehabilitation		60,248			67,476			12.0			60,248			67,476			12.0			46,578			46,474			(0.2	)		46,578			46,474			(0.2	)
Other		(34,070	)		(37,277	)		(9.4	)		(34,070	)		(37,277	)		(9.4	)
Other(3)																				(25,041	)		(22,224	)		(11.2	)		(25,041	)		(22,224	)		(11.2	)

Adjusted EBITDA margins:(3)
Adjusted EBITDA margins:(2)
Specialty hospitals		15.2	%		18.3	%		20.4	%		15.2	%		18.3	%		20.4	%		19.0	%		19.2	%		1.1	%		19.0	%		19.2	%		1.1	%
Outpatient rehabilitation		12.0			13.2			10.0			12.0			13.2			10.0			13.7			13.3			(2.9	)		13.7			13.3			(2.9	)
Other		N/M			N/M			N/M			N/M			N/M			N/M
Other(3)																				N/M			N/M			N/M			N/M			N/M			N/M

Total assets:
Specialty hospitals	$	1,900,485		$	1,898,494					$	1,900,485		$	1,898,494					$	1,920,040		$	1,969,566					$	1,920,040		$	1,969,566
Outpatient rehabilitation		502,943			484,703						502,943			484,703						492,936			495,399						492,936			495,399
Other		109,733			381,545						105,881			378,356
Other(3)																				119,706			195,158						115,324			192,375

Total company	$	2,513,161		$	2,764,742					$	2,509,309		$	2,761,553					$	2,532,682		$	2,660,123					$	2,528,300		$	2,657,340


Purchases of property and equipment, net:
Specialty hospitals	$	23,385		$	27,748					$	23,385		$	27,748					$	15,377		$	20,624					$	15,377		$	20,624
Outpatient rehabilitation		10,048			6,575						10,048			6,575						5,009			5,168						5,009			5,168
Other		2,337			927						2,337			927
Other(3)																				595			662						595			662

Total company	$	35,770		$	35,250					$	35,770		$	35,250					$	20,981		$	26,454					$	20,981		$	26,454

The following tables reconcile same hospitals information:

Select Medical Holdings Corporation Select Medical Corporation
Three Months Ended Three Months Ended
September 30, September 30,
2008 2009 2008 2009
(in thousands) (in thousands)
Net operating revenue
Specialty hospitals net operating revenue $ 358,838 $ 376,859 $ 358,838 $ 376,859
Less: Specialty hospitals in development, opened or closed after 1/1/08 13,386 27,995 13,386 27,995

Specialty hospitals same store net operating revenue $ 345,452 $ 348,864 $ 345,452 $ 348,864

Adjusted EBITDA(3)
Specialty hospitals Adjusted EBITDA(3) $ 49,137 $ 64,381 $ 49,137 $ 64,381
Less: Specialty hospitals in development, opened or closed after 1/1/08 (6,161 ) 1,265 (6,161 ) 1,265

Specialty hospitals same store Adjusted
EBITDA(3) $ 55,298 $ 63,116 $ 55,298 $ 63,116

All specialty hospitals Adjusted EBITDA
margin(3) 13.7 % 17.1 % 13.7 % 17.1 %
Specialty hospitals same store Adjusted EBITDA margin(3) 16.0 % 18.1 % 16.0 % 18.1 %

Select Medical Holdings
Corporation Select Medical Corporation
Three Months Ended Three Months Ended
June 30, June 30,
2009 2010 2009 2010
(in thousands) (in thousands)
Net operating revenue
Specialty hospitals net operating revenue $ 386,331 $ 403,079 $ 386,331 $ 403,079
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 2,550 10,748 2,550 10,748

Specialty hospitals same store net operating revenue $ 383,781 $ 392,331 $ 383,781 $ 392,331

Adjusted EBITDA(2)
Specialty hospitals Adjusted EBITDA(2) $ 70,960 $ 73,344 $ 70,960 $ 73,344
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 338 582 338 582

Specialty hospitals same store Adjusted EBITDA(2) $ 70,622 $ 72,762 $ 70,622 $ 72,762

All specialty hospitals Adjusted EBITDA margin(2) 18.4 % 18.2 % 18.4 % 18.2 %
Specialty hospitals same store Adjusted EBITDA margin(2) 18.4 % 18.5 % 18.4 % 18.5 %

Select Medical Holdings Corporation Select Medical Corporation
Nine Months Ended Nine Months Ended
September 30, September 30,
2008 2009 2008 2009
(in thousands) (in thousands)
Net operating revenue
Specialty hospitals net operating revenue $ 1,104,731 $ 1,156,422 $ 1,104,731 $ 1,156,422
Less: Specialty hospitals in development, opened or closed after 1/1/08 36,456 79,885 36,456 79,885

Specialty hospitals same store net operating revenue $ 1,068,275 $ 1,076,537 $ 1,068,275 $ 1,076,537

Adjusted EBITDA(3)
Specialty hospitals Adjusted EBITDA(3) $ 167,617 $ 212,122 $ 167,617 $ 212,122
Less: Specialty hospitals in development, opened or closed after 1/1/08 (17,587 ) (992 ) (17,587 ) (992 )

Specialty hospitals same store Adjusted
EBITDA(3) $ 185,204 $ 213,114 $ 185,204 $ 213,114

All specialty hospitals Adjusted EBITDA
margin(3) 15.2 % 18.3 % 15.2 % 18.3 %
Specialty hospitals same store Adjusted EBITDA margin(3) 17.3 % 19.8 % 17.3 % 19.8 %

Select Medical Holdings
Corporation Select Medical Corporation
Six Months Ended Six Months Ended
June 30, June 30,
2009 2010 2009 2010
(in thousands) (in thousands)
Net operating revenue
Specialty hospitals net operating revenue $ 779,563 $ 814,764 $ 779,563 $ 814,764
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 5,572 19,575 5,572 19,575

Specialty hospitals same store net operating revenue $ 773,991 $ 795,189 $ 773,991 $ 795,189

Adjusted EBITDA(2)
Specialty hospitals Adjusted EBITDA(2) $ 147,741 $ 156,241 $ 147,741 $ 156,241
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 392 (490 ) 392 (490 )

Specialty hospitals same store Adjusted EBITDA(2) $ 147,349 $ 156,731 $ 147,349 $ 156,731

All specialty hospitals Adjusted EBITDA margin(2) 19.0 % 19.2 % 19.0 % 19.2 %
Specialty hospitals same store Adjusted EBITDA margin(2) 19.0 % 19.7 % 19.0 % 19.7 %


N/M		— Not Meaningful.

(1)		Cost of services ~~include~~includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs.

4344


(2)		Includes non-recurring charges related to Holding’s initial public offering of $18.3 million in long term incentive compensation and $3.7 million in stock compensation expense related to the grant of restricted stock that vested in connection with our initial public offering.

~~(3)~~		We define Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, gain on early retirement of debt, ~~other income (expense),~~ stock compensation expense ~~long term incentive compensation~~ and ~~non-controlling interest.~~other income (expense). We believe that the presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating units. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See footnote 109 to our interim unaudited consolidated financial statements for the period ended ~~September~~June 30, ~~2009~~2010 for a reconciliation of ~~net~~ 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~~June 30, ~~2009~~2010 Compared to Three Months Ended ~~September~~June 30, ~~2008~~2009

In the following discussion, we address the results of operations of Select and Holdings. With the exception of ~~incremental~~ interest expense ~~gain on early retirement of debt~~ and income taxes, the results of operations of Holdings are identical to those of Select. Therefore, discussion related to net operating revenue, operating expenses, Adjusted EBITDA, income from operations and non-controlling interest is identical for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased by ~~5.1%~~3.6% to ~~$545.6~~$579.9 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$519.2~~$559.5 million for the three months ended ~~September~~June 30, ~~2008.~~2009.

Specialty Hospitals.Our specialty hospital net operating revenues increased by ~~5.0%~~4.3% to ~~$376.9~~$403.1 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$358.8~~$386.3 million for the three months ended ~~September~~June 30, ~~2008.~~2009. For the three months ended ~~September~~June 30, ~~2009,~~2010, the hospitals opened ~~in 2008 increased net operating revenues by $15.7 million,~~ and ~~the hospitals~~ acquired in ~~2008 and~~ 2009 increased net operating revenues by ~~$2.8~~$9.7 million. These increases were offset partially by the loss of revenues from hospitals that closed, ~~during 2008 and 2009,~~ which accounted for ~~$3.8~~$1.5 million of the difference in net operating revenues between the three months ended ~~September~~June 30, ~~2008~~2009 and ~~September~~June 30, ~~2009.~~2010. Net operating revenues for the specialty hospitals opened as of January 1, ~~2008~~2009 and operated by us throughout both periods increased by ~~$3.4~~$8.5 million to ~~$348.9~~$392.3 million for the three months ended ~~September~~June 30, ~~2009,~~2010, compared to ~~$345.5~~$383.8 million for the three months ended ~~September~~June 30, ~~2008.~~2009. This increase in net operating revenue is principally related to an increase in our occupancy and patient days in these same store hospitals. Our patient days for these same store hospitals ~~decreased 1.1%~~for the three months ended June 30, 2010 increased 3.1% as compared to the three months ended June 30, 2009, which ~~consisted of a decline~~was primarily related to an increase in ~~both~~ our Medicare ~~and non-Medicare~~ patient days. The occupancy percentage in our same store hospitals ~~decreased~~increased to 69% for the three months ended June 30, 2010 from 67% for the three months ended ~~September~~June 30, 2009 from 68% for the three months ended September 30, 2008. The effect on net operating revenues from the decrease in patient days was offset by an increase in our average net revenue per patient day.2009. Our average net revenue per patient day in our ~~same store~~specialty hospitals ~~increased 1.9%~~declined to ~~$1,477~~$1,474 for the three months ended ~~September~~June 30, ~~2009 from $1,450~~2010 compared to $1,491 for the three months ended ~~September~~June 30, ~~2008.~~2009. This ~~increase~~decrease was principally due to a decline in our average Medicare revenue per patient day, which resulted from the June 3, 2009 interim final rule in which CMS adopted a new table of MS-LTC-DRG relative weights that had the effect of reducing reimbursement for Medicare cases. This reduction in Medicare payments was partially offset by the annual payment update that became effective on October 1, 2009. Additionally, on April 1, 2010 we experienced a further reduction in the standard federal rate per case of 0.25% mandated by PPACA. The net revenue per patient day was ~~primarily the result of~~further negatively affected by an increase in the ~~severity~~number of high cost outlier cases in the ~~Medicare cases we treated.~~current period, as our average net revenue per patient day is lower for high cost outlier cases.

4445

Outpatient Rehabilitation.Our outpatient rehabilitation net operating revenues increased ~~5.3%~~2.1% to ~~$168.8~~$176.8 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$160.3~~$173.2 million for the three months ended ~~September~~June 30, ~~2008.~~2009. The increase ~~is principally related~~in our outpatient rehabilitation net operating revenues was due to an increase in ~~contracted~~both our outpatient rehabilitation clinic revenue and contract services based ~~revenue.~~revenue, both of which primarily resulted from operations acquired in 2009. The net operating revenues generated by our outpatient rehabilitation clinics for the three months ended June 30, 2010 grew approximately 1.3% as compared to the three months ended June 30, 2009. The number of patient visits in our outpatient rehabilitation clinics increased ~~1.8%~~0.8% for the three months ended ~~September~~June 30, ~~2009~~2010 to ~~1,126,096~~1,172,212 visits compared to ~~1,106,529~~1,163,341 visits for the three months ended ~~September~~June 30, ~~2008.~~2009. Net revenue per visit in our clinics ~~was~~remained stable at $101 for ~~both~~ the three months ended ~~September~~June 30, ~~2009~~2010 and ~~2008.~~June 30, 2009.

Operating Expenses

Our operating expenses increased by $29.8 million to $495.0 million for the three months ended September 30, 2009 compared to $465.2 million for the three months ended September 30, 2008. The principal cause of this increase were compensation costs of $22.0 million that we incurred associated with our initial public offering of common stock. Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Our operating expenses increased by $14.5 million to $490.7 million for the three months ended June 30, 2010 compared to $476.2 million for the three months ended June 30, 2009. As a percentage of our net operating revenues, our operating expenses were ~~90.8%~~84.6% for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~89.6%~~85.1% for the three months ended ~~September~~June 30, ~~2008.~~2009. Our cost of services, ~~increased by 1.7% to $448.7~~a major component of which is labor expense, were $470.0 million for the three months ended ~~September~~June 30, ~~2009 from $441.4~~2010 compared to $453.0 million for the three months ended ~~September~~June 30, ~~2008. A major component~~2009. The principal cause of ~~these costs is our labor expense. This~~this increase was increased costs associated with the ~~result of an increase~~hospitals acquired in 2009 and the ~~cost of services in both our specialty hospital and outpatient rehabilitation segments. The increase in cost of services we~~growth experienced in ~~the specialty hospital segment was due to an increase in patient volume in the~~our hospitals we opened ~~or acquired in 2008. The increase in cost~~as of ~~services we experienced in the outpatient rehabilitation segment was due to the increase in contracted services based business.~~January 1, 2009 and operated by us throughout both periods. Another component of cost of services is facility rent expense, which was ~~$29.1~~$28.6 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$27.8~~$29.6 million for the three months ended ~~September~~June 30, ~~2008.~~2009. General and administrative expenses were ~~$34.6~~$9.8 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$11.5~~$12.9 million for the three months ended ~~September~~June 30, ~~2008.~~2009. The ~~increase in general and administrative expenses is principally~~decrease was primarily related to ~~an $18.3 million payment under our Long Term Cash Incentive Plan and $3.7 million~~a reduction in ~~stock~~incentive based compensation ~~expense related to the grant of restricted stock that vested in connection with our initial public offering of common stock.~~for executive officers. Our bad debt expense as a percentage of net operating revenues was ~~2.2%~~1.9% for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~2.4%~~1.8% for the three months ended ~~September~~June 30, ~~2008.~~2009.

Adjusted EBITDA

Specialty Hospitals. Adjusted EBITDA increased by ~~31.0%~~3.4% to ~~$64.4~~$73.3 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$49.1~~$71.0 million for the three months ended ~~September~~June 30, ~~2008.~~2009. Our Adjusted EBITDA margins ~~increased to 17.1%~~were 18.2% for the three months ended ~~September~~June 30, ~~2009 from 13.7%~~2010 compared to 18.4% for the three months ended ~~September~~June 30, ~~2008.~~2009. The hospitals opened as of January 1, ~~2008~~2009 and operated by us throughout both periods had Adjusted EBITDA of ~~$63.1~~$72.8 million for the three months ended ~~September~~June 30, ~~2009,~~2010, an increase of ~~$7.8~~$2.2 million or ~~14.1%~~3.0% over the Adjusted EBITDA of ~~$55.3~~$70.6 million for these hospitals for the three months ended ~~September~~June 30, ~~2008.~~2009. Our Adjusted EBITDA margin in these same store hospitals increased to ~~18.1%~~18.5% for the three months ended ~~September~~June 30, ~~2009~~2010 from ~~16.0%~~18.4% for the three months ended ~~September~~June 30, ~~2008.~~2009. The principal reason for the growth in our Adjusted EBITDA ~~margin~~ for these same store hospitals ~~is an increase in our net revenue per patient day due to~~was an increase in the ~~severity~~volume of ~~our Medicare~~ cases ~~while~~ we ~~controlled our costs related to~~treated in these ~~cases, and a reduction in bad debt expense. We also reduced the Adjusted EBITDA losses in our recently opened~~ hospitals. Our hospitals opened during ~~2008 had~~2009 or currently still in development incurred Adjusted EBITDA losses of ~~$1.3~~$0.3 million for the three months ended ~~September~~June 30, ~~2009 compared to Adjusted EBITDA losses of $5.7 million incurred for the three months ended September 30, 2008.~~2010.

4546

Outpatient Rehabilitation. Adjusted EBITDA increased by ~~27.4%~~2.6% to ~~$20.9~~$26.0 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$16.4~~$25.3 million for the three months ended ~~September~~June 30, ~~2008.~~2009. Our Adjusted EBITDA margins increased to ~~12.4%~~14.7% for the three months ended ~~September~~June 30, ~~2009~~2010 from ~~10.2%~~14.6% for the three months ended ~~September~~June 30, ~~2008.~~2009. The increase in Adjusted EBITDA was primarily due to the EBITDA contribution from the operations acquired in 2009.

Other. The Adjusted EBITDA loss was ~~$12.2~~$9.7 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to an Adjusted EBITDA loss of ~~$11.0~~$12.6 million for the three months ended ~~September~~June 30, ~~2008 and~~2009. This decrease is ~~due~~related to the reduction in our general and administrative ~~expenses. The increase of $1.2 million is related to increases in non-salary related costs.~~expenses described above under “Operating Expenses.”

Income from Operations

For the three months ended ~~September~~June 30, ~~2009~~2010 we experienced income from operations of ~~$32.9~~$72.6 million compared to ~~$36.2~~$65.4 million for the three months ended ~~September~~June 30, ~~2008.~~2009. The ~~decrease~~increase in income from operations ~~is due to the compensation costs of $22.0 million we incurred associated with our initial public offering of common stock. This increase in costs was offset by increases in income~~resulted from ~~operations in~~(1) increased profitability at the hospitals opened as of January 1, ~~2008~~2009 and operated by us throughout both periods, (2) the ~~hospitals we opened~~growth in ~~2008 and~~ our outpatient ~~rehabilitation segment.~~operations and (3) a reduction in our general and administrative expenses.

Gain on Early Retirement of Debt

~~Select Medical Holdings Corporation.~~For the three months ended ~~September~~June 30, 2009, we paid approximately ~~$6.5~~$11.1 million to repurchase and retire a portion of ~~Holdings’~~Select’s 7⁵/₈% senior ~~floating rate~~subordinated notes. These notes had a carrying value of ~~$7.7~~$15.0 million. A gain on early retirement of debt in the amount of ~~$1.1~~$3.6 million was recognized on the ~~transaction,~~transactions, which was net of the write-off of unamortized deferred financing costs related to the ~~repurchased~~ debt.

Interest Expense

Select Medical Corporation.Interest expense was ~~$25.1~~$22.3 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$27.4~~$24.9 million for the three months ended ~~September~~June 30, ~~2008.~~2009. The decrease in interest expense is related to ~~lower average~~a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of our 7⁵/₈% senior subordinated notes and the repayment of a ~~decline in interest rates.~~portion of our senior secured credit facility with proceeds from Holdings’ initial public offering of common stock.

Select Medical Holdings Corporation.Interest expense was ~~$33.5~~$29.3 million for the three months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$36.2~~$33.7 million for the three months ended ~~September~~June 30, ~~2008.~~2009. The decrease in interest expense is related to ~~lower average~~a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of Select’s 7⁵/₈% senior subordinated notes, repurchases of our senior floating rate notes and the repayment of a ~~decline in interest rates.~~portion of Select’s senior secured credit facility with proceeds from our initial public offering of common stock.

Income Taxes

Select Medical Corporation.We recorded income tax expense of ~~$2.5~~$19.7 million for the three months ended ~~September~~June 30, 2010. The expense represented an effective tax rate of 39.1%. We recorded income tax expense of $18.2 million for the three months ended June 30, 2009. The expense represented an effective tax rate of ~~24.9%~~41.3%. ~~We recorded income~~The lower effective tax ~~expense of $3.4 million~~rate we experienced for the three months ended ~~September~~June 30, ~~2008. The expense represented an effective tax rate of 33.6%. In the three months ended September 30, 2009, we resolved with the Internal Revenue Service additional deductions related~~2010 is due to ~~our 2005 tax return that resulted in interest being paid to us by the Internal Revenue Service. The total effect of this benefit is reflected~~a reduction in our effective tax rate for ~~this period. Had this settlement not occurred, our effective~~state and local taxes and a reduction in the amount of tax ~~rate would have been approximately 41.0% for the period.~~reserves provided on uncertain tax positions.

4647

Select Medical Holdings ~~Corporation~~Corporation..We recorded income tax ~~benefit~~expense of ~~$0.8~~$17.3 million for the three months ended ~~September~~June 30, ~~2009.~~2010. The expense represented an effective tax rate of 39.8%. We recorded income tax ~~benefit~~expense of ~~$0.1~~$15.1 million for the three months ended ~~September~~June 30, ~~2008. In both periods~~2009. The expense represented an effective tax rate of 42.9%. The lower effective tax rate we had minimal income from operations before income taxes. Because income taxes are estimated on an annualized basis, any changes in the estimates are adjusted through the current period. The significant reduction in taxable income in both periods resulted in adjustments that yield small tax benefits in the periods. Additionally duringexperienced for the three months ended ~~September~~June 30, ~~2009 we resolved with the Internal Revenue Service additional deductions related~~2010 is due to ~~our 2005 tax return that resulted in interest being paid to us by the Internal Revenue Service. The total effect of this interest benefit is reflected~~a reduction in our effective tax rate for ~~this period.~~state and local taxes and a reduction in the amount of tax reserves provided on uncertain tax positions.

Non-Controlling Interests

Non-controlling interests in consolidated earnings were ~~$0.8~~$1.7 million for the three months ended ~~September~~June 30, ~~2009~~2010 and ~~$1.0~~$0.4 million for the three months ended ~~September~~June 30, ~~2008.~~2009. These amounts reflect minority owners’ share of the earnings of joint ventured operations.

~~Nine~~Six Months Ended ~~September~~June 30, ~~2009~~2010 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2008~~2009

Net Operating Revenues

Our net operating revenues increased by ~~3.7%~~3.9% to ~~$1,666.3~~$1,164.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$1,606.3~~$1,120.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009.

Specialty Hospitals.Our specialty hospital net operating revenues increased by ~~4.7%~~4.5% to ~~$1,156.4~~$814.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$1,104.7~~$779.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. For the ~~nine~~six months ended ~~September~~June 30, ~~2009,~~2010, the hospitals opened ~~in 2008 increased net operating revenues by $50.0 million~~ and ~~the hospitals~~ acquired in ~~2008 and~~ 2009 increased net operating revenues by ~~$9.6~~$18.1 million. These increases were offset partially by the loss of revenues from hospitals that closed during ~~2008 and~~ 2009, which accounted for ~~$16.2~~$4.1 million of the difference in net operating revenues between the ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 and ~~September~~June 30, ~~2009.~~2010. Net operating revenues for the specialty hospitals opened as of January 1, ~~2008~~2009 and operated by us throughout both periods increased by ~~$8.3~~$21.2 million to ~~$1,076.5~~$795.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009,~~2010, compared to ~~$1,068.3~~$774.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. This increase in net operating revenue is principally related to an increase in our occupancy and patient days in these same store hospitals. Our patient days for these same store hospitals ~~decreased~~for the six months ended June 30, 2010 increased 3.2% ~~and~~as compared to the six months ended June 30, 2009, which was ~~attributable~~primarily related to ~~a decline~~an increase in our Medicare patient days. The occupancy percentage in our same store hospitals ~~decreased~~increased to ~~69%~~70% for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 from ~~71%~~68% for the ~~nine~~six months ended ~~September~~June 30, ~~2008. The effect on net operating revenues from the decrease in patient days was offset by an increase in our average net revenue per patient day.~~2009. Our average net revenue per patient day in our ~~same store~~specialty hospitals ~~increased 4.0% to $1,497~~was $1,483 for the ~~nine~~six months ended ~~September~~June 30, ~~2009 from $1,439~~2010 compared to $1,494 for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. This ~~increase~~decline was principally due to a decline in our average Medicare revenue per patient day, which resulted from the June 3, 2009 interim final rule in which CMS adopted a new table of MS-LTC-DRG relative weights that had the effect of reducing reimbursement for Medicare cases. This reduction in Medicare payments was partially offset by the annual payment update that became effective on October 1, 2009. Additionally, on April 1, 2010 we experienced a further reduction in the standard federal rate per case of 0.25% mandated by PPACA. The net revenue per patient day was ~~primarily the result of~~further negatively affected by an increase in the ~~severity~~number of high cost outlier cases in the ~~Medicare cases we treated.~~current period, as our average net revenue per patient day is lower for high cost outlier cases.

4748

Outpatient Rehabilitation.Our outpatient rehabilitation net operating revenues ~~was $509.8~~increased 2.6% to $349.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$501.4~~$341.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The increase in our outpatient rehabilitation net operating revenues iswas primarily due to an increase in contracted services based revenue resulting from new ~~business offset by a reduction in the~~business. The net operating revenues generated by our outpatient rehabilitation ~~clinics.~~clinics for the six months ended June 30, 2010 grew approximately 1.1% as compared to the six months ended June 30, 2009. The number of patient visits in our outpatient rehabilitation clinics ~~decreased 1.3%~~increased 1.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 to ~~3,385,733~~2,298,170 visits compared to ~~3,430,138~~2,259,637 visits for the ~~nine~~six months ended ~~September~~June 30, 2008. The decline in visits, which principally occurred during the first quarter of 2009, was the result of various factors in numerous locations where we operate, including staffing shortages and increased competition.2009. Net revenue per visit in our clinics ~~was~~declined 1.0% to $101 for the six months ended June 30, 2010, compared to $102 for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2009 and 2008.~~2009. This reduction in net revenue per visit is primarily related to a migration of patients in one of the geographic areas we serve into a managed care plan that has lower reimbursement rates.

Operating Expenses

Our operating expenses increased by $32.9 million to $1,447.1 million for the nine months ended September 30, 2009 compared to $1,414.2 million for the nine months ended September 30, 2008. The principal cause of this increase were compensation costs of $22.0 million that we incurred associated with our initial public offering of common stock. Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Our operating expenses increased by $33.1 million to $985.1 million for the six months ended June 30, 2010 compared to $952.0 million for the six months ended June 30, 2009. As a percentage of our net operating revenues, our operating expenses were ~~86.8%~~84.6% for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~88.0%~~85.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. Our cost of services, a major component of which is labor expense, were ~~$1,353.1~~$942.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$1,343.0~~$904.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008. A major component~~2009. The principal cause of ~~these costs is our labor expense. This~~this increase was ~~principally~~increased costs associated with the ~~result of an increase~~hospital operations acquired in 2009 and the ~~cost of services~~growth experienced in our ~~specialty hospital segment. The increase in cost~~hospitals opened as of ~~services we experienced in the specialty hospital segment was due to an increase in patient volume in the hospitals we opened or acquired in 2008.~~January 1, 2009 and operated by us throughout both periods. Another component of cost of services is facility rent expense, which was ~~$87.4~~$57.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$82.4~~$58.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. General and administrative expenses were ~~$60.3~~$22.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$35.8~~$25.7 million for the ~~nine~~six months ended ~~September~~June 30 ~~2008.~~2009. The ~~increase of $24.4 million in general and administrative expense is~~decrease was primarily related to ~~an $18.3 million payment under our Long Term Cash Incentive Plan and $3.7 million~~a reduction in ~~stock~~incentive based compensation ~~expense related to the grant of restricted stock that vested in connection with our initial public offering of common stock. The remaining increase occurred in non-salary related operating expenses.~~for executive officers. Our bad debt expense as a percentage of net operating revenues was 1.7% for the six months ended June 30, 2010 compared to 2.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2009 compared to 2.2% for~~2009. The reduction resulted from improved collections and a reduction in the ~~nine months ended September 30, 2008.~~amount of accounts receivable outstanding greater than 180 days.

Adjusted EBITDA

Specialty Hospitals. Adjusted EBITDA increased by ~~26.6%~~5.8% to ~~$212.1~~$156.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$167.6~~$147.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. Our Adjusted EBITDA margins increased to ~~18.3%~~19.2% for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 from ~~15.2%~~19.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The hospitals opened as of January 1, ~~2008~~2009 and operated by us throughout both periods had Adjusted EBITDA of ~~$213.1~~$156.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009,~~2010, an increase of ~~$27.9~~$9.4 million or ~~15.1%~~6.4% over the Adjusted EBITDA of ~~$185.2~~$147.3 million for these hospitals for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. Our Adjusted EBITDA margin in these same store hospitals increased to ~~19.8%~~19.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 from ~~17.3%~~19.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The principal reason for the growth in our Adjusted EBITDA and Adjusted EBITDA margin for these same store hospitals ~~is an increase in our net revenue per patient day due to~~was an increase in the ~~severity~~volume of cases we treated in these hospitals and our ~~Medicare cases while we controlled~~ability to control our costs ~~related~~of services in these hospitals. We were also able to reduce the bad debt expense in these ~~cases. We also reduced~~hospitals, which had the effect of increasing our Adjusted EBITDA ~~losses in our recently opened hospitals.~~and Adjusted EBITDA margin. Our hospitals opened during ~~2008~~2009 or currently still in development incurred Adjusted EBITDA losses of ~~$1.6~~$1.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009 compared to Adjusted EBITDA losses of $17.9 million incurred for the nine months ended September 30, 2008.~~2010.

4849

Outpatient Rehabilitation. Adjusted EBITDA ~~increased by 12.0%~~decreased slightly to ~~$67.5~~$46.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$60.2~~$46.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. Our Adjusted EBITDA margins ~~increased~~declined to ~~13.2%~~13.3% for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 from ~~12.0%~~13.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The ~~increase~~decrease in Adjusted EBITDA and Adjusted EBITDA margin was primarily the result of ~~the growth~~higher costs in our ~~contracted~~contract services business. This resulted from lost productivity in the Northeast during the three months ended March 31, 2010 due to a difficult winter weather season and the need to use higher cost agency staffing at some of our locations due to the turnover of a number of our contracts. This decline was partially offset by increased Adjusted EBITDA in our outpatient ~~business.~~rehabilitation clinics that resulted from the increase in patient visits.

Other. The Adjusted EBITDA loss was ~~$37.3~~$22.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to an Adjusted EBITDA loss of ~~$34.1~~$25.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008 and~~2009. This decrease is primarily related to the reduction in our general and administrative ~~expenses. The increase of $3.2 million is related to increases in non-salary related costs.~~expenses described above under “Operating Expenses.”

Income from Operations

For the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 we experienced income from operations of ~~$165.9~~$145.2 million compared to ~~$138.9~~$133.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The increase in income from operations resulted primarily from increased profitability at the ~~improved operating performance we experienced in both the specialty hospitals opened in 2008 and the specialty~~ hospitals opened as of January 1, ~~2008~~2009 and operated by us throughout both periods and ~~was offset by the compensation costs of $22.0 million we incurred associated with~~a reduction in our ~~initial public offering of common stock.~~general and administrative expenses.

Gain on Early Retirement of Debt

~~Select Medical Corporation.~~For the ~~nine~~six months ended ~~September~~June 30, 2009, we paid approximately $30.1 million to repurchase and retire a portion of ~~our~~Select’s 7⁵/₈% senior subordinated notes. These notes had a carrying value of $46.5 million. A gain on early retirement of debt in the amount of $15.3 million was recognized on the transactions, which was net of the write-off of unamortized deferred financing costs related to the ~~repurchased debt.~~

~~Select Medical Holdings Corporation.~~~~For the nine months ended September 30, 2009, we paid approximately $30.1 million to repurchase and retire a portion of our 7~~⁵/₈% senior subordinated notes. These notes had a carrying value of $46.5 million. A gain on early retirement of debt in the amount of $15.3 million was recognized on the transactions which was net of the write-off of unamortized deferred financing costs related to the debt. In addition for the nine months ended September 30, 2009, we paid approximately $6.5 million to repurchase and retire a portion of Holdings’ senior floating rate notes. These notes have a carrying value of $7.7 million. A gain on early retirement of debt in the amount of $1.1 million was recognized on the transaction which was net of the write-off of unamortized deferred financing costs related to the repurchased debt.

Interest Expense

Select Medical Corporation.Interest expense was ~~$75.9~~$45.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$83.4~~$50.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The decrease in interest expense is related to ~~lower average~~a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of our 7⁵/₈% senior subordinated notes and the repayment of a ~~decline in interest rates.~~portion of our senior secured credit facility with proceeds from Holdings’ initial public offering of common stock.

Select Medical Holdings Corporation.Interest expense was ~~$101.8~~$59.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 compared to ~~$109.6~~$68.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The decrease in interest expense is related to ~~lower average~~a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of Select’s 7⁵/₈% senior subordinated notes, repurchases of our senior floating rate notes and the repayment of a ~~decline in interest rates.~~portion of Select’s senior secured credit facility with proceeds from our initial public offering of common stock.

Income Taxes

Select Medical Corporation.We recorded income tax expense of ~~$43.1~~$39.3 million for the ~~nine~~six months ended ~~September~~June 30, 2010. The expense represented an effective tax rate of 39.2%. We recorded income tax expense of $40.6 million for the six months ended June 30, 2009. The expense represented an effective tax rate of ~~39.4%~~43.2%. The lower effective tax rate we experienced for the six months ended June 30, 2010 is due to a reduction in our effective tax rate for state and local taxes and a reduction in the amount of tax reserves provided on uncertain tax positions.

Select Medical Holdings Corporation.We recorded income tax expense of ~~$22.6~~$34.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2010. The expense represented an effective tax rate of ~~41.4%~~39.9%. The reduction in the effective tax rate for the nine months ended September 30, 2009 is principally due to a reduction in the reserve for uncertain tax positions, a reduction in the accrued interest and penalties associated with these uncertain tax positions, a reduction in valuation reserves recorded related to estimated unusable state net operating losses, estimated interest to be received on additional deductions being allowed by the Internal Revenue Service on our 2005 tax return and the smaller relative effect that permanent items have on the effective tax rate due to the increase in our taxable income.

~~Select Medical Holdings Corporation~~.We recorded income tax expense of ~~$33.1~~$33.9 million for the ~~nine~~six months ended ~~September~~June 30, 2009. The expense represented an effective tax rate of ~~41.0%~~42.3%. ~~We recorded income tax expense of $13.9 million for the nine months ended September 30, 2008.~~ The ~~expense represented an~~lower effective tax rate ~~of 46.8%. The reduction in the effective tax rate~~we experienced for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 is ~~principally~~ due to a reduction in ~~the reserve~~our effective tax rate for ~~uncertain tax positions,~~state and local taxes and a reduction in the ~~accrued interest and penalties associated with these~~amount of tax reserves provided on uncertain tax positions, a reduction in valuation reserves recorded related to estimated unusable state net operating losses, estimated interest to be received on additional deductions being allowed by the Internal Revenue Service on our 2005 tax return and the smaller relative effect that permanent items have on the effective tax rate due to the increase in our taxable income.positions.

Non-Controlling Interests

Non-controlling interests in consolidated earnings were ~~$2.2~~$3.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 and ~~$2.1~~$1.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. These amounts reflect minority owners’ share of the earnings of joint ventured operations.

Liquidity and Capital Resources

~~The following table summarizes the statement of cash flows of Holdings~~Six Months Ended June 30, 2010 and ~~Select for the nine months ended September~~Six Months Ended June 30, ~~2008 and 2009:~~2009


													Select Medical Holdings
	Select Medical Holdings Corporation						Select Medical Corporation						Corporation						Select Medical Corporation
	Nine Months Ended						Nine Months Ended						Six Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2008			2009			2008			2009			2009			2010			2009			2010
	(in thousands)						(in thousands)						(in thousands)						(in thousands)

Cash flows provided by operating activities	$	33,973		$	93,447		$	66,779		$	126,266		$	57,235		$	58,719		$	73,645		$	71,602
Cash flows used in investing activities		(40,578	)		(34,290	)		(40,578	)		(34,290	)		(19,640	)		(26,454	)		(19,640	)		(26,454	)
Cash flows provided by (used in) financing activities		11,443			157,075			(21,363	)		124,256			(74,166	)		12,808			(90,576	)		(75	)

Net increase in cash and cash equivalents		4,838			216,232			4,838			216,232
Net increase (decrease) in cash and cash equivalents														(36,571	)		45,073			(36,571	)		45,073
Cash and cash equivalents at beginning of period		4,529			64,260			4,529			64,260			64,260			83,680			64,260			83,680

Cash and cash equivalents at end of period	$	9,367		$	280,492		$	9,367		$	280,492		$	27,689		$	128,753		$	27,689		$	128,753

The operating cash flow of Select exceeds the operating cash flow of Holdings by ~~$32.8~~$12.9 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 and by $16.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008.~~2009. The difference relates to interest payments on Holdings’ senior subordinated notes and senior floating rate notes.

Investing activities used ~~$34.3~~$26.5 million of cash flow for the ~~nine~~six months ended ~~September~~June 30, 2010 and $19.6 million of cash flow for the six months ended June 30, 2009. The use of cash ~~was $35.3 million~~in both periods related to the purchase of property and ~~equipment and $0.4 million in acquisition related payments, offset by $1.3 million of proceeds from the sale of property. Investing~~equipment.

Financing activities for Select used ~~$40.6~~$0.1 million of cash flow for the ~~nine~~six months ended ~~September~~June 30, 2008. The primary use of cash in the nine months ended September 30, 2008 was $35.8 million related to the purchase of property and equipment and $7.4 million related to the acquisition of businesses and the final settlement of the purchase price for the acquisition of the outpatient rehabilitation division of HealthSouth Corporation. These cash outflows were offset by proceeds of $2.6 million related to the sale of a minority interest in a specialty hospital and sale of real property.

~~Financing activities for Select provided $124.3 million of cash flow for the nine months ended September 30, 2009.~~2010. The primary source of cash related to ~~$282.0 in net~~ proceeds from ~~Holdings’ initial public offering~~bank overdrafts of ~~common stock~~$14.2 million and borrowings of other debt of $5.0 million, which were offset by payments on our seller and other debt of $4.4 million, dividends paid to Holdings to fund interest payments of $12.9 million, and $2.1 million in distributions to non-controlling interests. Financing activities used $90.6 million of cash flow for the six months ended June 30, 2009. The primary use of cash related to the repurchase ~~of a portion~~ of Select’s 7⁵/₈% senior subordinated notes for $30.1 million, repayment of bank overdrafts of ~~$21.1~~$4.7 million, net payments on our senior secured credit facility of ~~$65.0~~$38.4 million, dividends paid to Holdings ~~to fund interest payments~~ of ~~$39.4~~$16.5 million ~~$2.5~~and $1.8 million in distributions to non-controlling ~~interests and~~interests. These payments were offset by net ~~payments~~borrowings related to seller and other debt of ~~$0.6~~$1.3 million. Financing activities used $21.4 million of cash flow for the nine months ended September 30, 2008. The primary usage of cash related to dividends paid to Holdings to fund interest payments of $33.4 million, repayment of bank overdrafts of $7.2 million, principal payments on seller and other debt of $4.0 million and distributions to minority interests of $1.7 million offset by borrowings, net of repayments, on our senior secured credit facility of $24.9 million. The net borrowings on our senior secured credit facility were used to fund the slow-down we experienced in our collection of accounts receivable and our purchase of property and equipment.

The difference in cash flows provided by (used in) financing activities of Holdings compared to Select of ~~$32.8~~$12.9 million for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2009~~2010 and $16.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2008~~2009 relates to dividends paid by Select to Holdings to service Holdings’ interest obligations related to its senior subordinated notes and its senior floating rate ~~notes and to fund repurchases of common and preferred stock.~~notes.

Capital Resources

Select Medical Corporation.Select had net working capital of ~~$234.3~~$136.8 million at ~~September~~June 30, ~~2009~~2010 compared to net working capital of ~~$100.1~~$167.3 million at December 31, ~~2008.~~2009. The ~~principal reason for the increase~~decrease in net working capital is primarily due to ~~the cash received upon the closing of Holdings’ initial public offering of common stock on September 30, 2009 offset by the~~an increase in ~~the~~our current portion of ~~long term~~long-term debt ~~that resulted from the mandatory repayment obligation that was triggered under~~offset by an increase in our ~~senior secured credit facility upon the consummation of the initial public offering.~~cash and accounts receivable.

Select Medical Holdings Corporation.Holdings had net working capital of ~~$231.4~~$140.1 million at ~~September~~June 30, ~~2009~~2010 compared to net working capital of ~~$118.4~~$170.8 million at December 31, ~~2008.~~2009. The ~~principal reason for the increase~~decrease in net working capital is primarily due to ~~the cash received upon the closing of our initial public offering of common stock on September 30, 2009 offset by the~~an increase in ~~the~~our current portion of ~~long term~~long-term debt ~~that resulted from the mandatory repayment obligation that was triggered under~~offset by an increase in our ~~senior secured credit facility upon the consummation of the initial public offering.~~cash and accounts receivable.

	•		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”).

On June 7, 2010 we entered into an Assignment and Assumption and Amendment No. 4 (“Amendment No. 4”) to Select’s senior secured credit facility (the “Credit Agreement”) with a group of lenders and JPMorgan Chase Bank, N.A. as administrative agent. Amendment No. 4 extended the maturity of $300.0 million of commitments under Select’s revolving credit facility from February 24, 2011 ~~including both a letter of credit sub-facility and a swingline loan sub-facility, and~~

~~$268.6 million in term loans that mature on February 24, 2012 (the “Tranche B Term Loans”), and~~

~~$384.5 million in term loans that mature on~~to August 22, ~~2014 (the “Tranche B-1 Term Loans”)~~2013, and made related technical changes to the Credit Agreement. The applicable margin percentage for extended revolving loans and the commitment fee rate for extended revolving commitments have increased and will be determined based on a pricing grid set forth in Amendment No. 4. Under the pricing grid, the applicable margin percentage for revolving ABR loans ranges from 2% per annum to 3% per annum, the applicable margin percentage for revolving Eurodollar loans ranges from 3% per annum to 4% per annum, and the commitment fee rate for extended revolving commitments ranges from 0.375% to 0.75%.

On June 7, 2010, we also entered into an Amendment No. 4-A to the Credit Agreement with a group of lenders and JPMorgan Chase Bank, N.A. as administrative agent. Amendment No. 4-A made a technical change to the Credit Agreement that permits us to refinance existing indebtedness with the proceeds of new indebtedness, including the refinancing of existing senior subordinated indebtedness with the proceeds of new senior subordinated indebtedness.

The interest rates per annum applicable to loans, other than swingline loans and Tranche B-1 Term Loans, under our senior secured credit facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a one, two, three or six month interest period, or a nine or twelve month period if available, in each case, plus an applicable margin percentage. The interest rates per annum applicable to the Tranche B-1 Term Loans under our senior credit facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a three or six month interest period, or a nine or twelve month period if available, in each case, plus an applicable margin percentage. The alternate base rate is the greater of (1) JPMorgan Chase Bank, N.A.’s prime rate and (2) one-half of 1% over the weighted average of rates on overnight Federal funds as published by the Federal Reserve Bank of New York. The adjusted LIBOR rate is determined by reference to settlement rates established for deposits in dollars in the London interbank market for a period equal to the interest period of the loan and the maximum reserve percentages established by the Board of Governors of the United States Federal Reserve to which our lenders are subject. The applicable margin percentage for borrowings under our revolving loans is subject to change based upon ~~the~~Select’s leverage ratio ~~of Select’s total indebtedness to consolidated EBITDA~~ (as defined in the credit agreement). The applicable margin percentage for revolving loans ~~is currently~~will decrease from (1) ~~1.50%~~2.75% to 2.50% for alternate base rate loans and (2) ~~2.50%~~3.75% to 3.50% for adjusted LIBOR ~~loans.~~loans upon the delivery of Select’s Form 10-Q to JP Morgan Chase Bank, N.A., as administrative agent to Select’s senior secured credit facility. The applicable margin percentages for the Tranche B Term Loans are (1) 1.00% for alternate base rate loans and (2) 2.00% for adjusted LIBOR loans. The applicable margin percentages for the Tranche B-1 Term Loans are (1) 2.75% for alternate base rate loans and (2) 3.75% for adjusted LIBOR loans.

Our senior secured credit facility requires Select to maintain certain interest expense coverage ratios and leverage ratios (both as defined in our senior secured credit facility) which become more restrictive over time. For the four consecutive fiscal quarters ended ~~September~~June 30, ~~2009,~~2010, Select was required to maintain an interest expense coverage ratio (its ratio of consolidated EBITDA ~~(as defined in our senior secured credit facility)~~ to cash interest expense) for the prior four consecutive fiscal quarters of at least 2.00 to 1.00. Select’s interest expense coverage ratio was ~~2.47~~2.87 to 1.00 for such period. As of ~~September~~June 30, ~~2009,~~2010, Select was required to maintain ~~its~~a leverage ratio (its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters) at less than ~~5.00~~4.75 to 1.00. Select’s leverage ratio was ~~3.89~~2.88 to 1.00 as of ~~September~~June 30, ~~2009.~~2010.

Also, as of ~~September~~June 30, ~~2009,~~2010, we had ~~$179.1~~$271.2 million of availability under our revolving loan facility (after giving effect to ~~$30.9~~$28.8 million of outstanding letters of credit).

Our initial public offering of common stock triggered the mandatory prepayment obligation under our senior secured credit facility in the amount of 50% of the net proceeds we received in the offering. On October 5, 2009 we repaid to the lenders under the senior secured credit facility $139.4 million, of which $57.3 million was applied to Tranche B term loans and $82.1 million was applied to Tranche B-1 term loans. On October 16, 2009, we made an additional $12.1 million voluntary prepayment of Tranche B Term Loans with a portion of the initial public offering proceeds.

On October 28, 2009, the underwriters purchased an additional 3,602,700 shares pursuant to their over-allotment option. We received $33.9 million of net proceeds from the exercise of the over-allotment option. On November 3, 2009 we repaid $16.9 million of debt under our senior secured credit facility, of which $6.7 million was applied to Tranche B term loans and $10.2 million was applied to Tranche B-1 term loans.

On June 13, 2005, Select entered into atwo five year interest rate swap ~~transaction~~transactions with an effective date of August 22, 2005. On ~~March 8, 2007 and~~ November 23, 2007, Select entered into ~~two~~an additional interest rate swap ~~transactions~~transaction for three years with an effective ~~dates~~date of ~~May 22, 2007 and~~ November 23, ~~2007, respectively.~~2007. The swaps are designated as a cash flow hedge of forecasted LIBOR-based variable rate interest payments. The underlying variable rate debt is ~~$500.0~~$300.0 million.

On August 5, 2009 we entered into Amendment No. 3 to our senior secured credit facility with a group of holders of Tranche B term loans and JPMorgan Chase Bank, N.A., as administrative agent. Amendment No. 3 extended the maturity of $384.5 million principal amount of Tranche B term loans from February 24, 2012 to August 22, 2014, and made related technical changes to our senior secured credit facility. Holders of Tranche B term loans that extended the maturity of their Tranche B term loans now hold Tranche B-1 term loans that mature on August 22, 2014, and holders of Tranche B term loans that did not extend the maturity of their Tranche B term loans continue to hold Tranche B term loans that mature on February 24, 2012. The applicable margin percentage for the Tranche B-1 term loans under our senior secured credit facility is 3.75% for adjusted LIBOR loans and 2.75% for alternate base rate loans. Under the terms of Amendment No. 3, if, prior to August 5, 2011, our senior secured credit facility is amended to reduce the applicable margin percentage for the Tranche B-1 term loans, then we will be required to pay a fee in an amount equal to 1% of theSelect has outstanding Tranche B-1 term loans held by those holders of Tranche B-1 term loans that agree to amend our senior secured credit facility to reduce the applicable margin percentage. In addition, if, prior to August 5, 2011, we make any prepayment of Tranche B-1 term loans with proceeds of any term loan indebtedness, we will be required to pay a fee to holders of Tranche B-1 term loans in an amount equal to 1% of the outstanding Tranche B-1 term loans that are being prepaid.

~~On February 24, 2005, EGL Acquisition Corp. issued and sold $660.0~~$611.5 million in aggregate principal amount of 7⁵/₈% senior subordinated notes due 2015, which Select assumed in connection with the Merger. The net proceeds of the offering were used to finance a portion of the funds needed to consummate the Merger with EGL Acquisition Corp. The notes were issued under an indenture between EGL Acquisition Corp. and U.S. Bank Trust National Association, as trustee.2015. Interest on the notes is payable semi-annually in arrears on February 1 and August 1 of each year. The notes are guaranteed by all of Select’s wholly-owned subsidiaries, subject to certain exceptions. ~~On or after February 1, 2010, the~~The notes may be redeemed at Select’s option, in whole or in part, at redemption prices that decline annually to 100% on and after February 1, 2013, plus accrued and unpaid interest. Currently through January 31, 2011, Select may redeem the notes at a redemption price equal to 103.813% of the principal amount of the notes, plus accrued and unpaid interest, if any, to the redemption date. Upon a change of control of Holdings, each holder of notes may require us to repurchase all or any portion of the holder’s notes at a purchase price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase.

~~During the first and second quarter of 2009, we paid approximately $30.1 million to repurchase and retire additional~~ 7⁵/₈% senior subordinated notes. These notes had a carrying value of $46.5 million. A gain on early retirement of debt in the amount of $15.3 million was recognized, which was net of the write-off of unamortized deferred financing costs related to the debt.

~~On September 29, 2005,~~As of June 30, 2010, Holdings ~~sold $175.0~~had outstanding $167.3 million of senior floating rate notes due 2015, which bear interest at a rate per annum, reset semi-annually, equal to the 6-month LIBOR plus 5.75%. Interest is payable semi-annually in arrears on March 15 and September 15 of each year, with the principal due in full on September 15, 2015. The senior floating rate notes are general unsecured obligations of Holdings and are not guaranteed by Select or any of its subsidiaries. The net proceeds of the issuance of the senior floating rate notes, together with cash was used to reduce the amount of our preferred stock, to make a payment to participants in our long-term incentive plan and to pay related fees and expenses.

During the third quarter of 2009, we paid approximately $6.5 million to repurchase and retire a portion of Holdings senior floating rate notes. These notes had a carrying value of $7.7 million. A gain on early retirement of debt in the amount of $1.1 million was recognized, which was net of the write-off of unamortized deferred financing costs related to the debt.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

We believe our internally generated cash flows and borrowing capacity under our senior secured credit facility will be sufficient to finance normal operations ~~for~~over the ~~foreseeable future.~~next twelve months. Our lenders, including the lenders participating in our senior secured credit facility, may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy, increased financial instability of many borrowers and the declining value of their assets. As a result, lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit ~~facility, refinance our existing indebtedness or to obtain other financing on favorable terms or at all.~~facility. Our access to funds under the senior secured credit facility is dependent upon the ability of our lenders to meet their funding commitments. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our senior secured credit facility because of a lender default or to obtain other cost-effective financing.

Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating other discretionary uses of cash.

As a result of the SCHIP Extension Act as amended by PPACA, which prohibits the establishment and classification of new LTCHs or satellites during the ~~three~~five calendar years commencing on December 29, 2007, we have stopped all new LTCH development. However, we continue to evaluate opportunities to develop new joint venture relationships with significant health systems, and from time to time we may also develop new inpatient rehabilitation hospitals. We also intend to open new outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow our network of specialty hospitals through opportunistic acquisitions.

Inflation

The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. In addition, suppliers pass along rising costs to us in the form of higher prices. We have implemented cost control measures, including our case and resource management program, to curtail increases in operating costs and expenses. We cannot predict our ability to cover or offset future cost increases.

Recent Accounting Pronouncements

In ~~August 2009,~~January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ~~2009-05,~~(“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — ~~Measuring Liabilities at~~Improving Disclosures about Fair ~~Value”~~Value Measurements” (“Update ~~2009-05”~~2010-06”)~~. Update 2009-05 provides clarification that in circumstances in~~, which ~~a quoted price in an active market~~amends the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the ~~identical liability is not available, a reporting entity is required~~level of disaggregation and about inputs and valuation techniques used to measure fair ~~value~~value. The Company adopted update 2010-06 on January 1, 2010, except for the requirement to provide the Level 3 activity of ~~such liability using one or more of the techniques prescribed by the update. Update 2009-05 is~~purchases, sales, issuances, and settlements on a gross basis, which will be effective for ~~the first annual or interim period~~fiscal years beginning after ~~the issuance of this update.~~December 15, 2010, and for interim periods within those fiscal years. The adoption of Update ~~2009-05 is not anticipated to have a material impact on our consolidated financial statements.~~

In June 2009, the FASB issued an amendment to Accounting Standards Codification (“ASC”) topic 105, “Generally Accepted Accounting Principles.” The amendment stipulates the FASB Accounting Standards Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The amendment was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this amendment2010-06 did not have ~~a material~~an impact on ~~our~~the Company’s consolidated ~~financial statements.~~

In May 2009, the FASB issued an amendment to ASC topic 855, “Subsequent Events.” The amendment provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The amendment sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The amendment also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. Furthermore, this amendment identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted this amendment during the second quarter of 2009 and evaluated subsequent events through November 13, 2009, the issuance date of this report.

In April 2009, the FASB issued an amendment to ASC topic 820, “Fair Value Measurements and Disclosures.” This amendment provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have decreased significantly. The amendment also provides guidance on identifying circumstances that indicate a transaction is not orderly. The amendment was effective for our interim period ending on June 30, 2009. The adoption of this amendment did not have a material impact on our consolidated financial statements.

On January 1, 2009, we adopted an amendment issued by the FASB in December 2007 to ASC topic 810, “Consolidation.” Upon adoption of this amendment, minority interest is now referred to as non-controlling interest andCompany currently has been reclassified from the mezzanine section of the balance sheet to the equity section. The balance sheet as of December 31, 2008 has been revised to show this change in presentation. In addition, non-controlling interest is now deducted from net income to obtain net income attributable to each of Holdings and Select.no Level 3 measurements.

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

We are subject to interest rate risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under Select’s senior secured credit facility and Holdings’ senior floating rate notes. As of ~~September~~June 30, ~~2009,~~2010, Select had ~~$741.5~~$483.1 million in term ~~and revolving~~ loans outstanding under its senior secured credit facility and Holdings had $167.3 million in senior floating rate notes outstanding, which bear interest at variable rates. On June 13, 2005, Select entered into atwo five year interest rate swap ~~transaction~~transactions with an effective date of August 22, 2005. On ~~March 8, 2007 and~~ November 16, 2007, Select entered into ~~two~~an additional interest rate swap ~~transactions~~transaction for three years with an effective ~~dates~~date of ~~May 22, 2007 and~~ November 23, ~~2007, respectively.~~2007. Select entered into the swap transactions to mitigate the risks of future variable rate interest payments. The notional amount of the interest rate swaps are ~~$500.0~~$300.0 million and the underlying variable rate debt is associated with the senior secured credit facility. Each eighth point change in interest rates on the variable rate portion of our long-term indebtedness would result in a ~~$0.5~~$0.2 million annual change in interest expense on our term loans.

~~ITEM 4T.~~
ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.

5655

~~During the period covered by this report, there has been~~Internal Control Over Financial Reporting

There was no change toin our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the six months ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

~~ITEM 1. LEGAL PROCEEDINGS~~
ITEM 1. LEGAL PROCEEDINGS

To cover claims arising out of the operations of the Company’s specialty hospitals and outpatient rehabilitation facilities, the Company maintains professional malpractice liability insurance and general liability insurance. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions as well as the cost and possible lack of available insurance could subject the Company to substantial uninsured liabilities.

During July 2009, the Company received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its hospitals in Columbus, Ohio. ~~The Company does not know whether~~We believe that the subpoena has been issued in connection with a qui tam lawsuit, ~~or in connection with possible civil, criminal or administrative proceedings by~~and that the ~~government.~~government is currently investigating the matter to determine whether to intervene. The Company has produced documents in response to the subpoena and intends to fully cooperate with ~~this~~the government’s investigation. In addition, the Company has initiated an internal review of its policies and practices related to physician relationships in the Columbus market. At this time, the Company is unable to predict the timing and outcome of this matter.

On March 8, 2010, the Company received a letter from the United States Senate Finance Committee in response to a New York Times article published February 10, 2010 focusing on our Company and the long term acute care hospital industry entitled “Long-Term Care Hospitals Face Little Scrutiny.” The letter from the Senate Finance Committee asked us to respond to a variety of questions regarding our long-term care hospitals. On March 23, 2010, the Company responded to the letter. On May 25, 2010 the Company received follow-up questions from the committee, which the Company responded to on June 4, 2010. The Company intends on fully cooperating and, at this time, the Company is unable to predict the timing and outcome of this matter.

~~ITEM 1A. RISK FACTORS.~~
ITEM 1A. RISK FACTORS.

~~There~~As a result of the enactment of the PPACA, which President Obama signed into law on March 23, 2010, there have been changes to certain of the laws and regulations that were described in the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Changes” for a description of these regulatory changes.

Except as set forth above, there have been no material changes from our risk factors as previously reported in our ~~Registration Statement~~Annual Report onForm ~~S-1~~ ~~originally filed on July 24, 2008, as amended (Registration No. 333-152514).~~10-K for the year ended December 31, 2009.

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Unregistered Sales of Equity Securities~~

On August 12, 2009, we awarded to certain of our employees an aggregate of 363,608 shares of our restricted common stock under the Select Medical Holdings Corporation 2005 Equity Incentive Plan, as amended and restated. These shares vested upon the consummation of our initial public offering.

~~Use of Proceeds from Initial Public Offering~~

On September 24, 2009, our registration statement on Form S-1 originally filed on July 24, 2008 (File No. 333-152514) was declared effective, pursuant to which Holdings issued and sold (1) 30,000,000 shares of common stock for aggregate gross offering proceeds of $300.0 million at a price to the public of $10.00 per share, which closed on September 30, 2009, and (2) an additional 3,602,700 shares of common stock to the underwriters pursuant to their over-allotment option for aggregate gross offering proceeds of approximately $36.0 million at a price to the public of $10.00 per share, which closed on October 28, 2009. The managing underwriters were Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc.

We paid to the underwriters underwriting discounts and commissions totaling approximately $20.1 million in connection with the offering. In addition, through November 3, 2009, we incurred additional costs of approximately $2.9 million in connection with the offering which, when added to the underwriting discounts and commissions paid by Holdings, resulted in total expenses of approximately $23.0 million related to the offering. Accordingly, the net proceeds to Holdings from the offering, after deducting underwriting discounts and commissions and offering expenses, were approximately $313.0 million. Except for the payments to executive officers under our Long Term Cash Incentive Plan described below, no amounts, including offering expenses, were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of Holdings’ equity securities or to any other affiliates from the proceeds of the offering.

Holdings used the net proceeds from the offering to repay $258.4 million of indebtedness and to make payments of $18.3 million to its executive officers under our Long Term Cash Incentive Plan, and will use the remaining net proceeds from the offering to repay additional indebtedness or for general corporate purposes. There has been no material change in the planned use of proceeds from our initial public offering from that described in the Prospectus filed on September 25, 2009 with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended.None.

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

~~ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~

Effective as of August 12, 2009, our stockholders approved the following matters by written consent in connection with our initial public offering of common stock: (1) the restatement of the certificate of incorporation of Holdings to become effective upon the consummation of our initial public offering of common stock, (2) the amendment and restatement of the bylaws of Holdings to become effective upon the consummation of our initial public offering of common stock, (3) the amendment and restatement of the Select Medical Holdings Corporation 2005 Equity Incentive Plan, as amended, to become effective immediately prior to the consummation of our initial public offering of common stock, (4) the amendment and restatement of the Select Medical Holdings Corporation 2005 Equity Incentive Plan for Non-Employee Directors, as amended, to become effective immediately prior to the consummation of our initial public offering of common stock, and (5) the waiver of the rights of the preferred stockholders under the certificate of incorporation of Holdings to approve the filing of any registration statement filed by Holdings with the Securities and Exchange Commission in connection with our initial public offering of common stock. These matters were approved by the written consent of a majority of the stockholders of Holdings on August 12, 2009. The stockholders of Holdings that did not approve these matters received notice of the action taken by written consent of a majority of the stockholders of Holdings as required by the General Corporation Law of the State of Delaware.

Effective as of September 17, 2009, our stockholders approved the following matters by written consent in connection with our initial public offering of common stock: (1) a plan of recapitalization, pursuant to which the holders of Holdings’ common stock exchanged each share of common stock then outstanding for 0.30 of a share of Holdings’ common stock, effective immediately upon the filing of the certificate of amendment to the amended and restated certificate of incorporation of Holdings (referenced below) with the Secretary of State of the State of Delaware, and (2) the filing of the certificate of amendment to the amended and restated certificate of incorporation of Holdings with the Secretary of State of the State of Delaware permitting the plan of recapitalization referenced above and the conversion of the preferred stock into common stock at the time of the consummation of our initial public offering of common stock without the cash payment of accrued dividends or the subsequent redemption of common stock. These matters were approved by the written consent of a majority of the stockholders of Holdings on September 17, 2009. The stockholders of Holdings that did not approve these matters received notice of the action taken by written consent of a majority of the stockholders of Holdings as required by the General Corporation Law of the State of Delaware.
ITEM 4. REMOVED AND RESERVED

~~ITEM 5. OTHER INFORMATION~~
ITEM 5. OTHER INFORMATION

None.

~~ITEM 6. EXHIBITS~~
ITEM 6. EXHIBITS

The exhibits to this report are listed in the Exhibit Index appearing on page 6159 hereof.

5957

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


			SELECT MEDICAL CORPORATION
	By:	/s/ Martin F. Jackson
				Martin F. Jackson
		~~By:~~	~~/s/ Martin F. Jackson~~

			~~Martin F. Jackson~~
			Executive Vice President and Chief Financial Officer	(Duly Authorized Officer)

	~~(Duly Authorized Officer)~~By:	/s/ Scott A. Romberger
				Scott A. Romberger
		~~By:~~	~~/s/ Scott A. Romberger~~

			~~Scott A. Romberger~~
			~~Senior Vice President, Chief Accounting Officer and Controller~~
			~~(Principal Accounting Officer)~~

~~Dated: November 13, 2009~~

		~~SELECT MEDICAL HOLDINGS CORPORATION~~

		~~By:~~	~~/s/ Martin F. Jackson~~

			~~Martin F. Jackson~~
			~~Executive Vice President and Chief Financial Officer~~
			~~(Duly Authorized Officer)~~

		~~By:~~	~~/s/ Scott A. Romberger~~

			~~Scott A. Romberger~~
			Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

Dated: August 12, 2010


~~Dated: November 13, 2009~~	SELECT MEDICAL HOLDINGS CORPORATION
	By:	/s/ Martin F. Jackson
		Martin F. Jackson
		Executive Vice President and Chief Financial Officer (Duly Authorized Officer)

	By:	/s/ Scott A. Romberger
		Scott A. Romberger
		Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

Dated: August 12, 2010

6058

EXHIBIT INDEX


Exhibit		Description

	~~1.1~~2.1	~~Underwriting~~Purchase and Sale Agreement by and among Regency Hospital Company, L.L.C., the Sellers named therein, the Representative named therein, Intensiva Healthcare Corporation and Select Medical Corporation, dated June 18, 2010, incorporated herein by reference to Exhibit 2.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on June 23, 2010 (Reg. Nos. 001-34465 and 001-34465)

	10.1	Assignment and Assumption and Amendment No. 4, dated June 7, 2010, to Credit Agreement dated ~~September 25, 2009,~~as of February 24, 2005, as amended, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent and ~~Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated,~~Collateral Agent, Wachovia Bank, National Association as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and ~~J.P. Morgan Securities~~CIBC Inc., as ~~representatives~~Co-Documentation Agents, and the Lenders named therein.

	10.2	Amendment No. 4-A, dated June 7, 2010, to Credit Agreement dated as of ~~the several underwriters named therein, incorporated~~February 24, 2005, as amended, by ~~reference to Exhibit 1.1 of~~and among Select Medical Holdings Corporation, ~~and~~ Select Medical ~~Corporation’s Current Report on Form 8-K filed October 1, 2009.~~Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent, Wachovia Bank, National Association as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC Inc. as Co-Documentation Agents, and the Lenders named therein.

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

6159


~~(1)~~		Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 2, Accounting Policies — Recent Accounting Pronouncements, for additional information.

~~(2)~~		Adjusted for the clarification by the Financial Accounting Standards Board that stated share based payment awards that have not vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. See Note 11 for additional information.


~~(1)~~		Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 2, Accounting Policies — Recent Accounting Pronouncements, for additional information.

~~(2)~~		Adjusted for the clarification by the Financial Accounting Standards Board that stated share based payment awards that have not vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. See Note 11 for additional information.


PART I FINANCIAL INFORMATION			3

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS			3

Consolidated balance sheets			3

Consolidated statements of operations			4

Consolidated statements of changes in stockholders’ equity and ~~comprehensive~~ income (loss)			6

Consolidated statements of cash flows			7

Notes to consolidated financial statements			8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			5655

ITEM 4.4T. CONTROLS AND PROCEDURES			5655

PART II OTHER INFORMATION			5756

ITEM 1. LEGAL PROCEEDINGS			5756

ITEM 1A. RISK FACTORS			57

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			57

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			5857

ITEM 4. ~~SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~REMOVED AND RESERVED			5857

ITEM 5. OTHER INFORMATION			5957

ITEM 6. EXHIBITS			5957

SIGNATURES			6058

Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1


	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2009		2008		2009
	(in thousands)
Amortization expense	$	2,208	$	2,207	$	6,623	$	6,623


	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2010		2009		2010
	(in thousands)
Amortization expense	$	2,208	$	1,185	$	4,416	$	3,052


	Lease
	Termination
	Costs			Severance			Other			Total
	(in thousands)
December 31, 2008	$	7,047		$	992		$	69		$	8,108
Amounts paid in 2009		(2,925	)		(443	)		—			(3,368	)
Revision of estimate		565			(496	)		(69	)		—

September 30, 2009	$	4,687		$	53		$	—		$	4,740


		Lease Termination Costs
	(in thousands)
December 31, 2009		$	4,256
Amounts paid in 2010			(699	)
Revision of estimate			(325	)

June 30, 2010		$	3,232


	Nine Months Ended September 30, 2009									Six Months Ended June 30, 2009
	Specialty		Outpatient							Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total		Hospitals		Rehabilitation		All Other			Total
	(in thousands)											(in thousands)

Net operating revenue	$	1,156,422	$	509,760	$	146		$	1,666,328	$	779,563	$	341,009	$	135		$	1,120,707
Adjusted EBITDA		212,122		67,476		(37,277	)		242,321		147,741		46,578		(25,041	)		169,278
Total assets:
Select Medical Corporation		1,898,494		484,703		378,356			2,761,553		1,920,040		492,936		115,324			2,528,300
Select Medical Holdings Corporation		1,898,494		484,703		381,545			2,764,742		1,920,040		492,936		119,706			2,532,682
Capital expenditures		27,748		6,575		927			35,250		15,377		5,009		595			20,981


		Caritas Rehab Services, LLC
		Elizabethtown Physical Therapy, P.S.C.
		Great Lakes Specialty Hospital — Hackley, LLC
		Great Lakes Specialty Hospital — Oak, LLC
		Jeff Ayres, PT Therapy Center, Inc.
		Jeffersontown Physical Therapy, LLC
		Kentucky Orthopedic Rehabilitation, LLC
		Kessler Core PT, OT and Speech Therapy at New York, LLC
		Louisville Physical Therapy, P.S.C.
		Metropolitan West Physical Therapy and Sports Medicine Services, Inc.
		MKJ Physical Therapy, Inc.
		New York Physician Services, P.C.
		North Andover Physical Therapy, P.C.
		Partners in Physical Therapy, PLLC
		Penn State Hershey Rehabilitation, LLC
		Philadelphia Occupational Health, P.C.
		Rehabilitation Physician Services, P.C.
		Select LifeCare Western Michigan, LLC
		Select Physical Therapy/Baptist Rehabilitation Center, LLC
		Select Physical Therapy of Las Vegas Limited Partnership
		Select Specialty — Downriver, LLC
		Select Specialty Hospital — Akron, LLC
		Select Specialty Hospital — Evansville, LLC
		Select Specialty Hospital — Central Pennsylvania, L.P.
		Select Specialty Hospital — Houston, L.P.
		Select Specialty Hospital — Gulf Coast, Inc.
		SSM Select Rehab St. Louis, LLC
		Therex, P.C.
		TJ Corporation I, LLC
		U.S. Regional Occupational Health II, P.C.
		U.S. Regional Occupational Health II of New Jersey, P.C.


(a)		Elimination of investments in subsidiaries.

(b)		Elimination of investments in subsidiaries’ earnings.


(a)		Elimination of equity in net income from consolidated subsidiaries.


(a)		Elimination of equity in earnings of ~~subsidiary.~~subsidiaries.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS