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 30, ~~2010~~2011


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

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.

YESþ NOo

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~~YESoþ 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 filersoþ		Non-accelerated filersþo		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 31, ~~2010,~~2011, Select Medical Holdings Corporation had outstanding ~~161,040,060~~148,108,130 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.

TABLE OF CONTENTS


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 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			30

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			5854

ITEM ~~4T.~~4. CONTROLS AND PROCEDURES			5855

PART II OTHER INFORMATION			5855

ITEM 1. LEGAL PROCEEDINGS			5855

ITEM 1A. RISK FACTORS			5956

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			5956

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			5957

ITEM 4. REMOVED AND RESERVED			6057

ITEM 5. OTHER INFORMATION			6057

ITEM 6. EXHIBITS			6057

SIGNATURES			6057

~~Exhibit 3.1~~
~~Exhibit 3.2~~
~~Exhibit 10.1~~
~~Exhibit 10.2~~
~~Exhibit 10.3~~
~~Exhibit 10.4~~
~~Exhibit 10.5~~
~~Exhibit 10.6~~
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I FINANCIAL INFORMATION

~~ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS~~


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,			September 30,			December 31,			September 30,			2010		2011		2010		2011
	2009			2010			2009			2010
ASSETS
Current Assets:
Cash and cash equivalents	$	83,680		$	15,343		$	83,680		$	15,343		$	4,365	$	10,213	$	4,365	$	10,213
Accounts receivable, net of allowance for doubtful accounts of $43,357 and $46,332 in 2009 and 2010, respectively		307,079			325,338			307,079			325,338
Accounts receivable, net of allowance for doubtful accounts of $44,416 and $50,597 in 2010 and 2011, respectively														353,432		394,989		353,432		394,989
Current deferred tax asset		48,535			38,949			48,535			38,949			30,654		19,834		30,654		19,834
Prepaid income taxes		11,179			12,966			11,179			12,966			12,699		10,340		12,699		10,340
Other current assets		24,240			25,897			24,240			25,897			28,176		28,106		28,176		28,106

Total Current Assets		474,713			418,493			474,713			418,493			429,326		463,482		429,326		463,482

Property and equipment, net		466,131			538,026			466,131			538,026			532,100		505,894		532,100		505,894
Goodwill		1,548,269			1,646,698			1,548,269			1,646,698			1,631,252		1,627,509		1,631,252		1,627,509
Other identifiable intangibles		65,297			67,719			65,297			67,719			80,119		72,448		80,119		72,448
Assets held for sale		11,342			11,342			11,342			11,342			11,342		11,342		11,342		11,342
Other assets		36,481			38,330			33,427			35,682			37,947		70,435		35,433		68,937


Total Assets	$	2,602,233		$	2,720,608		$	2,599,179		$	2,717,960		$	2,722,086	$	2,751,110	$	2,719,572	$	2,749,612


LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	—		$	10,971		$	—		$	10,971		$	18,792	$	14,618	$	18,792	$	14,618
Current portion of long-term debt and notes payable		4,145			149,116			4,145			149,116			149,379		10,268		149,379		10,268
Accounts payable		73,434			76,447			73,434			76,447			74,193		88,942		74,193		88,942
Accrued payroll		62,035			72,450			62,035			72,450			63,760		70,917		63,760		70,917
Accrued vacation		41,013			46,152			41,013			46,152			46,588		48,243		46,588		48,243
Accrued interest		32,919			13,191			23,473			10,256			30,937		5,590		21,586		5,153
Accrued restructuring		4,256			2,831			4,256			2,831			6,754		5,608		6,754		5,608
Accrued other		84,234			95,538			97,134			95,538			103,856		105,053		116,456		105,053
Due to third party payors		1,905			6,445			1,905			6,445			5,299		4,249		5,299		4,249

Total Current Liabilities		303,941			473,141			307,395			470,206			499,558		353,488		502,807		353,051

Long-term debt, net of current portion		1,401,426			1,276,816			1,096,842			970,836			1,281,390		1,397,418		974,913		1,230,118
Non-current deferred tax liability		66,768			66,269			66,768			66,269			59,074		68,399		59,074		68,399
Other non-current liabilities		60,543			67,266			60,543			67,266			66,650		73,219		66,650		73,219


Total Liabilities		1,832,678			1,883,492			1,531,548			1,574,577			1,906,672		1,892,524		1,603,444		1,724,787

Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 159,980,544 shares and 161,040,060 shares issued and outstanding in 2009 and 2010, respectively		160			161			—			—
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 154,519,025 shares and 149,936,594 shares issued and outstanding in 2010 and 2011, respectively														155		150		—		—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding		—			—			—						—		—		0		0
Capital in excess of par		578,648			565,342			822,664			831,479			535,628		518,295		834,894		846,806
Retained earnings		169,094			240,627			223,314			280,918			248,097		307,648		249,700		145,526
Accumulated other comprehensive loss		(8,914	)		(414	)		(8,914	)		(414	)

Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity		738,988			805,716			1,037,064			1,111,983			783,880		826,093		1,084,594		992,332
Non-controlling interests		30,567			31,400			30,567			31,400
Non-controlling interest														31,534		32,493		31,534		32,493

Total Equity		769,555			837,116			1,067,631			1,143,383			815,414		858,586		1,116,128		1,024,825


Total Liabilities and Equity	$	2,602,233		$	2,720,608		$	2,599,179		$	2,717,960		$	2,722,086	$	2,751,110	$	2,719,572	$	2,749,612

The accompanying notes are an integral part of ~~this statement.~~these consolidated financial statements.

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 Three Months Ended September 30,						For the Three Months Ended September 30,
	2009			2010			2009			2010			2010			2011			2010			2011

Net operating revenues	$	545,621		$	588,250		$	545,621		$	588,250		$	588,250		$	694,131		$	588,250		$	694,131


Costs and expenses:
Cost of services		448,702			498,739			448,702			498,739			498,739			581,829			498,739			581,829
General and administrative		34,618			19,228			34,618			19,228			19,228			14,975			19,228			14,975
Bad debt expense		11,720			11,317			11,720			11,317			11,317			11,709			11,317			11,709
Depreciation and amortization		17,676			17,012			17,676			17,012			17,012			17,545			17,012			17,545

Total costs and expenses		512,716			546,296			512,716			546,296			546,296			626,058			546,296			626,058


Income from operations		32,905			41,954			32,905			41,954			41,954			68,073			41,954			68,073

Other income and expense:
Gain on early retirement of debt		1,129			—			—			—
Equity in losses of unconsolidated subsidiaries		—			(186	)		—			(186	)
Equity in earnings (losses) of unconsolidated subsidiaries														(186	)		1,653			(186	)		1,653
Other income		—			148			2,215			148			148			—			148			—
Interest income		2			—			2			—			—			119			—			119
Interest expense		(33,451	)		(27,677	)		(25,114	)		(20,821	)		(27,677	)		(24,134	)		(20,821	)		(21,526	)


Income from operations before income taxes		585			14,239			10,008			21,095
Income before income taxes														14,239			45,711			21,095			48,319

Income tax expense (benefit)		(804	)		5,574			2,494			7,974
Income tax expense														5,574			19,330			7,974			20,243


Net income		1,389			8,665			7,514			13,121			8,665			26,381			13,121			28,076

Less: Net income attributable to non-controlling interests		806			656			806			656			656			785			656			785


Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation		583			8,009		$	6,708		$	12,465		$	8,009		$	25,596		$	12,465		$	27,291


Less: Preferred dividends		6,667			—


Net income (loss) available to common stockholders and participating securities	$	(6,084	)	$	8,009


Income (loss) per common share:
Income per common share:
Basic	$	(0.09	)	$	0.05								$	0.05		$	0.17
Diluted	$	(0.09	)	$	0.05								$	0.05		$	0.17

The accompanying notes are an integral part of ~~this statement.~~these consolidated financial statements.

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 Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2009			2010			2009			2010			2010			2011			2010				2011

Net operating revenues	$	1,666,328		$	1,752,940		$	1,666,328		$	1,752,940		$	1,752,940		$	2,086,066		$	1,752,940			$	2,086,066


Costs and expenses:
Cost of services		1,353,107			1,441,160			1,353,107			1,441,160			1,441,160			1,708,911			1,441,160		��		1,708,911
General and administrative		60,278			41,819			60,278			41,819			41,819			47,656			41,819				47,656
Bad debt expense		33,678			31,449			33,678			31,449			31,449			40,002			31,449				40,002
Depreciation and amortization		53,346			51,333			53,346			51,333			51,333			52,766			51,333				52,766

Total costs and expenses		1,500,409			1,565,761			1,500,409			1,565,761			1,565,761			1,849,335			1,565,761				1,849,335


Income from operations		165,919			187,179			165,919			187,179			187,179			236,731			187,179				236,731

Other income and expense:
Gain on early retirement of debt		16,445			—			15,316			—
Equity in losses of unconsolidated subsidiaries		—			(186	)		—			(186	)
Loss on early retirement of debt														—			(31,018	)		—				(20,385	)
Equity in earnings (losses) of unconsolidated subsidiaries														(186	)		1,329			(186	)			1,329
Other income		—			464			3,836			464			464			—			464				—
Interest income		82			—			82			—			—			286			—				286
Interest expense		(101,781	)		(86,998	)		(75,936	)		(66,184	)		(86,998	)		(75,094	)		(66,184	)			(59,882	)


Income from operations before income taxes		80,665			100,459			109,217			121,273			100,459			132,234			121,273				158,079

Income tax expense		33,076			39,989			43,069			47,274			39,989			56,809			47,274				65,854


Net income		47,589			60,470			66,148			73,999			60,470			75,425			73,999				92,225

Less: Net income attributable to non-controlling interests		2,218			3,773			2,218			3,773			3,773			4,438			3,773				4,438


Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation		45,371			56,697		$	63,930		$	70,226		$	56,697		$	70,987		$	70,226			$	87,787


Less: Preferred dividends		19,537			—


Net income available to common stockholders and participating securities	$	25,834		$	56,697


Income per common share:
Basic	$	0.38		$	0.35								$	0.35		$	0.46
Diluted	$	0.37		$	0.35								$	0.35		$	0.46

The accompanying notes are an integral part of ~~this statement.~~these consolidated financial statements.

Select Medical Holdings Corporation

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

(unaudited)

(in thousands)


						Select Medical Holdings Corporation Stockholders																				Select Medical Holdings Corporation Stockholders
															Accumulated														Common
						Common		Common		Capital in					Other			Non-						Comprehensive		Common			Stock Par			Capital in			Retained			Non-controlling
				Comprehensive		Stock		Stock Par		Excess of			Retained		Comprehensive			controlling			Total			Income		Stock Issued			Value			Excess of Par			Earnings			Interests
	Total			Income		Issued		Value		Par			Earnings		Income (Loss)			Interests
Balance at December 31, 2009	$	769,555					159,981	$	160	$	578,648		$	169,094	$	(8,914	)	$	30,567
Balance at December 31, 2010																					$	815,414					154,519		$	155		$	535,628		$	248,097		$	31,534
Net income		60,470		$	60,470									56,697					3,773			75,425		$	75,425											70,987			4,438
Unrealized gain on interest rate swap, net of tax		8,500			8,500											8,500

Total comprehensive income		68,970		$	68,970

Issuance and vesting of restricted stock		530							1		529											1,801					26			(0	)		1,801
Exercise of stock options		125					1,059				125											169					42			0			169
Stock option expense		876									876											897											897
Reclassification of deemed dividend		—									(14,836	)		14,836
Repurchase of common shares																						(31,641	)				(4,650	)		(5	)		(20,200	)		(11,436	)
Distributions to non-controlling interests		(3,618	)																(3,618	)		(3,507	)																(3,507	)
Other		678																	678			28																	28

Balance at September 30, 2010	$	837,116					161,040	$	161	$	565,342		$	240,627	$	(414	)	$	31,400
Balance at September 30, 2011																					$	858,586					149,937		$	150		$	518,295		$	307,648		$	32,493

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


						Select Medical Corporation Stockholders																				Select Medical Corporation Stockholders
															Accumulated													Common
						Common		Common		Capital in					Other			Non-						Comprehensive		Common		Stock Par		Capital in		Retained			Non-controlling
				Comprehensive		Stock		Stock Par		Excess of		Retained			Comprehensive			controlling			Total			Income		Stock Issued		Value		Excess of Par		Earnings			Interests
	Total			Income		Issued		Value		Par		Earnings			Income (Loss)			Interests
Balance at December 31, 2009	$	1,067,631					—	$	—	$	822,664	$	223,314		$	(8,914	)	$	30,567
Balance at December 31, 2010																					$	1,116,128					0	$	0	$	834,894	$	249,700		$	31,534
Net income		73,999		$	73,999								70,226						3,773			92,225		$	92,225								87,787			4,438
Unrealized gain on interest rate swap, net of tax		8,500			8,500											8,500

Total comprehensive income		82,499		$	82,499

Federal tax benefit of losses contributed by Holdings		7,285									7,285											9,045									9,045
Additional investment by Holdings		125									125											169									169
Settlement of dividends paid to Holdings		(12,622	)										(12,622	)
Net change in dividends payable to Holdings																						12,600											12,600
Dividends declared and paid to Holdings																						(204,561	)										(204,561	)
Distributions to non-controlling interests		(3,618	)																(3,618	)		(3,507	)													(3,507	)
Other		678																	678			28														28
Contribution related to restricted stock awards and stock option issuances by Holdings		1,405									1,405											2,698									2,698

Balance at September 30, 2010	$	1,143,383					—	$	—	$	831,479	$	280,918		$	(414	)	$	31,400
Balance at September 30, 2011																					$	1,024,825					0	$	0	$	846,806	$	145,526		$	32,493

The accompanying notes are an integral part of ~~this statement.~~these consolidated financial statements.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


													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 Nine Months Ended September 30,						For the Nine Months Ended September 30,						2010			2011			2010			2011
	2009			2010			2009			2010
Operating activities
Net income	$	47,589		$	60,470		$	66,148		$	73,999		$	60,470		$	75,425		$	73,999		$	92,225
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		53,346			51,333			53,346			51,333			51,333			52,766			51,333			52,766
Provision for bad debts		33,678			31,449			33,678			31,449			31,449			40,002			31,449			40,002
Gain on early retirement of debt		(16,445	)		—			(15,316	)		—
Loss from disposal of assets		550			612			550			612
Loss on early retirement of debt														—			31,018			—			20,385
Loss (gain) from disposal of assets														612			(5,182	)		612			(5,182	)
Non-cash gain from interest rate swaps		—			(464	)		(3,836	)		(464	)		(464	)		—			(464	)		—
Non-cash stock compensation expense		4,795			1,405			4,795			1,405			1,405			2,698			1,405			2,698
Amortization of debt discount		1,239			1,396			—			—			1,396			1,271			—			412
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable		(32,033	)		(26,668	)		(32,033	)		(26,668	)		(26,668	)		(81,466	)		(26,668	)		(81,466	)
Other current assets		(982	)		3,571			(982	)		3,571			3,571			240			3,571			240
Other assets		4,018			494			3,589			88			494			1,072			88			723
Accounts payable		(8,366	)		(3,469	)		(8,366	)		(3,469	)		(3,469	)		14,008			(3,469	)		14,008
Due to third-party payors		(3,530	)		(756	)		(3,530	)		(756	)		(756	)		(1,050	)		(756	)		(1,050	)
Accrued expenses		(1,024	)		(13,038	)		7,615			(6,527	)		(13,038	)		(12,566	)		(6,527	)		(3,650	)
Income and deferred taxes		10,612			3,930			20,608			11,214			3,930			25,678			11,214			34,723

Net cash provided by operating activities		93,447			110,265			126,266			135,787			110,265			143,914			135,787			166,834


Investing activities
Purchases of property and equipment		(35,250	)		(38,626	)		(35,250	)		(38,626	)		(38,626	)		(32,094	)		(38,626	)		(32,094	)
Proceeds from sale of property		1,341			—			1,341			—
Investment in business														—			(13,514	)		—			(13,514	)
Acquisition of businesses, net of cash acquired		(381	)		(165,802	)		(381	)		(165,802	)		(165,802	)		1,921			(165,802	)		1,921
Proceeds from sale of assets														—			7,879			—			7,879

Net cash used in investing activities		(34,290	)		(204,428	)		(34,290	)		(204,428	)		(204,428	)		(35,808	)		(204,428	)		(35,808	)


Financing activities
Proceeds from initial public offering, net of fees		282,000			—			—			—
Equity investment by Holdings		—			—			282,024			125
Payment of initial public offering costs		(584	)		—			(584	)		—
Borrowings on revolving credit facility		193,000			90,000			193,000			90,000
Payments on revolving credit facility		(253,000	)		(70,000	)		(253,000	)		(70,000	)
Payment on credit facility term loan		(5,033	)		—			(5,033	)		—
Repurchase of 7 5/8% senior subordinated notes		(30,114	)		—			(30,114	)		—
Repurchase of senior floating rate notes		(6,468	)		—			—			—
Borrowings on revolving credit facilities														90,000			595,000			90,000			595,000
Payments on revolving credit facilities														(70,000	)		(570,000	)		(70,000	)		(570,000	)
Borrowings on 2011 credit facility term loan, net of discount														—			841,500			—			841,500
Payments on 2011 credit facility term loans														—			(2,125	)		—			(2,125	)
Payments on 2005 credit facility term loans, net of call premium														—			(484,633	)		—			(484,633	)
Repurchase of 10% senior subordinated notes														—			(150,000	)		—			—
Repurchase of 7 5/8% senior subordinated notes, net of tender premium														—			(273,941	)		—			(273,941	)
Borrowings of other debt		5,184			5,015			5,184			5,015			5,015			5,496			5,015			5,496
Principal payments on seller and other debt		(5,738	)		(6,667	)		(5,738	)		(6,667	)		(6,667	)		(5,846	)		(6,667	)		(5,846	)
Debt issuance costs														—			(18,556	)		—			(18,556	)
Proceeds from (repayment of) bank overdrafts														10,971			(4,174	)		10,971			(4,174	)
Equity investment by Holdings														—			—			125			169
Repurchase of common stock														—			(31,641	)		—			—
Proceeds from issuance of common stock														125			169			—			—
Dividends paid to Holdings		—			—			(39,367	)		(25,522	)		—			—			(25,522	)		(204,561	)
Repurchase of common and preferred stock		(80	)		—			—			—
Exercise of stock options		24			125			—			—
Borrowings (repayment) of bank overdrafts		(21,130	)		10,971			(21,130	)		10,971
Equity contribution and loans from non-controlling interests		1,500			—			1,500			—
Distributions to non-controlling interests		(2,486	)		(3,618	)		(2,486	)		(3,618	)		(3,618	)		(3,507	)		(3,618	)		(3,507	)

Net cash provided by financing activities		157,075			25,826			124,256			304
Net cash provided by (used in) financing activities														25,826			(102,258	)		304			(125,178	)


Net increase (decrease) in cash and cash equivalents		216,232			(68,337	)		216,232			(68,337	)		(68,337	)		5,848			(68,337	)		5,848

Cash and cash equivalents at beginning of period		64,260			83,680			64,260			83,680			83,680			4,365			83,680			4,365

Cash and cash equivalents at end of period	$	280,492		$	15,343		$	280,492		$	15,343		$	15,343		$	10,213		$	15,343		$	10,213


Supplemental Cash Flow Information
Cash paid for interest	$	115,901		$	99,897		$	83,082		$	74,381		$	99,897		$	94,632		$	74,381		$	71,719
Cash paid for taxes	$	22,441		$	36,424		$	22,441		$	36,424		$	36,424		$	31,105		$	36,424		$	31,105

The accompanying notes are an integral part of ~~this statement.~~these consolidated financial statements.

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~~effectuating a leveraged buyout of Select, which was a publicly traded entity. Holdings was originally owned by an investor group that ~~included~~includes 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 merged with a subsidiary of Holdings, which resulted in Select becoming a wholly-owned subsidiary of Holdings (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.~~stock. 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 30, ~~2010~~2011 and for the three and nine month periods ended September 30, ~~2009~~2010 and ~~2010~~2011 have been prepared in accordance with ~~generally accepted accounting principles.~~GAAP. 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 months ended September 30, ~~2010~~2011 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, ~~2010.~~2011.

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, ~~2009~~2010 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March ~~17, 2010.~~9, 2011.

2. Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with 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 could differ materially from those estimates.

Recent Accounting Pronouncements

In ~~January 2010,~~May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2010-06,~~2011-04, “Fair Value ~~Measurements and Disclosures~~Measurement (Topic 820) — ~~Improving Disclosures about~~Amendments to Achieve Common Fair Value ~~Measurements”~~Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“Update ~~2010-06”~~2011-04”)~~, which amends the guidance on~~. Update 2011-04 generally represents clarification of Topic 820, but also includes instances where a particular principle or requirement for measuring fair value ~~to add new~~or disclosing information about fair value measurements has changed. Update 2011-04 results in common principles and 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~~measuring fair value ~~disclosures~~and for disclosing information about ~~the level of disaggregation~~fair value measurements in accordance with GAAP and ~~about inputs~~International Financial Reporting Standards. Update 2011-04 is effective for interim and ~~valuation techniques used~~annual periods beginning after December 15, 2011 and is to ~~measure fair value.~~be applied prospectively. Early application is not permitted. The Company ~~adopted update 2010-06~~does not expect the adoption of Update 2011-04 to have a material impact on ~~January 1, 2010, except~~its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” (“Update 2011-05”) that improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Update 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from other comprehensive income (“OCI”) to net income, in both net income and OCI. Update 2011-05 does not change the ~~requirement~~current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, Update 2011-05 does not affect the calculation or reporting of earnings per share. Update 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively, with early adoption permitted. The adoption of Update 2011-05 will cause the Company to change its presentation of other comprehensive income on its consolidated financial statements.

In July 2011, the FASB issued ASU 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities” (“Update 2011-07”). Update 2011-07 requires certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the ~~Level 3 activity~~allowance for doubtful accounts. Update 2011-07 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is in the process of ~~purchases, sales, issuances,~~evaluating the effects of Update 2011-07 on its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and ~~settlements~~Other (Topic 350): Testing Goodwill for Impairment” (“Update 2011-08). Update 2011-08 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under Update 2011-08, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a ~~gross basis, which~~qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Update 2011-08 includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. Update 2011-08 will be effective for goodwill impairment test performed for fiscal years beginning after December 15, ~~2010, and for interim periods within those fiscal years. The adoption~~2011. Update 2011-08 does not change the accounting or measurement of ~~Update 2010-06 did not~~impairments. This update will have ~~an impact~~no effect on the Company’s consolidated financial statements. ~~The Company currently has no Level 3 measurements.~~

~~3. Purchase of Regency Hospital Company, L.L.C.~~

On September 1, 2010, Select completed the acquisition of all the issued and outstanding equity securities of Regency Hospital Company, L.L.C. (“Regency”) an operator of long-term acute care hospitals, for $210.0 million, including certain assumed liabilities. The amount paid at closing was reduced by $33.1 million for certain assumed liabilities, payments to employees, payments for the purchase of minority interests and an estimated working capital adjustment. The purchase price is subject to a final settlement of net working capital. Regency operated a network of 23 long-term acute care hospitals located in nine states. The results of operations of Regency have been included in the Company’s consolidated financial statements since September 1, 2010 and consisted of net operating revenues of $23.4 million and pre-tax losses of $4.2 million. Regency’s operations have been included in the specialty hospitals segment.

The purchase price was allocated to tangible and identifiable intangible assets and liabilities based upon preliminary estimates of fair value, with the remainder allocated to goodwill. The Company is in the process of completing its valuation analysis to identify and determine the fair values of tangible and intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from preliminary estimates used at September 30, 2010. The Company expects to finalize the allocation of the purchase price prior to December 31, 2010. In accordance with the provisions of ASC 350 Intangibles — Goodwill and other, no amortization of goodwill has been recorded. The factors that were considered when deciding to acquire Regency and determining the purchase price that resulted in goodwill included the historical earnings of the acquired long-term acute care hospitals, general and administrative cost saving opportunities that could be achieved by utilizing the Company’s infrastructure and the benefits that could be achieved with patients and commercial payors by having a larger network of long-term acute care hospitals.

~~The preliminary purchase price allocation is as follows (in thousands):~~

Cash paid, net of cash acquired of $11.3 million $ 165,616

Fair value of net tangible assets acquired:
Accounts receivable 22,526
Other current assets 5,194
Property and equipment 83,976
Other assets 506
Current liabilities (43,615 )
Other liabilities (6,313 )

Net tangible assets acquired 62,274
Tradename 5,000
Goodwill 98,342

$ 165,616

~~Unaudited pro forma net revenue~~3. Significant Transactions

On April 1, 2011, the Company entered into a joint venture with Baylor Health Care System. The joint venture consists of a partnership between Baylor Institute for Rehabilitation and ~~net income~~Select Physical Therapy Texas, a wholly-owned subsidiary of the Company. The Company contributed several businesses to the joint venture, including its Frisco inpatient rehabilitation facility and certain Texas-based outpatient rehabilitation clinics. A gain of $1.2 million was recognized on this contribution and is included in the general and administrative line item on the consolidated statement of operations for the ~~three and~~ nine months ended September 30, ~~2010~~2011. Additionally, the Company purchased partnership units and ~~2009~~made initial working capital advances to the newly formed partnership utilizing $13.5 million in cash. The Company owns a 49.0% interest in the partnership and is accounting for ~~Select and Holdings as if~~the investment using the equity method because the Company does not have a controlling influence.

On June 30, 2011, the Company sold a building which it acquired in connection with the acquisition ~~occurred as~~ of ~~January 1, 2009~~Regency Hospital Company, L.L.C. for $7.6 million in cash. A gain of $4.2 million was recognized on this sale and ~~January 1, 2010~~ is ~~as follows:~~

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2010 2009 2010
(in thousands except per share amounts)

Net revenue $ 636,126 $ 645,300 $ 1,944,487 $ 1,987,885
Net income:
Select Medical Corporation $ 8,044 $ 12,250 $ 71,288 $ 71,985
Select Medical Holdings Corporation $ 1,919 $ 7,444 $ 52,595 $ 58,484
Income (loss) per common share of Select Medical Holdings Corporation:
Basic $ (0.08 ) $ 0.04 $ 0.44 $ 0.34
Diluted $ (0.08 ) $ 0.04 $ 0.44 $ 0.34
included in the general and administrative line item on the consolidated statement of operations for the nine months ended September 30, 2011.

4. Intangible Assets

The Company’s intangible assets consist of the following:


	As of September 30, 2010					As of September 30, 2011
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
	(in thousands)					(in thousands)
Amortized intangible assets:
Contract therapy relationships	$	20,456	$	(20,456	)
Non-compete agreements		25,909		(23,937	)	$	25,909	$	(25,244	)

Total	$	46,365	$	(44,393	)


Indefinite-lived intangible assets:
Goodwill	$	1,646,698				$	1,627,509
Trademarks		52,858					57,709
Certificates of need		11,550					11,914
Accreditations		1,339					2,160

Total	$	1,712,445				$	1,699,292

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At September 30, ~~2010,~~2011, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and ~~3.7~~8.7 years, respectively.

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

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2009 2010 2009 2010
(in thousands)
Amortization expense $ 2,207 $ 869 $ 6,623 $ 3,921


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2011		2010		2011
	(in thousands)				(in thousands)
Amortization expense	$	869	$	328	$	3,921	$	981

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 ~~Kessler Rehabilitation Corporation~~ and SemperCare, Inc. ~~and the value assigned to the Company’s contract therapy relationships.~~ The useful lives of the outpatient rehabilitation division of HealthSouth Corporation’s non-compete ~~the Kessler Rehabilitation Corporation non-compete,~~and the SemperCare, Inc. non-compete are five and ~~the Company’s contract therapy relationships are approximately five,~~ seven ~~seven and five~~ years, respectively. Amortization expense related to these intangible assets for each of the next five years commencing January 1, ~~2010~~2011 is approximately as follows (in thousands):


2010	$	4,247

2011		1,306	$	1,306
2012		340		340
2013		0		0
2014		0		0
2015				0

The changes in the carrying amount of goodwill for the Company’s reportable segments for the nine months ended September 30, ~~2010~~2011 are as follows:

Specialty Outpatient
Hospitals Rehabilitation Total
(in thousands)
Balance as of December 31, 2009 $ 1,247,713 $ 300,556 $ 1,548,269
Goodwill acquired during the year 98,342 87 98,429

Balance as of September 30, 2010 $ 1,346,055 $ 300,643 $ 1,646,698


	Specialty			Outpatient
	Hospitals			Rehabilitation			Total
	(in thousands)
Balance as of December 31, 2010	$	1,330,609		$	300,643		$	1,631,252
Goodwill revision (1)		7,114			—			7,114
Purchase price settlement (2)		(3,921	)		—			(3,921	)
Goodwill acquired during the period		2,169			—			2,169
Goodwill allocated to dispositions during the period		(2,750	)		(6,355	)		(9,105	)

Balance as of September 30, 2011	$	1,333,221		$	294,288		$	1,627,509


(1)		During the three months ended March 31, 2011, the Company made a revision to the Regency Hospital Company, L.L.C. purchase price allocation resulting from the finalization of the intangible asset valuations.

(2)		During the three months ended June 30, 2011, the Company completed the post-closing settlement of net working capital with the seller of Regency Hospital Company, L.L.C.

5. Restructuring Reserves

In connection with the acquisition of substantially all of the outpatient rehabilitation division of HealthSouth Corporation, the Company recorded an 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.

In connection with the acquisition of all the issued and outstanding equity securities of Regency Hospital Company, L.L.C. (“Regency”), an operator of long term acute care hospitals, the Company recorded an estimated liability of $4.3 million in 2010 for business restructuring related to lease termination costs.

The following summarizes the Company’s restructuring activity:

Lease Termination Costs
(in thousands)
December 31, 2009 $ 4,256
Amounts paid in 2010 (1,050 )
Revision of estimate (375 )

September 30, 2010 $ 2,831


	Lease Termination Costs
	(in thousands)
Balance as of December 31, 2010	$	6,754
Amounts paid in 2011		(1,480	)
Accretion expense		334

Balance as of September 30, 2011	$	5,608

The Company expects to pay out the remaining lease termination costs through ~~2014.~~2014 for the acquisition of the outpatient rehabilitation division of HealthSouth Corporation and through 2015 for the lease termination costs related to the Regency acquisition.

6. ~~Extension~~Indebtedness

The components of ~~Revolving Credit Facility~~long-term debt and notes payable are shown in the following table:


	Holdings				Select
	December 31,		September 30,		December 31,		September 30,
	2010		2011		2010		2011
	(in thousands)
7 5/8% senior subordinated notes	$	611,500	$	345,000	$	611,500	$	345,000
2011 - senior secured credit facilities:
Revolving loan		—		50,000		—		50,000
Term loan (1)		—		839,787		—		839,787
2005 - senior secured credit facilities:
Revolving loan		25,000		—		25,000		—
Term loan B		191,268		—		191,268		—
Term loan B-1		290,576		—		290,576		—
10% senior subordinated notes (2)		139,177		—		—		—
Senior floating rate notes		167,300		167,300		—		—
Other debt		5,948		5,599		5,948		5,599

Total debt		1,430,769		1,407,686		1,124,292		1,240,386
Less: current maturities		149,379		10,268		149,379		10,268

Total long-term debt	$	1,281,390	$	1,397,418	$	974,913	$	1,230,118


(1)		Presented net of unamortized discount of $8.1 million.

(2)		Presented net of unamortized discount of $10.8 million.

On June ~~7, 2010, the Company~~1, 2011, Select entered into ~~an amendment to its~~a new senior secured credit agreement (the “Credit Agreement”) that provides for $1.15 billion in senior secured credit facilities (“Senior Secured Credit Facilities”), comprised of an $850.0 million, seven-year term loan facility ~~that extended the maturity of its~~(“Term Loan”) and a $300.0 million, five-year revolving credit facility (“Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit and a $25.0 million sublimit for swingline loans.

Select used borrowings under the Senior Secured Credit Facilities to refinance all of its outstanding indebtedness under its existing credit facilities, to repurchase $266.5 million aggregate principal amount of its 7 5/8% senior subordinated notes due 2015 and to repay all of Holdings’ existing 10% senior subordinated notes due 2015. Select recognized a loss on early retirement of debt for the nine months ended September 30, 2011 of $20.4 million related to these transactions. Holdings recognized a loss on early retirement of debt for the nine months ended September 30, 2011 of $31.0 million related to these transactions. Borrowings under the Senior Secured Credit Facilities are guaranteed by Holdings and substantially all of Select’s current domestic subsidiaries and will be guaranteed by Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries, if any.

Borrowings under the Senior Secured Credit Facilities will bear interest at a rate equal to:

in the case of the Term Loan, Adjusted LIBO plus 3.75%, or Alternative Base Rate plus 2.75%; and

in the case of the Revolving Credit Facility, Adjusted LIBO plus a percentage ranging from ~~February 24, 2011~~2.75% to ~~August 22, 2013. The applicable margin~~3.75%, or Alternative Base Rate plus a percentage ~~and commitment fee for revolving loans have increased and are determined~~ranging from 1.75% to 2.75%, in each case based on ~~a pricing grid whereby changes~~Select’s leverage ratio.

“Adjusted LIBO” is defined as, with respect to any interest period, the London interbank offered rate for such interest period, adjusted for any applicable statutory reserve requirements; provided that Adjusted LIBO, when used in ~~the leverage ratio, as defined in the credit agreement, results in changes~~reference to the ~~applicable margin percentage. Under~~Term Loan, will at no time be less than 1.75% per annum.

“Alternative Base Rate” is defined as the ~~pricing grid,~~highest of (a) the administrative agent’s Prime Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1.00% and (c) the Adjusted LIBO from time to time for an interest period of one month, plus 1.00%.

The applicable margin percentage for revolving ~~ABR~~ loans ~~ranges~~will decrease from ~~2% per annum~~(1) 2.75% to ~~3% per annum,~~2.50% for alternate base rate loans and (2) 3.75% to 3.50% for adjusted LIBOR 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 Term Loan will amortize in equal quarterly installments on the last day of each March, June, September and December in aggregate annual amounts equal to $2.1 million commencing in September 2011. The balance of the Term Loan will be payable on June 1, 2018, provided that if on the 90th day prior to the scheduled final maturity date of Select’s 7 5/8% senior subordinated notes due 2015 (the “Tranche B Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 are outstanding, the maturity date for the Term Loan will be the Tranche B Trigger Date. Similarly, the Revolving Credit Facility will be payable on June 1, 2016, provided that if on the 90th day prior to the scheduled final maturity date of Select’s 7 5/8% senior subordinated notes due 2015 (the “Revolving Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 are outstanding, the maturity date for the Revolving Credit Facility will be the Revolving Trigger Date.

Select will be required to prepay borrowings under the Senior Secured Credit Facilities with (1) 100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens subject to a first lien intercreditor agreement, (2) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (3) 50% of excess cash flow (as defined in the Credit Agreement) if Select’s leverage ratio is greater than 3.75 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 3.75 to 1.00 and greater than 3.25 to 1.00, in each case, reduced by the aggregate amount of term loans optionally prepaid during the applicable ~~margin percentage~~fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 3.25 to 1.00.

The Senior Secured Credit Facilities require Select to maintain a leverage ratio (based upon the ratio of indebtedness for ~~revolving Eurodollar loans ranges~~money borrowed to consolidated EBITDA, as defined in the Credit Agreement), which is tested quarterly and becomes more restrictive over time, and prohibits Select from ~~3% per annum~~making capital expenditures in excess of $125.0 million in any fiscal year (subject to ~~4% per annum,~~a 50% carry-over provision). Failure to comply with these covenants would result in an event of default under the Senior Secured Credit Facilities and, absent a waiver or an amendment from the lenders, preclude Select from making further borrowings under the Revolving Credit Facility and permit the lenders to accelerate all outstanding borrowings under the Senior Secured Credit Facilities.

The Senior Secured Credit Facilities also contain a number of affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Senior Secured Credit Facilities contain events of default for non-payment of principal and interest when due, cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

Maturities of Long-Term Debt and Notes Payable

Maturities of the Company’s long-term debt for the period from October 1, 2011 through December 31, 2011 and the ~~commitment fee rate for extended revolving commitments ranges from 0.375% to 0.75%.~~years after 2011 are approximately as follows and are presented net of the discount on 2011 Senior Secured Credit Facilities’ term loan:


	Holdings		Select
	(in thousands)
2011	$	3,425	$	3,425
2012		8,826		8,826
2013		7,614		7,614
2014		7,613		7,613
2015		519,845		352,545
2016 and beyond		860,363		860,363

7. 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 $1.0 million at September 30, 2010 and $14.1 million at December 31, 2009. These liabilities are reported on the consolidated balance sheet as current liabilities in accrued 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 value of Select’s senior secured credit ~~facility~~facilities was ~~$483.1~~$506.8 million and ~~$503.1~~$889.8 million at December 31, ~~2009~~2010 and September 30, ~~2010,~~2011, respectively. The fair value of Select’s senior secured credit ~~facility~~facilities was ~~$471.0~~$497.7 million and ~~$493.4~~$800.3 million at December 31, ~~2009~~2010 and September 30, ~~2010,~~2011, respectively. The fair value of Select’s senior secured credit ~~facility~~facilities was based on quoted market prices for this debt in the syndicated loan market.

The carrying value of ~~the~~Select’s 7⁵/₈% 5/8% senior subordinated notes was $611.5 million and $345.0 million at ~~both~~ December 31, ~~2009~~2010 and September 30, ~~2010.~~2011, respectively. The fair value of ~~the~~Select’s 7⁵/₈% 5/8% senior subordinated notes was ~~$593.2~~$616.1 million and ~~$596.2~~$300.2 million at December 31, ~~2009~~2010 and September 30, ~~2010,~~2011, respectively. The fair value of this ~~registered~~publicly traded debt was based on quoted market prices.

The carrying value of ~~the~~Holdings’ senior floating rate notes was $167.3 million at both December 31, ~~2009~~2010 and September 30, ~~2010.~~2011. The fair value of ~~the~~Holdings’ senior floating rate notes was ~~$155.6~~$156.0 million and ~~$145.8~~$148.1 million at December 31, ~~2009~~2010 and September 30, ~~2010,~~2011, respectively. The fair value of this ~~registered~~publicly traded debt was based on 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. At September 30, 2010, Select has one outstanding interest swap contract that it entered into on November 16, 2007 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 3.41% and the weighted average fixed rate of the swap was 7.34% at September 30, 2010. The swap is for a period of three years, and matures on November 22, 2010.

For the portion of swaps that qualify as a hedge, the interest rate swaps are reflected at fair value in the consolidated balance sheet. A gain of $2.5 million, net of tax, was recorded in Holdings’ stockholders’ equity as a component of other comprehensive loss for the nine months ended September 30, 2009. A gain of $8.5 million, net of tax, was recorded for the nine months ended September 30, 2010. Select recorded a gain of $0.8 million, net of tax, for the nine months ended September 30, 2009, and a gain of $8.5 million, net of tax, for the nine months ended September 30, 2010 related to the swaps in Select’s stockholder’s equity as a component of other comprehensive loss. The Company tests for ineffectiveness whenever financial statements are issued or at least every three months using the Hypothetical Derivative Method. See also Note 8,~~Accumulated Other Comprehensive Loss.~~

8. ~~Accumulated Other Comprehensive Loss~~

Included in accumulated other comprehensive loss at December 31, 2009 and September 30, 2010 were cumulative losses of $8.9 million (net of tax) and $0.4 million (net of tax), respectively, on interest rate swaps accounted for as cash flow hedges.

~~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.~~

~~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.~~ 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. 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~~stock compensation expense, equity in earnings (losses) of unconsolidated subsidiaries, loss on early retirement of debt ~~stock compensation expense, long term incentive compensation, equity in losses of unconsolidated subsidiaries~~ and other income.

The following tables summarize selected financial data for the Company’s reportable segments for the three and nine months ended September 30, ~~2009~~2010 and ~~2010.~~2011. The segment results of Holdings are identical to those of Select with the exception of total assets:


	Three Months Ended September 30, 2009									Three Months Ended September 30, 2010
	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	$	419,798	$	168,438	$	14		$	588,250
Adjusted EBITDA		64,381		20,898		(12,236	)		73,043		58,282		20,339		(19,195	)		59,426
Total assets:
Select Medical Corporation		1,898,494		484,703		378,356			2,761,553		2,051,238		487,171		179,551			2,717,960
Select Medical Holdings Corporation		1,898,494		484,703		381,545			2,764,742		2,051,238		487,171		182,199			2,720,608
Capital expenditures		12,371		1,566		332			14,269		9,339		2,019		814			12,172

1415

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

Net operating revenue $ 419,798 $ 168,438 $ 14 $ 588,250
Adjusted EBITDA 58,282 20,339 (19,195 ) 59,426
Total assets:
Select Medical Corporation 2,051,238 487,171 179,551 2,717,960
Select Medical Holdings Corporation 2,051,238 487,171 182,199 2,720,608
Capital expenditures 9,339 2,019 814 12,172


	Nine Months Ended September 30, 2009									Three Months Ended September 30, 2011
	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	$	521,085	$	173,030	$	16		$	694,131
Adjusted EBITDA		212,122		67,476		(37,277	)		242,321		81,570		19,435		(14,469	)		86,536
Total assets:
Select Medical Corporation		1,898,494		484,703		378,356			2,761,553		2,191,493		468,551		89,568			2,749,612
Select Medical Holdings Corporation		1,898,494		484,703		381,545			2,764,742		2,191,493		468,551		91,066			2,751,110
Capital expenditures		27,748		6,575		927			35,250		4,957		3,160		281			8,398


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

Net operating revenue	$	1,234,562	$	518,288	$	90		$	1,752,940
Adjusted EBITDA		214,523		66,813		(41,419	)		239,917
Total assets:
Select Medical Corporation		2,051,238		487,171		179,551			2,717,960
Select Medical Holdings Corporation		2,051,238		487,171		182,199			2,720,608
Capital expenditures		29,963		7,187		1,476			38,626


	Nine Months Ended September 30, 2011
	Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total
	(in thousands)

Net operating revenue	$	1,561,270	$	524,694	$	102		$	2,086,066
Adjusted EBITDA		273,004		65,308		(46,117	)		292,195
Total assets:
Select Medical Corporation		2,191,493		468,551		89,568			2,749,612
Select Medical Holdings Corporation		2,191,493		468,551		91,066			2,751,110
Capital expenditures		21,574		8,142		2,378			32,094

1516

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


	Three Months Ended September 30, 2009															Three Months Ended September 30, 2010
	Specialty			Outpatient												Specialty			Outpatient
	Hospitals			Rehabilitation			All Other									Hospitals			Rehabilitation			All Other
Adjusted EBITDA	$	64,381		$	20,898		$	(12,236	)							$	58,282		$	20,339		$	(19,195	)
Depreciation and amortization		(10,485	)		(6,282	)		(909	)								(11,237	)		(4,953	)		(822	)
Long term incentive compensation								(18,261	)
Stock compensation expense		—			—			(4,201	)								—			—			(460	)

										Select Medical
										Holdings			Select Medical												Select Medical
										Corporation			Corporation												Holdings			Select Medical
																									Corporation			Corporation
Income (loss) from operations	$	53,896		$	14,616		$	(35,607	)	$	32,905		$	32,905		$	47,045		$	15,386		$	(20,477	)	$	41,954		$	41,954
Gain on early retirement of debt											1,129			—
Other expense											—			2,215
Equity in losses of unconsolidated subsidiaries																										(186	)		(186	)
Other income																										148			148
Interest expense, net											(33,449	)		(25,112	)											(27,677	)		(20,821	)


Income from operations before income taxes										$	585		$	10,008
Income before income taxes																									$	14,239		$	21,095


	Three Months Ended September 30, 2010															Three Months Ended September 30, 2011
	Specialty			Outpatient												Specialty			Outpatient
	Hospitals			Rehabilitation			All Other									Hospitals			Rehabilitation			All Other
Adjusted EBITDA	$	58,282		$	20,339		$	(19,195	)							$	81,570		$	19,435		$	(14,469	)
Depreciation and amortization		(11,237	)		(4,953	)		(822	)								(12,828	)		(4,003	)		(714	)
Stock compensation expense		—			—			(460	)								—			—			(918	)

										Select Medical
										Holdings			Select Medical												Select Medical
										Corporation			Corporation												Holdings			Select Medical
																									Corporation			Corporation
Income (loss) from operations	$	47,045		$	15,386		$	(20,477	)	$	41,954		$	41,954		$	68,742		$	15,432		$	(16,101	)	$	68,073		$	68,073
Equity in losses of unconsolidated subsidiaries											(186	)		(186	)
Other income											148			148
Equity in earnings of unconsolidated subsidiaries																										1,653			1,653
Interest expense, net											(27,677	)		(20,821	)											(24,015	)		(21,407	)


Income from operations before income taxes										$	14,239		$	21,095
Income before income taxes																									$	45,711		$	48,319

1617


	Nine Months Ended September 30, 2009															Nine Months Ended September 30, 2010
	Specialty			Outpatient												Specialty			Outpatient
	Hospitals			Rehabilitation			All Other									Hospitals			Rehabilitation			All Other
Adjusted EBITDA	$	212,122		$	67,476		$	(37,277	)							$	214,523		$	66,813		$	(41,419	)
Depreciation and amortization		(32,022	)		(18,679	)		(2,645	)								(33,095	)		(15,752	)		(2,486	)
Long term incentive compensation		—			—			(18,261	)
Stock compensation expense		—			—			(4,795	)								—			—			(1,405	)

										Select Medical
										Holdings			Select Medical												Select Medical
										Corporation			Corporation												Holdings			Select Medical
																									Corporation			Corporation
Income (loss) from operations	$	180,100		$	48,797		$	(62,978	)	$	165,919		$	165,919		$	181,428		$	51,061		$	(45,310	)	$	187,179		$	187,179
Gain on early retirement of debt											16,445			15,316
Equity in losses of unconsolidated subsidiaries																										(186	)		(186	)
Other income											—			3,836												464			464
Interest expense, net											(101,699	)		(75,854	)											(86,998	)		(66,184	)


Income from operations before income taxes										$	80,665		$	109,217
Income before income taxes																									$	100,459		$	121,273


	Nine Months Ended September 30, 2010															Nine Months Ended September 30, 2011
	Specialty			Outpatient												Specialty			Outpatient
	Hospitals			Rehabilitation			All Other									Hospitals			Rehabilitation			All Other
Adjusted EBITDA	$	214,523		$	66,813		$	(41,419	)							$	273,004		$	65,308		$	(46,117	)
Depreciation and amortization		(33,095	)		(15,752	)		(2,486	)								(37,921	)		(12,689	)		(2,156	)
Stock compensation expense		—			—			(1,405	)								—			—			(2,698	)

										Select Medical
										Holdings			Select Medical												Select Medical
										Corporation			Corporation												Holdings			Select Medical
																									Corporation			Corporation
Income (loss) from operations	$	181,428		$	51,061		$	(45,310	)	$	187,179		$	187,179		$	235,083		$	52,619		$	(50,971	)	$	236,731		$	236,731
Equity in losses of unconsolidated subsidiaries											(186	)		(186	)
Other income											464			464
Loss on early retirement of debt																										(31,018	)		(20,385	)
Equity in earnings of unconsolidated subsidiaries																										1,329			1,329
Interest expense, net											(86,998	)		(66,184	)											(74,808	)		(59,596	)


Income from operations before income taxes										$	100,459		$	121,273
Income before income taxes																									$	132,234		$	158,079

~~11.~~9. 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. Effective January 1, 2009 ~~the Financial Accounting Standards Board (“FASB”)~~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. 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 computation of basic earnings ~~(loss)~~ per share under the two class method. Based upon the clarification made by FASB, the Company concluded that its non-vested restricted stock awards meet the definition of a participating security and should be included in the Company’s computation of basic earnings ~~(loss)~~ per share.

1718

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				Three Months Ended				Nine Months Ended
	September 30,					September 30,				September 30,				September 30,
	2009			2010		2009		2010		2010		2011		2010		2011
	(in thousands, except per share amounts)									(in thousands, except per share amounts)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	583		$	8,009	$	45,371	$	56,697	$	8,009	$	25,596	$	56,697	$	70,987
Less: Preferred stock dividends		6,667			—		19,537		—
Less: Earnings (loss) allocated to preferred stockholders		(582	)		—		2,497		—
Less: Earnings allocated to unvested restricted stockholders		—			25		315		135		25		278		135		763

Income (loss) available to common and preferred stockholders — basic and diluted	$	(5,502	)	$	7,984	$	23,022	$	56,562
Net income available to common stockholders										$	7,984	$	25,318	$	56,562	$	70,224


Denominator:
Weighted average shares — basic		62,078			159,717		61,030		159,698		159,717		151,470		159,698		152,299
Effect of dilutive securities:
Stock options		—			238		470		266		238		206		266		223

Weighted average shares — diluted		62,078			159,955		61,500		159,964		159,955		151,676		159,964		152,522


Basic income (loss) per common share	$	(0.09	)	$	0.05	$	0.38	$	0.35
Diluted income (loss) per common share	$	(0.09	)	$	0.05	$	0.37	$	0.35
Basic income per common share										$	0.05	$	0.17	$	0.35	$	0.46
Diluted income per common share										$	0.05	$	0.17	$	0.35	$	0.46

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,
2009 2010 2009 2010
(in thousands)
Stock options 469 2,392 — 2,383

~~12. Early Retirement of Debt~~

~~During the first and second quarter of 2009, the Company paid approximately $30.1 million to repurchase and retire a portion of its 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, which was net of the write-off of $1.0 million in unamortized deferred financing costs related to the debt. In the third quarter of 2009, the Company paid approximately $6.5 million to repurchase and retire a portion of Holdings senior floating rate notes with a carrying value of $7.7 million. A gain on the early retirement of debt in the amount of $1.1 million was recognized in the third quarter of 2009 which was net of the write off of $0.1 million in unamortized deferred financing costs related to the debt.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2011		2010		2011
	(in thousands)
Stock options		2,392		2,437		2,383		2,412

~~13.~~10. 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 a 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.

Healthcare providers are subject to lawsuits under thequi tamprovisions of the federal False Claims Act.Qui tamlawsuits 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 privatequi tamplaintiff (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 third quarter of 2011, the Company ~~received~~entered into a settlement agreement with the United States government in connection with the previously disclosedqui tamlawsuit filed in Columbus, Ohio against certain subsidiaries of the Company. The lawsuit, filed under seal in September 2007, led to the Company’s receiving, in July 2009, a subpoena from the ~~Office of Inspector General of the U.S. Department of Health and Human Services~~government seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its long term acute care hospitals in Columbus, Ohio. ~~The~~Under the terms of the settlement, the Company ~~believes that the subpoena has been issued in connection with a qui tam lawsuit, and that~~agreed to pay $7.5 million to the 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 the government’s investigation. At this time, the Company is unable to predict the timing and outcome of this matter.~~

~~On March 8, 2010, the Company received~~enter into 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~~5-year corporate integrity agreement covering its long term acute care ~~hospital industry entitled “Long-Term Care Hospitals Face Little Scrutiny.”~~hospitals. The ~~letter from~~Company also agreed to pay certain legal fees of the ~~Senate Finance Committee asked~~qui tamrelator’s counsel. In the settlement agreement, the Company ~~to respond to a variety~~admitted no liability or wrongdoing. During the second quarter of ~~questions regarding our long-term care hospitals. On March 23, 2010,~~2011, the Company ~~responded~~recorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with the ~~letter. On May 25, 2010~~matter. The settlement amounts and counsel fees were paid in full during the third quarter of 2011, and the Company ~~received follow-up questions from the committee, which the Company responded~~does not expect to ~~on June 4, 2010. The Company intends on fully cooperating~~incur any additional material charges in connection with ~~the Committee. At this time, the Company is unable to predict the timing and outcome of~~ this matter.

Construction Commitments

At September 30, ~~2010,~~2011, the Company had outstanding commitments under construction contracts related to new construction, improvements and renovations at ~~certain of~~ the Company’s long term acute care properties and inpatient rehabilitation facilities totaling approximately ~~$10.3~~$2.7 million.

11. Common Stock Repurchase Program

On August 3, 2011, the Company’s board of directors authorized an increase of $50.0 million in the capacity of its common stock repurchase program, from $100.0 million to $150.0 million. The other terms of the program remain unchanged. The program will now remain in effect until March 31, 2013, unless extended by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as the Company deems appropriate.

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

12.

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

Select’s 7⁵/₈~~% Senior Subordinated Notes~~ 5/8% senior subordinated notes are fully and unconditionally guaranteed, except for customary limitations, 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~~ 5/8% 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 December 31, 2010 and September 30, ~~2009 and 2010~~2011 and for the three and nine months ended September 30, ~~2009~~2010 and ~~2010.~~2011.

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 30, ~~2010 after giving effect to the guarantees of the subsidiaries acquired in the Regency transaction:~~2011:

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.
Regency Hospital of ~~Forth~~Fort Worth, ~~LLP~~L.L.P.
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
September 30, 2010
(unaudited)
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
(in thousands)
Assets

Current Assets:
Cash and cash equivalents $ 8,185 $ 6,614 $ 544 $ — $ 15,343
Accounts receivable, net — 276,189 49,149 — 325,338
Current deferred tax asset 7,307 26,248 5,394 — 38,949
Prepaid income taxes 12,966 — — — 12,966
Other current assets 2,793 20,775 2,329 — 25,897

Total Current Assets 31,251 329,826 57,416 — 418,493

Property and equipment, net 5,901 473,360 58,765 — 538,026
Investment in affiliates 2,964,610 80,797 — (3,045,407 )(a) (b) —
Goodwill — 1,646,698 — — 1,646,698
Other identifiable intangibles — 67,719 — — 67,719
Assets held for sale 11,342 — — — 11,342
Other assets 22,172 9,438 4,072 — 35,682

Total Assets
$ 3,035,276 $ 2,607,838 $ 120,253 $ (3,045,407 ) $ 2,717,960

Liabilities and Equity

Current Liabilities:
Bank overdrafts $ 10,971 $ — $ — $ — $ 10,971
Current portion of long-term debt and notes payable 147,955 858 303 — 149,116
Accounts payable 7,808 59,469 9,170 — 76,447
Intercompany accounts 1,153,988 (1,079,892 ) (74,096 ) — —
Accrued payroll 147 72,114 189 — 72,450
Accrued vacation 3,072 37,645 5,435 — 46,152
Accrued interest 9,936 320 — — 10,256
Accrued restructuring — 2,831 — — 2,831
Accrued other 32,615 56,254 6,669 — 95,538
Due to third party payors — 6,445 — — 6,445

Total Current Liabilities 1,366,492 (843,956 ) (52,330 ) — 470,206

Long-term debt, net of current portion 494,627 422,363 53,846 — 970,836
Non-current deferred tax liability (620 ) 60,074 6,815 — 66,269
Other non-current liabilities 62,794 4,472 — — 67,266

Total Liabilities 1,923,293 (357,047 ) 8,331 — 1,574,577

Stockholder’s Equity:
Common stock — — — — —
Capital in excess of par 831,479 — — — 831,479
Retained earnings 280,918 494,448 25,957 (520,405 )(b) 280,918
Subsidiary investment — 2,470,437 54,565 (2,525,002 )(a) —
Accumulated other comprehensive loss (414 ) — — — (414 )

Total Select Medical Corporation Stockholder’s Equity 1,111,983 2,964,885 80,522 (3,045,407 ) 1,111,983

Non-controlling interests — — 31,400 — 31,400

Total Equity 1,111,983 2,964,885 111,922 (3,045,407 ) 1,143,383

Total Liabilities and Equity
$ 3,035,276 $ 2,607,838 $ 120,253 $ (3,045,407 ) $ 2,717,960

Select Medical Corporation

Condensed Consolidating Balance Sheet

September 30, 2011

(unaudited)


	Select Medical
	Corporation
	(Parent Company		Subsidiary			Non-Guarantor
	Only)		Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	8,968	$	580		$	665		$	—		$	10,213
Accounts receivable, net		—		352,525			42,464			—			394,989
Current deferred tax asset		10,455		6,025			3,354			—			19,834
Prepaid income taxes		10,340		—			—			—			10,340
Other current assets		5,015		19,885			3,206			—			28,106

Total Current Assets		34,778		379,015			49,689			—			463,482

Property and equipment, net		7,176		444,451			54,267			—			505,894
Investment in affiliates		2,727,699		77,954			—			(2,805,653	)(a) (b)		—
Goodwill		—		1,627,509			—			—			1,627,509
Other identifiable intangibles		—		72,448			—			—			72,448
Assets held for sale		11,342		—			—			—			11,342
Other assets		30,599		37,423			915			—			68,937


Total Assets	$	2,811,594	$	2,638,800		$	104,871		$	(2,805,653	)	$	2,749,612


Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	14,618	$	—		$	—		$	—		$	14,618
Current portion of long-term debt and notes payable		9,584		384			300			—			10,268
Accounts payable		7,649		70,007			11,286			—			88,942
Intercompany accounts		954,939		(865,649	)		(89,290	)		—			—
Accrued payroll		412		70,288			217			—			70,917
Accrued vacation		3,608		38,715			5,920			—			48,243
Accrued interest		4,562		8			583			—			5,153
Accrued restructuring		—		5,608			—			—			5,608
Accrued other		42,332		56,347			6,374			—			105,053
Due to third party payors		—		14,935			(10,686	)		—			4,249

Total Current Liabilities		1,037,704		(609,357	)		(75,296	)		—			353,051

Long-term debt, net of current portion		723,410		445,070			61,638			—			1,230,118
Non-current deferred tax liability		1,321		58,651			8,427			—			68,399
Other non-current liabilities		56,827		16,392			—			—			73,219


Total Liabilities		1,819,262		(89,244	)		(5,231	)		—			1,724,787

Stockholder’s Equity:
Common stock		0		—			—			—			0
Capital in excess of par		846,806		—			—			—			846,806
Retained earnings		145,526		604,446			21,637			(626,083	)(b)		145,526
Subsidiary investment		—		2,123,598			55,972			(2,179,570	)(a)		—

Total Select Medical Corporation Stockholder’s Equity		992,332		2,728,044			77,609			(2,805,653	)		992,332

Non-controlling interest		—		—			32,493			—			32,493

Total Equity		992,332		2,728,044			110,102			(2,805,653	)		1,024,825


Total Liabilities and Equity	$	2,811,594	$	2,638,800		$	104,871		$	(2,805,653	)	$	2,749,612


(a)		Elimination of investments in consolidated subsidiaries.

(b)		Elimination of investments in consolidated subsidiaries’ earnings.

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

Net operating revenues $ 14 $ 507,589 $ 80,647 $ — $ 588,250

Costs and expenses:
Cost of services 440 427,761 70,538 — 498,739
General and administrative 17,031 2,197 — — 19,228
Bad debt expense — 9,661 1,656 — 11,317
Depreciation and amortization 662 14,249 2,101 — 17,012

Total costs and expenses 18,133 453,868 74,295 — 546,296

Income (loss) from operations (18,119 ) 53,721 6,352 — 41,954

Other income and expense:
Intercompany interest and royalty fees (888 ) 877 11 — —
Intercompany management fees 22,773 (18,937 ) (3,836 ) — —
Equity in losses of unconsolidated subsidiaries — (186 ) — — (186 )
Other income 148 — — — 148
Interest expense (11,330 ) (8,462 ) (1,029 ) — (20,821 )

Income from operations before income taxes (7,416 ) 27,013 1,498 — 21,095

Income tax expense 366 7,600 8 — 7,974
Equity in earnings of subsidiaries 20,247 965 — (21,212 )(a) —

Net income 12,465 20,378 1,490 (21,212 ) 13,121

Less: Net income attributable to non-controlling interests — — 656 — 656

Net income attributable to Select Medical Corporation $ 12,465 $ 20,378 $ 834 $ (21,212 ) $ 12,465

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended September 30, 2011

(unaudited)


	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)

Net operating revenues	$	16		$	603,737		$	90,378		$	—		$	694,131


Costs and expenses:
Cost of services		430			502,576			78,823			—			581,829
General and administrative		14,804			171			—			—			14,975
Bad debt expense		—			10,219			1,490			—			11,709
Depreciation and amortization		641			14,484			2,420			—			17,545

Total costs and expenses		15,875			527,450			82,733			—			626,058


Income (loss) from operations		(15,859	)		76,287			7,645			—			68,073

Other income and expense:
Intercompany interest and royalty fees		(659	)		655			4			—			—
Intercompany management fees		18,698			(14,320	)		(4,378	)		—			—
Equity in earnings of unconsolidated subsidiaries		—			1,633			20			—			1,653
Interest income		36			16			67			—			119
Interest expense		(12,556	)		(7,874	)		(1,096	)		—			(21,526	)


Income (loss) from operations before income taxes		(10,340	)		56,397			2,262			—			48,319

Income tax expense (benefit)		(1,502	)		21,215			530			—			20,243
Equity in earnings of subsidiaries		36,129			1,761			—			(37,890	)(a)		—


Net income		27,291			36,943			1,732			(37,890	)		28,076

Less: Net income attributable to non-controlling interests		—			—			785			—			785


Net income attributable to Select Medical Corporation	$	27,291		$	36,943		$	947		$	(37,890	)	$	27,291


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

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

Net operating revenues $ 90 $ 1,509,246 $ 243,604 $ — $ 1,752,940

Costs and expenses:
Cost of services 1,094 1,236,392 203,674 — 1,441,160
General and administrative 39,590 2,229 — — 41,819
Bad debt expense — 26,402 5,047 — 31,449
Depreciation and amortization 2,160 42,787 6,386 — 51,333

Total costs and expenses 42,844 1,307,810 215,107 — 1,565,761

Income (loss) from operations (42,754 ) 201,436 28,497 — 187,179

Other income and expense:
Intercompany interest and royalty fees (2,849 ) 2,829 20 — —
Intercompany management fees 68,002 (56,706 ) (11,296 ) — —
Equity in losses of unconsolidated subsidiaries — (186 ) — — (186 )
Other income �� 464 — — — 464
Interest expense (37,430 ) (25,466 ) (3,288 ) — (66,184 )

Income (loss) from operations before income taxes (14,567 ) 121,907 13,933 — 121,273

Income tax expense (benefit) 1,856 46,159 (741 ) — 47,274
Equity in earnings of subsidiaries 86,649 10,831 — (97,480 )(a) —

Net income 70,226 86,579 14,674 (97,480 ) 73,999

Less: Net income attributable to non-controlling interests — — 3,773 — 3,773

Net income attributable to Select Medical Corporation $ 70,226 $ 86,579 $ 10,901 $ (97,480 ) $ 70,226

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2011
(unaudited)


	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)

Net operating revenues	$	102		$	1,809,552		$	276,412		$	—		$	2,086,066


Costs and expenses:
Cost of services		1,262			1,476,857			230,792			—			1,708,911
General and administrative		47,298			358			—			—			47,656
Bad debt expense		—			35,128			4,874			—			40,002
Depreciation and amortization		1,941			43,939			6,886			—			52,766

Total costs and expenses		50,501			1,556,282			242,552			—			1,849,335


Income (loss) from operations		(50,399	)		253,270			33,860			—			236,731

Other income and expense:
Intercompany interest and royalty fees		(2,654	)		2,635			19			—			—
Intercompany management fees		86,561			(73,451	)		(13,110	)		—			—
Loss on early retirement of debt		(20,385	)		—			—			—			(20,385	)
Equity in earnings of unconsolidated subsidiaries		—			1,285			44			—			1,329
Interest income		101			117			68			—			286
Interest expense		(28,932	)		(27,193	)		(3,757	)		—			(59,882	)


Income (loss) from operations before income taxes		(15,708	)		156,663			17,124			—			158,079

Income tax expense (benefit)		(214	)		65,259			809			—			65,854
Equity in earnings of subsidiaries		103,281			12,342			—			(115,623	)(a)		—


Net income		87,787			103,746			16,315			(115,623	)		92,225

Less: Net income attributable to non-controlling interests		—			—			4,438			—			4,438


Net income attributable to Select Medical Corporation	$	87,787		$	103,746		$	11,877		$	(115,623	)	$	87,787


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

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

Net income $ 70,226 $ 86,579 $ 14,674 $ (97,480 )(a) $ 73,999
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 2,160 42,787 6,386 — 51,333
Provision for bad debts — 26,402 5,047 — 31,449
Loss from disposal of assets 127 352 133 — 612
Non-cash gain from interest rate swaps (464 ) — — — (464 )
Non-cash stock compensation expense 1,405 — — — 1,405
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries (86,649 ) (10,831 ) — 97,480 (a) —
Intercompany (54,741 ) 62,368 (7,627 ) — —
Accounts receivable — 3,119 (29,787 ) — (26,668 )
Other current assets 2,593 (1,959 ) 2,937 — 3,571
Other assets 228 1,621 (1,761 ) — 88
Accounts payable 4,579 (8,228 ) 180 — (3,469 )
Due to third-party payors — (10,170 ) 9,414 — (756 )
Accrued expenses (30,729 ) 22,401 1,801 — (6,527 )
Income and deferred taxes 11,214 — — — 11,214

Net cash provided by (used in) operating activities (80,051 ) 214,441 1,397 — 135,787

Investing activities

Purchases of property and equipment (1,475 ) (30,107 ) (7,044 ) — (38,626 )
Acquisition of businesses, net of cash acquired — (165,802 ) — — (165,802 )

Net cash used in investing activities (1,475 ) (195,909 ) (7,044 ) — (204,428 )

Financing activities

Borrowings on revolving credit facility 90,000 — — — 90,000
Payments on revolving credit facility (70,000 ) — — — (70,000 )
Borrowings of other debt 5,015 — — — 5,015
Principal payments on seller and other debt (5,181 ) (1,428 ) (58 ) — (6,667 )
Dividends paid to Holdings (25,522 ) — — — (25,522 )
Equity investment by Holdings 125 — — — 125
Proceeds from bank overdrafts 10,971 — — — 10,971
Intercompany debt reallocation 3,363 (12,788 ) 9,425 — —
Distributions to non-controlling interests — — (3,618 ) — (3,618 )

Net cash provided by (used in) financing activities 8,771 (14,216 ) 5,749 — 304

Net increase (decrease) in cash and cash equivalents (72,755 ) 4,316 102 — (68,337 )

Cash and cash equivalents at beginning of period 80,940 2,298 442 — 83,680

Cash and cash equivalents at end of period $ 8,185 $ 6,614 $ 544 $ — $ 15,343

Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2011
(unaudited)


	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating activities
Net income	$	87,787		$	103,746		$	16,315		$	(115,623	)(a)	$	92,225
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,941			43,939			6,886			—			52,766
Provision for bad debts		—			35,128			4,874			—			40,002
Loss on early retirement of debt		20,385			—			—			—			20,385
Loss (gain) from disposal of assets		13			(5,233	)		38			—			(5,182	)
Non-cash stock compensation expense		2,698			—			—			—			2,698
Amortization of debt discount		412			—			—			—			412
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		(103,281	)		(12,342	)		—			115,623	(a)		—
Intercompany		60,188			(49,269	)		(10,919	)		—			—
Accounts receivable		—			(73,437	)		(8,029	)		—			(81,466	)
Other current assets		(455	)		412			283			—			240
Other assets		(8,306	)		8,826			203			—			723
Accounts payable		1,622			10,102			2,284			—			14,008
Due to third-party payors		—			2,710			(3,760	)		—			(1,050	)
Accrued expenses		(4,455	)		701			104			—			(3,650	)
Income and deferred taxes		34,723			—			—			—			34,723

Net cash provided by operating activities		93,272			65,283			8,279			—			166,834


Investing activities
Purchases of property and equipment		(2,384	)		(26,342	)		(3,368	)		—			(32,094	)
Investment in business		—			(13,514	)		—			—			(13,514	)
Acquisition of businesses, net of cash acquired		—			1,921			—			—			1,921
Proceeds from sale of assets		—			7,879			—			—			7,879

Net cash used in investing activities		(2,384	)		(30,056	)		(3,368	)		—			(35,808	)


Financing activities
Borrowings on revolving credit facility		595,000			—			—			—			595,000
Payments on revolving credit facility		(570,000	)		—			—			—			(570,000	)
Borrowings on 2011 credit facility term loan		841,500			—			—			—			841,500
Payments on 2011 credit facility term loans, net of discount		(2,125	)		—			—			—			(2,125	)
Payments on 2005 credit facility term loans, net of call premium		(484,633	)		—			—			—			(484,633	)
Repurchase of 7 5/8% senior subordinated notes, net of tender premium		(273,941	)		—			—			—			(273,941	)
Borrowings of other debt		5,496			—			—			—			5,496
Principal payments on seller and other debt		(4,326	)		(650	)		(870	)		—			(5,846	)
Debt issuance costs		(18,556	)		—			—			—			(18,556	)
Repayments of bank overdrafts		(4,174	)		—			—			—			(4,174	)
Equity investment by Holdings		169			—			—			—			169
Dividends paid to Holdings		(204,561	)		—			—			—			(204,561	)
Intercompany debt reallocation		38,082			(37,564	)		(518	)		—			—
Distributions to non-controlling interests		—			—			(3,507	)		—			(3,507	)

Net cash used in financing activities		(82,069	)		(38,214	)		(4,895	)		—			(125,178	)


Net increase (decrease) in cash and cash equivalents		8,819			(2,987	)		16			—			5,848

Cash and cash equivalents at beginning of period		149			3,567			649			—			4,365

Cash and cash equivalents at end of period	$	8,968		$	580		$	665		$	—		$	10,213


(a)		Elimination of equity in earnings of consolidated subsidiaries.

Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2009
Select Medical Non-
Corporation (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
(in thousands)
Assets

Current Assets:
Cash and cash equivalents $ 80,940 $ 2,298 $ 442 $ — $ 83,680
Accounts receivable, net — 282,670 24,409 — 307,079
Current deferred tax asset 13,677 29,854 5,004 — 48,535
Prepaid income taxes 11,179 — — — 11,179
Other current assets 5,386 13,588 5,266 — 24,240

Total Current Assets 111,182 328,410 35,121 — 474,713

Property and equipment, net 6,649 409,258 50,224 — 466,131
Investment in affiliates 2,142,189 72,628 — (2,214,817 )(a) (b) —
Goodwill — 1,548,269 — — 1,548,269
Other identifiable intangibles — 65,297 — — 65,297
Assets held for sale 11,342 — — — 11,342
Other assets 22,400 8,716 2,311 — 33,427

Total Assets
$ 2,293,762 $ 2,432,578 $ 87,656 $ (2,214,817 ) $ 2,599,179

Liabilities and Equity

Current Liabilities:
Current portion of long-term debt and notes payable $ 2,545 $ 803 $ 797 $ — $ 4,145
Accounts payable 3,229 61,215 8,990 — 73,434
Intercompany accounts 495,981 (416,944 ) (79,037 ) — —
Accrued payroll 81 61,860 94 — 62,035
Accrued vacation 2,942 33,024 5,047 — 41,013
Accrued interest 23,354 119 — — 23,473
Accrued restructuring — 4,256 — — 4,256
Accrued other 50,122 41,661 5,351 — 97,134
Due to third party payors — 11,319 (9,414 ) — 1,905

Total Current Liabilities 578,254 (202,687 ) (68,172 ) — 307,395

Long-term debt, net of current portion 616,906 434,384 45,552 — 1,096,842
Non-current deferred tax liability 995 58,346 7,427 — 66,768
Other non-current liabilities 60,543 — — — 60,543

Total Liabilities 1,256,698 290,043 (15,193 ) — 1,531,548

Stockholder’s Equity:
Common stock — — — — —
Capital in excess of par 822,664 — — — 822,664
Retained earnings 223,314 407,870 21,075 (428,945 )(b) 223,314
Subsidiary investment — 1,734,665 51,207 (1,785,872 )(a) —
Accumulated other comprehensive loss (8,914 ) — — — (8,914 )

Total Select Medical Corporation Stockholder’s Equity 1,037,064 2,142,535 72,282 (2,214,817 ) 1,037,064

Non-controlling interests — — 30,567 — 30,567

Total Equity 1,037,064 2,142,535 102,849 (2,214,817 ) 1,067,631

Total Liabilities and Equity
$ 2,293,762 $ 2,432,578 $ 87,656 $ (2,214,817 ) $ 2,599,179

Select Medical Corporation
Condensed Consolidating Balance Sheet
December 31, 2010
(unaudited)


	Select Medical
	Corporation (Parent		Subsidiary			Non-Guarantor
	Company Only)		Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)

Assets
Current Assets:
Cash and cash equivalents	$	149	$	3,567		$	649		$	—		$	4,365
Accounts receivable, net		—		314,123			39,309			—			353,432
Current deferred tax asset		8,007		19,226			3,421			—			30,654
Prepaid income taxes		12,699		—			—			—			12,699
Other current assets		4,560		20,127			3,489			—			28,176

Total Current Assets		25,415		357,043			46,868			—			429,326

Property and equipment, net		6,806		467,554			57,740			—			532,100
Investment in affiliates		2,667,767		81,839			—			(2,749,606	)(a) (b)		—
Goodwill		—		1,631,252			—			—			1,631,252
Other identifiable intangibles		—		80,119			—			—			80,119
Assets held for sale		11,342		—			—			—			11,342
Other assets		22,293		12,022			1,118			—			35,433


Total Assets	$	2,733,623	$	2,629,829		$	105,726		$	(2,749,606	)	$	2,719,572


Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	18,792	$	—		$	—		$	—		$	18,792
Current portion of long-term debt and notes payable		147,609		758			1,012			—			149,379
Accounts payable		6,027		59,164			9,002			—			74,193
Intercompany accounts		925,741		(832,683	)		(93,058	)		—			—
Accrued payroll		967		62,539			254			—			63,760
Accrued vacation		3,255		37,948			5,385			—			46,588
Accrued interest		21,198		388			—			—			21,586
Accrued restructuring		—		6,754			—			—			6,754
Accrued other		29,948		79,157			7,351			—			116,456
Due to third party payors		—		12,225			(6,926	)		—			5,299

Total Current Liabilities		1,153,537		(573,750	)		(76,980	)		—			502,807

Long-term debt, net of current portion		429,743		482,858			62,312			—			974,913
Non-current deferred tax liability		2,266		48,976			7,832			—			59,074
Other non-current liabilities		63,483		3,167			—			—			66,650


Total Liabilities		1,649,029		(38,749	)		(6,836	)		—			1,603,444

Stockholder’s Equity:
Common stock		0		—			—			—			0
Capital in excess of par		834,894		—			—			—			834,894
Retained earnings		249,700		500,700			24,587			(525,287	)(b)		249,700
Subsidiary investment		—		2,167,878			56,441			(2,224,319	)(a)		—

Total Select Medical Corporation Stockholder’s Equity		1,084,594		2,668,578			81,028			(2,749,606	)		1,084,594

Non-controlling interest		—		—			31,534			—			31,534

Total Equity		1,084,594		2,668,578			112,562			(2,749,606	)		1,116,128


Total Liabilities and Equity	$	2,733,623	$	2,629,829		$	105,726		$	(2,749,606	)	$	2,719,572


(a)		Elimination of investments in ~~consolidated~~ subsidiaries.

(b)		Elimination of investments in ~~consolidated~~ subsidiaries’ retained earnings.

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Quarter Ended September 30, 2009
(unaudited)
Select Medical Non-
Corporation (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
(in thousands)
Net operating revenues $ 11 $ 486,958 $ 58,652 $ — $ 545,621

Costs and expenses:
Cost of services 90 399,316 49,296 — 448,702
General and administrative 34,594 24 — — 34,618
Bad debt expense — 8,440 3,280 — 11,720
Depreciation and amortization 831 15,297 1,548 — 17,676

Total costs and expenses 35,515 423,077 54,124 — 512,716

Income (loss) from operations (35,504 ) 63,881 4,528 — 32,905

Other income and expense:
Intercompany interest and royalty fees (1,141 ) 1,138 3 — —
Intercompany management fees 31,929 (29,286 ) (2,643 ) — —
Other income 2,215 — — — 2,215
Interest income 2 — — — 2
Interest expense (15,513 ) (8,726 ) (875 ) — (25,114 )

Income (loss) from operations before income taxes (18,012 ) 27,007 1,013 — 10,008

Income tax expense (benefit) (3,768 ) 5,318 944 — 2,494
Equity in earnings of subsidiaries 20,952 (429 ) — (20,523 )(a) —

Net income 6,708 21,260 69 (20,523 ) 7,514

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

Net income (loss) attributable to Select Medical Corporation $ 6,708 $ 21,260 $ (737 ) $ (20,523 ) $ 6,708

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Quarter Ended September 30, 2010
(unaudited)


	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)

Net operating revenues	$	14		$	507,589		$	80,647		$	—		$	588,250


Costs and expenses:
Cost of services		440			427,761			70,538			—			498,739
General and administrative		17,031			2,197			—			—			19,228
Bad debt expense		—			9,661			1,656			—			11,317
Depreciation and amortization		662			14,249			2,101			—			17,012

Total costs and expenses		18,133			453,868			74,295			—			546,296


Income (loss) from operations		(18,119	)		53,721			6,352			—			41,954

Other income and expense:
Intercompany interest and royalty fees		(888	)		877			11			—			—
Intercompany management fees		22,773			(18,937	)		(3,836	)		—			—
Equity in losses of unconsolidated subsidiaries		—			(186	)		—			—			(186	)
Other income		148			—			—			—			148
Interest expense		(11,330	)		(8,462	)		(1,029	)		—			(20,821	)


Income (loss) from operations before income taxes		(7,416	)		27,013			1,498			—			21,095

Income tax expense		366			7,600			8			—			7,974
Equity in earnings of subsidiaries		20,247			965			—			(21,212	)(a)		—


Net income		12,465			20,378			1,490			(21,212	)		13,121

Less: Net income attributable to non-controlling interests		—			—			656			—			656


Net income attributable to Select Medical Corporation	$	12,465		$	20,378		$	834		$	(21,212	)	$	12,465


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

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

Net operating revenues $ 146 $ 1,487,899 $ 178,283 $ — $ 1,666,328

Costs and expenses:
Cost of services 201 1,202,007 150,899 — 1,353,107
General and administrative 60,210 68 — — 60,278
Bad debt expense — 27,862 5,816 — 33,678
Depreciation and amortization 2,408 46,315 4,623 — 53,346

Total costs and expenses 62,819 1,276,252 161,338 — 1,500,409

Income (loss) from operations (62,673 ) 211,647 16,945 — 165,919

Other income and expense:
Intercompany interest and royalty fees (6,292 ) 6,252 40 — —
Intercompany management fees 95,063 (87,810 ) (7,253 ) — —
Gain on early retirement of debt 15,316 — — — 15,316
Other income 3,836 — — — 3,836
Interest income 65 16 1 — 82
Interest expense (47,914 ) (25,670 ) (2,352 ) — (75,936 )

Income (loss) from operations before income taxes (2,599 ) 104,435 7,381 — 109,217

Income tax expense 3,420 38,833 816 — 43,069
Equity in earnings of subsidiaries 69,949 4,767 — (74,716 )(a) —

Net income 63,930 70,369 6,565 (74,716 ) 66,148

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

Net income attributable to Select Medical Corporation $ 63,930 $ 70,369 $ 4,347 $ (74,716 ) $ 63,930

Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2010
(unaudited)


	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)

Net operating revenues	$	90		$	1,509,246		$	243,604		$	—		$	1,752,940


Costs and expenses:
Cost of services		1,094			1,236,392			203,674			—			1,441,160
General and administrative		39,590			2,229			—			—			41,819
Bad debt expense		—			26,402			5,047			—			31,449
Depreciation and amortization		2,160			42,787			6,386			—			51,333

Total costs and expenses		42,844			1,307,810			215,107			—			1,565,761


Income (loss) from operations		(42,754	)		201,436			28,497			—			187,179

Other income and expense:
Intercompany interest and royalty fees		(2,849	)		2,829			20			—			—
Intercompany management fees		68,002			(56,706	)		(11,296	)		—			—
Equity in losses of unconsolidated subsidiaries		—			(186	)		—			—			(186	)
Other income		464			—			—			—			464
Interest expense		(37,430	)		(25,466	)		(3,288	)		—			(66,184	)


Income (loss) from operations before income taxes		(14,567	)		121,907			13,933			—			121,273

Income tax expense (benefit)		1,856			46,159			(741	)		—			47,274
Equity in earnings of subsidiaries		86,649			10,831			—			(97,480	)(a)		—


Net income		70,226			86,579			14,674			(97,480	)		73,999

Less: Net income attributable to non-controlling interests		—			—			3,773			—			3,773


Net income attributable to Select Medical Corporation	$	70,226		$	86,579		$	10,901		$	(97,480	)	$	70,226


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

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

Operating activities

Net income $ 63,930 $ 70,369 $ 6,565 $ (74,716 )(a) $ 66,148
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
Provision for bad debts — 27,862 5,816 — 33,678
Gain on early retirement of debt (15,316 ) — — — (15,316 )
Loss from disposal of assets and sale of business units 15 506 29 — 550
Non-cash gain from interest rate swaps (3,836 ) — — — (3,836 )
Non-cash stock compensation expense 4,795 — — — 4,795
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) —
Intercompany 132,270 (125,875 ) (6,395 ) — —
Accounts receivable (111 ) (26,654 ) (5,268 ) — (32,033 )
Other current assets (765 ) 1,681 (1,898 ) — (982 )
Other assets 5,724 (2,235 ) 100 — 3,589
Accounts payable (3,105 ) (4,253 ) (1,008 ) — (8,366 )
Due to third-party payors — (8,118 ) 4,588 — (3,530 )
Accrued expenses 8,002 (1,211 ) 824 — 7,615
Income and deferred taxes 20,608 — — — 20,608

Net cash provided by (used in) operating activities 144,670 (26,380 ) 7,976 — 126,266

Investing activities

Purchases of property and equipment (1,117 ) (23,644 ) (10,489 ) — (35,250 )
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 )

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
Principal payments on seller and other debt (4,892 ) (837 ) (9 ) — (5,738 )
Dividends paid to Holdings (39,367 ) — — — (39,367 )
Payment of initial public offering costs (584 ) — — — (584 )
Equity investment by Holdings 282,024 — — — 282,024
Repayment of bank overdrafts (21,130 ) — — — (21,130 )
Intercompany debt reallocation (50,515 ) 47,405 3,110 — —
Equity contribution and loans from non-controlling interests — — 1,500 — 1,500
Distributions to non-controlling interests — — (2,486 ) — (2,486 )

Net cash provided by financing activities 75,573 46,568 2,115 — 124,256

Net increase (decrease) in cash and cash equivalents 219,126 (2,496 ) (398 ) — 216,232

Cash and cash equivalents at beginning of period 58,332 5,108 820 — 64,260

Cash and cash equivalents at end of period $ 277,458 $ 2,612 $ 422 $ — $ 280,492

Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2010
(unaudited)


	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)

Operating activities
Net income	$	70,226		$	86,579		$	14,674		$	(97,480	)(a)	$	73,999
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,160			42,787			6,386			—			51,333
Provision for bad debts		—			26,402			5,047			—			31,449
Loss from disposal of assets		127			352			133			—			612
Non-cash gain from interest rate swaps		(464	)		—			—			—			(464	)
Non-cash stock compensation expense		1,405			—			—			—			1,405
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		(86,649	)		(10,831	)		—			97,480	(a)		—
Intercompany		(54,741	)		62,368			(7,627	)		—			—
Accounts receivable		—			3,119			(29,787	)		—			(26,668	)
Other current assets		2,593			(1,959	)		2,937			—			3,571
Other assets		228			1,621			(1,761	)		—			88
Accounts payable		4,579			(8,228	)		180			—			(3,469	)
Due to third-party payors		—			(10,170	)		9,414			—			(756	)
Accrued expenses		(30,729	)		22,401			1,801			—			(6,527	)
Income and deferred taxes		11,214			—			—			—			11,214

Net cash provided by (used in) operating activities		(80,051	)		214,441			1,397			—			135,787


Investing activities
Purchases of property and equipment		(1,475	)		(30,107	)		(7,044	)		—			(38,626	)
Acquisition of businesses, net of cash acquired		—			(165,802	)		—			—			(165,802	)

Net cash used in investing activities		(1,475	)		(195,909	)		(7,044	)		—			(204,428	)


Financing activities
Borrowings on revolving credit facility		90,000			—			—			—			90,000
Payments on revolving credit facility		(70,000	)		—			—			—			(70,000	)
Borrowings of other debt		5,015			—			—			—			5,015
Principal payments on seller and other debt		(5,181	)		(1,428	)		(58	)		—			(6,667	)
Dividends paid to Holdings		(25,522	)		—			—			—			(25,522	)
Equity investment by Holdings		125			—			—			—			125
Proceeds from bank overdrafts		10,971			—			—			—			10,971
Intercompany debt reallocation		3,363			(12,788	)		9,425			—			—
Distributions to non-controlling interests		—			—			(3,618	)		—			(3,618	)

Net cash provided by (used in) financing activities		8,771			(14,216	)		5,749			—			304


Net increase (decrease) in cash and cash equivalents		(72,755	)		4,316			102			—			(68,337	)

Cash and cash equivalents at beginning of period		80,940			2,298			442			—			83,680

Cash and cash equivalents at end of period	$	8,185		$	6,614		$	544		$	—		$	15,343


(a)		Elimination of equity in earnings of consolidated subsidiaries.

~~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.

Forward Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” ~~“believe,~~‘believe,” “expect,” “anticipate,” “plan,” “target,” ~~“estimate,~~“ estimate,” “project,” ~~“intend”~~“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.~~performances. 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, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

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 Medicare, Medicaid and 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 loss of key members of our management team could significantly disrupt our operations;

	•		the effect of claims asserted against us could subject us to substantial uninsured liabilities and in the future we may not be able to obtain insurance at a reasonable price; and

~~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,~~Securities and Exchange Commission (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.~~2010 contained in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2011.

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 30, ~~2010,~~2011, we operated ~~111~~110 long term acute care hospitals and ~~six~~nine inpatient rehabilitation facilities in 28 states, and ~~950~~952 outpatient rehabilitation clinics in 3634 states and the District of Columbia. We also provide medical rehabilitation services on a contracted basis to nursing homes, hospitals, assisted living and senior care centers, schools and work sites. We began operations in 1997 under the leadership of our current management team.

We manage our Company through two business segments, our specialty ~~hospitals~~hospital segment and our outpatient rehabilitation segment. We had net operating revenues of ~~$1,752.9~~$2,086.1 million for the nine months ended September 30, ~~2010.~~2011. Of this total, we earned approximately ~~70%~~75% of our net operating revenues from our specialty hospitals and approximately ~~30%~~25% from our outpatient rehabilitation ~~business.~~business, compared to 70% and 30% respectively in the comparable period in 2010. The increase in the relative portion of our net operating revenues generated from our specialty hospitals resulted from the hospitals added through our Regency Hospital Company, L.L.C. (“Regency”) acquisition on September 1, 2010. Our specialty hospital segment consists of hospitals designed to serve the needs of long term stay acute patients and hospitals designed to serve patients that require intensive inpatient medical rehabilitation care. Patients are typically admitted to our 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~~Significant 2011 Events

~~Purchase of Regency Hospital Company, L.L.C.~~Refinancing

On ~~September~~June 1, ~~2010, we completed~~2011, Select Medical Corporation (“Select”) entered into a new senior secured credit agreement that provides for $1.15 billion in senior secured credit facilities, comprised of an $850.0 million, seven-year term loan facility and a $300.0 million five-year revolving credit facility of which $125.0 million was drawn at closing. The refinancing also included the ~~acquisition~~repurchase of $266.5 million aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 and the repurchase of all $150.0 million principal amount of Holdings’ 10.0% senior subordinated notes.

At September 30, 2011, Select had outstanding an $847.9 million term loan (at aggregate principal value) and a $50.0 million balance on the ~~issued~~revolving portion of its senior secured credit facilities and $345.0 million in principal amount of 7 5/8% senior subordinated notes due 2015. Holdings also had $167.3 million in principal amount outstanding ~~equity securities~~ of ~~Regency Hospital Company, L.L.C.~~its senior floating rate notes due 2015.

Significant Transactions

On April 1, 2011, we entered into a joint venture with Baylor Health Care System (“~~Regency”~~Baylor JV”) ~~an operator~~. The joint venture consists of ~~long-term acute care hospitals,~~a partnership between Baylor Institute for ~~$210.0~~Rehabilitation and Select Physical Therapy Texas, a wholly-owned subsidiary of Select. We contributed several businesses to the joint venture, including our Frisco inpatient rehabilitation facility and certain of our Texas-based outpatient rehabilitation clinics. A gain of $1.2 million ~~including certain assumed liabilities. The amount paid at closing~~ was ~~reduced by $33.1 million for certain assumed liabilities, payments to employees, payments~~recognized on this contribution during the second quarter of 2011 and is included in the general and administrative line item on the consolidated statement of operations for the purchase of minority interests and an estimated working capital adjustment. The purchase price is subject to a final settlement of net working capital. Regency operated a network of 23 long-term acute care hospitals located in nine ~~states.~~

~~During the three~~ months ended September 30, ~~2010, our~~2011. Additionally, on April 1, 2011 we purchased partnership units and made working capital advances to the newly formed partnership utilizing $13.5 million in cash. We own a 49.0% interest in the partnership and account for the investment using the equity method because we do not have a controlling interest.

On June 30, 2011, we sold a building which we acquired in connection with the acquisition of Regency for $7.6 million in cash. A gain of $4.2 million was recognized on this sale and is included in the general and administrative ~~costs include approximately $2.1 million~~line item on the consolidated statement of ~~costs related to~~operations for the ~~transition of management functions and closing of~~nine months ended September 30, 2011.

Litigation

During the ~~Regency corporate office. The transition and closing of the Regency corporate office will be completed in the fourth~~third quarter of 2010. We anticipate incurring approximately $2.0 million to complete the closure during the fourth quarter of 2010. Additionally, we expect to record a restructuring charge in the fourth quarter of approximately $5.0 million related to lease termination costs associated with Regency’s corporate headquarters.

~~Extension of Revolving Credit Facility~~

~~On June 7, 2010,~~2011, we entered into ~~an amendment to our senior secured credit facility that extended~~a settlement agreement with the ~~maturity~~United States government in connection with the previously disclosedqui tamlawsuit filed in Columbus, Ohio against certain of our ~~$300.0~~subsidiaries. The lawsuit, filed under seal in September 2007, led to the Company’s receiving, in July 2009, a subpoena from the government seeking various documents concerning our financial relationships with certain physicians practicing at our long term acute care hospitals in Columbus, Ohio. Under the terms of the settlement, we agreed to pay $7.5 million ~~revolving credit facility from February 24,~~to the government and entered into a 5-year corporate integrity agreement covering our long term acute care hospitals. We also agreed to pay certain legal fees of thequi tamrelator’s counsel. In the settlement agreement, we admitted no liability or wrongdoing. During the second quarter of 2011, we recorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with the matter. The settlement amounts and counsel fees were paid in full during the third quarter 2011, and we do not expect to incur any additional material charges in connection with this matter.

Stock Repurchase Program

On 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~~3, 2011, our board of directors authorized an increase of $50.0 million in the ~~leverage ratio, as defined~~capacity of our common stock repurchase program, from $100.0 million to $150.0 million. The other terms of the program remain unchanged. The program will now remain in effect until March 31, 2013, unless extended by the board of directors. Stock repurchases under this program may be made in the ~~credit agreement, results~~open market or through privately negotiated transactions, and at times and in ~~changes to the applicable margin percentage. Under the pricing grid, the applicable margin percentage~~such amounts as we deem appropriate. Through September 30, 2011, we have repurchased 11,555,447 shares 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%.an aggregate cost, including transaction fees, of $75.8 million.

Summary Financial Results

Third Quarter Ended September 30, ~~2010~~2011

For the three months ended September 30, ~~2010,~~2011, our net operating revenues increased ~~7.8%,~~18.0% to ~~$588.3~~$694.1 million compared to ~~$545.6~~$588.3 million for the three months ended September 30, ~~2009.~~2010. This increase in net operating revenues resulted principally from ana 24.1% increase in our specialty hospital net operating revenues. The increase in our specialty hospital net operating revenue is principally due to (1) the acquisition of Regency, (2) growth in the hospitals opened as of January 1, 2009 and operated by us throughout both periods and (3) the hospitals opened and acquired in 2009. We had income from operations for the three months ended September 30, 2010 of $42.0 million compared to $32.9 million for the three months ended September 30, 2009. Holdings’ interest expense for the three months ended September 30, 2010 was $27.7 million compared to $33.5 million for the three months ended September 30, 2009. Select’s interest expense for the three months ended September 30, 2010 was $20.8 million compared to $25.1 million for the three months ended September 30, 2009.The decrease in interest expense for both Holdings and Select was attributable to our repayment of outstanding debt with a portion of the proceeds Holding’s initial public offering of common stock in September 2009 and lower interest rates that resulted from the maturation of interest rate swaps that carried higher fixed interest rates.

For the nine months ended September 30, 2010, our net operating revenues increased 5.2% to $1,752.9 million compared to $1,666.3 million for the nine months ended September 30, 2009. This increase in net operating revenues resulted from a 6.8% increase in our specialty hospital net operating revenue and a 1.7% increase in our outpatient rehabilitation net operating revenue. The increase in our specialty hospital net operating revenue is ~~principally~~primarily due to ~~(1)~~ the ~~acquisition~~Regency hospitals acquired on September 1, 2010. We had income from operations for the three months ended September 30, 2011 of $68.1 million compared to $42.0 million for the three months ended September 30, 2010. The increase in income from operations resulted from the addition of the Regency ~~(2) growth~~hospitals acquired on September 1, 2010, improved operating performance at our other specialty hospitals and lower general and administrative costs. Holdings’ interest expense for the three months ended September 30, 2011 was $24.1 million compared to $27.7 million for the three months ended September 30, 2010. Select’s interest expense for the three months ended September 30, 2011 was $21.5 million compared to $20.8 million for the three months ended September 30, 2010. The decrease in interest expense for Holdings was attributable to a reduction in our average interest rate that resulted from lower interest rates on portions of the ~~hospitals opened and acquired as~~debt we refinanced on June 1, 2011. Higher interest expense was incurred by Select because a portion of ~~January~~Holdings debt for which Select was not previously obligated was refinanced at Select through indebtedness incurred under the new senior secured credit facility on June 1, ~~2009 and operated by us throughout both periods and (3)~~2011.

For the ~~hospitals opened and acquired~~nine months ended September 30, 2011, our net operating revenues increased 19.0% to $2,086.1 million compared to $1,752.9 million for the nine months ended September 30, 2010. This increase in ~~2009.~~net operating revenues resulted principally from a 26.5% increase in our specialty hospital net operating revenue. The increase in our ~~outpatient rehabilitation~~specialty hospital net operating revenue is ~~principally~~primarily due to ~~an increase in both our contract services based revenue and increased revenues in our rehabilitation clinics.~~the Regency hospitals acquired on September 1, 2010. We had income from operations for the nine months ended September 30, ~~2010~~2011 of ~~$187.2~~$236.7 million compared to ~~$165.9~~$187.2 million for the nine months ended September 30, ~~2009.~~2010. The increase in income from operations resulted from the addition of the Regency hospitals acquired on September 1, 2010 and improved operating performance at our other specialty hospitals, offset in part by an increase in general and administrative costs. Holdings’ interest expense for the nine months ended September 30, ~~2010~~2011 was ~~$87.0~~$75.1 million compared to ~~$101.8~~$87.0 million for the nine months ended September 30, ~~2009.~~2010. Select’s interest expense for the nine months ended September 30, ~~2010~~2011 was ~~$66.2~~$59.9 million compared to ~~$75.9~~$66.2 million for the nine months ended September 30, ~~2009.~~2010. The decrease in interest expense for both Holdings and Select was primarily attributable to a reduction in ~~outstanding debt balances~~our average interest rate that ~~occurred throughout 2009~~resulted from the expiration of interest rate swaps during 2010 and lower interest rates ~~that resulted from that maturation~~on portions of ~~interest rate swaps that carried higher fixed interest rates.~~the debt we refinanced on June 1, 2011.

Cash flow from operations provided ~~$110.3~~$143.9 million of cash for the nine months ended September 30, ~~2010~~2011 for Holdings and ~~$135.8~~provided $166.8 million of cash for the nine months ended September 30, ~~2010~~2011 for Select. The difference between Holdings and Select primarily relates to interest payments on Holdings’ 10% senior subordinated notes and senior floating rate notes.

Regulatory Changes

In the ~~last~~past few years, there have been significant regulatory changes that have affected our net operating revenues and, in some cases, caused us to change our operating models and strategies. The following is a discussion of ~~significant~~recent regulatory changes that have ~~occurred since we filed~~affected our ~~Annual Report on Form 10-K~~results of operations for the ~~year~~three and nine months ended ~~December 31, 2009 with the Securities and Exchange Commission (“SEC”)~~September 30, 2011 or may have an affect on ~~March 17, 2010.~~our future results of operations. Our Annual Report on Form 10-K for the year ended December 31, ~~2009~~2010 filed with the Securities and Exchange Commission (“SEC”) on March 9, 2011 contains a more detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations, and the information below should be read in connection with that more detailed discussion.

Health Reform Legislation

~~On March 23, 2010, President Obama signed into law H.R. 3590,~~Federal agencies, including the ~~“Patient~~Centers for Medicare & Medicaid Services (“CMS”), continue to implement provisions of the Patient Protection and Affordable Care ~~Act”~~Act (“PPACA”). The PPACA expands access to 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 are particularly relevant to long term acute care hospitals (“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,” which made some limited but important changes to the PPACA.

~~Extension of Changes Made by~~We have included in our Annual Report on Form 10-K for the ~~Medicare, Medicaid, and SCHIP Extension Act of 2007~~

~~The PPACA includes~~year ended December 31, 2010 a ~~two-year extension to Sections 114(c) and (d)~~detailed discussion of the ~~Medicare, Medicaid, and SCHIP Extension Act of 2007 (“SCHIP Extension Act”),~~PPACA provisions that affect our business, as ~~amended~~well as regulatory initiatives adopted by ~~the American Recovery and Reinvestment Act of 2009 (Public Law 111-5) (“ARRA”). The two-year extension applies the relief granted by Section 114(c)~~CMS in response to the “25% Rule” payment adjustment, the one-time budget neutrality adjustment and 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 the SCHIP Extension Act. These changes are described further below.

~~25% Rule~~

The 25% Rule is a downward payment adjustment that applies to Medicare patients discharged from LTCHs who were admitted from a co-located (“host”) hospital or a non-co-located hospital and who exceed applicable percentage thresholds of discharged Medicare patients. The following table describes the types of LTCHs and the relief they have received under the SCHIP Extension Act as amended by the ARRA and PPACA, from the payment adjustment for these discharges:


~~Type of LTCH~~	~~Non Co-located Admissions~~	~~Co-located Admissions~~
~~Non-grandfathered HIHs~~ ~~opened before October~~ ~~1, 2004~~ ~~(63 owned hospitals)~~	Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population.	Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after October 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%.

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

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


~~Type of LTCH~~	~~Non Co-located Admissions~~	~~Co-located Admissions~~
~~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%.

~~Freestanding facilities~~ ~~(29 owned hospitals)~~	~~Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007.~~	~~25% Rule not applicable.~~

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

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

~~One-Time Budget Neutrality Adjustment~~

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 rate year 2009 LTCH-PPS final rule, CMS estimated this one-time adjustment would result in a negative adjustment of 3.75% to the base rate. The SCHIP Extension Act precluded CMS from implementing the one-time prospective adjustment to the LTCH standard amount for a period of three years. PPACA extends by two years the stay on CMS’s ability to 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 SCHIP Extension Act prevented CMS from applying the so-called very short stay outlier policy that was added to LTCH-PPS in the 2008 rate year update published on 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 of a case with the same diagnosis related group under the inpatient prospective payment system, regardless of the clinical considerations for admission to the LTCH or the average length of stay an LTCH must satisfy for Medicare certification. The SCHIP Extension Act 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 very short stay outlier policy before December 29, 2012.

~~Moratorium on New LTCHs and New LTCH Beds~~

The SCHIP Extension Act imposed a moratorium on the establishment and classification of new LTCHs, LTCH satellite facilities and LTCH beds in existing 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 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 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 non-farm 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 the LTCH-PPS 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 reduction in their payment updates as a result of the Medicare productivity adjustment (discussed above).

~~Physician-Owned Hospital Limitations~~

~~Under the transparency and program integrity~~particular 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 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. In a proposed rule published on September 23, 2010, CMS proposes to implement an enrollment application fee for new providers and for current enrolled providers revalidating their enrollment status on or after March 23, 2011. The proposed rule would implement a $500 application fee that is adjusted by the percentage change in the consumer price index. 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 to conduct national and state criminal background checks, including fingerprint checks of their employees and contractors who have (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 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.PPACA.

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

On June 2, 2010, CMS published 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 was revised to $39,795. This change reflects a decrease from $39,897 established in the original final rule for RY 2010. This change to the LTCH-PPS standard federal rate for the remainder of 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 PPACA. The notice revises the fixed-loss amount for high cost outlier cases for RY 2010 discharges occurring on or after April 1, 2010 to $18,615, which is higher than the RY 2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010.

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

On August 16, 2010, CMS published the policies and payment rates for ~~LTCH-PPS~~long term care hospital prospective payment system (“LTCH-PPS”) for fiscal year 2011 (affecting discharges and cost reporting periods beginning on or after October 1, 2010 ~~and before~~through September 30, 2011). The standard federal rate for FYfiscal year 2011 is $39,600, which is a decrease from the RYfiscal year 2010 federal rate of $39,897 in effect from October 1, 2009 to March 31, 2010 and ~~the RY 2010 federal rate of~~ $39,795 ~~that went into~~in effect onfrom April 1, ~~2010. This update~~2010 to the LTCH-PPS standard federal rate for FY 2011 is based on a market basket increase of 2.5% less a reduction of 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 less an additional reduction of 0.5% as mandated by the PPACA.September 30, 2010. The final rule ~~establishes~~established a fixed-loss amount for high cost outlier cases for FYfiscal year 2011 of $18,785, which is higher than the RYfiscal year 2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010 and ~~the~~ $18,615 ~~that went into~~in effect onfrom April 1, 2010 to September 31, 2010. The final rule ~~includes~~included revisions to the relative weights for the ~~MS-LTC-DRGs~~Medicare severity long term care diagnostic related groups for ~~FY 2011 based on the standard federal rate. Consistent with the May 4, 2010 proposed rule for FY~~fiscal year 2011.

Medicare Payment of Long Term Acute Care Hospitals during Fiscal Year 2012

On August 18, 2011, CMS ~~replaced the term “rate year” for LTCHs with “fiscal year” in order to reflect the fact that~~published the policies and payment rates for ~~LTCHs are now revised on a~~LTCH-PPS for 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 the payment rates for IRF-PPS during the portion of rate year 2010 occurring~~2012 (affecting discharges and cost reporting periods beginning on or after ~~April 1, 2010 and before~~ October 1, ~~2010. As described above, the PPACA mandates a market basket reduction of 0.25% for FY 2010.~~2011 through September 30, 2012). The standard federal rate for ~~discharges occurring on or after April 1, 2010 was revised to $13,627. This change reflects~~fiscal year 2012 is $40,222, an increase from the fiscal year 2011 federal rate of $39,600. The final rule establishes a fixed loss amount for high cost outlier cases for fiscal year 2012 of $17,931, which is a decrease from ~~$13,661 established~~the fixed loss amount in the ~~original~~2011 fiscal year of $18,785. The final rule included revisions to the relative weights for ~~FY 2010. In~~ the ~~same notice, CMS increased the outlier threshold amount to $10,721~~Medicare severity long term care diagnostic related groups for ~~discharges occurring on or after April 1, 2010. The outlier threshold was $10,652 for discharges occurring on or after October 1, 2009 through March 31, 2010.~~fiscal year 2012.

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The labor-related share of the LTCH-PPS standard federal rate is adjusted annually to account for geographic differences in area wage levels by applying the applicable LTCH-PPS wage index. CMS adopted a decrease in the labor-related share from 75.271% to 70.199% under the LTCH-PPS for fiscal year 2012. In addition, CMS applied an area wage level budget neutrality factor to the standard federal rate to make annual changes to the area wage level adjustment budget neutral. Previously, there was no statutory or regulatory requirement that these adjustments to the area wage level be made in a budget neutral manner. The final rule creates a regulatory requirement that any adjustments or updates to the area wage level adjustment be made in a budget neutral manner such that estimated aggregate LTCH-PPS payments are not affected.

An LTCH must have an average inpatient length of stay for Medicare patients (including both Medicare covered and non-covered days) of greater than 25 days. In the preamble to the final rule for fiscal year 2012, CMS clarified its policy on the calculation of the average length of stay by specifying that all data on all Medicare inpatient days, including Medicare Advantage days, must be included in the average length of stay calculation effective for cost reporting periods beginning on or after January 1, 2012. CMS now has the ability to capture Medicare Advantage days through the required submission of “information only” bills for Medicare Advantage patients.

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~~inpatient rehabilitation facility prospective payment system (“IRF-PPS”) for fiscal year 2011 (affecting discharges and cost reporting periods beginning on or after October 1, 2010 ~~and before~~through September 30, 2011). The standard ~~federal rate~~payment conversion factor for discharges during FYfiscal year 2011 is ~~revised to $13,860. This change reflects~~$13,860 which is an increase from $13,661 in effect from October 1, 2009 to March 31, 2010 and $13,627 ~~established~~ in ~~the revised final rule for the final months of FY~~effect from April 1, 2010 ~~as well as the market basket reduction of 0.25% required by PPACA.~~to September 30, 2010. CMS also increased the outlier threshold amount for FYfiscal year 2011 to $11,410 from ~~$10,721.~~$10,721 in fiscal year 2010. The final rule included updates to the Case-Mix-Group (“CMG”) relative weights and average length of stay values for fiscal year 2011.

~~Reductions~~Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2012

On August 5, 2011, CMS published the policies and payment rates for IRF-PPS for fiscal year 2012 (affecting discharges and cost reporting periods beginning on or after October 1, 2011 and through September 30, 2012). The standard payment conversion factor for fiscal year 2012 is $14,076 which is an increase from $13,860 applicable during fiscal year 2011. CMS decreased the outlier threshold amount for fiscal year 2012 to $10,660 from $11,410 for fiscal year 2011. The final rule includes updates to the ~~Medicare Physician Fee Schedule~~CMG relative weights and average length of stay values for fiscal year 2012. In a notice published September 26, 2011, CMS revised its calculation of the outlier threshold amount for fiscal year 2012 which changed the amount from $10,660 to $10,713 and made corrections to the CMG relative weights.

The ~~Medicare program reimburses outpatient rehabilitation providers~~IRF-PPS provides a low-income patient adjustment to account for the cost differences associated with treatment of low-income patients. Similarly, the IRF-PPS provides a teaching adjustment to account for the higher indirect operating costs experienced by hospitals that participate in graduate medical education programs. The teaching adjustment is based on the ~~Medicare physician fee schedule. The Medicare physician fee schedule rates are automatically updated annually based~~number of full-time equivalent interns and residents training in the IRF and the IRF’s average daily census. In the proposed rule for fiscal year 2012, CMS proposed updating the low-income patient and teaching status adjustment factors. However, after receiving public comments on ~~a formula, called~~its proposal, CMS decided to maintain the ~~sustainable growth rate (“SGR”) formula, contained~~same low-income patient and teaching status adjustment factors that applied 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.

~~On November 2, 2010, CMS released the final update to the Medicare physician fee schedule for calendar~~fiscal year 2011. In the final rule, the Medicare physician fee schedule payment rates between November 30, 2010 and January 1, 2011 will be reduced by 24.9% as a result of the SGR formula. An additional reduction will occurCMS indicated that it would continue to review its policies on ~~January 1, 2011, unless Congress prevents the SGR formula reductions from going into effect.~~these adjustment factors.

Medicare Payment of Outpatient Rehabilitation Services

Medicare Physician Fee Schedule Sustainable Growth Rate Update

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 2011 CMS or Congress has taken action to prevent the SGR formula reductions. The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 provided 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. The Medicare and Medicaid Extenders Act of 2010 (“MMEA”) prevented a 25.5% reduction in the Medicare Physician Fee Schedule payment rates as a result of the SGR formula that would have taken effect on January 1, 2011. The MMEA extends the current Medicare Physician Fee Schedule payment rates through December 31, 2011.

On November 1, 2011 CMS released the 2012 Medicare Physician Fee Schedule final rule and noted that due to the SGR formula, the physician fee schedule update for calendar year 2012 is projected to be a 27.4% reduction unless Congress again takes legislative action to prevent the SGR formula reductions from going into effect. Over the last several years, Congress has taken legislative action to avert these cuts prior to their effective date. If the 27.4% cut is averted by Congress, the projected impact of other changes in the rule on outpatient physical therapy service payments in aggregate would be a 4.0% increase in 2012, primarily due to the continued phase in of new practice expense survey data derived from the Physician Practice Information Survey (“PPIS”). In 2013, when the use of the PPIS data is fully phased in, the impact would be a 6.0% increase for outpatient physical therapy payments.

On October 6, 2011, the Medicare Payment Advisory Commission (MedPAC) voted to recommend that Congress repeal and replace the statutory SGR formula. The MedPAC proposal — which would require congressional approval — would freeze current Medicare Physician Fee Schedule rates for primary care services for ten years, while other services would be subject to annual payment reductions of 5.9% for three years, followed by a freeze. MedPAC offered a list of options for Congress to consider if it decides to offset SGR repeal costs (estimated at about $200 billion over ten years) within the Medicare program. For the year ended December 31, 2010, we received approximately 10% of our outpatient rehabilitation net operating revenues from Medicare.

Therapy Caps

Beginning on January 1, 1999, the Balanced Budget Act of 1997 subjected certain outpatient therapy providers reimbursed under the Medicare ~~physician fee schedule~~Physician Fee Schedule to annual limits for therapy expenses. Effective January 1, ~~2011,~~2012, the annual limit on outpatient therapy services ~~will be $1,870~~is $1,880 for combined physical and speech language pathology services and ~~$1,870~~$1,880 for occupational therapy services. The per beneficiary caps were $1,870 for calendar year 2011 and $1,860 for calendar year 2010. In the Deficit Reduction Act of 2005, Congress implemented an 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 the therapy caps if the provision of therapy services was deemed to be medically necessary. Therapy cap exceptions have been available automatically for certain conditions and on a case-by-case basis upon submission of documentation of medical necessity. The ~~PPACA~~MMEA extended the exceptions process for outpatient therapy caps

through December 31, ~~2010.~~2011. Unless Congress extends the exceptions process, the therapy caps will apply to all outpatient therapy services beginning on January 1, 2012, except those services furnished and billed by outpatient hospital departments. The 2011 final Medicare Physician Fee Schedule rule indicated that CMS is evaluating alternative payment methodologies that may provide appropriate payment for medically necessary and effective therapy services furnished to Medicare beneficiaries based on patient needs rather than the current therapy caps. As in past years, congressional action will be necessary to extend the exceptions process after December 31, 2011.

InMultiple Procedure Payment Reduction

CMS adopted a multiple procedure payment reduction for therapy services in the final update to the Medicare Physician Fee Schedule for calendar year ~~2011, CMS adopted a multiple procedure payment reduction for therapy services.~~2011. Under the policy, the Medicare program ~~will pay~~pays 100% of the practice expense component of the ~~CPT code/~~therapy procedure or unit of service with the highest Relative Value Unit ~~(RVU)~~(“RVU”), and then ~~reduce by 25%~~reduces the payment for the practice expense component ofby 20% in office and other non-institutional settings and 25% in institutional settings for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished ~~by a single provider to a beneficiary on a single date of service.~~in separate sessions. This multiple procedure payment reduction policy is(“MPPR”) was effective January 1, 2011 and ~~will apply~~applies to all outpatient therapy services paid under Medicare Part ~~B, including those furnished in office and facility settings.~~B. Furthermore, the multiple procedure payment reduction policy applies across all therapy ~~disciplines-occupational~~disciplines — occupational therapy, physical therapy and speech-language pathology. Our outpatient rehabilitation therapy services are primarily offered in institutional settings and, as such, will be subject to the applicable 25% payment reduction in the practice expense component for the second and subsequent therapy services furnished by us to the same patient on the same day. In the final 2012 Medicare Physician Fee Schedule rule, CMS indicated that over the next year it will continue to review whether specific Current Procedural Terminology (“CPT”) codes billed under the fee schedule are overvalued or undervalued, including certain specific CPT codes used by physical therapists.

Medicare Quality Reporting Program for LTCHs and IRFs

The PPACA requires that CMS establish new quality data reporting programs for LTCHs and IRFs by fiscal year 2014. CMS has adopted a quality data reporting program requiring LTCHs to submit data from three quality measures in order to receive the full payment update in fiscal year 2014, including measures related to (1) catheter-associated urinary tract infections, (2) central line catheter-associated blood stream infection, and (3) pressure ulcers that are new or have worsened. CMS adopted a quality data reporting program requiring IRFs to submit data from two quality measures in order to receive the full payment update in fiscal year 2014, including measures related to (1) catheter-associated urinary tract infections and (2) pressure ulcers that are new or have worsened. Under the PPACA and CMS regulations, if an LTCH or IRF fails to report on the selected quality measures, it will see its reimbursement reduced by 2.0% 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 fiscal years.

3937

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 specialty 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~~all of our specialty hospitals ~~and outpatient rehabilitation clinics~~ are currently 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 specialty 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 specialty 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.

On September 15, 2011, the United States Government Accountability Office (“GAO”) issued a report concerning the oversight of LTCHs. The GAO examined the extent to which CMS (1) collects data about LTCHs’ quality of care and (2) oversees LTCH survey activities. GAO identified several potential areas where the data may assist CMS in more effectively overseeing survey activities at LTCHs, such as how effectively state survey agencies triage and conduct complaint validation surveys. The GAO report recommends that CMS strengthen its oversight of LTCHs by improving available data on quality of care and by improving oversight of LTCH survey activities. According to the GAO, the Department of Health and Human Services concurred with the GAO’s recommendations.

4038

Operating Statistics

The following tables set forth operating statistics for our specialty hospitals and our outpatient rehabilitation clinics for each of the periods presented. The data in the 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 ~~consolidations.~~sales. The operating statistics reflect data for the period of time these operations were managed by us.


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2009			2010			2009			2010			2010			2011			2010			2011
Specialty hospital data(1):
Number of hospitals — start of period		92			94			93			94
Number of hospital start-ups		1			—			1			—
Number of hospitals owned — start of period														94			115			94			116
Number of hospitals acquired		1			23			1			23			23			—			23			1
Number of hospitals closed		(1	)		(2	)		(2	)		(2	)
Number of hospitals closed/sold														(2	)		—			(2	)		(2	)

Number of hospitals owned — end of period		93			115			93			115			115			115			115			115
Number of hospitals managed — end of period		1			2			1			2			2			4			2			4

Total number of hospitals (all) — end of period		94			117			94			117			117			119			117			119

Available licensed beds — end of period		4,173			5,117			4,173			5,117

Available licensed beds														5,117			5,135			5,117			5,135
Admissions		10,466			11,305			31,775			33,022			11,305			13,599			33,022			40,965
Patient days		248,504			275,387			757,487			808,133			275,387			333,322			808,133			994,179
Average length of stay (days)		24			24			24			24			24			25			24			24
Net revenue per patient day(2)	$	1,479		$	1,478		$	1,489		$	1,481		$	1,478		$	1,474		$	1,481		$	1,498
Occupancy rate		65	%		65	%		66	%		68	%		65	%		71	%		68	%		71	%
Percent patient days — Medicare		65	%		64	%		65	%		64	%		64	%		65	%		64	%		65	%

Outpatient rehabilitation data:
Number of clinics owned — start of period		875			880			880			883			880			849			883			875
Number of clinics acquired		2			1			3			1			1			—			1			—
Number of clinic start-ups		2			7			9			17			7			7			17			22
Number of clinics closed/sold		(6	)		(9	)		(19	)		(22	)		(9	)		(9	)		(22	)		(50	)

Number of clinics owned — end of period		873			879			873			879			879			847			879			847
Number of clinics managed — end of period		74			71			74			71			71			105			71			105

Total number of clinics (all) — end of period		947			950			947			950			950			952			950			952


Number of visits		1,126,096			1,144,096			3,385,733			3,442,266			1,144,096			1,099,342			3,442,266			3,381,896
Net revenue per visit (3)	$	101		$	101		$	102		$	101		$	101		$	103		$	101		$	103


(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~~patient 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 managed clinics or contract services revenue.

4139

Results of Operations

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


	Select Medical												Select Medical Holdings
	Holdings						Select Medical						Corporation						Select Medical Corporation
	Corporation						Corporation						Three Months						Three Months
	Three Months Ended						Three Months Ended						Ended						Ended
	September 30,						September 30,						September 30,						September 30,
	2009			2010			2009			2010			2010			2011			2010			2011
Net operating revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of services(1)		82.3			84.8			82.3			84.8			84.8			83.8			84.8			83.8
General and administrative		6.3			3.3			6.3			3.3			3.3			2.2			3.3			2.2
Bad debt expense		2.2			1.9			2.2			1.9			1.9			1.7			1.9			1.7
Depreciation and amortization		3.2			2.9			3.2			2.9			2.9			2.5			2.9			2.5

Income from operations		6.0			7.1			6.0			7.1			7.1			9.8			7.1			9.8
Gain on early retirement of debt		0.2			—			—			—
Equity in losses of unconsolidated subsidiaries		—			0.0			—			0.0
Equity in earnings (losses) of unconsolidated subsidiaries														(0.0	)		0.2			(0.0	)		0.2
Other income		—			0.0			0.4			0.0			0.0			—			0.0			—
Interest expense, net		(6.1	)		(4.7	)		(4.6	)		(3.5	)		(4.7	)		(3.4	)		(3.5	)		(3.1	)

Income from operations before income taxes		0.1			2.4			1.8			3.6
Income tax expense (benefit)		(0.2	)		0.9			0.4			1.4
Income before income taxes														2.4			6.6			3.6			6.9
Income tax expense														0.9			2.8			1.4			2.9

Net income		0.3			1.5			1.4			2.2			1.5			3.8			2.2			4.0
Net income attributable to non-controlling interests		0.2			0.1			0.2			0.1
Net income attributable to non-controlling interest														0.1			0.1			0.1			0.1


Net income attributable to Holdings and Select		0.1	%		1.4	%		1.2	%		2.1	%		1.4	%		3.7	%		2.1	%		3.9	%


	Select Medical												Select Medical Holdings
	Holdings						Select Medical						Corporation						Select Medical Corporation
	Corporation						Corporation						Nine Months						Nine Months
	Nine Months Ended						Nine Months Ended						Ended						Ended
	September 30,						September 30,						September 30,						September 30,
	2009			2010			2009			2010			2010			2011			2010			2011
Net operating revenues		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of services(1)		81.2			82.2			81.2			82.2			82.2			81.9			82.2			81.9
General and administrative		3.6			2.4			3.6			2.4			2.4			2.3			2.4			2.3
Bad debt expense		2.0			1.8			2.0			1.8			1.8			1.9			1.8			1.9
Depreciation and amortization		3.2			2.9			3.2			2.9			2.9			2.5			2.9			2.5

Income from operations		10.0			10.7			10.0			10.7			10.7			11.4			10.7			11.4
Gain on early retirement of debt		1.0			—			0.9			—
Equity in losses of unconsolidated subsidiaries		—			0.0			—			0.0
Loss on early retirement of debt														—			(1.5	)		—			(0.9	)
Equity in earnings (losses) of unconsolidated subsidiaries														(0.0	)		0.0			(0.0	)		0.0
Other income		—			0.0			0.2			0.0			0.0			—			0.0			—
Interest expense, net		(6.1	)		(5.0	)		(4.5	)		(3.8	)		(5.0	)		(3.6	)		(3.8	)		(2.9	)

Income from operations before income taxes		4.9			5.7			6.6			6.9
Income before income taxes														5.7			6.3			6.9			7.6
Income tax expense		2.0			2.3			2.6			2.7			2.3			2.7			2.7			3.2

Net income		2.9			3.4			4.0			4.2			3.4			3.6			4.2			4.4
Net income attributable to non-controlling interests		0.1			0.2			0.1			0.2
Net income attributable to non-controlling interest														0.2			0.2			0.2			0.2


Net income attributable to Holdings and Select		2.8	%		3.2	%		3.9	%		4.0	%		3.2	%		3.4	%		4.0	%		4.2	%

4240

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


	Select Medical Holdings Corporation									Select Medical Corporation
	Three Months Ended									Three Months Ended									Select Medical Holdings Corporation									Select Medical Corporation
	September 30,									September 30,									Three Months Ended September 30,									Three Months Ended September 30,
							%									%									%									%
	2009			2010			Change			2009			2010			Change			2010			2011			Change			2010			2011			Change
	(in thousands)									(in thousands)									(in thousands)
Net operating revenues:
Specialty hospitals	$	376,859		$	419,798			11.4	%	$	376,859		$	419,798			11.4	%	$	419,798		$	521,085			24.1	%	$	419,798		$	521,085			24.1	%
Outpatient rehabilitation		168,751			168,438			(0.2	)		168,751			168,438			(0.2	)		168,438			173,030			2.7			168,438			173,030			2.7
Other(3)		11			14			27.3			11			14			27.3			14			16			14.3			14			16			14.3

Total company	$	545,621		$	588,250			7.8	%	$	545,621		$	588,250			7.8	%	$	588,250		$	694,131			18.0	%	$	588,250		$	694,131			18.0	%


Income (loss) from operations:
Specialty hospitals	$	53,896		$	47,045			(12.7	%)	$	53,896		$	47,045			(12.7	%)	$	47,045		$	68,742			46.1	%	$	47,045		$	68,742			46.1	%
Outpatient rehabilitation		14,616			15,386			5.3			14,616			15,386			5.3			15,386			15,432			0.3			15,386			15,432			0.3
Other(3)		(35,607	)		(20,477	)		42.5			(35,607	)		(20,477	)		42.5			(20,477	)		(16,101	)		21.4			(20,477	)		(16,101	)		21.4

Total company	$	32,905		$	41,954			27.5	%	$	32,905		$	41,954			27.5	%	$	41,954		$	68,073			62.3	%	$	41,954		$	68,073			62.3	%


Adjusted EBITDA:(2)
Specialty hospitals	$	64,381		$	58,282			(9.5	)%	$	64,381		$	58,282			(9.5	)%	$	58,282		$	81,570			40.0	%	$	58,282		$	81,570			40.0	%
Outpatient rehabilitation		20,898			20,339			(2.7	)		20,898			20,339			(2.7	)		20,339			19,435			(4.4	)		20,339			19,435			(4.4	)
Other(3)		(12,236	)		(19,195	)		(56.9	)		(12,236	)		(19,195	)		(56.9	)		(19,195	)		(14,469	)		24.6			(19,195	)		(14,469	)		24.6

Adjusted EBITDA margins:(2) Specialty hospitals		17.1	%		13.9	%					17.1	%		13.9	%
Adjusted EBITDA margins:(2)
Specialty hospitals																				13.9	%		15.7	%					13.9	%		15.7	%
Outpatient rehabilitation		12.4			12.1						12.4			12.1						12.1			11.2						12.1			11.2
Other		N/M			N/M						N/M			N/M
Other(3)																				N/M			N/M						N/M			N/M

Total assets:
Specialty hospitals	$	1,898,494		$	2,051,238					$	1,898,494		$	2,051,238					$	2,051,238		$	2,191,493					$	2,051,238		$	2,191,493
Outpatient rehabilitation		484,703			487,171						484,703			487,171						487,171			468,551						487,171			468,551
Other(3)		381,545			182,199						378,356			179,551						182,199			91,066						179,551			89,568

Total company	$	2,764,742		$	2,720,608					$	2,761,553		$	2,717,960					$	2,720,608		$	2,751,110					$	2,717,960		$	2,749,612


Purchases of property and equipment, net:
Specialty hospitals	$	12,371		$	9,339					$	12,371		$	9,339					$	9,339		$	4,957					$	9,339		$	4,957
Outpatient rehabilitation		1,566			2,019						1,566			2,019						2,019			3,160						2,019			3,160
Other(3)		332			814						332			814						814			281						814			281

Total company	$	14,269		$	12,172					$	14,269		$	12,172					$	12,172		$	8,398					$	12,172		$	8,398

4341


	Select Medical Holdings
	Corporation									Select Medical Corporation
	Nine Months Ended									Nine Months Ended									Select Medical Holdings Corporation									Select Medical Corporation
	September 30,									September 30,									Nine Months Ended September 30,									Nine Months Ended September 30,
							%									%									%									%
	2009			2010			Change			2009			2010			Change			2010			2011			Change			2010			2011			Change
	(in thousands)									(in thousands)									(in thousands)
Net operating revenues:
Specialty hospitals	$	1,156,422		$	1,234,562			6.8	%	$	1,156,422		$	1,234,562			6.8	%	$	1,234,562		$	1,561,270			26.5	%	$	1,234,562		$	1,561,270			26.5	%
Outpatient rehabilitation		509,760			518,288			1.7			509,760			518,288			1.7			518,288			524,694			1.2			518,288			524,694			1.2
Other(3)		146			90			(38.4	)		146			90			(38.4	)		90			102			13.3			90			102			13.3

Total company	$	1,666,328		$	1,752,940			5.2	%	$	1,666,328		$	1,752,940			5.2	%	$	1,752,940		$	2,086,066			19.0	%	$	1,752,940		$	2,086,066			19.0	%


Income (loss) from operations:
Specialty hospitals	$	180,100		$	181,428			0.7	%	$	180,100		$	181,428			0.7	%	$	181,428		$	235,083			29.6	%	$	181,428		$	235,083			29.6	%
Outpatient rehabilitation		48,797			51,061			4.6			48,797			51,061			4.6			51,061			52,619			3.1			51,061			52,619			3.1
Other(3)		(62,978	)		(45,310	)		28.1			(62,978	)		(45,310	)		28.1			(45,310	)		(50,971	)		(12.5	)		(45,310	)		(50,971	)		(12.5	)

Total company	$	165,919		$	187,179			12.8	%	$	165,919		$	187,179			12.8	%	$	187,179		$	236,731			26.5	%	$	187,179		$	236,731			26.5	%


Adjusted EBITDA:(2)
Specialty hospitals	$	212,122		$	214,523			1.1	%	$	212,122		$	214,523			1.1	%	$	214,523		$	273,004			27.3	%	$	214,523		$	273,004			27.3	%
Outpatient rehabilitation		67,476			66,813			(1.0	)		67,476			66,813			(1.0	)		66,813			65,308			(2.3	)		66,813			65,308			(2.3	)
Other(3)		(37,277	)		(41,419	)		(11.1	)		(37,277	)		(41,419	)		(11.1	)		(41,419	)		(46,117	)		(11.3	)		(41,419	)		(46,117	)		(11.3	)

Adjusted EBITDA margins:(2)
Specialty hospitals		18.3	%		17.4	%					18.3	%		17.4	%					17.4	%		17.5	%					17.4	%		17.5	%
Outpatient rehabilitation		13.2			12.9						13.2			12.9						12.9			12.4						12.9			12.4
Other		N/M			N/M						N/M			N/M
Other(3)																				N/M			N/M						N/M			N/M

Total assets:
Specialty hospitals	$	1,898,494		$	2,051,238					$	1,898,494		$	2,051,238					$	2,051,238		$	2,191,493					$	2,051,238		$	2,191,493
Outpatient rehabilitation		484,703			487,171						484,703			487,171						487,171			468,551						487,171			468,551
Other(3)		381,545			182,199						378,356			179,551						182,199			91,066						179,551			89,568

Total company	$	2,764,742		$	2,720,608					$	2,761,553		$	2,717,960					$	2,720,608		$	2,751,110					$	2,717,960		$	2,749,612


Purchases of property and equipment, net:
Specialty hospitals	$	27,748		$	29,963					$	27,748		$	29,963					$	29,963		$	21,574					$	29,963		$	21,574
Outpatient rehabilitation		6,575			7,187						6,575			7,187						7,187			8,142						7,187			8,142
Other(3)		927			1,476						927			1,476						1,476			2,378						1,476			2,378

Total company	$	35,250		$	38,626					$	35,250		$	38,626					$	38,626		$	32,094					$	38,626		$	32,094

4442

~~The following tables reconcile same store hospital information:~~

Select Medical Holdings Select Medical
Corporation Corporation
Three Months Ended Three Months Ended
September 30, September 30,
2009 2010 2009 2010
(in thousands) (in thousands)
Net operating revenue
Specialty hospitals net operating revenue $ 376,859 $ 419,798 $ 376,859 $ 419,798
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 3,482 34,965 3,482 34,965

Specialty hospitals same store net operating revenue $ 373,377 $ 384,833 $ 373,377 $ 384,833

Adjusted EBITDA(2)
Specialty hospitals Adjusted EBITDA(2) $ 64,381 $ 58,282 $ 64,381 $ 58,282
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 (1,779 ) (2,231 ) (1,779 ) (2,231 )

Specialty hospitals same store Adjusted EBITDA(2) $ 66,160 $ 60,513 $ 66,160 $ 60,513

All specialty hospitals Adjusted EBITDA margin(2) 17.1 % 13.9 % 17.1 % 13.9 %
Specialty hospitals same store Adjusted EBITDA margin(2) 17.7 % 15.7 % 17.7 % 15.7 %

Select Medical Holdings Select Medical
Corporation Corporation
Nine Months Ended Nine Months Ended
September 30, September 30,
2009 2010 2009 2010
(in thousands) (in thousands)
Net operating revenue
Specialty hospitals net operating revenue $ 1,156,422 $ 1,234,562 $ 1,156,422 $ 1,234,562
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 10,711 58,366 10,711 58,366

Specialty hospitals same store net operating revenue $ 1,145,711 $ 1,176,196 $ 1,145,711 $ 1,176,196

Adjusted EBITDA(2)
Specialty hospitals Adjusted EBITDA(2) $ 212,122 $ 214,523 $ 212,122 $ 214,523
Less: Specialty hospitals in development, opened, acquired or closed after 1/1/09 (3,698 ) (3,321 ) (3,698 ) (3,321 )

Specialty hospitals same store Adjusted EBITDA(2) $ 215,820 $ 217,844 $ 215,820 $ 217,844

All specialty hospitals Adjusted EBITDA margin(2) 18.3 % 17.4 % 18.3 % 17.4 %
Specialty hospitals same store Adjusted EBITDA margin(2) 18.8 % 18.5 % 18.8 % 18.5 %
N/M — Not Meaningful.


~~N/M~~		~~— Not Meaningful.~~

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


(2)		We define Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, ~~gain~~stock compensation expense, equity in earnings (losses) of unconsolidated subsidiaries, loss on early retirement of debt ~~stock compensation expense,~~and other ~~income, equity in losses of unconsolidated subsidiaries and long term incentive compensation.~~income. 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.~~GAAP. 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~~GAAP and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See ~~footnote 10~~Note 8 to our interim unaudited consolidated financial statements for the period ended September 30, ~~2010~~2011 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 30, ~~2010~~2011 Compared to Three Months Ended September 30, ~~2009~~2010

In the following discussion, we address the results of operations of Select and Holdings. With the exception of incremental interest expense 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 ~~interests~~interest is identical for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased by ~~7.8%~~18.0% to $694.1 million for the three months ended September 30, 2011 compared to $588.3 million for the three months ended September 30, ~~2010 compared to $545.6 million for the three months ended September 30, 2009.~~2010.

Specialty Hospitals.Our specialty hospital net operating revenues increased by ~~11.4%~~24.1% to $521.1 million for the three months ended September 30, 2011 compared to $419.8 million for the three months ended September 30, 2010. The Regency hospitals acquired on September 1, 2010 contributed $84.1 million of net revenue, or $61.3 million of the increased net operating revenues. The remaining increase resulted primarily from an increase in patient volumes in our other specialty hospitals. Our patient days increased 21.0% from the three months ended September 30, 2010 to 333,322 days for the three months ended September 30, 2011, which was primarily related to the addition of the Regency hospitals. The Regency hospitals contributed a net increase in patient days of 37,354 days. Excluding the effect of the Regency hospitals, patient days would have increased 8.0% compared to ~~$376.9~~the same quarter, prior year primarily as a result of increased Medicare patient volumes. The occupancy percentage increased to 71% for the three months ended September 30, 2011 from 65% for the three months ended September 30, 2010. Our average net revenue per patient day was $1,474 for the three months ended September 30, 2011 compared to $1,478 for the three months ended September 30, 2010. The decrease in our net revenue per patient day resulted from a decline in our average non-Medicare net revenue per patient day which resulted from a lower non-Medicare per patient day rate realized at the rehabilitation hospital we acquired through a hospital exchange in January 2011.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating revenues for the segment increased 2.7% to $173.0 million for the three months ended September 30, 2009. For the three months ended September 30, 2010, the hospitals opened and acquired in 2009 increased net operating revenues by $10.2 million and the Regency hospitals acquired on September 1, 2010 increased net operating revenue by $23.4 million. These increases were offset by the loss of revenues from hospitals that closed during 2009 and 2010, which accounted for $2.1 million of the difference in net operating revenues between the three months ended September 30, 2009 and September 30, 2010. Net operating revenues for the specialty hospitals opened as of January 1, 2009 and operated by us throughout both periods increased by $11.4 million to $384.8 million for the three months ended September 30, 2010,2011 compared to $373.4 million for the three months ended September 30, 2009. This increase in net operating revenue is principally related to an increase in our patient days in these same store hospitals. Our patient days for these same store hospitals for the three months ended September 30, 2010 increased 2.4% as compared to the three months ended September 30, 2009, which was primarily due to an increase in our Non-Medicare patient days. The occupancy percentage in our same store hospitals was 66% for both the three months ended September 30, 2010 and for the three months ended September 30, 2009. Our average net revenue per patient day in our specialty hospitals was $1,478 for the three months ended September 30, 2010 compared to $1,479 for the three months ended September 30, 2009.

~~Outpatient Rehabilitation.~~~~Net operating revenue for our outpatient rehabilitation segment, which is comprised of outpatient rehabilitation clinics and contract therapy services, were~~ $168.4 million for the three months ended September 30, 2010 compared to $168.8 million for the three months ended September 30, 2009. The decrease in our outpatient rehabilitation segment net operating revenues was due to a decrease in our contracted services based revenue, partially offset by an increase in our outpatient rehabilitation clinic revenue.2010. The net operating revenues generated by our outpatient rehabilitation clinics ~~for the three months ended September 30, 2010~~ grew approximately ~~1.2% as~~2.4% compared to the three months ended September 30, ~~2009.~~2010. The increase was principally related to revenues we are generating from services provided to the Baylor JV. The number of patient visits in our owned outpatient rehabilitation clinics ~~increased 1.6%~~decreased 3.9% for the three months ended September 30, ~~2010~~2011 to ~~1,144,096~~1,099,342 visits compared to ~~1,126,096~~1,144,096 visits for the three months ended September 30, ~~2009.~~2010. The decrease in visits, which also slowed our revenue growth, resulted from the 18 clinics in the Dallas-Fort Worth metroplex that were contributed to the Baylor JV, which is accounted for as an unconsolidated joint venture, and the adverse effect hurricanes Irene and Lee had on our clinics in the Mid-Atlantic and Northeast regions. Net revenue per visit in our clinics ~~remained stable at~~increased 2.0% to $103 for the three months ended September 30, 2011, compared to $101 for the three months ended September 30, ~~2010 and September 30, 2009. We experienced a decline in our~~2010. Our contract services ~~based revenue~~business experienced an increase in net operating revenues of approximately ~~5.0% for the three months ended September 30, 2010 as~~3.9% compared to the three months ended September 30, ~~2009. This decline~~2010, which was ~~primarily due~~ the ~~termination~~result of ~~a significant~~growth from existing locations where we provide therapy services ~~contract.~~and new locations that have been added in 2011.

Operating Expenses

Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Our operating expenses increased by ~~$34.3~~$79.2 million to $608.5 million for the three months ended September 30, 2011 compared to $529.3 million for the three months ended September 30, ~~2010 compared to $495.0 million for the three months ended September 30, 2009.~~2010. As a percentage of our net operating revenues, our operating expenses were 87.7% for the three months ended September 30, 2011 compared to 90.0% for the three months ended September 30, ~~2010 compared to 90.8% for the three months ended September 30, 2009.~~2010. Our cost of services, a major component of which is labor expense, were $581.8 million for the three months ended September 30, 2011 compared to $498.7 million for the three months ended September 30, ~~2010 compared to $448.7~~2010. The principal cause of this increase resulted from the addition of the Regency hospitals. Additionally, our facility rent expense, which is a component of cost of services, was $29.5 million for the three months ended September 30, 2009. The principal cause of this increase was increased costs associated with the hospitals acquired in 2009 and 2010 and increased cost in our hospitals opened as of January 1, 2009 and operated by us throughout both periods. Our labor costs in these same store hospitals were 154 basis points higher and our other operating costs were 83 basis points higher for the three months ended September 30, 2010 when2011 compared to the three months ended September 30, 2009. Our labor costs were primarily higher due to increased patient care hours that resulted from a higher acuity patient population for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Additionally, the labor costs included a $4.0 million charge due to an increase in our workers compensation program costs during the three months ended September 30, 2010. The increase in our other operating costs were caused by increasing onsite physician services at certain hospitals, increased equipment leasing costs and increased purchases of minor equipment and supplies. Another component of cost of services is facility rent expense, which was $29.8 million for the three months ended September 30, ~~2010 compared to $29.1~~2010. General and administrative expenses were 2.2% of net operating revenue or $15.0 million for ~~the~~ three months ended September 30, ~~2009. General and administrative expenses were~~2011, compared to 3.3% of net operating revenue or $19.2 million for ~~the~~ three months ended September 30, ~~2010 compared to $34.6 million for~~2010. Our general and administrative costs in the three ~~months~~month period ended September 30, 2009. The change is related to a number of factors. In 2009 our general and administrative expenses were significantly higher because we incurred non-recurring charges related to an $18.3 million payment under the 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. In 2010 ~~our expenses were higher because we incurred~~included $2.1 million of ~~additional~~ costs related to the transition of management functions and closing of the Regency corporate ~~office. Additionally we incurred~~office and a $4.8 million charge due to an increase in employee healthcare costs. These increases in 2010 ~~increases~~ were partially offset by a reduction of $1.8 million in incentive compensation for executive officers ~~from the same period~~ in ~~the prior year.~~2010. Our bad debt expense as a percentage of net operating revenues was 1.7% for the three months ended September 30, 2011 compared to 1.9% for the three months ended September 30, ~~2010 compared~~2010. The decline principally occurred in our outpatient rehabilitation segment and was due to ~~2.2%~~improved collection activity.

Adjusted EBITDA

Specialty Hospitals.Our specialty hospital Adjusted EBITDA increased by 40.0% to $81.6 million for the three months ended September 30, ~~2009.~~

~~Adjusted EBITDA~~

~~Specialty Hospitals~~~~. Adjusted EBITDA decreased by 9.5%~~2011 compared to $58.3 million for the three months ended September 30, ~~2010 compared to $64.4 million for the three months ended September 30, 2009. Our~~2010. Adjusted EBITDA margins ~~were 13.9%~~ for the three months ended September 30, 2010 compared to 17.1% for the three months ended September 30, 2009. The hospitals opened as of January 1, 2009 and operated by us throughout both periods had Adjusted EBITDA of $60.5 million for the three months ended September 30, 2010, a decrease of $5.7 million or 8.5% compared to the Adjusted EBITDA of $66.2 million for these hospitals for the three months ended September 30, 2009. Our Adjusted EBITDA margin in these same store hospitals decreasedsegment increased to 15.7% for the three months ended September 30, ~~2010~~2011 from ~~17.7%~~13.9% for the three months ended September 30, ~~2009. The principal reason~~2010. For the three months ended September 30, 2011, the Regency hospitals acquired on September 1, 2010 contributed $12.7 million of the increase in specialty hospital Adjusted EBITDA. Excluding the effect of the Regency hospitals in both periods, the Adjusted EBITDA margin would have been 16.0% and 14.9% for the ~~decline~~three months ended September 30, 2011 and 2010, respectively. In addition to the Adjusted EBITDA contribution from the Regency hospitals, the increase in ~~our~~the Adjusted EBITDA for ~~these same store~~the remainder of our specialty hospitals was anprimarily the result of the increase in ~~costs of services~~patient volumes described above under ~~“Operating Expenses”~~“Net Operating Revenues — Specialty Hospitals” and lower operating costs. During the three months ended September 30, 2010 we incurred an unanticipated $4.0 million charge due to an abnormal increase in our workers compensation program costs.

Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA for the segment decreased by 4.4% to $19.4 million for the three months ended September 30, 2011 compared to $20.3 million for the three months ended September 30, 2010. Our outpatient rehabilitation Adjusted EBITDA margins for the segment decreased to 11.2% for the three months ended September 30, 2011 from 12.1% for the three months ended September 30, 2010. The ~~hospitals acquired~~Adjusted EBITDA in ~~2009 and 2010 had losses of~~our outpatient rehabilitation clinics increased by $1.1 million for the three months ended September 30, ~~2010~~2011 compared to ~~losses~~the three months ended September 30, 2010. Additionally, our Adjusted EBITDA margins for our outpatient rehabilitation clinics grew to 12.5% for the three months ended September 30, 2011 from 12.0% for the three months ended September 30, 2010. The increase in our Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation clinics was primarily due to an increase in our net revenue per visit and lower bad debt expense. We experienced a decline in the Adjusted EBITDA and Adjusted EBITDA margin of ~~$0.1~~our contract services business that resulted from higher labor costs for the treatment models required by RUGS IV/MDS 3.0 rules that became effective on October 1, 2010 and higher labor costs associated with the recently added contract therapy locations.

Other. The Adjusted EBITDA loss was $14.5 million for the three months ended September 30, ~~2009. The increased losses were due~~2011 compared to ~~the hospitals acquired from Regency which generated~~ an Adjusted EBITDA loss of ~~$1.3 million from its acquisition date through September 30, 2010 in addition to the $2.1 million of transition costs discussed under “~~~~Operating Expenses~~~~” above. Our hospitals opened during 2009 or currently still in development incurred Adjusted EBITDA losses of $0.5~~$19.2 million for the three months ended September 30, 2010 and ~~2009.~~

~~Outpatient Rehabilitation~~. Adjusted EBITDA decreased by 2.7% to $20.3 million for the three months ended September 30, 2010 compared to $20.9 million for the three months ended September 30, 2009. Our Adjusted EBITDA margins decreased to 12.1% for the three months ended September 30, 2010 from 12.4% for the three months ended September 30, 2009. The decrease in Adjusted EBITDA wasis primarily ~~due to the termination of a significant therapy services contract.~~

~~Other~~. The Adjusted EBITDA loss was $19.2 million for the three months ended September 30, 2010 compared to an Adjusted EBITDA loss of $12.2 million for the three months ended September 30, 2009. This increased loss is related to ~~the cost affecting~~ our general and administrative expenses as described above under “~~Operating~~“Operating Expenses.”

Income from Operations

For the three months ended September 30, ~~2010~~2011 we ~~experienced~~had income from operations of ~~$42.0~~$68.1 million compared to ~~$32.9~~$42.0 million for the three months ended September 30, ~~2009.~~2010. The increase in income from operations resulted primarily from ~~a reduction in~~the Regency hospitals acquired on September 1, 2010, which contributed $11.5 million of income from operations for the quarter, and improved operating performance at our other specialty hospitals, and lower general and administrative ~~expenses.~~costs.

~~Gain on Early Retirement of Debt~~

~~Select Medical Holdings Corporation.~~For the three 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 had 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 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 $21.5 million for the three months ended September 30, 2011 compared to $20.8 million for the three months ended September 30, ~~2010 compared to $25.1 million for the three months ended September 30, 2009.~~2010. The ~~decrease~~increase in interest expense ~~is related to a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of our 7~~⁵/₈~~% senior subordinated notes and~~for Select resulted from the repayment of ~~a portion~~$150.0 million of ~~our~~Holdings debt, for which Select was not previously obligated, which was refinanced at Select through indebtedness incurred under the new senior secured credit facility ~~with proceeds from Holdings’ initial public offering of common stock and a reduction in rate that has resulted from the maturation of interest rate swaps that carried higher fixed interest rates.~~on June 1, 2011.

Select Medical Holdings Corporation.Interest expense was $24.1 million for the three months ended September 30, 2011 compared to $27.7 million for the three months ended September 30, ~~2010 compared to $33.5~~2010. The decrease in interest expense resulted primarily from lower interest rates on the portions of the debt that were refinanced on June 1, 2011.

Income Taxes

Select Medical Corporation.We recorded income tax expense of $20.2 million for the three months ended September 30, ~~2009.~~2011. The ~~decrease in interest~~ expense ~~is related to a reduction in outstanding debt balances that occurred in 2009 as a result~~represented an effective tax rate of ~~repurchases of Select’s 7~~⁵/₈% senior subordinated notes, repurchases of our senior floating rate notes and the repayment of a portion of Select’s senior secured credit facility with proceeds from our initial public offering of common stock and a reduction in rate that has resulted from the maturation of interest rate swaps that carried higher fixed interest rates.

~~Income Taxes~~

~~Select Medical Corporation.~~41.9%. We recorded income tax expense of $8.0 million for the three months ended September 30, 2010. The expense represented an effective tax rate of 37.8%. Select Medical Corporation is part of the consolidated federal tax return for Select Medical Holdings Corporation. We allocate income taxes between Select and Holdings for purposes of financial statement presentation. Because Holdings is a passive investment company incorporated in Delaware, it does not incur any state income tax expense or benefit on its specific income or loss and, as such, receives a tax allocation equal to the federal statutory rate of 35% on its specific income or loss. Based upon the relative size of Holdings’ income or loss, this can cause the effective tax rate for Select to differ from the effective tax rate for the consolidated company. The analysis in the following paragraph discusses the change in our consolidated tax rate.

Select Medical Holdings Corporation.We recorded income tax expense of ~~$2.5~~$19.3 million for the three months ended September 30, ~~2009.~~2011. The expense represented an effective tax rate of ~~24.9%~~42.3%. In 2009 we favorably resolved with the Internal Revenue Service certain matters related to the 2005 tax return that resulted in interest being paid to us by the Internal Revenue Service. The total effect of this benefit is reflected in our effective tax rate for the three months ended September 30, 2009.

~~Select Medical Holdings Corporation.~~We recorded income tax expense of $5.6 million for the three months ended September 30, 2010. The expense represented an effective tax rate of 39.1%. ~~We recorded income~~The increase in our effective tax ~~benefit of $0.8 million for~~rate has resulted primarily from a difference between the ~~three months ended September 30, 2009. The significant reduction~~tax accounting basis and the financial accounting basis associated with a hospital exchange that occurred in taxable income for the three months ended September 30, 2009 resulted in minimal tax expense and this was further offset by the favorable resolution of our 2005 tax return with the Internal Revenue Service that resulted in interest being paid to us which was reflected as a tax benefit.2011.

Non-Controlling Interests

Non-controlling interests in consolidated earnings were $0.8 million for the three months ended September 30, 2011 compared to $0.7 million for the three months ended September 30, ~~2010 and $0.8 million for the three months ended September 30, 2009. These amounts reflect minority owners’ share of the earnings of joint ventured operations.~~2010.

Nine Months Ended September 30, ~~2010~~2011 Compared to Nine Months Ended September 30, ~~2009~~2010

In the following discussion, we address the results of operations of Select and Holdings. With the exception of interest expense, loss 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 ~~interests~~interest is identical for Holdings and Select.

Net Operating Revenues

Our net operating revenues increased by ~~5.2%~~19.0% to $2,086.1 million for the nine months ended September 30, 2011 compared to $1,752.9 million for the nine months ended September 30, ~~2010 compared to $1,666.3 million for the nine months ended September 30, 2009.~~2010.

Specialty Hospitals.Our specialty hospital net operating revenues increased by ~~6.8%~~26.5% to $1,561.3 million for the nine months ended September 30, 2011 compared to $1,234.6 million for the nine months ended September 30, 2010. The Regency hospitals acquired on September 1, 2010 contributed $255.0 million of net operating revenue, or $232.2 million of the increased net operating revenues. The remaining increase primarily resulted from an increase in patient volumes in our other specialty hospitals. Our patient days increased 23.0% to 994,179 days for the nine months ended September 30, 2011, which was principally related to the addition of the Regency hospitals. The Regency hospitals contributed a net increase in patient days of 143,092 days. Excluding the effect of the Regency hospitals, patient days would have increased 5.4% compared to ~~$1,156.4~~the same period, prior year as a result of increases in both Medicare and non-Medicare volumes. The occupancy percentage increased to 71% for the nine months ended September 30, 2011 from 68% for the nine months ended September 30, 2010. Our average net revenue per patient day was $1,498 for the nine months ended September 30, 2011 compared to $1,481 for the nine months ended September 30, 2010. The increase in our net revenue per patient day was principally due to increases in our average Medicare net revenue per patient day.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating revenues increased 1.2% to $524.7 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, the hospitals opened and acquired in 2009 increased net operating revenues by $28.3 million and the Regency hospitals acquired on September 1, 2010 increased net operating revenues by $23.4 million from the three months ended September 30, 2009. These increases were offset by the loss of revenues from hospitals that closed during 2009 and 2010, which accounted for the $4.0 million of the differences in the net operating revenues between the nine months ended September 30, 2009 and September 30, 2010. Net operating revenues for the specialty hospitals opened as of January 1, 2009 and operated by us throughout both periods increased by $30.5 million to $1,176.2 million for the nine months ended September 30, 2010,2011 compared to $1,145.7 million for the nine months ended September 30, 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 for the nine months ended September 30, 2010 increased 2.9% as compared to the nine months ended September 30, 2009, which resulted from to an increase in both our Medicare and Non-Medicare patient days. The occupancy percentage in our same store hospitals increased to 69% for the nine months ended September 30, 2010 from 67% for the nine months ended September 30, 2009. Our average net revenue per patient day in our specialty hospitals was $1,481 for the nine months ended September 30, 2010 compared to $1,489 for the nine months ended September 30, 2009. This 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

~~Outpatient Rehabilitation.~~~~Our outpatient rehabilitation segment net operating revenues increased 1.7%~~ to $518.3 million for the nine months ended September 30, 2010 compared to $509.8 million for the nine months ended September 30, 2009. The increase in our outpatient rehabilitation segment net operating revenues was due to an increase in both our outpatient rehabilitation clinic revenue and contract services based revenue.2010. The net operating revenues generated by our outpatient rehabilitation clinics ~~for the nine months ended September 30, 2010~~ grew approximately ~~1.1% as~~2.3% compared to the nine months ended September 30, ~~2009.~~2010. The increase was principally related to revenues we are generating from services provided to the Baylor JV. The number of patient visits in our owned outpatient rehabilitation clinics ~~increased 1.7%~~decreased 1.8% for the nine months ended September 30, ~~2010~~2011 to ~~3,442,266~~3,381,896 visits compared to ~~3,385,733~~3,442,266 visits for the nine months ended September 30, ~~2009.~~2010. The decrease in visits, which also slowed our revenue growth, resulted primarily from the 18 clinics in the Dallas-Fort Worth metroplex that were contributed to the Baylor JV, which is accounted for as an unconsolidated joint venture. Net revenue per visit in our clinics ~~declined 1.0%~~increased 2.0% to $103 for the nine months ended September 30, 2011, compared to $101 for the nine months ended September 30, ~~2010, compared to $102 for the nine months ended September 30, 2009.~~2010. Our ~~contracted~~contract services ~~based revenue for the nine months ended September 30, 2010 grew~~business experienced a decline in net operating revenues of approximately ~~3.5% as~~2.3% compared to the nine months ended September 30, ~~2009. This increase principally resulted from operations acquired in 2009.~~2010 which was the result of a loss of a significant group of locations during the second quarter of 2010 where our contract was cancelled when our customer sold its business. We were able to partially offset some of the lost net revenue through the addition of new contracts.

Operating Expenses

Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Our operating expenses increased by ~~$67.3~~$282.2 million to $1,796.6 million for the nine months ended September 30, 2011 compared to $1,514.4 million for the nine months ended September 30, ~~2010 compared to $1,447.1 million for the nine months ended September 30, 2009.~~2010. As a percentage of our net operating revenues, our operating expenses were 86.1% for the nine months ended September 30, 2011 compared to 86.4% for the nine months ended September 30, ~~2010 compared to 86.8% for the nine months ended September 30, 2009.~~2010. Our cost of services, a major component of which is labor expense, were $1,708.9 million for the nine months ended September 30, 2011 compared to $1,441.2 million for the nine months ended September 30, ~~2010 compared to $1,353.1~~2010. The principal cause of this increase resulted from the addition of the Regency hospitals. Additionally facility rent expense, which is a component of cost of services, was $89.1 million for the nine months ended September 30, 2009. The principal cause of this increase was increased costs associated with the hospital operations acquired in 2009 and 2010 and the growth experienced in our hospitals opened as of January 1, 2009 and operated by us throughout both periods. Our labor costs in these same store hospitals were 42 basis points higher and our other operating costs were 11 basis points higher2011 compared to $87.5 million for the nine months ended September 30, ~~2010 when compared to~~2010. General and administrative expenses were 2.3% of net operating revenue or $47.7 million for the nine months ended September 30, ~~2009. Our labor costs were primarily higher due~~2011 compared to ~~increased patient care hours that resulted from a higher acuity patient population~~2.4% of net operating revenue or $41.8 million for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Additionally, the labor costs included a $4.0 million charge due to an increase in our workers compensation program costs during the threenine months ended September 30, 2010. The increase in our ~~other operating costs was caused by increasing onsite physician services at certain hospitals, increased equipment leasing costs~~general and ~~increased purchases of minor equipment and supplies. Another component of cost of services is facility rent expense, which was $87.5 million~~administrative expenses for the nine months ended September 30, ~~2010 compared to $87.4~~2011 resulted from increased compensation costs of approximately $7.6 million for the nine months ended September 30, 2009. General and administrative expenses were $41.8 million for the nine months ended September 30, 2010 compared to $60.3 million for the nine months ended September 30 2009. The change isprimarily related to ~~a number~~executive compensation, and increased legal expenses of ~~factors. In 2009 our general and administrative expenses were significantly higher because we incurred non-recurring charges related to an $18.3~~approximately $7.8 million ~~payment under the Long Term Cash Incentive Plan and $3.7 million in stock compensation expense~~primarily related to the ~~grant~~Columbus matter. These cost increases were offset by gains of ~~restricted stock that vested in connection with our initial public offering~~$5.4 million on the sale of ~~common stock. In~~assets. Additionally, the 2010 ~~our expenses were higher than normal because we incurred $2.1 million of additional costs related to the transition and closing of the Regency corporate office. Additionally we incurred~~period included a $4.8 million charge ~~due~~related to an increase in employee healthcare costs. ~~These 2010 increases were offset by a reduction in incentive compensation for executive officers of $5.2 million from the same period in the prior year.~~ Our bad debt expense as a percentage of net operating revenues was 1.9% for the nine months ended September 30, 2011 compared to 1.8% for the nine months ended September 30, 2010 compared to 2.0% for the nine months ended September 30, 2009. The reduction resulted from improved collections and a reduction in the amount of accounts receivable outstanding greater than 180 days.2010.

Adjusted EBITDA

Specialty Hospitals. Our specialty hospital Adjusted EBITDA increased by ~~1.1%~~27.3% to $273.0 million for the nine months ended September 30, 2011 compared to $214.5 million for the nine months ended September 30, ~~2010 compared~~2010. Our Adjusted EBITDA margins increased to ~~$212.1 million~~17.5% for the nine months ended September 30, ~~2009. Our Adjusted EBITDA margins decreased to~~2011 from 17.4% for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, the Regency hospitals acquired on September 1, 2010 ~~from 18.3%~~contributed $35.9 million of the increase in specialty hospital Adjusted EBITDA. Excluding the effect of the Regency hospitals in both periods, the Adjusted EBITDA margin would have been 18.2% and 17.8% for the nine months ended September 30, ~~2009. The~~2011 and 2010, respectively. In addition to the contribution from the Regency hospitals, ~~opened as of January 1, 2009 and operated by us throughout both periods had Adjusted EBITDA of $217.8 million for~~ the ~~nine months ended September 30, 2010, an~~ increase ~~of $2.0 million or 0.9% over~~in the Adjusted EBITDA ~~of $215.8 million for these hospitals~~ for the nine months ended September 30, 2009. Our Adjusted EBITDA margin in these same store hospitals decreased to 18.5% for the nine months ended September 30, 2010 from 18.8% for the nine months ended September 30, 2009. The principal reason for the growth inremainder of our ~~Adjusted EBITDA for these same store~~specialty hospitals was anprimarily the result of the increase in ~~the volume of cases we treated in these hospitals. The Adjusted EBITDA margins declined due to higher relative costs of services as a percentage of~~patient volumes and our Medicare net ~~operating revenues. These increases were~~revenue per patient day described above under “Operating Expenses”. We were also able to reduce the bad debt expense in these hospitals, which had the effect of increasing our Adjusted EBITDA. The hospitals acquired in 2009 and 2010 had losses of $1.5 million for the nine months ended September 30, 2010 compared to losses of $0.1 million for the nine months ended September 30, 2009. The increased losses were due to the hospitals acquired from Regency which generated an Adjusted EBITDA loss of $1.3 million from its acquisition date through September 30, 2010 in addition to the $2.1 million of transition costs discussed under ““Net Operating ~~Expenses~~Revenues — Specialty Hospitals.” above. Our hospitals opened during 2009 or currently still in development incurred Adjusted EBITDA losses of $1.9 million for the nine months ended September 30, 2010 compared to $0.7 million for the nine months ended September 30, 2009.

5147

Outpatient Rehabilitation. Our outpatient rehabilitation Adjusted EBITDA ~~was~~for the segment decreased by 2.3% to $65.3 million for the nine months ended September 30, 2011 compared to $66.8 million for the nine months ended September 30, ~~2010 compared~~2010. Our outpatient rehabilitation Adjusted EBITDA margins for the segment decreased to ~~$67.5~~12.4% for the nine months ended September 30, 2011 from 12.9% for the nine months ended September 30, 2010. The principal reason for the decrease in the Adjusted EBITDA margin for the segment was related to our contract services business. The Adjusted EBITDA in our outpatient rehabilitation clinics increased by $5.7 million for the nine months ended September 30, ~~2009. Our~~2011 compared to the nine months ended September 30, 2010. Additionally, our Adjusted EBITDA margins ~~declined~~for our outpatient rehabilitation clinics grew to ~~12.9%~~13.6% for the nine months ended September 30, ~~2010~~2011 from ~~13.2%~~12.5% for the nine months ended September 30, ~~2009.~~2010. The ~~decrease~~increase in our Adjusted EBITDA and Adjusted EBITDA margin in our rehabilitation clinics was ~~primarily~~principally due to an improvement in the ~~result~~performance in the clinics acquired in 2007 from HealthSouth Corporation and the increase in our net revenue per visit. We experienced a decline in the Adjusted EBITDA and Adjusted EBITDA margin of ~~higher costs in~~ our contract services ~~business. This~~business that resulted from the ~~need to use higher cost agency staffing at some of our locations due to the turnover~~loss of a ~~number of our contracts and lost productivity in the Northeast~~significant contract during the ~~three months ended March 31,~~second quarter of 2010 ~~due to a difficult winter weather season. This decline was partially offset~~as described under “Net Operating Revenues — Outpatient Rehabilitation” and higher labor costs for the treatment models required by ~~an increase of Adjusted EBITDA in our outpatient rehabilitation clinics~~RUGS IV/MDS 3.0 rules that ~~resulted from an increase in patient visits.~~became effective on October 1, 2010.

Other. The Adjusted EBITDA loss was $46.1 million for the nine months ended September 30, 2011 compared to an Adjusted EBITDA loss of $41.4 million for the nine months ended September 30, 2010 ~~compared to an Adjusted EBITDA loss of $37.3 million for the nine months ended September 30, 2009. This increased loss~~and is primarily related to ~~the~~our general and administrative expenses as described ~~above~~ under “~~Operating Expenses~~.“Operating Expenses.”

Income from Operations

For the nine months ended September 30, ~~2010~~2011 we ~~experienced~~had income from operations of ~~$187.2~~$236.7 million compared to ~~$165.9~~$187.2 million for the nine months ended September 30, ~~2009.~~2010. The increase in income from operations resulted primarily from ~~a reduction~~the Regency hospitals acquired on September 1, 2010 which contributed $31.0 million of income from operations for the nine months ended September 30, 2011, and improved operating performance at our other specialty hospitals, offset in ~~our~~part by an increase in general and administrative ~~expenses.~~costs.

~~Gain~~Loss on Early Retirement of Debt

Select Medical Corporation.~~For~~On June 1, 2011 we refinanced our senior secured credit facility which consisted of an $850.0 million term loan facility and a $300.0 million revolving facility. A portion of the proceeds from this transaction were used to repay $266.5 million of our 7 5/8% senior subordinated notes. We recognized a loss on early retirement of debt of $20.4 million 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~~2011 which ~~was net of~~included the write-off of unamortized deferred financing costs ~~related to the repurchased debt.~~and tender premiums.

Select Medical Holdings Corporation.~~For~~On June 1, 2011 we refinanced our senior secured credit facility which consisted of an $850.0 million term loan facility and a $300.0 million revolving facility. A portion of the proceeds from this transaction were used to repurchase and retire $266.5 million of Select’s 7 5/8% senior subordinated notes and $150.0 million to repurchase and retire our 10% senior subordinated notes. In connection with the refinancing, we recognized a loss on early retirement of debt of $31.0 million 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 $16.4 million was recognized on the transactions~~2011 which ~~was net of~~included the write-off of unamortized deferred financing costs, ~~related to the repurchased debt. In addition for the nine months ended September 30, 2009, we paid approximately $6.5 million to repurchase~~tender premiums 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.original issue discount.

Interest Expense

Select Medical Corporation.Interest expense was $59.9 million for the nine months ended September 30, 2011 compared to $66.2 million for the nine months ended September 30, ~~2010 compared to $75.9 million for the nine months ended September 30, 2009.~~2010. The decrease in interest expense ~~is related to a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of our 7~~⁵/₈~~% senior subordinated notes and the repayment of a portion of our senior secured credit facility with proceeds from Holdings’ initial public offering of common stock and a reduction in rate that has~~ resulted primarily from the ~~maturation~~expiration of interest rate swaps in 2010 that carried higher fixed interest ~~rates.~~rates, which was offset in part by the effects of the repayment of $150.0 million of Holdings’ debt, for which Select was not previously obligated, which was refinanced at Select through indebtedness incurred under the new senior secured credit facility on June 1, 2011.

Select Medical Holdings Corporation.Interest expense was $75.1 million for the nine months ended September 30, 2011 compared to $87.0 million for the nine months ended September 30, ~~2010 compared to $101.8 million for the nine months ended September 30, 2009.~~2010. The decrease in interest expense ~~is related to a reduction in outstanding debt balances that occurred in 2009 as a result of repurchases of Select’s 7~~⁵/₈% senior subordinated notes, repurchases of our senior floating rate notes and the repayment of a portion of Select’s senior secured credit facility with proceeds from our initial public offering of common stock and a reduction in rate that has resulted primarily from the ~~maturation~~expiration of interest rate swaps in 2010 that carried higher fixed interest ~~rates.~~rates and lower interest rates on the portions of the debt that were refinanced on June 1, 2011.

Income Taxes

Select Medical Corporation.We recorded income tax expense of $65.9 million for the nine months ended September 30, 2011. The expense represented an effective tax rate of 41.7%. We recorded income tax expense of $47.3 million for the nine months ended September 30, 2010. The expense represented an effective tax rate of 39.0%. Select Medical Corporation is part of the consolidated federal tax return for Select Medical Holdings Corporation. We allocate income taxes between Select and Holdings for purposes of financial statement presentation. Because Holdings is a passive investment company incorporated in Delaware, it does not incur any state income tax expense or benefit on its specific income or loss and, as such, receives a tax allocation equal to the federal statutory rate of 35% on its specific income or loss. Based upon the relative size of Holdings’ income or loss, this can cause the effective tax rate for Select to differ from the effective tax rate for the consolidated company. The analysis in the following paragraph discusses the change in our consolidated tax rate.

Select Medical Holdings Corporation.We recorded income tax expense of ~~$43.1~~$56.8 million for the nine months ended September 30, ~~2009.~~2011. The expense represented an effective tax rate of ~~39.4%~~43.0%. The lower effective tax rate we experienced for the nine months ended September 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 $40.0 million for the nine months ended September 30, 2010. The expense represented an effective tax rate of 39.8%. ~~We recorded income tax expense of $33.1 million for the nine months ended September 30, 2009.~~ The ~~expense represented an effective tax rate of 41.0%. The lower effective tax rate we experienced for the nine months ended September 30, 2010 is due to a reduction~~increase in our effective tax rate ~~for state~~has resulted primarily from a difference between the tax accounting basis and ~~local taxes~~the financial accounting basis associated with a hospital exchange that occurred in 2011 and ~~a reduction~~an increase in ~~the amount of tax~~our reserves ~~provided on~~for uncertain tax ~~positions.~~positions resulting from the settlement costs associated with the Columbus matter.

Non-Controlling Interests

Non-controlling interests in consolidated earnings were $4.4 million for the nine months ended September 30, 2011 compared to $3.8 million for the nine months ended September 30, ~~2010 and $2.2 million for the nine months ended September 30, 2009. These amounts reflect minority owners’ share of the earnings of joint ventured operations.~~2010.

5349

Liquidity and Capital Resources

Cash Flows for the Nine Months Ended September 30, ~~2010~~2011 and Nine Months Ended September 30, ~~2009~~2010


	Select Medical Holdings												Select Medical Holdings
	Corporation						Select Medical Corporation						Corporation						Select Medical Corporation
	Nine Months Ended						Nine Months Ended						Nine Months						Nine Months
	September 30,						September 30,						Ended September 30,						Ended September 30,
	2009			2010			2009			2010			2010			2011			2010			2011
	(in thousands)						(in thousands)						(in thousands)						(in thousands)

Cash flows provided by operating activities	$	93,447		$	110,265		$	126,266		$	135,787		$	110,265		$	143,914		$	135,787		$	166,834
Cash flows used in investing activities		(34,290	)		(204,428	)		(34,290	)		(204,428	)		(204,428	)		(35,808	)		(204,428	)		(35,808	)
Cash flows provided by financing activities		157,075			25,826			124,256			304
Cash flows provided by (used in) financing activities														25,826			(102,258	)		304			(125,178	)

Net increase (decrease) in cash and cash equivalents		216,232			(68,337	)		216,232			(68,337	)		(68,337	)		5,848			(68,337	)		5,848
Cash and cash equivalents at beginning of period		64,260			83,680			64,260			83,680			83,680			4,365			83,680			4,365

Cash and cash equivalents at end of period	$	280,492		$	15,343		$	280,492		$	15,343		$	15,343		$	10,213		$	15,343		$	10,213

Operating activities for Select provided ~~$135.8~~$166.8 million of cash flows for the nine months ended September 30, 2011. Our days sales outstanding were 52 days at September 30, 2011 compared to 47 days at September 30, 2010 and 51 days at December 31, 2010. The increase in days sales outstanding between September 30, 2010 and September 30, 2011 is primarily related to the timing of the periodic interim payments we receive from Medicare for the services provided at our specialty hospitals.

The operating cash flows of Select exceeded the operating cash flows of Holdings by $22.9 million for the nine months ended September 30, ~~2010. Our days sales outstanding were 47 days at September 30, 2010 compared to 49 days at December 31, 2009. The decrease in days sales outstanding between December 31, 2009~~2011 and ~~September 30, 2010 is primarily related to the affect of the Regency acquisition which had a lower days sales outstanding.~~

~~The cash flow from operating activities of Select exceeds the operating cash flow of Holdings~~ by $25.5 million for the nine months ended September 30, ~~2010~~2010. The difference relates to interest payments associated with Holdings’ indebtedness.

Investing activities for Select and ~~by $32.8~~Holdings used $35.8 million of cash flow for the nine months ended September 30, ~~2009.~~2011. The ~~difference relates~~principal use of cash included $32.1 million related to ~~interest payments on Holdings’ senior subordinated notes~~the purchase of property and ~~senior floating rate notes.~~

equipment and $13.5 million related to the purchase of the Baylor JV partnership units and working capital advances, offset by proceeds from the sale of assets of $7.9 million, which was primarily related to the sale of a building we acquired in connection with the acquisition of Regency and $1.9 million from acquisition activities that includes the post-closing settlement of the Regency net working capital adjustment with the seller. Investing activities used $204.4 million of cash flow for the nine months ended September 30, ~~2010~~2010. The use of cash included acquisition payments of $165.8 million related principally to the acquisition of Regency, and ~~$34.3~~$38.6 million for the purchase of property and equipment.

Financing activities for Select used $125.2 million of cash flow for the nine months ended September 30, ~~2009.~~2011. The primary use of cash ~~for~~related to dividends paid to Holdings of $204.6 million to fund interest payments and the ~~nine months ended September 30, 2010 related principally to the acquisition~~repurchase of ~~Regency which was $165.6 million. We used cash for the purchase~~all $150.0 million principal amount of ~~property and equipment~~Holdings 10% senior subordinated notes, $18.6 million of ~~$38.6~~debt issuance costs, repayment of bank overdrafts of $4.2 million and ~~$35.3~~$3.5 million ~~for the nine months ended September 30, 2010 and 2009, respectively.~~

in distributions to non-controlling interests offset by net borrowings of debt of $105.5 million. Financing activities ~~for Select~~ provided $0.3 million of cash flow for the nine months ended September 30, 2010. The primary source of cash related to net borrowings on our revolving credit facility of $20.0 million and proceeds from bank overdrafts of $11.0 million which were offset by dividends paid to Holdings to fund interest payments of $25.5 million, $3.6 million in distributions to non-controlling interests, and net payments related to seller and other debt of ~~$1.6~~$1.7 million. Financing activities used $124.3 million of cash flow for the nine months ended September 30, 2009. The primary source of cash related to $282.0 in net proceeds from Holdings’ initial public offering of common stock offset by the repurchase of a portion of Select’s 7⁵/₈% senior subordinated notes for $30.1 million, repayment of bank overdrafts of $21.1 million, net payments on our senior secured credit facility of $65.0 million, dividends paid to Holdings to fund interest payments of $39.4 million, $2.5 million in distributions to non-controlling interests and net payments related to seller and other debt of $0.6 million.

The difference in cash flows provided by financing activities of Holdings compared to Select of $22.9 million for the nine months ended September 30, 2011 and $25.5 million for the nine months ended September 30, 2010 ~~and $32.8 million for the nine months ended September 30, 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 the repurchase of senior floating rate notes.~~indebtedness.

Capital Resources

Select Medical ~~Corporation~~Corporation..Select had anet working capital of $110.4 million at September 30, 2011 compared to net working capital deficit of ~~$51.7 million at September 30, 2010 compared to net working capital of $167.3~~$73.5 million at December 31, ~~2009.~~2010. The ~~decrease~~increase in net working capital is primarily due to ~~an increase~~a decrease in our current portion of long-term debt ~~related to scheduled principal due~~resulting from our debt refinancing on June 1, 2011 and an increase in our ~~Tranche B Term Loans and the use of cash to fund the Regency acquisition.~~accounts receivable.

Select Medical Holdings ~~Corporation~~Corporation..Holdings had net a working capital ~~deficit~~ of ~~$54.6~~$110.0 million at September 30, ~~2010~~2011 compared to net working capital deficit of ~~$170.8~~$70.2 million at December 31, ~~2009.~~2010. The ~~decrease~~increase in net working capital is primarily due to ~~an increase~~a decrease in our current portion of long-term debt ~~related to scheduled principal due~~resulting from our debt refinancing on June 1, 2011 and an increase in our ~~Tranche B Term Loans and the use of cash to fund the Regency acquisition.~~accounts receivable.

~~At September 30, 2010, our~~On June 1, 2011, Select entered into a new senior secured credit ~~facility provides for senior secured financing consisting of:~~

~~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~~agreement (the “Credit Agreement”) ~~with~~that provides for $1.15 billion in senior secured credit facilities (“Senior Secured Credit Facilities”) comprised of an $850.0 million, seven-year term loan facility (“Term Loan”) and a ~~group of lenders and JPMorgan Chase Bank, N.A. as administrative agent. Amendment No. 4 extended the maturity of all~~ $300.0 million, ~~of commitments under Select’s~~five-year revolving credit facility ~~from February 24, 2011 to August 22, 2013,~~(“Revolving Credit Facility”), including a $75.0 million sublimit for the issuance of standby letters of credit and ~~made related technical changes to~~a $25.0 million sublimit for swingline loans. Borrowings under the Senior Secured Credit ~~Agreement. The applicable margin percentage for extended revolving loans~~Facilities are guaranteed by Holdings and ~~the commitment fee rate for extended revolving commitments have increased~~substantially all of Select’s current domestic subsidiaries and will be ~~determined based on~~guaranteed by Select’s future domestic subsidiaries and secured by substantially all of Select’s existing and future property and assets and by a ~~pricing grid set forth~~ pledge of Select’s capital stock, the capital stock of Select’s domestic subsidiaries and up to 65% of the capital stock of Select’s foreign subsidiaries, if any.

Borrowings under the Senior Secured Credit Facilities will bear interest at a rate equal to:

in ~~Amendment No. 4. Under~~ the ~~pricing grid,~~case of the ~~applicable margin~~Term Loan, Adjusted LIBO plus 3.75%, or Alternative Base Rate plus 2.75%; and

in the case of the Revolving Credit Facility, Adjusted LIBO plus a percentage ~~for revolving ABR loans ranges~~ranging from ~~2% per annum~~2.75% to ~~3% per annum, the applicable margin~~3.75%, or Alternative Base Rate plus a percentage ~~for revolving Eurodollar loans ranges~~ranging from ~~3% per annum~~1.75% 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,2.75%, in each case ~~plus an~~based on Select’s leverage ratio.

“Adjusted LIBO” is defined as, with respect to any interest period, the London interbank offered rate for such interest period, adjusted for any applicable ~~margin percentage. The interest rates per annum applicable~~statutory reserve requirements; provided that Adjusted LIBO, when used in reference to the ~~Tranche B-1~~ Term ~~Loans under our senior credit facility are,~~Loan, will at ~~our option, equal~~no time be less than 1.75% per annum.

“Alternative Base Rate” is defined as the highest of (a) the administrative agent’s Prime Rate, (b) the Federal Funds Effective Rate plus 1/2 of 1.00% and (c) the Adjusted LIBO from time to ~~either~~time for an ~~alternate base rate or an adjusted LIBOR rate for a three or six month~~ interest period ~~or a nine or twelve~~of one 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~~1.00%.

5551

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 Select’s leverage ratio (as defined in the credit agreement). The applicable margin percentage for revolving loans will ~~increase~~decrease from (1) ~~2.50%~~2.75% to ~~2.75%~~2.50% for alternate base rate loans and (2) ~~3.50%~~3.75% to ~~3.75%~~3.50% for adjusted LIBOR 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~~Term Loan amortizes in equal quarterly installments on the last day of each March, June, September and December in aggregate annual amounts equal to $2.1 million. The balance of the Term Loan will be payable on June 1, 2018, provided that if on the 90th day prior to the scheduled final maturity date of Select’s 7 5/8% senior subordinated notes due 2015 (the “Tranche B Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 are outstanding, the maturity date for the Term Loan will be the Tranche B ~~Term Loans~~Trigger Date. Similarly, the Revolving Credit Facility will be payable on June 1, 2016, provided that if on the 90th day prior to the scheduled final maturity date of Select’s 7 5/8% senior subordinated notes due 2015 (the “Revolving Trigger Date”) more than $60.0 million in aggregate principal amount of Select’s 7 5/8% senior subordinated notes due 2015 are ~~(1) 1.00% for alternate base rate loans and (2) 2.00% for adjusted LIBOR loans. The applicable margin percentages~~outstanding, the maturity date for the ~~Tranche B-1 Term Loans are~~Revolving Credit Facility will be the Revolving Trigger Date.

Select will be required to prepay borrowings under the Senior Secured Credit Facilities with (1) ~~2.75% for alternate base rate~~100% of the net cash proceeds received from non-ordinary course asset sales or other dispositions, or as a result of a casualty or condemnation, subject to reinvestment provisions and other customary carveouts and the payment of certain indebtedness secured by liens subject to a first lien intercreditor agreement, (2) 100% of the net cash proceeds received from the issuance of debt obligations other than certain permitted debt obligations, and (3) 50% of excess cash flow (as defined in the Credit Agreement) if Select’s leverage ratio is greater than 3.75 to 1.00 and 25% of excess cash flow if Select’s leverage ratio is less than or equal to 3.75 to 1.00 and greater than 3.25 to 1.00, in each case, reduced by the aggregate amount of term loans ~~and (2) 3.75% for adjusted LIBOR loans.~~optionally prepaid during the applicable fiscal year. Select will not be required to prepay borrowings with excess cash flow if Select’s leverage ratio is less than or equal to 3.25 to 1.00.

~~Our senior secured credit facility requires~~The Senior Secured Credit Facilities require Select to maintain ~~certain interest expense coverage ratios and~~a leverage ~~ratios (both~~ratio (based upon the ratio of indebtedness for money borrowed to consolidated EBITDA, as defined in ~~our senior secured credit facility)~~the Credit Agreement), which ~~become more restrictive over time. For the four consecutive~~is tested quarterly, and prohibits Select from making capital expenditures in excess of $125.0 million in any fiscal ~~quarters ended~~year (subject to a 50% carry-over provision). As of September 30, ~~2010,~~2011, Select was required to maintain an interest expense coverage ratio (its ratio of consolidated EBITDA 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 3.25 to 1.00 for such period. As of September 30, 2010, Select was required to maintain aits leverage ratio ~~(its ratio of total indebtedness to consolidated EBITDA for the prior four consecutive fiscal quarters)~~ at less than ~~4.50~~6.00 to ~~1.00.~~1.00, and Select’s leverage ratio was ~~3.07~~3.44 to 1.00 as of September 30, ~~2010.~~2011. Failure to comply with these covenants would result in an event of default under the Senior Secured Credit Facilities and, absent a waiver or an amendment from the lenders, preclude Select from making further borrowings under the Revolving Credit Facility and permit the lenders to accelerate all outstanding borrowings under the Senior Secured Credit Facilities.

~~Also, as~~The Senior Secured Credit Facilities also contain a number of affirmative and restrictive covenants, including limitations on mergers, consolidations and dissolutions; sales of assets; investments and acquisitions; indebtedness; liens; affiliate transactions; and dividends and restricted payments. The Senior Secured Credit Facilities contain events of default for non-payment of principal and interest when due, cross-default and cross-acceleration provisions and an event of default that would be triggered by a change of control.

As of September 30, ~~2010,~~2011, we had ~~$251.4~~$217.2 million of availability under our ~~revolving loan facility~~Revolving Credit Facility (after giving effect to ~~$28.6~~$32.8 million of outstanding letters of credit).

On November 23, 2007, Select entered into an interest rate swap transaction for three years with an effective date of November 23, 2007. The swap is designated as a cash flow hedge of forecasted LIBOR-based variable rate interest payments. The underlying variable rate debt is $100.0 million.

~~Select has outstanding $611.5 million in aggregate principal amount of 7~~⁵/₈% senior subordinated notes due 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. 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.

As of September 30, 2010, Holdings 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.

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, in tender offers, 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.

Holdings has authorized a program to repurchase up to ~~$100.0~~$150.0 million worth of shares of our common stock. The program will remain in effect until ~~January~~March 31, ~~2012,~~2013, unless extended by the ~~Board~~board of ~~Directors.~~directors. Through September 30, 2011, Holdings has repurchased 11,555,447 shares at a cost of $75.8 million, which includes related transaction costs. We anticipate funding this program through available operating cash flow and borrowings under our senior secured credit facility.

We believe our internally generated cash flows and borrowing capacity under our senior secured credit facility will be sufficient to finance ~~normal~~ operations over the 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. 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.

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 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. ~~As part of the Regency acquisition, we acquired one LTCH under construction.~~

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 ~~January 2010, the Financial Accounting Standards Board (“FASB”)~~May 2011, FASB issued Accounting Standards Update (“ASU”) ~~2010-06,~~2011-04, “Fair Value ~~Measurements and Disclosures~~Measurement (Topic 820) — ~~Improving Disclosures about~~Amendments to Achieve Common Fair Value ~~Measurements”~~Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“Update ~~2010-06”~~2011-04”)~~, which amends the guidance on~~. Update 2011-04 generally represents clarification of Topic 820, but also includes instances where a particular principle or requirement for measuring fair value ~~to add new~~or disclosing information about fair value measurements has changed. Update 2011-04 results in common principles and 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~~measuring fair value ~~disclosures~~and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. Update 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application is not permitted. We do not expect the ~~level~~adoption of ~~disaggregation~~Update 2011-04 to have a material impact on our consolidated financial statements.

In June 2011, FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” (“Update 2011-05”) that improves the comparability, consistency, and ~~about inputs~~transparency of financial reporting and ~~valuation techniques used~~increases the prominence of items reported in other comprehensive income by eliminating the option to ~~measure fair value.~~present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Update 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from other comprehensive income (“OCI”) to net income, in both net income and OCI. Update 2011-05 does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, Update 2011-05 does not affect the calculation or reporting of earnings per share. Update 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively, with early adoption permitted. The ~~Company adopted update 2010-06~~adoption of Update 2011-05 will cause us to change our presentation of other comprehensive income on ~~January 1, 2010, except~~our consolidated financial statements.

In July 2011, the FASB issued ASU 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts and the ~~requirement~~Allowance for Doubtful Accounts for Certain Health Care Entities” (“Update 2011-07”). Update 2011-07 requires certain health care entities to change the presentation in their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the ~~Level 3 activity~~allowance for doubtful accounts. Update 2011-07 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. We are in the process of ~~purchases, sales, issuances,~~evaluating the effects of Update 2011-07 on our consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and ~~settlements~~Other (Topic 350): Testing Goodwill for Impairment” (“Update 2011-08). Update 2011-08 allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under Update 2011-08, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a ~~gross basis, which~~qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Update 2011-08 includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. Update 2011-08 will be effective for goodwill impairment test performed for fiscal years beginning after December 15, ~~2010, and for interim periods within those fiscal years. The adoption~~2011. Update 2011-08 does not change the accounting or measurement of ~~Update 2010-06 did not~~impairments. This update will have ~~an impact~~no effect on ~~the Company’s~~our consolidated financial statements. ~~The Company currently has 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 30, ~~2010,~~2011, Select had ~~$503.1~~$897.9 million in term and revolving loans outstanding under its senior secured credit facility, excluding the unamortized debt discount of $8.1 million, and Holdings had $167.3 million in senior floating rate notes outstanding, which bear interest at variable rates. On November 16, 2007, Select entered into an interest rate swap transaction for three years with an effective date of November 23, 2007. Select entered into the swap transaction to mitigate the risks of future 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 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 ~~$0.8~~$1.3 million annual change in interest ~~expense~~expense. However, because the variable interest rate for our $847.9 million in term loans is subject to an Adjusted LIBO Rate floor of 1.75%, until the Adjusted LIBO Rate exceeds 1.75%, our interest rate on ~~our term loans.~~this indebtedness is effectively fixed at 5.50%.

~~ITEM 4T. CONTROLS AND PROCEDURES~~


ITEM 4.		CONTROLS AND PROCEDURES

Evaluation of 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 as of September 30, 2011 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.

Changes in Internal Control Over Financial Reporting

There was no change in 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 ~~nine months~~third quarter ended September 30, ~~2010~~2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

PART II OTHER INFORMATION

~~ITEM 1. LEGAL PROCEEDINGS~~


ITEM 1.		LEGAL PROCEEDINGS

During ~~July 2009,~~the third quarter of 2011, the Company ~~received~~entered into a settlement agreement with the United States government in connection with the previously disclosedqui tamlawsuit filed in Columbus, Ohio against certain subsidiaries of the Company. The lawsuit, filed under seal in September 2007, led to the Company’s receiving, in July 2009, a subpoena from the ~~Office of Inspector General of the U.S. Department of Health and Human Services~~government seeking various documents concerning the Company’s financial relationships with certain physicians practicing at its long term acute care hospitals in Columbus, Ohio. ~~We believe that~~Under the ~~subpoena has been issued in connection with a qui tam lawsuit, and that~~terms of the settlement, the Company agreed to pay $7.5 million to the 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 the government’s investigation. At this time, the Company is unable to predict the timing and outcome of this matter.~~

~~On March 8, 2010, the Company received~~enter into 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~~5-year corporate integrity agreement covering its long term acute care ~~hospital industry entitled “Long-Term Care Hospitals Face Little Scrutiny.”~~hospitals. The ~~letter from~~Company also agreed to pay certain legal fees of the ~~Senate Finance Committee asked us to respond to a variety of questions regarding our long-term care hospitals. On March 23, 2010,~~qui tamrelator’s counsel. In the settlement agreement, the Company ~~responded to~~admitted no liability or wrongdoing. During the ~~letter. On May 25, 2010~~second quarter of 2011, the Company ~~received follow-up questions from~~recorded a pre-tax charge of $7.5 million to establish a settlement reserve in connection with the ~~committee, which~~matter. The settlement amounts and counsel fees were paid in full during the third quarter of 2011, and the Company ~~responded~~does not expect to ~~on June 4, 2010. The Company intends on fully cooperating~~incur any additional material charges in connection with ~~the Committee. At this time, the Company is unable to predict the timing and outcome of~~ this matter.

~~ITEM 1A. RISK FACTORS.~~


ITEM 1A.		RISK FACTORS.

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~~There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, ~~2009.~~2010.

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

Purchases of Equity Securities by the Issuer

~~None.~~In November 2010, our board of directors authorized a stock repurchase program pursuant to which we may purchase up to $100.0 million worth of our common stock. On August 3, 2011, our board of directors authorized an increase of $50.0 million in the capacity of our common stock repurchase program, from $100.0 million to $150.0 million. The other terms of the plan remain unchanged. The program will now remain in effect until March 31, 2013, unless extended by our board of directors. In the three months ended September 30, 2011, we purchased a total of 4,239,972 shares of our common stock at an average purchase price of $6.67. The following table sets forth the monthly purchases made under this program during the three months ended September 30, 2011:

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~

~~Not applicable.~~

Total
Number of Approximate
Shares Dollar Value of
Purchased Shares that
as Part of May Yet Be
Total Average Publicly Purchased
Number Price Announced Under the
of Shares Paid Per Plans or Plans or
Period Purchased Share Programs Programs
July 1, 2011 to July 31, 2011 — — — $ 52,571,798
August 1, 2011 to August 31, 2011 1,438,760 $ 6.20 1,438,760 $ 93,622,314
September 1, 2011 to September 30, 2011 2,801,212 $ 6.91 2,801,212 $ 74,215,982

5956

~~ITEM 4. REMOVED AND RESERVED~~
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

~~ITEM 5. OTHER INFORMATION~~
ITEM 4. REMOVED AND RESERVED


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 6158 hereof.

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
	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: November 12, 2010~~


	~~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: November ~~12, 2010~~3, 2011


	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: November 3, 2011

6057

EXHIBIT INDEX — OPEN


Exhibit		Description

	~~3.1~~	~~Amended and Restated Bylaws of Select Medical Holdings Corporation, as amended.~~

	~~3.2~~	~~Amended and Restated Bylaws of Select Medical Corporation, as amended.~~

	~~10.1~~	~~Second Addendum to Lease Agreement, dated August 1, 2010, by and between Old Gettysburg Associates II and Select Medical Corporation.~~

	~~10.2~~	~~Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and Bryan C. Cressey.~~

	~~10.3~~	~~Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and James E. Dalton, Jr.~~

	~~10.4~~	~~Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and James S. Ely, III.~~

	~~10.5~~	~~Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and William H. Frist, M.D.~~

	~~10.6~~	~~Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and Leopold Swergold.~~

	~~10.7~~	Employment Agreement, dated September 13, 2010, by and between Select Medical Corporation and David S. Chernow, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on September 15, 2010.

	~~10.8~~	Restricted Stock Award Agreement, dated September 13, 2010, by and between Select Medical Holdings Corporation and David S. Chernow, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on September 15, 2010.

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

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

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

6158


Cash paid, net of cash acquired of $11.3 million	$	165,616

Fair value of net tangible assets acquired:
Accounts receivable		22,526
Other current assets		5,194
Property and equipment		83,976
Other assets		506
Current liabilities		(43,615	)
Other liabilities		(6,313	)

Net tangible assets acquired		62,274
Tradename		5,000
Goodwill		98,342

	$	165,616


	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2009			2010		2009		2010
	(in thousands except per share amounts)

Net revenue	$	636,126		$	645,300	$	1,944,487	$	1,987,885
Net income:
Select Medical Corporation	$	8,044		$	12,250	$	71,288	$	71,985
Select Medical Holdings Corporation	$	1,919		$	7,444	$	52,595	$	58,484
Income (loss) per common share of Select Medical Holdings Corporation:
Basic	$	(0.08	)	$	0.04	$	0.44	$	0.34
Diluted	$	(0.08	)	$	0.04	$	0.44	$	0.34


	Lease Termination Costs
	(in thousands)
December 31, 2009	$	4,256
Amounts paid in 2010		(1,050	)
Revision of estimate		(375	)

September 30, 2010	$	2,831


	Select Medical Corporation
	Condensed Consolidating Balance Sheet
	September 30, 2010
	(unaudited)
	Select Medical
	Corporation (Parent			Subsidiary			Non-Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	8,185		$	6,614		$	544		$	—		$	15,343
Accounts receivable, net		—			276,189			49,149			—			325,338
Current deferred tax asset		7,307			26,248			5,394			—			38,949
Prepaid income taxes		12,966			—			—			—			12,966
Other current assets		2,793			20,775			2,329			—			25,897

Total Current Assets		31,251			329,826			57,416			—			418,493

Property and equipment, net		5,901			473,360			58,765			—			538,026
Investment in affiliates		2,964,610			80,797			—			(3,045,407	)(a) (b)		—
Goodwill		—			1,646,698			—			—			1,646,698
Other identifiable intangibles		—			67,719			—			—			67,719
Assets held for sale		11,342			—			—			—			11,342
Other assets		22,172			9,438			4,072			—			35,682


Total Assets	$	3,035,276		$	2,607,838		$	120,253		$	(3,045,407	)	$	2,717,960


Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	10,971		$	—		$	—		$	—		$	10,971
Current portion of long-term debt and notes payable		147,955			858			303			—			149,116
Accounts payable		7,808			59,469			9,170			—			76,447
Intercompany accounts		1,153,988			(1,079,892	)		(74,096	)		—			—
Accrued payroll		147			72,114			189			—			72,450
Accrued vacation		3,072			37,645			5,435			—			46,152
Accrued interest		9,936			320			—			—			10,256
Accrued restructuring		—			2,831			—			—			2,831
Accrued other		32,615			56,254			6,669			—			95,538
Due to third party payors		—			6,445			—			—			6,445

Total Current Liabilities		1,366,492			(843,956	)		(52,330	)		—			470,206

Long-term debt, net of current portion		494,627			422,363			53,846			—			970,836
Non-current deferred tax liability		(620	)		60,074			6,815			—			66,269
Other non-current liabilities		62,794			4,472			—			—			67,266


Total Liabilities		1,923,293			(357,047	)		8,331			—			1,574,577

Stockholder’s Equity:
Common stock		—			—			—			—			—
Capital in excess of par		831,479			—			—			—			831,479
Retained earnings		280,918			494,448			25,957			(520,405	)(b)		280,918
Subsidiary investment		—			2,470,437			54,565			(2,525,002	)(a)		—
Accumulated other comprehensive loss		(414	)		—			—			—			(414	)

Total Select Medical Corporation Stockholder’s Equity		1,111,983			2,964,885			80,522			(3,045,407	)		1,111,983

Non-controlling interests		—			—			31,400			—			31,400

Total Equity		1,111,983			2,964,885			111,922			(3,045,407	)		1,143,383


Total Liabilities and Equity	$	3,035,276		$	2,607,838		$	120,253		$	(3,045,407	)	$	2,717,960


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

Net operating revenues	$	14		$	507,589		$	80,647		$	—		$	588,250


Costs and expenses:
Cost of services		440			427,761			70,538			—			498,739
General and administrative		17,031			2,197			—			—			19,228
Bad debt expense		—			9,661			1,656			—			11,317
Depreciation and amortization		662			14,249			2,101			—			17,012

Total costs and expenses		18,133			453,868			74,295			—			546,296


Income (loss) from operations		(18,119	)		53,721			6,352			—			41,954

Other income and expense:
Intercompany interest and royalty fees		(888	)		877			11			—			—
Intercompany management fees		22,773			(18,937	)		(3,836	)		—			—
Equity in losses of unconsolidated subsidiaries		—			(186	)		—			—			(186	)
Other income		148			—			—			—			148
Interest expense		(11,330	)		(8,462	)		(1,029	)		—			(20,821	)


Income from operations before income taxes		(7,416	)		27,013			1,498			—			21,095

Income tax expense		366			7,600			8			—			7,974
Equity in earnings of subsidiaries		20,247			965			—			(21,212	)(a)		—


Net income		12,465			20,378			1,490			(21,212	)		13,121

Less: Net income attributable to non-controlling interests		—			—			656			—			656


Net income attributable to Select Medical Corporation	$	12,465		$	20,378		$	834		$	(21,212	)	$	12,465


	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows
	For the Nine Months Ended September 30, 2010
	(unaudited)
	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating activities
Net income	$	70,226		$	86,579		$	14,674		$	(97,480	)(a)	$	73,999
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,160			42,787			6,386			—			51,333
Provision for bad debts		—			26,402			5,047			—			31,449
Loss from disposal of assets		127			352			133			—			612
Non-cash gain from interest rate swaps		(464	)		—			—			—			(464	)
Non-cash stock compensation expense		1,405			—			—			—			1,405
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		(86,649	)		(10,831	)		—			97,480	(a)		—
Intercompany		(54,741	)		62,368			(7,627	)		—			—
Accounts receivable		—			3,119			(29,787	)		—			(26,668	)
Other current assets		2,593			(1,959	)		2,937			—			3,571
Other assets		228			1,621			(1,761	)		—			88
Accounts payable		4,579			(8,228	)		180			—			(3,469	)
Due to third-party payors		—			(10,170	)		9,414			—			(756	)
Accrued expenses		(30,729	)		22,401			1,801			—			(6,527	)
Income and deferred taxes		11,214			—			—			—			11,214

Net cash provided by (used in) operating activities		(80,051	)		214,441			1,397			—			135,787


Investing activities
Purchases of property and equipment		(1,475	)		(30,107	)		(7,044	)		—			(38,626	)
Acquisition of businesses, net of cash acquired		—			(165,802	)		—			—			(165,802	)

Net cash used in investing activities		(1,475	)		(195,909	)		(7,044	)		—			(204,428	)


Financing activities
Borrowings on revolving credit facility		90,000			—			—			—			90,000
Payments on revolving credit facility		(70,000	)		—			—			—			(70,000	)
Borrowings of other debt		5,015			—			—			—			5,015
Principal payments on seller and other debt		(5,181	)		(1,428	)		(58	)		—			(6,667	)
Dividends paid to Holdings		(25,522	)		—			—			—			(25,522	)
Equity investment by Holdings		125			—			—			—			125
Proceeds from bank overdrafts		10,971			—			—			—			10,971
Intercompany debt reallocation		3,363			(12,788	)		9,425			—			—
Distributions to non-controlling interests		—			—			(3,618	)		—			(3,618	)

Net cash provided by (used in) financing activities		8,771			(14,216	)		5,749			—			304


Net increase (decrease) in cash and cash equivalents		(72,755	)		4,316			102			—			(68,337	)

Cash and cash equivalents at beginning of period		80,940			2,298			442			—			83,680

Cash and cash equivalents at end of period	$	8,185		$	6,614		$	544		$	—		$	15,343


	Select Medical Corporation
	Condensed Consolidating Statement of Operations
	For the Quarter Ended September 30, 2009
	(unaudited)
	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Net operating revenues	$	11		$	486,958		$	58,652		$	—		$	545,621


Costs and expenses:
Cost of services		90			399,316			49,296			—			448,702
General and administrative		34,594			24			—			—			34,618
Bad debt expense		—			8,440			3,280			—			11,720
Depreciation and amortization		831			15,297			1,548			—			17,676

Total costs and expenses		35,515			423,077			54,124			—			512,716


Income (loss) from operations		(35,504	)		63,881			4,528			—			32,905

Other income and expense:
Intercompany interest and royalty fees		(1,141	)		1,138			3			—			—
Intercompany management fees		31,929			(29,286	)		(2,643	)		—			—
Other income		2,215			—			—			—			2,215
Interest income		2			—			—			—			2
Interest expense		(15,513	)		(8,726	)		(875	)		—			(25,114	)


Income (loss) from operations before income taxes		(18,012	)		27,007			1,013			—			10,008

Income tax expense (benefit)		(3,768	)		5,318			944			—			2,494
Equity in earnings of subsidiaries		20,952			(429	)		—			(20,523	)(a)		—


Net income		6,708			21,260			69			(20,523	)		7,514

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


Net income (loss) attributable to Select Medical Corporation	$	6,708		$	21,260		$	(737	)	$	(20,523	)	$	6,708


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