UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2012
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 23-2872718
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification number)

4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055

(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.  YES x  NO o

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 x  NO o

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 filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

As of April 30, 2012, Select Medical Holdings Corporation had outstanding 141,056,662 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
	Consolidated balance sheets	3
	Consolidated statements of operations	4
	Consolidated statements of changes in stockholders’ equity and income	5
	Consolidated statements of cash flows	6
	Notes to consolidated financial statements	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	42
PART II	OTHER INFORMATION	42
ITEM 1.	LEGAL PROCEEDINGS	43
ITEM 1A.	RISK FACTORS	43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44
ITEM 4.	MINE SAFETY DISCLOSURES	44
ITEM 5.	OTHER INFORMATION	44
ITEM 6.	EXHIBITS	44
SIGNATURES

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		March 31,		December 31,		March 31,
	2011		2012		2011		2012
ASSETS
Current Assets:
Cash and cash equivalents	$	12,043	$	9,274	$	12,043	$	9,274
Accounts receivable, net of allowance for doubtful accounts of $47,469 and $44,466 in 2011 and 2012, respectively	413,743		465,687		413,743		465,687
Current deferred tax asset	18,305		19,894		18,305		19,894
Prepaid income taxes	9,497		—		9,497		—
Other current assets	29,822		34,178		29,822		34,178
Total Current Assets	483,410		529,033		483,410		529,033
Property and equipment, net	510,028		491,773		510,028		491,773
Goodwill	1,631,716		1,631,383		1,631,716		1,631,383
Other identifiable intangibles	72,123		71,868		72,123		71,868
Assets held for sale	2,742		2,742		2,742		2,742
Other assets	72,128		79,779		70,719		78,463
Total Assets	$	2,772,147	$	2,806,578	$	2,770,738	$	2,805,262
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	16,609	$	19,100	$	16,609	$	19,100
Current portion of long-term debt and notes payable	10,848		14,451		10,848		14,451
Accounts payable	95,618		94,058		95,618		94,058
Accrued payroll	82,888		70,634		82,888		70,634
Accrued vacation	51,250		54,701		51,250		54,701
Accrued interest	15,096		5,942		11,980		5,489
Accrued restructuring	5,027		4,325		5,027		4,325
Accrued other	101,076		95,652		106,316		95,652
Income taxes payable	—		16,095		—		16,095
Due to third party payors	5,526		6,011		5,526		6,011
Total Current Liabilities	383,938		380,969		386,062		380,516
Long-term debt, net of current portion	1,385,950		1,399,039		1,218,650		1,231,739
Non-current deferred tax liability	82,028		85,029		82,028		85,029
Other non-current liabilities	64,905		69,459		64,905		69,459
Total Liabilities	1,916,821		1,934,496		1,751,645		1,766,743
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 145,268,190 shares and 142,158,133 shares issued and outstanding in 2011 and 2012, respectively	145		142		—		—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0		0
Capital in excess of par	493,828		479,547		848,844		850,800
Retained earnings	328,882		359,990		137,778		155,316
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	822,855		839,679		986,622		1,006,116
Non-controlling interest	32,471		32,403		32,471		32,403
Total Equity	855,326		872,082		1,019,093		1,038,519
Total Liabilities and Equity	$	2,772,147	$	2,806,578	$	2,770,738	$	2,805,262

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

3

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Quarter Ended March 31,						For the Quarter Ended March 31,
	2011			2012			2011			2012
Net operating revenues	$	693,186		$	744,021		$	693,186		$	744,021
Costs and expenses:
Cost of services	557,416			611,619			557,416			611,619
General and administrative	16,566			14,224			16,566			14,224
Bad debt expense	14,350			10,375			14,350			10,375
Depreciation and amortization	17,222			16,199			17,222			16,199
Total costs and expenses	605,554			652,417			605,554			652,417
Income from operations	87,632			91,604			87,632			91,604
Other income and expense:
Equity in earnings (losses) of unconsolidated subsidiaries	(73		)	2,465			(73		)	2,465
Interest income	56			—			56			—
Interest expense	(25,664		)	(23,922		)	(18,662		)	(21,250		)
Income before income taxes	61,951			70,147			68,953			72,819
Income tax expense	26,564			27,575			29,014			28,510
Net income	35,387			42,572			39,939			44,309
Less: Net income attributable to non-controlling interests	1,715			1,030			1,715			1,030
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	33,672		$	41,542		$	38,224		$	43,279
Income per common share:
Basic	$	0.22		$	0.29
Diluted	$	0.22		$	0.29

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

4

Select Medical Holdings Corporation

Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

				Select Medical Holdings Corporation Stockholders
	Total			Common Stock Issued		Common Stock Par Value			Capital in Excess of Par			Retained Earnings			Non-controlling Interests
Balance at December 31, 2011	$	855,326		145,268		$	145		$	493,828		$	328,882		$	32,471
Net income	42,572											41,542			1,030
Issuance and vesting of restricted stock	960			65		0			960
Exercise of stock options	95			29		0			95
Stock option expense	300								300
Repurchase of common shares	(25,739		)	(3,204	)	(3		)	(15,302		)	(10,434		)
Distributions to non-controlling interests	(1,098		)												(1,098		)
Other	(334		)						(334		)
Balance at March 31, 2012	$	872,082		142,158		$	142		$	479,547		$	359,990		$	32,403

Select Medical Corporation

Consolidated Statement of Changes in Equity and Income

(unaudited)

(in thousands)

				Select Medical Corporation Stockholders
	Total			Common Stock Issued	Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Non-controlling Interests
Balance at December 31, 2011	$	1,019,093		0	$	0	$	848,844		$	137,778		$	32,471
Net income	44,309									43,279			1,030
Federal tax benefit of losses contributed by Holdings	935						935
Additional investment by Holdings	95						95
Net change in dividends payable to Holdings	5,240									5,240
Dividends declared and paid to Holdings	(30,981		)							(30,981		)
Distributions to non-controlling interests	(1,098		)										(1,098		)
Other	(334		)				(334		)
Contribution related to restricted stock awards and stock option issuances by Holdings	1,260						1,260
Balance at March 31, 2012	$	1,038,519		0	$	0	$	850,800		$	155,316		$	32,403

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

5

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2011			2012			2011			2012
Operating activities
Net income	$	35,387		$	42,572		$	39,939		$	44,309
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	17,222			16,199			17,222			16,199
Provision for bad debts	14,350			10,375			14,350			10,375
Loss (gain) from disposal or sale of assets	188			(3,550		)	188			(3,550		)
Non-cash stock compensation expense	880			1,261			880			1,261
Amortization of debt discount	507			311			—			311
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(100,135		)	(62,319		)	(100,135		)	(62,319		)
Other current assets	(3,076		)	(4,419		)	(3,076		)	(4,419		)
Other assets	2,052			2,028			1,914			1,935
Accounts payable	11,777			(1,560		)	11,777			(1,560		)
Due to third-party payors	(474		)	485			(474		)	485
Accrued expenses	(9,948		)	(20,585		)	(3,588		)	(17,922		)
Income and deferred taxes	26,238			27,382			28,688			28,317
Net cash provided by (used in) operating activities	(5,032		)	8,180			7,685			13,422
Investing activities
Purchases of property and equipment	(12,920		)	(11,751		)	(12,920		)	(11,751		)
Proceeds from sale of assets	250			16,511			250			16,511
Investment in business	—			(7,840		)	—			(7,840		)
Acquisition of businesses, net of cash acquired	(2,000		)	—			(2,000		)	—
Net cash used in investing activities	(14,670		)	(3,080		)	(14,670		)	(3,080		)
Financing activities
Borrowings on revolving credit facilities	205,000			230,000			205,000			230,000
Payments on revolving credit facilities	(105,000		)	(215,000		)	(105,000		)	(215,000		)
Payments on 2011 credit facility term loans	—			(2,125		)	—			(2,125		)
Payments on 2005 credit facility term loans	(59,563		)	—			(59,563		)	—
Borrowings of other debt	5,496			5,835			5,496			5,835
Principal payments on other debt	(2,494		)	(2,328		)	(2,494		)	(2,328		)
Dividends paid to Holdings	—			—			(14,743		)	(30,981		)
Repurchase of common stock	(2,026		)	(25,739		)	—			—
Proceeds from issuance of common stock	81			95			—			—
Equity investment by Holdings	—			—			81			95
Proceeds from (repayment of) bank overdrafts	(9,418		)	2,491			(9,418		)	2,491
Distributions to non-controlling interests	(1,671		)	(1,098		)	(1,671		)	(1,098		)
Net cash provided by (used in) financing activities	30,405			(7,869		)	17,688			(13,111		)
Net increase (decrease in) cash and cash equivalents	10,703			(2,769		)	10,703			(2,769		)
Cash and cash equivalents at beginning of period	4,365			12,043			4,365			12,043
Cash and cash equivalents at end of period	$	15,068		$	9,274		$	15,068		$	9,274
Supplemental Cash Flow Information
Cash paid for interest	$	41,365		$	31,285		$	28,648		$	26,042
Cash paid for taxes	$	103		$	204		$	103		$	204

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

6

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 affecting a leveraged buyout of Select, which was a publicly traded entity.  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.  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 March 31, 2012 and for the three month period ended March 31, 2011 and 2012 have been prepared in accordance with 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 months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2012.

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, 2011 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2012.

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.

7

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is to be applied retrospectively. The Company adopted Update 2011-05 on January 1, 2012.  Update 2011-05 had no effect on the Company’s presentation of other comprehensive income for the three months ended March 31, 2011 and 2012 because the Company did not have any items of other comprehensive income during these periods.

3.  Intangible Assets

The Company’s intangible assets consist of the following:

	As of March 31, 2012
	Gross Carrying Amount		Accumulated Amortization
	(in thousands)
Amortized intangible assets:
Non-compete agreements	$	25,909	$	(25,824	)
Indefinite-lived intangible assets:
Goodwill	$	1,631,383
Trademarks	57,709
Certificates of need	11,914
Accreditations	2,160
Total	$	1,703,166

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At March 31, 2012, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 8.2 years, respectively.

8

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

	Three Months Ended March 31,
	2011		2012
	(in thousands)
Amortization expense	$	326	$	255

Amortization expense for the Company’s intangible assets primarily relates to the amortization of the value associated with the non-compete agreement entered into in connection with the acquisition of the outpatient rehabilitation division of HealthSouth Corporation. The useful life of the outpatient rehabilitation division of HealthSouth Corporation’s non-compete is five years. Amortization expense related to this intangible asset for each of the next five years commencing January 1, 2012 is approximately as follows (in thousands):

2012	$	340
2013	0
2014	0
2015	0
2016	0

The changes in the carrying amount of goodwill for the Company’s reportable segments for the three months ended March 31, 2012 are as follows:

	Specialty Hospitals			Outpatient Rehabilitation		Total
	(in thousands)
Balance as of December 31, 2011	$	1,333,553		$	298,163	$	1,631,716
Other	(333		)	—		(333		)
Balance as of March 31, 2012	$	1,333,220		$	298,163	$	1,631,383

4.  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.

9

The following summarizes the Company’s restructuring activity:

	Lease Termination Costs
	(in thousands)
December 31, 2011	$	5,027
Amounts paid in 2012	(435		)
Accretion expense	83
Revision of estimate	(350		)
March 31, 2012	$	4,325

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

5.  Fair Value

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 was $878.0 million and $891.2 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of Select’s senior secured credit facility was $823.3 million and $859.0 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of Select’s senior secured credit facility was based on quoted market prices for this debt in the syndicated loan market.

The carrying value of Select’s 7 5/8% senior subordinated notes was $345.0 million at both December 31, 2011 and March 31, 2012.  The fair value of Select’s 7 5/8% senior subordinated notes was $326.4 million and $341.1 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of this registered debt was based on quoted market prices.

The carrying value of Holdings’ senior floating rate notes was $167.3 million at both December 31, 2011 and March 31, 2012.  The fair value of Holdings’ senior floating rate notes was $143.9 million and $147.6 million at December 31, 2011 and March 31, 2012, respectively.  The fair value of this registered debt was based on quoted market prices.

10

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

The following tables summarize selected financial data for the Company’s reportable segments for the three months ended March 31, 2011 and 2012.  The segment results of Holdings are identical to those of Select with the exception of total assets:

	Three Months Ended March 31, 2011
	Specialty Hospitals		Outpatient Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	519,924	$	173,191	$	71		$	693,186
Adjusted EBITDA	100,353		21,406		(16,025		)	105,734
Total assets:
Select Medical Corporation	2,140,798		482,444		178,201			2,801,443
Select Medical Holdings Corporation	2,140,798		482,444		180,577			2,803,819
Capital expenditures	10,487		2,181		252			12,920

	Three Months Ended March 31, 2012
	Specialty Hospitals		Outpatient Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	553,038	$	190,899	$	84		$	744,021
Adjusted EBITDA	99,954		22,478		(13,368		)	109,064
Total assets:
Select Medical Corporation	2,222,825		437,364		145,073			2,805,262
Select Medical Holdings Corporation	2,222,825		437,364		146,389			2,806,578
Capital expenditures	7,051		3,791		909			11,751

11

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

	Three Months Ended March 31, 2011
	Specialty Hospitals			Outpatient Rehabilitation			All Other			Select Medical Holdings Corporation			Select Medical Corporation
Adjusted EBITDA	$	100,353		$	21,406		$	(16,025	)
Depreciation and amortization	(12,046		)	(4,459		)	(717		)
Stock compensation expense	—			—			(880		)
Income (loss) from operations	$	88,307		$	16,947		$	(17,622	)	$	87,632		$	87,632
Equity in losses of unconsolidated subsidiaries										(73		)	(73		)
Interest expense, net										(25,608		)	(18,606		)
Income before income taxes										$	61,951		$	68,953

	Three Months Ended March 31, 2012
	Specialty Hospitals			Outpatient Rehabilitation			All Other			Select Medical Holdings Corporation			Select Medical Corporation
Adjusted EBITDA	$	99,954		$	22,478		$	(13,368	)
Depreciation and amortization	(11,843		)	(3,650		)	(706		)
Stock compensation expense	—			—			(1,261		)
Income (loss) from operations	$	88,111		$	18,828		$	(15,335	)	$	91,604		$	91,604
Equity in earnings of unconsolidated subsidiaries										2,465			2,465
Interest expense, net										(23,922		)	(21,250		)
Income before income taxes										$	70,147		$	72,819

7.  Income per Common Share

The Company applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings. Effective January 1, 2009 the Financial Accounting Standards Board (“FASB”) clarified that share based payment awards that have not yet vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. 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 per share under the two class method. Based upon the clarification made by FASB, the Company

12

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 per share.

The following table sets forth for the periods indicated the calculation of net income 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 per share, respectively:

	For the Three Months Ended March 31,
	2011		2012
	(in thousands, except per share data)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	33,672	$	41,542
Less: Earnings allocated to unvested restricted stockholders	361		633
Net income available to common stockholders	$	33,311	$	40,909
Denominator:
Weighted average shares — basic	152,838		141,426
Effect of dilutive securities:
Stock options	218		214
Weighted average shares — diluted	153,056		141,640
Basic income per common share	$	0.22	$	0.29
Diluted income per common share	$	0.22	$	0.29

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

	Three Months Ended March 31,
	2011	2012
	(in thousands)
Stock options	2,372	2,415

8. Commitments and Contingencies

Litigation

The Company is a party to various legal actions, proceedings and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings and regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages,

13

recoupments, fines and other penalties. The Department of Justice, CMS or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

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, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. 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 could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

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

During April 2012, the Company’s long term acute care hospital in Evansville, Indiana (“SSH—Evansville”) received two subpoenas from the Office of Attorney General for the State of Indiana. One subpoena demanded certain patient medical records of SSH—Evansville. The second subpoena demanded reports and documents related to SSH—Evansville for various periods beginning in 2006, including certain financial, statistical, billing and quality reports; certain policies and procedures; joint venture board meeting minutes and documents related to certain complaints and internal investigations. Two days later, SSH-Evansville received a Request for Information or Assistance from the Office of Inspector General of the U.S. Department of Health and Human Services (Indianapolis, Indiana Field Office) covering the period beginning in 2007 seeking substantially the same records demanded by the Office of Attorney General for the State of Indiana, additional patient medical records of SSH—Evansville and additional documents and information of SSH—Evansville, including documents concerning SSH—Evansville’s relationships with its joint venture partner and eight other identified persons and entities. Separately, also in April 2012, the Company’s long term acute care hospital in Beech Grove, Indiana received a request from an investigator with the Medicaid Fraud Control Unit of the Office of Attorney General for the State of Indiana to produce the medical records of a single patient.  On May 1, 2012, the Evansville (Indiana) Police Department executed a search warrant at SSH-Evansville purporting to seek evidence pertaining to the crime of theft.  The search warrant sought various items of personal property, including copy machines, facsimile machines, printers and personal communication devices, and various documents and business records regarding SSH-Evansville for a period beginning in May 2004, including claims for Medicaid and Medicare payment, EOB forms, patient files, Medicaid and Medicare reimbursement manuals, personnel files, complaints and investigations of employees, contractors and physicians and other documents. The Company has produced and will continue to produce documents in response to these requests, and intends to fully cooperate with these government investigations. At this time, the Company is unable to predict the timing and outcome of this matter.

Construction Commitments

At March 31, 2012, the Company had outstanding commitments under construction contracts related to new construction, improvements and renovations at the Company’s long term acute care properties and inpatient rehabilitation facilities totaling approximately $6.1 million.

14

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

Select’s 7 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 7 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, 2011 and March 31, 2012 and for the three months ended March 31, 2011 and 2012.

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.

15

	Select Medical Corporation
	Condensed Consolidating Balance Sheet
	March 31, 2012
	(unaudited)
	Select Medical Corporation (Parent Company Only)			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Eliminations				Consolidated
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	5,255		$	3,355		$	664		$	—		$		9,274
Accounts receivable, net	—			419,428			46,259			—			465,687
Current deferred tax asset	13,388			2,798			3,708			—			19,894
Other current assets	10,817			19,262			4,099			—			34,178
Total Current Assets	29,460			444,843			54,730			—			529,033
Property and equipment, net	14,844			421,174			55,755			—			491,773
Investment in affiliates	2,798,795			74,531			—			(2,873,326		)(a) (b)	—
Goodwill	—			1,631,383			—			—			1,631,383
Other identifiable intangibles	—			71,868			—			—			71,868
Assets held for sale	2,742			—			—			—			2,742
Other assets	25,832			51,852			779			—			78,463
Total Assets	$	2,871,673		$	2,695,651		$	111,264		$	(2,873,326	)	$		2,805,262
Liabilities and Equity
Current Liabilities:
Bank overdrafts	$	19,100		$	—		$	—		$	—		$		19,100
Current portion of long-term debt and notes payable	12,519			365			1,567			—			14,451
Accounts payable	8,755			72,263			13,040			—			94,058
Intercompany accounts	968,181			(880,432		)	(87,749		)	—			—
Accrued payroll	95			70,296			243			—			70,634
Accrued vacation	4,219			43,784			6,698			—			54,701
Accrued interest	5,286			203			—			—			5,489
Accrued restructuring	—			4,325			—			—			4,325
Accrued other	36,427			52,441			6,784			—			95,652
Income taxes payable	16,095			—			—			—			16,095
Due to third party payors	—			18,661			(12,650		)	—			6,011
Total Current Liabilities	1,070,677			(618,094		)	(72,067		)	—			380,516
Long-term debt, net of current portion	749,069			419,086			63,584			—			1,231,739
Non-current deferred tax liability	(3,660		)	79,745			8,944			—			85,029
Other non-current liabilities	49,471			19,608			380			—			69,459
Total Liabilities	1,865,557			(99,655		)	841			—			1,766,743
Stockholder’s Equity:
Common stock	0			—			—			—			0
Capital in excess of par	850,800			—			—			—			850,800
Retained earnings	155,316			669,785			18,861			(688,646		)(b)	155,316
Subsidiary investment	—			2,125,521			59,159			(2,184,680		)(a)	—
Total Select Medical Corporation Stockholder’s Equity	1,006,116			2,795,306			78,020			(2,873,326		)	1,006,116
Non-controlling interest	—			—			32,403			—			32,403
Total Equity	1,006,116			2,795,306			110,423			(2,873,326		)	1,038,519
Total Liabilities and Equity	$	2,871,673		$	2,695,651		$	111,264		$	(2,873,326	)	$		2,805,262

(a)  Elimination of investments in consolidated subsidiaries.

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

16

	Select Medical Corporation
	Condensed Consolidating Statement of Operations
	For the Quarter Ended March 31, 2012
	(Unaudited)
	Select Medical Corporation (Parent Company Only)			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Net operating revenues	$	84		$	644,325		$	99,612		$	—		$	744,021
Costs and expenses:
Cost of services	489			525,465			85,665			—			611,619
General and administrative	14,110			114			—			—			14,224
Bad debt expense	—			8,842			1,533			—			10,375
Depreciation and amortization	705			13,170			2,324			—			16,199
Total costs and expenses	15,304			547,591			89,522			—			652,417
Income (loss) from operations	(15,220		)	96,734			10,090			—			91,604
Other income and expense:
Intercompany interest and royalty fees	(793		)	785			8			—			—
Intercompany management fees	29,374			(25,083		)	(4,291		)	—			—
Equity in earnings of unconsolidated subsidiaries	—			2,455			10			—			2,465
Interest expense	(12,974		)	(7,198		)	(1,078		)	—			(21,250		)
Income from operations before income taxes	387			67,693			4,739			—			72,819
Income tax expense (benefit)	(235		)	28,527			218			—			28,510
Equity in earnings of subsidiaries	42,657			3,499			—			(46,156		)(a)	—
Net income	43,279			42,665			4,521			(46,156		)	44,309
Less: Net income attributable to non-controlling interests	—			—			1,030			—			1,030
Net income attributable to Select Medical Corporation	$	43,279		$	42,665		$	3,491		$	(46,156	)	$	43,279

(a) Elimination of equity in earnings of subsidiaries.

17

	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows
	For the Quarter Ended March 31, 2012
	(Unaudited)
	Select Medical Corporation (Parent Company Only)			Subsidiary Guarantors			Non- Guarantor Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating activities
Net income	$	43,279		$	42,665		$	4,521		$	(46,156	)(a)	$	44,309
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	705			13,170			2,324			—			16,199
Provision for bad debts	—			8,842			1,533			—			10,375
Loss (gain) from disposal of assets	—			(3,565		)	15			—			(3,550		)
Non-cash stock compensation expense	1,261			—			—			—			1,261
Amortization of debt discount	311			—			—			—			311
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries	(42,657		)	(3,499		)	—			46,156		(a)	—
Intercompany	(9,083		)	11,082			(1,999		)	—			—
Accounts receivable	—			(60,482		)	(1,837		)	—			(62,319		)
Other current assets	(4,477		)	82			(24		)	—			(4,419		)
Other assets	2,554			(693		)	74			—			1,935
Accounts payable	1,402			(3,944		)	982			—			(1,560		)
Due to third-party payors	—			5,028			(4,543		)	—			485
Accrued expenses	(17,577		)	(286		)	(59