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 June 30, 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
(State or other jurisdiction of
incorporation or organization) 20-1764048 23-2872718
(I.R.S. employer identification
number)

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

(Address of principal executive offices and zip code)

(717) 972-1100

(Registrants’ telephone number, including area code)

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.  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 July 31, 2012, Select Medical Holdings Corporation had outstanding 139,866,719 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
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS
	Consolidated balance sheets	3
	Consolidated statements of operations	4
	Consolidated statements of changes in stockholders’ equity and income	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	27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52
ITEM 4.	CONTROLS AND PROCEDURES	52
PART II	OTHER INFORMATION	52
ITEM 1.	LEGAL PROCEEDINGS	52
ITEM 1A.	RISK FACTORS	54
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	54
ITEM 4.	MINE SAFETY DISCLOSURES	54
ITEM 5.	OTHER INFORMATION	54
ITEM 6.	EXHIBITS	55
SIGNATURES

2

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

	Select Medical Holdings Corporation				Select Medical Corporation
	December 31,		June 30,		December 31,		June 30,
	2011		2012		2011		2012
ASSETS
Current Assets:
Cash and cash equivalents	$	12,043	$	21,520	$	12,043	$	21,520
Accounts receivable, net of allowance for doubtful accounts of $47,469 and $44,783 in 2011 and 2012, respectively	413,743		423,859		413,743		423,859
Current deferred tax asset	18,305		15,533		18,305		15,533
Prepaid income taxes	9,497		4,061		9,497		4,061
Other current assets	29,822		31,383		29,822		31,383
Total Current Assets	483,410		496,356		483,410		496,356
Property and equipment, net	510,028		492,781		510,028		492,781
Goodwill	1,631,716		1,631,461		1,631,716		1,631,461
Other identifiable intangibles	72,123		71,783		72,123		71,783
Assets held for sale	2,742		2,742		2,742		2,742
Other assets	72,128		84,514		70,719		83,291
Total Assets	$	2,772,147	$	2,779,637	$	2,770,738	$	2,778,414
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdrafts	$	16,609	$	20,348	$	16,609	$	20,348
Current portion of long-term debt and notes payable	10,848		11,785		10,848		11,785
Accounts payable	95,618		90,132		95,618		90,132
Accrued payroll	82,888		73,712		82,888		73,712
Accrued vacation	51,250		56,208		51,250		56,208
Accrued interest	15,096		26,945		11,980		23,746
Accrued restructuring	5,027		3,038		5,027		3,038
Accrued other	101,076		99,583		106,316		104,823
Due to third party payors	5,526		7,264		5,526		7,264
Total Current Liabilities	383,938		389,015		386,062		391,056
Long-term debt, net of current portion	1,385,950		1,342,134		1,218,650		1,174,834
Non-current deferred tax liability	82,028		82,911		82,028		82,911
Other non-current liabilities	64,905		68,649		64,905		68,649
Total Liabilities	1,916,821		1,882,709		1,751,645		1,717,450
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 145,268,190 shares and 139,863,119 shares issued and outstanding in 2011 and 2012, respectively	145		140		—		—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0		0
Capital in excess of par	493,828		469,410		848,844		853,506
Retained earnings	328,882		393,961		137,778		174,041
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	822,855		863,511		986,622		1,027,547
Non-controlling interest	32,471		33,417		32,471		33,417
Total Equity	855,326		896,928		1,019,093		1,060,964
Total Liabilities and Equity	$	2,772,147	$	2,779,637	$	2,770,738	$	2,778,414

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 Three Months Ended June 30,						For the Three Months Ended June 30,
	2011			2012			2011			2012
Net operating revenues	$	698,749		$	750,193		$	698,749		$	750,193
Costs and expenses:
Cost of services	569,666			612,669			569,666			612,669
General and administrative	16,115			18,554			16,115			18,554
Bad debt expense	13,943			10,029			13,943			10,029
Depreciation and amortization	17,999			15,428			17,999			15,428
Total costs and expenses	617,723			656,680			617,723			656,680
Income from operations	81,026			93,513			81,026			93,513
Other income and expense:
Loss on early retirement of debt	(31,018		)	—			(20,385		)	—
Equity in earnings (losses) of unconsolidated subsidiaries	(251		)	2,752			(251		)	2,752
Interest income	111			—			111			—
Interest expense	(25,296		)	(23,798		)	(19,694		)	(20,957		)
Income before income taxes	24,572			72,467			40,807			75,308
Income tax expense	10,915			27,651			16,597			28,646
Net income	13,657			44,816			24,210			46,662
Less: Net income attributable to non-controlling interests	1,938			1,644			1,938			1,644
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	11,719		$	43,172		$	22,272		$	45,018
Income per common share:
Basic	$	0.08		$	0.31
Diluted	$	0.08		$	0.31

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

4

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2011			2012			2011			2012
Net operating revenues	$	1,391,935		$	1,494,214		$	1,391,935		$	1,494,214
Costs and expenses:
Cost of services	1,127,082			1,224,288			1,127,082			1,224,288
General and administrative	32,681			32,778			32,681			32,778
Bad debt expense	28,293			20,404			28,293			20,404
Depreciation and amortization	35,221			31,627			35,221			31,627
Total costs and expenses	1,223,277			1,309,097			1,223,277			1,309,097
Income from operations	168,658			185,117			168,658			185,117
Other income and expense:
Loss on early retirement of debt	(31,018		)	—			(20,385		)	—
Equity in earnings (losses) of unconsolidated subsidiaries	(324		)	5,217			(324		)	5,217
Interest income	167			—			167			—
Interest expense	(50,960		)	(47,720		)	(38,356		)	(42,207		)
Income before income taxes	86,523			142,614			109,760			148,127
Income tax expense	37,479			55,226			45,611			57,156
Net income	49,044			87,388			64,149			90,971
Less: Net income attributable to non-controlling interests	3,653			2,674			3,653			2,674
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	45,391		$	84,714		$	60,496		$	88,297
Income per common share:
Basic	$	0.29		$	0.60
Diluted	$	0.29		$	0.59

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

5

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	87,388											84,714			2,674
Issuance and vesting of restricted stock	1,998			194		0			1,998
Exercise of stock options	547			127		0			547
Stock option expense	601								601
Repurchase of common shares	(46,790		)	(5,726	)	(5		)	(27,150		)	(19,635		)
Distributions to non-controlling interests	(1,681		)												(1,681		)
Other	(461		)						(414		)				(47		)
Balance at June 30, 2012	$	896,928		139,863		$	140		$	469,410		$	393,961		$	33,417

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	90,971									88,297			2,674
Federal tax benefit of losses contributed by Holdings	1,930						1,930
Additional investment by Holdings	547						547
Dividends declared and paid to Holdings	(52,034		)							(52,034		)
Distributions to non-controlling interests	(1,681		)										(1,681		)
Other	(461		)				(414		)				(47		)
Contribution related to restricted stock awards and stock option issuances by Holdings	2,599						2,599
Balance at June 30, 2012	$	1,060,964		0	$	0	$	853,506		$	174,041		$	33,417

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

6

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,
	2011			2012			2011			2012
Operating activities
Net income	$	49,044		$	87,388		$	64,149		$	90,971
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	35,221			31,627			35,221			31,627
Provision for bad debts	28,293			20,404			28,293			20,404
Loss on early retirement of debt	31,018			—			20,385			—
Gain from disposal or sale of assets	(5,201		)	(3,604		)	(5,201		)	(3,604		)
Non-cash stock compensation expense	1,780			2,599			1,780			2,599
Amortization of debt discount	962			622			103			622
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable	(81,240		)	(30,520		)	(81,240		)	(30,520		)
Other current assets	(1,511		)	(1,612		)	(1,511		)	(1,612		)
Other assets	2,724			(653		)	2,469			(839		)
Accounts payable	8,107			(5,486		)	8,107			(5,486		)
Due to third-party payors	(464		)	1,738			(464		)	1,738
Accrued expenses	6,775			6,423			13,008			6,340
Income and deferred taxes	8,019			9,879			16,151			11,809
Net cash provided by operating activities	83,527			118,805			101,250			124,049
Investing activities
Purchases of property and equipment	(23,696		)	(27,934		)	(23,696		)	(27,934		)
Proceeds from sale of assets	7,879			16,511			7,879			16,511
Investment in business	(13,514		)	(10,014		)	(13,514		)	(10,014		)
Acquisition of businesses, net of cash acquired	1,921			(206		)	1,921			(206		)
Net cash used in investing activities	(27,410		)	(21,643		)	(27,410		)	(21,643		)
Financing activities
Borrowings on revolving credit facilities	435,000			340,000			435,000			340,000
Payments on revolving credit facilities	(395,000		)	(380,000		)	(395,000		)	(380,000		)
Borrowings on 2011 credit facility term loan, net of discount	841,500			—			841,500			—
Payments on 2011 credit facility term loan	—			(4,250		)	—			(4,250		)
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	5,496			5,835			5,496			5,835
Principal payments on other debt	(3,480		)	(5,085		)	(3,480		)	(5,085		)
Debt issuance costs	(18,556		)	—			(18,556		)	—
Dividends paid to Holdings	—			—			(171,008		)	(52,034		)
Repurchase of common stock	(3,285		)	(46,790		)	—			—
Proceeds from issuance of common stock	169			547			—			—
Equity investment by Holdings	—			—			169			547
Proceeds from bank overdrafts	2,102			3,739			2,102			3,739
Distributions to non-controlling interests	(2,270		)	(1,681		)	(2,270		)	(1,681		)
Net cash used in financing activities	(46,898		)	(87,685		)	(64,621		)	(92,929		)
Net increase in cash and cash equivalents	9,219			9,477			9,219			9,477
Cash and cash equivalents at beginning of period	4,365			12,043			4,365			12,043
Cash and cash equivalents at end of period	$	13,584		$	21,520		$	13,584		$	21,520
Supplemental Cash Flow Information
Cash paid for interest	$	59,289		$	32,378		$	41,572		$	27,136
Cash paid for taxes	$	29,435		$	45,344		$	29,435		$	45,344

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

7

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 June 30, 2012 and for the three and six month periods ended June 30, 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 and six months ended June 30, 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.

8

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 and six months ended June 30, 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 June 30, 2012
	Gross Carrying Amount		Accumulated Amortization
	(in thousands)
Amortized intangible assets:
Non-compete agreements	$	25,909	$	(25,909	)
Indefinite-lived intangible assets:
Goodwill	$	1,631,461
Trademarks	57,709
Certificates of need	11,914
Accreditations	2,160
Total	$	1,703,244

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At June 30, 2012, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 8.0 years, respectively.

9

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2012		2011		2012
	(in thousands)				(in thousands)
Amortization expense	$	327	$	85	$	653	$	340

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 was five years.

The changes in the carrying amount of goodwill for the Company’s reportable segments for the six months ended June 30, 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		)
Goodwill acquired during the period	—			78		78
Balance as of June 30, 2012	$	1,333,220		$	298,241	$	1,631,461

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.

The following summarizes the Company’s restructuring activity:

	Lease Termination Costs
	(in thousands)
Balance as of December 31, 2011	$	5,027
Amounts paid in 2012	(845		)
Accretion expense	157
Revision of estimate	(1,301		)
Balance as of June 30, 2012	$	3,038

10

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 $834.3 million at December 31, 2011 and June 30, 2012, respectively.  The fair value of Select’s senior secured credit facility was $823.3 million and $815.6 million at December 31, 2011 and June 30, 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 June 30, 2012.  The fair value of Select’s 7 5/8% senior subordinated notes was $326.4 million and $346.3 million at December 31, 2011 and June 30, 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 June 30, 2012.  The fair value of Holdings’ senior floating rate notes was $143.9 million and $160.6 million at December 31, 2011 and June 30, 2012, respectively.  The fair value of this registered debt was based on quoted market prices.

The Company considers the inputs in the valuation process of its debt instruments 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.

11

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 and six months ended June 30, 2011 and 2012.  The segment results of Holdings are identical to those of Select with the exception of total assets:

	Three Months Ended June 30, 2011
	Specialty Hospitals		Outpatient Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	520,261	$	178,473	$	15		$	698,749
Adjusted EBITDA	91,081		24,467		(15,623		)	99,925
Total assets:
Select Medical Corporation	2,202,994		471,175		112,264			2,786,433
Select Medical Holdings Corporation	2,202,994		471,175		113,853			2,788,022
Capital expenditures	6,130		2,801		1,845			10,776
	Three Months Ended June 30, 2012
	Specialty Hospitals		Outpatient Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	557,130	$	193,050	$	13		$	750,193
Adjusted EBITDA	102,166		25,837		(17,724		)	110,279
Total assets:
Select Medical Corporation	2,184,743		437,591		156,080			2,778,414
Select Medical Holdings Corporation	2,184,743		437,591		157,303			2,779,637
Capital expenditures	12,631		2,922		630			16,183

12

	Six Months Ended June 30, 2011
	Specialty Hospitals		Outpatient Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	1,040,185	$	351,664	$	86		$	1,391,935
Adjusted EBITDA	191,434		45,873		(31,648		)	205,659
Total assets:
Select Medical Corporation	2,202,994		471,175		112,264			2,786,433
Select Medical Holdings Corporation	2,202,994		471,175		113,853			2,788,022
Capital expenditures	16,617		4,982		2,097			23,696

	Six Months Ended June 30, 2012
	Specialty Hospitals		Outpatient Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	1,110,168	$	383,949	$	97		$	1,494,214
Adjusted EBITDA	202,120		48,315		(31,092		)	219,343
Total assets:
Select Medical Corporation	2,184,743		437,591		156,080			2,778,414
Select Medical Holdings Corporation	2,184,743		437,591		157,303			2,779,637
Capital expenditures	19,682		6,713		1,539			27,934

A reconciliation of Adjusted EBITDA to income before income taxes is as follows:

	Three Months Ended June 30, 2011
	(in thousands)
	Specialty Hospitals				Outpatient Rehabilitation				All Other
Adjusted EBITDA	$	91,081			$	24,467			$		(15,623	)
Depreciation and amortization	(13,047			)	(4,227			)	(725			)
Stock compensation expense	—				—				(900			)
													Select Medical Holdings Corporation			Select Medical Corporation
Income (loss) from operations	$		78,034		$		20,240		$	(17,248		)	$	81,026		$	81,026
Loss on early retirement of debt													(31,018		)	(20,385		)
Equity in losses of unconsolidated subsidiaries													(251		)	(251		)
Interest expense, net													(25,185		)	(19,583		)
Income before income taxes													$	24,572		$	40,807

13

	Three Months Ended June 30, 2012
	(in thousands)
	Specialty Hospitals				Outpatient Rehabilitation				All Other
Adjusted EBITDA	$	102,166			$	25,837			$		(17,724	)
Depreciation and amortization	(11,479			)	(3,232			)	(717			)
Stock compensation expense	—				—				(1,338			)
													Select Medical Holdings Corporation			Select Medical Corporation
Income (loss) from operations	$		90,687		$		22,605		$	(19,779		)	$	93,513		$	93,513
Equity in earnings of unconsolidated subsidiaries													2,752			2,752
Interest expense, net													(23,798		)	(20,957		)
Income before income taxes													$	72,467		$	75,308

	Six Months Ended June 30, 2011
	(in thousands)
	Specialty Hospitals				Outpatient Rehabilitation				All Other
Adjusted EBITDA	$	191,434			$	45,873			$		(31,648	)
Depreciation and amortization	(25,093			)	(8,686			)	(1,442			)
Stock compensation expense	—				—				(1,780			)
													Select Medical Holdings Corporation			Select Medical Corporation
Income (loss) from operations	$		166,341		$		37,187		$	(34,870		)	$	168,658		$	168,658
Loss on early retirement of debt													(31,018		)	(20,385		)
Equity in losses of unconsolidated subsidiaries													(324		)	(324		)
Interest expense, net													(50,793		)	(38,189		)
Income before income taxes													$	86,523		$	109,760

14

	Six Months Ended June 30, 2012
	(in thousands)
	Specialty Hospitals				Outpatient Rehabilitation				All Other
Adjusted EBITDA	$	202,120			$	48,315			$		(31,092	)
Depreciation and amortization	(23,322			)	(6,882			)	(1,423			)
Stock compensation expense	—				—				(2,599			)
													Select Medical Holdings Corporation			Select Medical Corporation
Income (loss) from operations	$		178,798		$		41,433		$	(35,114		)	$	185,117		$	185,117
Equity in earnings of unconsolidated subsidiaries													5,217			5,217
Interest expense, net													(47,720		)	(42,207		)
Income before income taxes													$	142,614		$	148,127

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 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.

15

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				For the Six Months
	Ended June 30,				Ended June, 30
	2011		2012		2011		2012
	(in thousands, except per share data)
Numerator:
Net income attributable to Select Medical Holdings Corporation	$	11,719	$	43,172	$	45,391	$	84,714
Less: Earnings allocated to unvested restricted stockholders	125		707		486		1,338
Net income available to common stockholders	$	11,594	$	42,465	$	44,905	$	83,376
Denominator:
Weighted average shares – basic	152,603		138,456		152,720		139,941
Effect of dilutive securities:
Stock options	278		229		231		221
Weighted average shares – diluted	152,881		138,685		152,951		140,162
Basic income per common share	$	0.08	$	0.31	$	0.29	$	0.60
Diluted income per common share	$	0.08	$	0.31	$	0.29	$	0.59

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

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2011	2012	2011	2012
	(in thousands)
Stock options	1,691	1,684	2,400	1,699

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 the Company to sanctions, damages, recoupments, fines and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“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

16

aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

To address 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, as well as the cost and possible lack of available insurance, 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. SSH — Evansville subsequently 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 Indiana Attorney General’s Office, 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 seven other identified persons and entities. During May 2012, the Evansville (Indiana) Police Department executed a search warrant at SSH - Evansville purporting to seek evidence pertaining to the crime of theft. At the Company’s request, the Vanderburgh (Indiana) Superior Court ordered the release of the probable cause affidavit supporting that search warrant. According to the affidavit, confidential informants, some of whom are purportedly current or former employees of SSH-Evansville, alleged, among other things, that a physician on the medical staff at SSH-Evansville improperly manipulated patient diagnoses to raise the diagnosis related group (DRG) and lengths-of-stay to enhance reimbursement and, on one occasion, discontinued treatments to a patient based on financial motivation and without regard to the patient’s end of life instructions resulting in the patient’s death, and that a second physician on the medical staff at SSH-Evansville performed bronchoscopes that were medically unnecessary and resulted in at least two patient deaths. The affidavit also makes allegations that imply that the Company may not have provided complete or accurate documents called for in the Indiana Attorney General’s Office subpoenas which were received during April 2012. In August 2012, the Company received a subpoena from the Office of Inspector General of the U.S. Department of Health and Human Services (Chicago Regional Office) demanding additional documents covering the period beginning in March 2007 relating to the Company and SSH - Evansville, including contracts with SSH - Evansville’s joint venture partner, contracts and other documents relating to financial relationships with physicians practicing at SSH - Evansville, records of payments to and hours worked by physicians practicing at SSH - Evansville, documents relating to actual or expected physician referrals and admissions to SSH - Evansville, documents relating to billing for services furnished by the Company’s long term acute care hospitals (“LTCHs”), such as government program guidance and staff training materials, information relating to case manager duties and responsibilities at the Company’s LTCHs, reports on patient admissions, discharges, DRG, length-of-stay and transfers at SSH - Evansville, and documents relating to criteria used by the Company or SSH - Evansville for patient admissions, discharges and eligibility for service.  The Company has produced and will continue to produce documents in response to, and intends to fully cooperate with, these governmental investigations. At this time, the Company is unable to predict the timing and outcome of this matter.

17

Construction Commitments

At June 30, 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 $9.3 million.

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 June 30, 2012 and for the three and six months ended June 30, 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.

18

	Select Medical Corporation
	Condensed Consolidating Balance Sheet
	June 30, 2012
	(unaudited)
	Select Medical Corporation (Parent Company Only)		Subsidiary Guarantors		Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	18,100	$	2,798	$	622	$	—		$	21,520
Accounts receivable, net	—		367,585		56,274		—			423,859
Current deferred tax asset	8,774		3,262		3,497		—			15,533
Prepaid income taxes	4,061		—		—		—			4,061
Other current assets	7,654		20,339		3,390		—			31,383
Total Current Assets	38,589		393,984		63,783		—			496,356
Property and equipment, net	14,754		422,031		55,996		—			492,781
Investment in affiliates	2,861,419		78,736		—		(2,940,155		)(a)(b)	—
Goodwill	—		1,631,461		—		—			1,631,461
Other identifiable intangibles	—		71,783		—		—