SELECT MEDICAL HOLDINGS CORP
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2010 | ||
|
OR
|
||
|
o
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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 Charter)
| Delaware | 20-1764048 | |
| Delaware | 23-2872718 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
|
4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA (Address of Principal Executive Offices) |
17055
(Zip Code) |
(717) 972-1100
(Registrants’ telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of Each Class
|
Name of Each Exchange on Which Registered
|
|
|
Common Stock, $0.001 par value
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
NONE
NONE
Indicate by check mark if the registrants are well-known
seasoned issuers, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrants are not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes
o
No
þ
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 twelve months (or for such shorter period that the
registrants were required to file such reports), and
(2) have been subject to such filing requirements for the
past
90 days. Yes
þ
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
(§ 232.405 of this chapter) during the preceding
twelve months (or for such shorter period that the registrants
were required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants’
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated
filer
o
|
Accelerated filer þ |
Non-accelerated
filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrants are shell
companies (as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of Holdings’ voting stock held
by non-affiliates at June 30, 2010 (the last business day
of Holdings’ most recently completed second fiscal quarter)
was approximately $353,131,000, based on the closing price per
share of common stock on that date of $6.78 as reported on the
New York Stock Exchange. Shares of common stock known by the
registrants to be beneficially owned by directors and officers
of Holdings subject to the reporting and other requirements of
Section 16 of the Securities Exchange Act of 1934 are not
included in the computation. The registrants, however, have made
no determination that such persons are “affiliates”
within the meaning of
Rule 12b-2
under the Securities Exchange Act of 1934.
The number of shares of Holdings’ Common Stock,
$0.001 par value, outstanding as of March 1, 2011 was
154,543,141.
This
Form 10-K
is a combined annual 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.
Documents
Incorporated by Reference
Listed hereunder are the documents, any portions of which are
incorporated by reference and the Parts of this
Form 10-K
into which such portions are incorporated:
| 1. | The registrant’s definitive proxy statement for use in connection with the 2011 Annual Meeting of Stockholders to be held on or about May 12, 2011 to be filed within 120 days after the registrant’s fiscal year ended December 31, 2010, portions of which are incorporated by reference into Part III of this Form 10-K. Such definitive proxy statement, except for the parts therein which have been specifically incorporated by reference, should not be deemed “filed” for the purposes of this form 10-K. |
SELECT
MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
SELECT MEDICAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
PART I
Forward-Looking
Statements
This annual report on
Form 10-K
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,” “expect,”
“anticipate,” “plan,” “target,”
“estimate,” “project,” “intend”
and similar expressions. These statements include, among others,
statements regarding our expected business outlook, anticipated
financial and operating results, our business strategy and means
to implement our strategy, our objectives, the amount and timing
of capital expenditures, the likelihood of our success in
expanding our business, financing plans, budgets, working
capital needs and sources of liquidity.
Forward-looking statements are only predictions and are not
guarantees of performance. These statements are based on our
management’s beliefs and assumptions, which in turn are
based on currently available information. Important assumptions
relating to the forward-looking statements include, among
others, assumptions regarding our services, the expansion of our
services, competitive conditions and general economic
conditions. These assumptions could prove inaccurate.
Forward-looking statements also involve known and unknown risks
and uncertainties, 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 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; | |
| • | acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities; | |
| • | private third-party payors for our services may undertake future cost containment initiatives that limit our future net operating revenues and profitability; | |
| • | the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability; | |
| • | shortages in qualified nurses or therapists could increase our operating costs significantly; | |
| • | competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability; | |
| • | the loss of key members of our management team could significantly disrupt our operations; | |
| • | the effect of claims asserted against us could subject us to substantial uninsured liabilities and in the future we may not be able to obtain insurance at a reasonable price; and | |
| • | other factors discussed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), including factors discussed under the heading “Risk Factors” of this annual report on Form 10-K. |
1
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 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.
| Item 1. | Business. |
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
December 31, 2010, we operated 111 long term acute care
hospitals, or “LTCHs” and seven inpatient
rehabilitation facilities, or “IRFs” in
28 states, and 944 outpatient rehabilitation clinics
in 36 states and the District of Columbia. We also provide
medical rehabilitation services on a contract basis at nursing
homes, hospitals, assisted living and senior care centers,
schools and worksites. We began operations in 1997 under the
leadership of our current management team.
We manage our company through two business segments, our
specialty hospital segment and our outpatient rehabilitation
segment. We had net operating revenues of $2,390.3 million
for the year ended December 31, 2010. Of this total, we
earned approximately 71% of our net operating revenues from our
specialty hospital segment and approximately 29% from our
outpatient rehabilitation segment. Our specialty hospital
segment consists of hospitals designed to serve the needs of
long term stay acute patients and hospitals designed to serve
patients who require intensive inpatient medical rehabilitation
care. Our outpatient rehabilitation segment consists of clinics
and contract services that provide physical, occupational and
speech rehabilitation services. See the financial statements
beginning on
page F-1
for financial information for each of our segments for the past
three fiscal years.
Specialty
Hospitals
We are a leading operator of specialty hospitals in the United
States, with 118 facilities throughout 28 states, as of
December 31, 2010. We operate 111 long term acute care
hospitals, all of which are currently certified by the federal
Medicare program as long term acute care hospitals. We also
operate seven acute medical rehabilitation hospitals, six of
which are currently certified by the federal Medicare program as
inpatient rehabilitation facilities and one new hospital that
has been deemed certified but is pending final Medicare
approval. For the years ended December 31, 2009 and
December 31, 2010, approximately 63% and 61%, respectively,
of the net operating revenues of our specialty hospital segment
came from Medicare reimbursement. As of December 31, 2010,
we operated a total of 5,163 available licensed beds and
employed approximately 17,000 people in our specialty
hospital segment, consisting primarily of registered or licensed
nurses, respiratory therapists, physical therapists,
occupational therapists and speech therapists.
Patients are typically admitted to our specialty 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. Given their complex
medical needs, these patients generally require a longer length
of stay than patients in a general acute care hospital and
benefit from being treated in a specialty hospital that is
designed to meet their unique medical needs. The average length
of stay for patients in our specialty hospitals was 26 days
in our long term acute care hospitals and 17 days in our
inpatient rehabilitation facilities, for the year ended
December 31, 2010.
2
Below is a table that shows the distribution by medical
condition (based on primary diagnosis) of patients in our
hospitals for the year ended December 31, 2010:
|
Distribution
|
||||
|
Medical Condition
|
of Patients | |||
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Respiratory disorders
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35 | % | ||
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Neuromuscular disorders
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30 | |||
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Cardiac disorders
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10 | |||
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Wound care
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7 | |||
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Infectious diseases
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6 | |||
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Other
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12 | |||
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Total
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100 | % | ||
We believe that we provide our services on a more cost-effective
basis than a typical general acute care hospital because we
provide a much narrower range of services. We believe that our
services are therefore attractive to healthcare payors who are
seeking to provide the most cost-effective level of care to
their enrollees. Additionally, we continually seek to increase
our admissions by expanding and improving our relationships with
the physicians and general acute care hospitals that refer
patients to our facilities. We also maintain a strong focus on
the provision of high-quality medical care within our facilities
and believe that this operational focus is in part reflected by
the accreditation of our specialty hospitals by The Joint
Commission, previously known as the Joint Commission on
Accreditation of Healthcare Organizations, and the Commission on
Accreditation of Rehabilitation Facilities. As of
December 31, 2010, The Joint Commission had fully
accredited 116 of the 118 specialty hospitals we operated. The
other two specialty hospitals are in the process of obtaining
full accreditation. Additionally, three of our inpatient
rehabilitation facilities have also received accreditation from
the Commission on Accreditation of Rehabilitation Facilities.
The Joint Commission and the Commission on Accreditation of
Rehabilitation Facilities are independent,
not-for-profit
organizations that establish standards related to the operation
and management of healthcare facilities. Each of our accredited
facilities must regularly demonstrate to a survey team
conformance to the applicable standards. When a survey is
completed, the facility receives a survey report that
acknowledges best practices, contains suggestions for improving
services, and makes recommendations for improvement based on
conformance to the standards.
When a patient is referred to one of our hospitals by a
physician, case manager, discharge planner, health maintenance
organization or insurance company, we perform a clinical
assessment of the patient to determine the care required. Based
on the determinations reached in this clinical assessment, an
admission decision is made by the attending physician.
Upon admission, an interdisciplinary team reviews a new
patient’s condition. The interdisciplinary team is
comprised of a number of clinicians and may include any or all
of the following: an attending physician; a specialty nurse; a
physical, occupational or speech therapist; a respiratory
therapist; a dietician; a pharmacist; and a case manager. Upon
completion of an initial evaluation by each member of the
treatment team, an individualized treatment plan is established
and implemented. The case manager coordinates all aspects of the
patient’s hospital stay and serves as a liaison with the
insurance carrier’s case management staff when appropriate.
The case manager communicates progress, resource utilization,
and treatment goals between the patient, the treatment team and
the payor.
Each of our specialty hospitals has an interdisciplinary medical
staff that is comprised of physicians that have completed the
privileging and credentialing process required by that specialty
hospital, and have been approved by the governing board of that
specialty hospital. Physicians on the medical staff of our
specialty hospitals are generally not directly employed by our
specialty hospitals but instead have staff privileges at one or
more hospitals. At each of our specialty hospitals, attending
physicians conduct rounds on their patients on a daily basis and
consulting physicians provide consulting services based on the
medical needs of our patients. Our specialty hospitals also have
on-call arrangements with physicians to ensure that a physician
is available to care for our patients at all times. We staff our
specialty hospitals with the number of physicians and other
medical practitioners that we believe is appropriate to address
the varying needs of our patients. When determining the
appropriate
3
composition of the medical staff of a specialty hospital, we
consider (1) the size of the specialty hospital,
(2) services provided by the specialty hospital,
(3) if applicable, the size and capabilities of the medical
staff of the acute care hospital that hosts a hospital within
hospital (“HIH”) and (4) if applicable, the
proximity of an acute care hospital to a free-standing hospital.
The medical staff of each of our specialty hospitals meets the
applicable requirements set forth by Medicare, The Joint
Commission and the state in which that specialty hospital is
located.
Each of our specialty hospitals has an onsite management team
consisting of a chief executive officer, a chief nursing officer
and a director of business development. These teams manage local
strategy and
day-to-day
operations, including oversight of clinical care and treatment.
They also assume primary responsibility for developing
relationships with the general acute care providers and
clinicians in the local areas we serve that refer patients to
our specialty hospitals. We provide our hospitals with
centralized accounting, payroll, legal, operational support,
human resources, compliance, management information systems and
billing and collection services. The centralization of these
services improves efficiency and permits hospital staff to focus
their time on patient care.
We operate the majority of our long term acute care hospitals as
“hospitals within hospitals.” A long term acute care
hospital that operates as an HIH leases space from a general
acute care “host” hospital and operates as a
separately licensed hospital within the host hospital, or on the
same campus as the host hospital. In contrast, a free-standing
long term acute care hospital does not operate on a host
hospital campus. We operated 111 long term acute care hospitals
at December 31, 2010, of which 110 are owned and one is
managed. Of the 110 long term acute care hospitals we owned,
81 were operated as HIHs and 29 were operated as
free-standing hospitals.
For a description of government regulations and Medicare
payments made to our long term acute care hospitals, acute
medical rehabilitation hospitals and outpatient rehabilitation
services see “— Government Regulations” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Regulatory
Changes.”
Specialty
Hospital Strategy
The key elements of our specialty hospital strategy are to:
Focus on Specialized Inpatient Services.
We
serve highly acute patients and patients with debilitating
injuries and rehabilitation needs that cannot be adequately
cared for in a less medically intensive environment, such as a
skilled nursing facility. Generally, patients in our specialty
hospitals require longer stays and higher levels of clinical
care than patients treated in general acute care hospitals. Our
patients’ average length of stay in our specialty hospitals
was 24 days for the year ended December 31, 2010.
Provide High Quality Care and Service.
We
believe that our specialty hospitals serve a critical role in
comprehensive healthcare delivery. Through our specialized
treatment programs and staffing models, we treat patients with
acute, complex and specialized medical needs who are typically
referred to us by general acute care hospitals. Our specialized
treatment programs focus on specific patient needs and medical
conditions such as ventilator weaning programs, wound care
protocols and rehabilitation programs for brain trauma and
spinal cord injuries. Our responsive staffing models ensure that
patients have the appropriate clinical resources over the course
of their stay. We believe that we are recognized for providing
quality care and service, as evidenced by accreditation by The
Joint Commission and the Commission on Accreditation of
Rehabilitation Facilities. We also believe we develop brand
loyalty in the local areas we serve allowing us to strengthen
our relationships with physicians and other referral sources and
drive additional patient volume to our hospitals.
Our treatment programs benefit patients because they give our
clinicians access to the best practices and protocols that we
have found to be most effective in treating various conditions
such as respiratory failure,
non-healing
wounds, brain and spinal cord injuries, strokes and
neuromuscular disorders. In addition, we combine or modify these
programs to provide a treatment plan tailored to meet our
patients’ unique needs.
The quality of the patient care we provide is continually
monitored using several measures, including patient satisfaction
surveys, as well as clinical outcomes analyses. Quality measures
are collected continuously and reported monthly, quarterly and
annually. In order to benchmark ourselves against other
healthcare organizations, we have contracted with outside
vendors to collect our clinical and patient satisfaction
information and compare it to other healthcare organizations.
The information collected is reported back to each hospital, to
our corporate
4
office, and directly to The Joint Commission. As of
December 31, 2010, The Joint Commission had fully
accredited 116 of the 118 specialty hospitals we operated. The
other two specialty hospitals are in the process of obtaining
full accreditation. Three of our seven inpatient rehabilitation
facilities have also received accreditation from the Commission
on Accreditation of Rehabilitation Facilities. See
“— Government Regulations —
Licensure — Accreditation.”
Reduce Operating Costs.
We continually seek to
improve operating efficiency and reduce costs at our hospitals
by standardizing operations and centralizing key administrative
functions. These initiatives include:
| • | centralizing administrative functions such as accounting, finance, payroll, legal, operational support, compliance, human resources and billing and collection; | |
| • | standardizing management information systems to aid in financial reporting, as well as billing and collecting; and | |
| • | participating in group purchasing arrangements to receive discounted prices for pharmaceuticals and medical supplies. |
Increase Higher Margin Commercial Volume.
With
reimbursement rates from commercial insurers typically higher
than the federal Medicare program, we have focused on continued
expansion of our relationships with commercial insurers to
increase our volume of patients with commercial insurance in our
specialty hospitals. We believe that commercial payors seek to
contract with our hospitals because we offer patients high
quality, cost-effective care at more attractive rates than
general acute care hospitals. We also offer commercial enrollees
customized treatment programs not typically offered in general
acute care hospitals.
Develop Inpatient Facilities.
Since our
inception in 1997 we have internally developed 63 specialty
hospitals. As a result of the Medicare, Medicaid, and SCHIP
Extension Act of 2007, or “SCHIP Extension Act,” which
prohibited the establishment and classification of new LTCHs or
satellites during the three calendar years commencing on
December 29, 2007 and the Patient Protection and Affordable
Care Act, which extended this moratorium for an additional two
years, we have stopped all new LTCH development with the
exception of one new hospital under development that we acquired
in the Regency acquisition. However, we will continue to
evaluate opportunities to develop joint venture relationships
with significant health systems, and from time to time we may
also develop new inpatient rehabilitation hospitals.
By leveraging the experience of our senior management and
dedicated development team, we believe that we are well
positioned to capitalize on development opportunities. When we
identify joint venture opportunities, our development team
conducts an extensive review of the area’s referral
patterns and commercial insurance to determine the general
reimbursement trends and payor mix. Ultimately, we determine the
needs of a joint venture, which could include working capital,
the construction of new space or the leasing and renovation of
existing space. During construction or renovation, the project
is transitioned to our
start-up
team, which is experienced in preparing a specialty hospital for
opening. The
start-up
team oversees equipment purchases, licensure procedures and if
necessary the recruitment of a full-time management team. After
the facility is opened, responsibility for its management is
transitioned to the onsite management team and our corporate
operations group.
Pursue Opportunistic Acquisitions.
In addition
to our development initiatives, we may grow our network of
specialty hospitals through opportunistic acquisitions. When we
acquire a hospital or a group of hospitals, a team of our
professionals is responsible for formulating and executing an
integration plan. We seek to improve financial performance at
acquired facilities by adding clinical programs that attract
commercial payors, centralizing administrative functions and
implementing our standardized resource management programs.
Outpatient
Rehabilitation
We believe that we are the largest operator of outpatient
rehabilitation clinics in the United States based on number of
facilities, with 944 facilities throughout 36 states and
the District of Columbia, as of December 31, 2010.
Typically, each of our clinics is located in a medical complex
or retail location. As of December 31, 2010, our outpatient
rehabilitation segment employed approximately 8,100 people.
5
In our clinics and through our contractual relationships, we
provide physical, occupational and speech rehabilitation
programs and services. We also provide certain specialized
programs such as hand therapy or sports performance enhancement
that treat sports and work related injuries, musculoskeletal
disorders, chronic or acute pain and orthopedic conditions. The
typical patient in one of our clinics suffers from
musculoskeletal impairments that restrict his or her ability to
perform normal activities of daily living. These impairments are
often associated with accidents, sports injuries, strokes, heart
attacks and other medical conditions. Our rehabilitation
programs and services are designed to help these patients
minimize physical and cognitive impairments and maximize
functional ability. We also provide services designed to prevent
short term disabilities from becoming chronic conditions. Our
rehabilitation services are provided by our professionals
including licensed physical therapists, occupational therapists,
speech-language
pathologists and respiratory therapists.
Outpatient rehabilitation patients are generally referred or
directed to our clinics by a physician, employer or health
insurer who believes that a patient, employee or member can
benefit from the level of therapy we provide in an outpatient
setting. We believe that our services are attractive to
healthcare payors who are seeking to provide the most
cost-effective level of care to their enrollees.
In addition to providing therapy in our outpatient clinics, we
provide medical rehabilitative services including physical and
occupational therapies and speech pathology services, to
residents and patients of nursing homes, hospitals, schools,
assisted living and senior care centers and worksites. We
provide rehabilitative services to approximately 321 contracted
locations in 29 states and the District of Columbia, while
our contract operations in New York provide pediatric contract
care at approximately 162 locations.
In our outpatient rehabilitation segment, approximately 89% of
our net operating revenues come from commercial payors,
including healthcare insurers, managed care organizations and
workers’ compensation programs, contract management
services and private pay sources. The balance of our
reimbursement is derived from Medicare and other government
sponsored programs.
Outpatient
Rehabilitation Strategy
The key elements of our outpatient rehabilitation strategy are
to:
Provide High Quality Care and Service.
We are
focused on providing a high level of service to our patients
throughout their entire course of treatment. To measure
satisfaction with our service we have developed surveys for both
patients and physicians. Our clinics utilize the feedback from
these surveys to continuously refine and improve service levels.
We believe that by focusing on quality care and offering a high
level of customer service we develop brand loyalty in the local
areas we serve. This high quality of care and service allows us
to strengthen our relationships with referring physicians,
employers and health insurers and drive additional patient
volume.
Increase Market Share.
We strive to establish
a leading presence within the local areas we serve. To increase
our presence, we seek to expand our services and programs and to
open new clinics in our existing markets. This allows us to
realize economies of scale, heightened brand loyalty, workforce
continuity and increased leverage when negotiating payor
contracts. We are focused on increasing our workers’
compensation and commercial/managed care payor mix.
Expand Rehabilitation Programs and
Services.
Through our local clinical directors of
operations and clinic managers within their service areas, we
assess the healthcare needs of the areas we serve. Based on
these assessments, we implement additional programs and services
specifically targeted to meet demand in the local community. In
designing these programs we benefit from the knowledge we gain
through our national network of clinics. This knowledge is used
to design programs that optimize treatment methods and measure
changes in health status, clinical outcomes and patient
satisfaction.
Optimize the Profitability of our Payor
Contracts.
We rigorously review payor contracts
up for renewal and potential new payor contracts to optimize our
profitability. Before we enter into a new contract with a
commercial payor, we evaluate it with the aid of our contract
management system. We assess potential profitability by
evaluating past and projected patient volume, clinic capacity,
and expense trends. We create a retention strategy for the top
performing contracts and a renegotiation strategy for contracts
that do not meet our defined criteria. We
6
believe that our size and our strong reputation enable us to
negotiate favorable outpatient contracts with commercial
insurers.
Maintain Strong Employee Relations.
We believe
that the relationships between our employees and the referral
sources in their communities are critical to our success. Our
referral sources, such as physicians and healthcare case
managers, send their patients to our clinics based on three
factors: the quality of our care, the service we provide and
their familiarity with our therapists. We seek to retain and
motivate our therapists by implementing a performance-based
bonus program, a defined career path with the ability to be
promoted from within, timely communication on company
developments and internal training programs. We also focus on
empowering our employees by giving them a high degree of
autonomy in determining local area strategy. We seek to identify
therapists who are potential business leaders. This management
approach reflects the unique nature of each local area in which
we operate and the importance of encouraging our employees to
assume responsibility for their clinic’s performance.
Pursue Opportunistic Acquisitions.
We may grow
our network of outpatient rehabilitation facilities through
opportunistic acquisitions. We believe our size and centralized
infrastructure allow us to take advantage of operational
efficiencies and increase margins at acquired facilities.
Other
Services
Other services (which accounted for less than 1% of our net
operating revenues for the year ended December 31,
2010) include corporate services and certain non-healthcare
services.
Our
Competitive Strengths
We believe that the success of our business model is based on a
number of competitive strengths, including our position as a
leading operator in each of our business segments, proven
financial performance and strong cash flow, significant scale,
experience in completing and integrating acquisitions, ability
to capitalize on consolidation opportunities and an experienced
management team.
Leading Operator in Distinct but Complementary Lines of
Business.
We believe that we are a leading
operator in each of our principal business segments, based on
number of facilities in the United States. Our leadership
position and reputation as a high quality, cost-effective
healthcare provider in each of our business segments allows us
to attract patients and employees, aids us in our marketing
efforts to payors and referral sources and helps us negotiate
payor contracts. In our specialty hospital segment, we operated
111 long term acute care hospitals in 28 states and seven
inpatient rehabilitation facilities in four states and derived
approximately 71% of net operating revenues from these
operations, for the year ended December 31, 2010. In our
outpatient rehabilitation segment, we operated 944 outpatient
rehabilitation clinics in 36 states and the District of
Columbia and derived approximately 29% of net operating revenues
from these operations, for the year ended December 31,
2010. With these leading positions in the areas we serve, we
believe that we are well-positioned to benefit from the rising
demand for medical services due to an aging population in the
United States, which will drive growth across our business lines.
Proven Financial Performance and Strong Cash
Flow.
We have established a track record of
improving the financial performance of our facilities due to our
disciplined approach to revenue growth, expense management and
an intense focus on free cash flow generation. This includes
regular review of specific financial metrics of our business to
determine trends in our revenue generation, expenses, billing
and cash collection. Based on the ongoing analysis of such
trends, we make adjustments to our operations to optimize our
financial performance and cash flow.
Significant Scale.
By building significant
scale in each of our business segments, we have been able to
leverage our operating costs by centralizing administrative
functions at our corporate office. As a result, we have been
able to minimize our general and administrative expense as a
percentage of revenues.
Well-Positioned to Capitalize on Consolidation
Opportunities.
We believe that we are
well-positioned to capitalize on consolidation opportunities
within each of our business segments and selectively augment our
internal growth. We believe that each of our business segments
is highly fragmented, with many of the nation’s long term
acute care hospitals, inpatient rehabilitation facilities and
outpatient rehabilitation facilities being operated by
7
independent operators lacking national or broad regional scope.
With our geographically diversified portfolio of facilities in
the United States, we believe that our footprint provides us
with a wide-ranging perspective on multiple potential
acquisition opportunities.
Experience in Successfully Completing and Integrating
Acquisitions.
From our inception in 1997 through
2010, we completed seven significant acquisitions for
approximately $1,104.8 million in aggregate consideration.
We believe that we have improved the operating performance of
these facilities over time by applying our standard operating
practices and by realizing efficiencies from our centralized
operations and management.
Experienced and Proven Management Team.
Prior
to co-founding our company with our current Chief Executive
Officer, our Executive Chairman founded and operated three other
healthcare companies focused on inpatient and outpatient
rehabilitation services. In addition, our four senior operations
executives have an average of over 31 years of experience
in the healthcare industry, including extensive experience
working together for our company and for past companies focused
on operating acute rehabilitation hospitals and outpatient
rehabilitation facilities.
Sources
of Net Operating Revenues
The following table presents the approximate percentages by
source of net operating revenue received for healthcare services
we provided for the periods indicated:
| Year Ended December 31, | ||||||||||||
|
Net Operating Revenues by Payor
Source
|
2008 | 2009 | 2010 | |||||||||
|
Medicare
|
46.2 | % | 46.6 | % | 46.7 | % | ||||||
|
Commercial
insurance
(1)
|
46.3 | % | 45.9 | % | 44.7 | % | ||||||
|
Private and
other
(2)
|
5.4 | % | 5.1 | % | 5.6 | % | ||||||
|
Medicaid
|
2.1 | % | 2.4 | % | 3.0 | % | ||||||
|
Total
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
| (1) | Includes commercial healthcare insurance carriers, health maintenance organizations, preferred provider organizations, workers’ compensation and managed care programs. | |
| (2) | Includes self payors, contract management services and non-patient related payments. Self pay revenues represent less than 1% of total net operating revenues. |
Government
Sources
Medicare is a federal program that provides medical insurance
benefits to persons age 65 and over, some disabled persons,
and persons with end-stage renal disease. Medicaid is a
federal-state funded program, administered by the states, which
provides medical benefits to individuals who are unable to
afford healthcare. We operate 118 specialty hospitals, 117 of
which are currently certified as Medicare providers and one new
hospital that has been deemed certified but is pending final
Medicare approval. Our outpatient rehabilitation clinics
regularly receive Medicare payments for their services.
Additionally, many of our specialty hospitals participate in
state Medicaid programs. Amounts received under the Medicare and
Medicaid programs are generally less than the customary charges
for the services provided. In recent years there have been
significant changes made to the Medicare and Medicaid programs.
Since a significant portion of our revenues come from patients
under the Medicare program, our ability to operate our business
successfully in the future will depend in large measure on our
ability to adapt to changes in the Medicare program. See
“— Government Regulations — Overview of
U.S. and State Government Reimbursements.”
Non-Government
Sources
Our non-government sources of net operating revenue include
insurance companies, workers’ compensation programs, health
maintenance organizations, preferred provider organizations,
other managed care companies and
8
employers, as well as by patients directly. Patients are
generally not responsible for any difference between customary
charges for our services and amounts paid by Medicare and
Medicaid programs, insurance companies, workers’
compensation companies, health maintenance organizations,
preferred provider organizations and other managed care
companies, but are responsible for services not covered by these
programs or plans, as well as for deductibles and co-insurance
obligations of their coverage. The amount of these deductibles
and co-insurance obligations has increased in recent years.
Collection of amounts due from individuals is typically more
difficult than collection of amounts due from government or
business payors.
Extension
of Revolving Credit Facility
On June 7, 2010, we entered into an amendment to our senior
secured credit facility that extended the maturity of our
$300.0 million revolving credit facility from
February 24, 2011 to August 22, 2013. The applicable
margin percentage and commitment fee for revolving loans have
increased and are determined based on a pricing grid whereby
changes in the leverage ratio, as defined in the credit
agreement, result in changes in the applicable margin
percentage. Under the pricing grid, the applicable margin
percentage for revolving ABR loans ranges from 2% per annum to
3% per annum, the applicable margin percentage for revolving
Eurodollar loans ranges from 3% per annum to 4% per annum, and
the commitment fee rate for revolving commitments ranges from
0.375% to 0.75%.
Purchase
of Regency Hospital Company, L.L.C.
On September 1, 2010, we acquired all of 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 non-controlling
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.
Employees
As of December 31, 2010, we employed approximately
25,900 people throughout the United States. Approximately
18,100 of our employees are full time and the remaining
approximately 7,800 are part time employees. Specialty hospital
employees totaled approximately 17,000 and outpatient, contract
therapy and physical rehabilitation and occupational health
employees totaled approximately 8,100. The remaining
approximately 800 employees were in corporate management,
administration and other services.
Competition
We compete on the basis of pricing, the quality of the patient
services we provide and the results that we achieve for our
patients. The primary competitive factors in the long term acute
care and inpatient rehabilitation businesses include quality of
services, charges for services and responsiveness to the needs
of patients, families, payors and physicians. Other companies
operate long term acute care hospitals and inpatient
rehabilitation facilities that compete with our hospitals,
including large operators of similar facilities, such as Kindred
Healthcare Inc., HealthSouth Corporation and RehabCare Group,
Inc and rehabilitation units and stepdown units operated by
acute care hospitals in the markets we serve. The competitive
position of any hospital is also affected by the ability of its
management to negotiate contracts with purchasers of group
healthcare services, including private employers, managed care
companies, preferred provider organizations and health
maintenance organizations. Such organizations attempt to obtain
discounts from established hospital charges. The importance of
obtaining contracts with preferred provider organizations,
health maintenance organizations and other organizations which
finance healthcare, and its effect on a hospital’s
competitive position, vary from area to area, depending on the
number and strength of such organizations.
Our outpatient rehabilitation clinics face competition
principally from locally owned and managed outpatient
rehabilitation clinics in the communities they serve and from
selected national providers such as Physiotherapy Associates and
U.S. Physical Therapy in selected local areas. Many of
these clinics have longer operating histories and greater name
recognition in these communities than our clinics, and they may
have stronger relations with physicians in these communities on
whom we rely for patient referrals.
9
Government
Regulations
General
The healthcare industry is required to comply with many complex
laws and regulations at the federal, state and local government
levels. These laws and regulations require that hospitals and
outpatient rehabilitation clinics meet various requirements,
including those relating to the adequacy of medical care,
equipment, personnel, operating policies and procedures,
maintenance of adequate records, safeguarding protected health
information, compliance with building codes and environmental
protection and healthcare fraud and abuse. These laws and
regulations are extremely complex and, in many instances, the
industry does not have the benefit of significant regulatory or
judicial interpretation. If we fail to comply with applicable
laws and regulations, we could suffer civil or criminal
penalties, including the loss of our licenses to operate and our
ability to participate in the Medicare, Medicaid and other
federal and state healthcare programs.
Facility
Licensure
Our healthcare facilities are subject to state and local
licensing regulations ranging from the adequacy of medical care
to compliance with building codes and environmental protection
laws. In order to assure continued compliance with these various
regulations, governmental and other authorities periodically
inspect our facilities, not only at scheduled intervals but also
in response to complaints from patients and others. While our
facilities intend to comply with existing licensing and 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 corrective action, assessment of fines
and penalties, or loss of licensure, Medicare certification or
accreditation. These consequences could have an adverse effect
on our company.
Some states still require us to get approval under certificate
of need regulations when we create, acquire or expand our
facilities or services, or alter the ownership of such
facilities, whether directly or indirectly. The certificate of
need regulations vary from state to state, and are subject to
change and new interpretation. If we fail to show public need
and obtain approval in these states for our new facilities or
changes to the ownership structure of existing facilities, we
may be subject to civil or even criminal penalties, lose our
facility license or become ineligible for reimbursement.
Professional
Licensure and Corporate Practice
Healthcare professionals at our hospitals and outpatient
rehabilitation clinics are required to be individually licensed
or certified under applicable state law. We take steps to ensure
that our employees and agents possess all necessary licenses and
certifications. Some states prohibit the “corporate
practice of therapy” so that business corporations such as
ours are restricted from practicing therapy through the direct
employment of therapists. The laws relating to corporate
practice vary from state to state and are not fully developed in
each state in which we have clinics. We believe that each of our
outpatient therapy clinics complies with any current corporate
practice prohibition of the state in which it is located. For
example, in those states that apply the corporate practice
prohibition, we either contract to obtain therapy services from
an entity permitted to employ therapists or we manage the
physical therapy practice owned by licensed therapists through
which the therapy services are provided. However, future
interpretations of the corporate practice prohibition, enactment
of new legislation or adoption of new regulations could cause us
to have to restructure our business operations or close our
clinics in a particular state. If new legislation, regulations
or interpretations establish that our clinics do not comply with
state corporate practice prohibition, we could be subject to
civil, and perhaps criminal, penalties. Any such restructuring
or penalties could have a material adverse effect on our
business.
Certification
In order to participate in the Medicare program and receive
Medicare reimbursement, each facility must comply with the
applicable regulations of the United States Department of Health
and Human Services relating to, among other things, the type of
facility, its equipment, its personnel and its standards of
medical care, as well as
10
compliance with all applicable state and local laws and
regulations. Of the 118 specialty hospitals we operate, 117 are
currently certified as Medicare providers and one new hospital
has been deemed certified but is pending final Medicare
approval. In addition, we provide the majority of our outpatient
rehabilitation services through clinics certified by Medicare as
rehabilitation agencies or “rehab agencies.”
Accreditation
Our specialty hospitals receive accreditation from The Joint
Commission. As of December 31, 2010, The Joint Commission
had fully accredited 116 of the 118 specialty hospitals we
operated. The other two specialty hospitals are in the process
of obtaining full accreditation. In addition, some of our
inpatient rehabilitation facilities have also received
accreditation from the Commission on Accreditation of
Rehabilitation Facilities (“CARF”), an independent,
not-for-profit
organization which reviews and grants accreditation for
rehabilitation facilities that meet established standards for
service and quality.
Overview
of U.S. and State Government Reimbursements
Medicare
Program in General
The Medicare program reimburses healthcare providers for
services furnished to Medicare beneficiaries, which are
generally persons age 65 and older, those who are
chronically disabled, and those suffering from end stage renal
disease. The program is governed by the Social Security Act of
1965 and is administered primarily by the Department of Health
and Human Services and the Centers for Medicare &
Medicaid Services (“CMS”). Net operating revenues
generated directly from the Medicare program represented
approximately 46% of our consolidated net operating revenues for
the year ended December 31, 2008 and 47% for both the years
ended December 31, 2009 and 2010.
The Medicare program reimburses various types of providers,
including long term acute care hospitals, inpatient
rehabilitation facilities and outpatient rehabilitation
providers, using different payment methodologies. The Medicare
reimbursement systems specific to long term acute care
hospitals, inpatient rehabilitation facilities and outpatient
rehabilitation providers, as described below, are different than
the system applicable to general acute care hospitals. If our
hospitals fail to comply with the requirements for payment under
the Medicare reimbursement system for long term acute care
hospitals or inpatient rehabilitation facilities, our hospitals
will be paid under the system applicable to general acute care
hospitals. For general acute care hospitals, Medicare payments
are made under an inpatient prospective payment system, or
“IPPS,” under which a hospital receives a fixed
payment amount per discharge (adjusted for area wage
differences) using Medicare severity diagnosis-related groups,
or
“MS-DRGs.”
The general acute care hospital MS-DRG payment rate is based
upon the national average cost of treating a Medicare
patient’s condition, based on severity levels of illness,
in that type of facility. Although the average length of stay
varies for each MS-DRG, the average stay of all Medicare
patients in a general acute care hospital is substantially less
than the average length of stay in LTCHs and IRFs. Thus, the
prospective payment system for general acute care hospitals
creates an economic incentive for those hospitals to discharge
medically complex Medicare patients to a post-acute care setting
as soon as clinically possible. Effective October 1, 2005,
CMS expanded its post-acute care transfer policy under which
general acute care hospitals are paid on a per diem basis rather
than the full MS-DRG rate if a patient is discharged early to
certain post-acute care settings, including LTCHs and IRFs. When
a patient is discharged from selected MS-DRGs to, among other
providers, an LTCH, the general acute care hospital is
reimbursed below the full MS-DRG payment if the patient’s
length of stay is less than the geometric mean length of stay
for the MS-DRG.
Long
Term Acute Care Hospital Medicare Reimbursement
The Medicare payment system for long term acute care hospitals
is based on a prospective payment system specifically applicable
to LTCHs. The long-term care hospital prospective payment
system, or “LTCH-PPS” was established by CMS final
regulations published on August 30, 2002, and applies to
long term acute care hospitals for cost reporting periods
beginning on or after October 1, 2002. Under LTCH-PPS, each
patient discharged from a long term acute care hospital was
assigned to a distinct LTC-DRG and a long term acute care
hospital is generally paid a pre-determined fixed amount
applicable to the assigned LTC-DRG (adjusted for area wage
differences), subject to
11
exceptions for short stay and high cost outlier patients
(described below). Beginning with discharges on or after
October 1, 2007, CMS implemented a new patient
classification system with categories referred to as
MS-LTC-DRGs.
The new classification categories take into account the severity
of the patient’s condition. CMS assigned relative weights
to each
MS-LTC-DRG
to reflect their relative use of medical care resources. The
payment amount for each
MS-LTC-DRG
is intended to reflect the average cost of treating a Medicare
patient assigned to that
MS-LTC-DRG
in a long term acute care hospital.
Standard
Federal Rate
Payment under the LTCH-PPS is dependent on determining the
patient classification, that is, the assignment of the case to a
particular MS-LTC-DRG, the weight of the MS-LTC-DRG and the
standard federal payment rate. There is a single standard
federal rate that encompasses both the inpatient operating and
capital-related costs that CMS updates on an annual basis.
LTCH-PPS also includes special payment policies that adjust the
payments for some patients based on the patient’s length of
stay, the facility’s costs, whether the patient was
discharged and readmitted and other factors.
Short
Stay Outlier Policy
For discharges occurring on or after July 1, 2006, CMS
modified the payment methodology for Medicare patients with a
length of stay less than or equal to five-sixths of the
geometric average length of stay for that particular LTC-DRG.
Payment for each short stay outlier, or “SSO,” case
had been based on the lesser of (1) 120% of the cost of the
case; (2) 120% of the LTC-DRG specific per diem amount
multiplied by the patient’s length of stay; or (3) the
full LTC-DRG payment. The 2007 rate year final rule modified the
limitation in clause (1) above to reduce payment for SSO
cases to 100% (rather than 120%) of the cost of the case. The
2007 rate year final rule also added a fourth limitation,
potentially further limiting payment for SSO cases at a per diem
rate derived from blending 120% of the MS-LTC-DRG specific per
diem amount with a per diem rate based on the general acute care
hospital IPPS. Under this methodology, as a patient’s
length of stay increases, the percentage of the per diem amount
based upon the IPPS component will decrease and the percentage
based on the MS-LTC-DRG component will increase.
High Cost
Outliers
Some cases are extraordinarily costly, producing losses that may
be too large for hospitals to offset. Cases with unusually high
costs, referred to as “high cost outliers,” receive a
payment adjustment to reflect the additional resources utilized.
CMS provides an additional payment if the estimated costs for
the patient exceed the adjusted MS-LTC-DRG payment plus a
fixed-loss amount that is established in the annual payment rate
update.
Interrupted
stays
An interrupted stay is defined as a case in which an LTCH
patient is admitted upon discharge to a general acute care
hospital, inpatient rehabilitation facility, skilled nursing
facility or a swing-bed hospital and returns to the same LTCH
within a specified period of time. If the length of stay at the
receiving provider is equal to or less than applicable fixed
period of time, it is considered to be an interrupted stay case
and is treated as a single discharge for the purposes of payment
to the LTCH.
Freestanding,
Hospitals within Hospitals and Satellite LTCHs
LTCHs may be organized and operated as freestanding facilities
or as hospitals within hospitals (HIHs). As its name suggests, a
freestanding LTCH is not located on the campus of another
hospital. For such purpose, “campus” means the
physical area immediately adjacent to a hospital’s main
buildings, other areas and structures that are not strictly
contiguous to a hospital’s main buildings but are located
within 250 yards of its main buildings, and any other areas
determined, on an individual case basis by the applicable CMS
regional office, to be part of a hospital’s campus.
Conversely, an HIH is a LTCH that is located on the campus of
another hospital. An LTCH, whether freestanding or an HIH, that
uses the same Medicare provider number of an affiliated
“primary site” LTCH is known as a
“satellite”. Under Medicare policy, a satellite LTCH
must be located within 35 miles of its primary site LTCH
12
and be administered by such primary site LTCH. A primary site
LTCH may have more than one satellite LTCH. CMS sometimes refers
to a satellite LTCH that is freestanding as a “remote
location”.
Facility
Certification Criteria
The LTCH-PPS regulations define the criteria that must be met in
order for a hospital to be certified as a long term acute care
hospital. To be eligible for payment under the LTCH-PPS, a
hospital must be primarily engaged in providing inpatient
services to Medicare beneficiaries with medically complex
conditions that require a long hospital stay. In addition, by
definition, LTCHs must meet certain facility criteria, including
(1) instituting a review process that screens patients for
appropriateness of an admission and validates the patient
criteria within 48 hours of each patient’s subsequent
admission, evaluates regularly their patients for continuation
of care and assesses the available discharge options;
(2) having active physician involvement with patient care
that includes a physician available
on-site
daily and additional consulting physicians on call; and
(3) having an interdisciplinary team of healthcare
professionals to prepare and carry out an individualized
treatment plan for each patient.
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. LTCHs that fail
to exceed an average length of stay of greater than 25 days
during any cost reporting period may be paid under the general
acute care hospital IPPS if not corrected within established
timeframes. CMS, through its contractors, determines whether an
LTCH has maintained an average length of stay of greater than
25 days during each annual cost reporting period.
Prior to qualifying under the payment system applicable to long
term acute care hospitals, a new long term acute care hospital
initially receives payments under the general acute care
hospital IPPS. The long term acute care hospital must continue
to be paid under this system for a minimum of six months while
meeting certain Medicare long term acute care hospital
requirements, the most significant requirement being an average
length of stay for Medicare patients greater than 25 days.
25 Percent
Rule
The 25 Percent 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 caused the LTCH to exceed the
applicable percentage thresholds of discharged Medicare
patients. To the extent that any LTCH’s or LTCH satellite
facility’s discharges that are admitted from an individual
hospital (regardless of whether the referring hospital is
co-located with the LTCH or LTCH satellite) exceed the
applicable percentage threshold during a particular cost
reporting period, the payment rate for those discharges would be
subject to a downward payment adjustment. Cases admitted in
excess of the applicable threshold are reimbursed at a rate
comparable to that under general acute care IPPS, which is
generally lower than LTCH-PPS rates. Cases that reach outlier
status in the discharging hospital do not count toward the limit
and are paid under LTCH-PPS.
For HIHs that meet specified criteria and were in existence as
of October 1, 2004, the Medicare percentage thresholds were
phased in over a four year period starting with hospital cost
reporting periods that began on or after October 1, 2004.
For HIHs opened after October 1, 2004, the Medicare
percentage threshold has been established at 25% except for HIHs
located in rural areas or co-located with an MSA dominant
hospital or single urban hospital (as defined by current
regulations) where the percentage is no more than 50%, nor less
than 25%.
The SCHIP Extension Act (as amended by the American Recovery and
Reinvestment Act, or “ARRA,” and the Patient
Protection and Affordable Care Act, or “PPACA”) has
limited the application of the Medicare percentage threshold to
HIHs in existence on October 1, 2004 and subject to the
four year phase in described above. For these HIHs, the
percentage threshold is no lower than 50% for a five year period
to commence on an LTCH’s first cost reporting period to
begin on or after October 1, 2007, except for HIHs located
in rural areas and those which receive referrals from MSA
dominant hospitals or single urban hospitals, in which cases the
percentage threshold is no more than 75% during the same five
cost reporting years.
For cost reporting periods beginning on or after July 1,
2007, CMS expanded the 25 Percent Rule to apply a payment
adjustment to Medicare patients admitted from any individual
hospital in excess of the specified percentage threshold.
Previously, the percentage threshold payment adjustment was
applicable only to Medicare
13
admissions from hospitals co-located with an LTCH or satellite
of an LTCH. Under the 2008 rate year final rule, free-standing
LTCHs, grandfathered HIHs and grandfathered satellites are
subject to the Medicare percentage threshold payment adjustment,
as well as HIHs that admit Medicare patients from non-co-located
hospitals.
The SCHIP Extension Act, as amended by the ARRA, postponed the
application of the percentage threshold to all free-standing and
grandfathered HIHs for a three year period commencing on an
LTCH’s first cost reporting period on or after July 1,
2007. However, the SCHIP Extension Act did not postpone the
application of the percentage threshold, or the transition
period, to those Medicare patients discharged from an LTCH HIH
or satellite that were admitted from a non-co-located hospital.
The ARRA limits application of the percentage threshold to no
more than 50% of Medicare admissions to grandfathered satellites
from a co-located hospital for a three year period commencing on
the first cost reporting period beginning on or after
July 1, 2007. The PPACA includes a two-year extension of
the limits placed on the 25 Percent Rule by the SCHIP
Extension Act, as amended by the ARRA.
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 Percent 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 Percent Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCH’s total Medicare population. | Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after October 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%. | ||
| Grandfathered HIHs (two owned hospitals) | Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | Percentage admission threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | ||
| Grandfathered satellites (no owned hospitals) | Not subject to any extensions of the admissions thresholds under the 25 Percent 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%. |
14
|
Type of LTCH
|
Non Co-located Admissions | Co-located Admissions | ||
| 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 Percent 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. In the special case where an LTCH is co-located with an MSA-dominate hospital, the referral percentage is no more than 50%, nor less than 25%. |
After the expiration of the regulatory relief provided by the
SCHIP Extension Act, the ARRA and PPACA, as described above, our
LTCHs (whether freestanding, HIH or satellite) will be subject
to a downward payment adjustment for any Medicare patients who
were admitted from a co-located or a non-co-located hospital and
that exceed the applicable percentage threshold of all Medicare
patients discharged from the LTCH during the cost reporting
period. If the 25 Percent Rule, as originally adopted by
CMS, becomes effective after the expiration of the applicable
provisions of the SCHIP Extension Act, the ARRA and PPACA, these
regulatory changes will collectively cause an adverse effect on
our operating revenues and profitability in 2013 and beyond,
which adverse effect could be partially mitigated if we are able
to implement certain operational changes.
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. The PPACA extends this moratorium by two years. The
moratorium will now expire on December 28, 2012. This
moratorium does not apply to LTCHs that, before the date of
enactment, (1) began the qualifying period for payment
under the LTCH-PPS, (2) have a written agreement with an
unrelated party for the construction, renovation, lease or
demolition for a LTCH and have expended at least 10% of the
estimated cost of the project or $2,500,000, or (3) have
obtained an approved certificate of need. Additionally, an LTCH
located in a state with only two LTCHs, may request an increase
in licensed beds following the closure or decrease in the number
of licensed beds at the other LTCH located within the state.
One-Time
Budget Neutrality Adjustment
Congress required that the LTC-DRG payment rates maintain budget
neutrality during the first years of the prospective payment
system with total expenditures that would have been made under
the previous reasonable cost-based payment system. The LTCH-PPS
regulations give 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 final
rule, CMS estimated this one-time adjustment would result in a
negative adjustment of 3.75% to the LTCH base rate. The SCHIP
Extension Act precluded CMS from implementing the one-time
prospective adjustment to the LTCH standard federal rate 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.
15
Modification
of Short Stay Outlier Policy
The 2008 rate year final rule revised the payment adjustment
formula for SSO cases. For cases with a length of stay that is
less than the average length of stay plus one standard deviation
for the same MS-DRG under IPPS, referred to as the so-called
“IPPS comparable threshold,” the rule lowers the LTCH
payment to a rate based on the general acute care hospital IPPS
per diem. SSO cases with covered lengths of stay that exceed the
IPPS comparable threshold would continue to be paid under the
SSO payment 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 final
rule 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.
Annual
Payment Rate Update and DRG Reweighting
Rate Year 2009
. On May 9, 2008, CMS
published its annual payment rate update for the 2009 LTCH-PPS
rate year, or “RY 2009” (affecting discharges and cost
reporting periods beginning on or after July 1, 2008). The
final rule adopted a
15-month
rate update, from July 1, 2008 through September 30,
2009 and moved LTCH-PPS from a
July-June
update cycle to the same update cycle as the general acute care
hospital inpatient rule (October — September). For RY
2009, the rule established a 2.7% update to the standard federal
rate. The standard federal rate for RY 2009 was set at $39,114,
an increase from the revised RY 2008 standard federal rate of
$38,086 applied to discharges occurring on or after
April 1, 2008 through June 30, 2008. The rule
increased the fixed-loss amount for high cost outlier cases by
$2,222, to $22,960.
Fiscal Year 2009
. On August 19, 2008, CMS
published the IPPS final rule for fiscal year 2009 (affecting
discharges and cost reports beginning on or after
October 1, 2008 through September 30, 2009), which
made limited revisions to the classifications of cases in
MS-LTC-DRGs.
On June 3, 2009, CMS published an interim final rule in
which CMS adopted a new table of MS-LTC-DRG relative weights
that apply from June 3, 2009 to the remainder of fiscal
year 2009 (through September 30, 2009). This interim final
rule revised the MS-LTC-DRG relative weights for payment under
the LTCH-PPS for fiscal year 2009 due to CMS’s
misapplication of its established methodology in the calculation
of the budget neutrality factor. This error resulted in relative
weights that were higher, by approximately 3.9% for all of
fiscal year 2009 (October 1, 2008 through
September 30, 2009). However, CMS only applied the
corrected weights to the remainder of fiscal year 2009 (that is,
from June 3, 2009 through September 30, 2009).
Fiscal Year 2010
. On August 27, 2009, CMS
published its annual payment rate update for the 2010
LTCH-PPS
fiscal year (affecting discharges and cost reporting periods
beginning on or after October 1, 2009 through
September 30, 2010). The increase in the standard federal
rate uses a 2.0% update factor based on the market basket update
of 2.5% less an adjustment of 0.5% to account for changes in
documentation and coding practices. As a result, the standard
federal rate for fiscal year 2010 was set at $39,897, an
increase from $39,114 in fiscal year 2009. The fixed loss amount
for high cost outlier cases was set at $18,425. This was a
decrease from the fixed loss amount in the 2009 rate year of
$22,960. On June 2, 2010, CMS published a notice of changes
to the payment rates for LTCH-PPS during the portion of fiscal
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 fiscal
year 2010. This change to the LTCH-PPS standard federal rate for
the remainder of fiscal year 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 fiscal year 2010 discharges occurring on or after
April 1, 2010 to $18,615, which is higher than the fiscal
year 2010 fixed-loss amount of $18,425 in effect from
October 1, 2009 to March 31, 2010.
Fiscal Year 2011
. On August 16, 2010, CMS
published the policies and payment rates for LTCH-PPS for fiscal
year 2011 (affecting discharges and cost reporting periods
beginning on or after October 1, 2010 through
September 30, 2011). The standard federal rate for fiscal
year 2011 is $39,600, which is a decrease from the fiscal year
2010 standard federal rate of $39,897 in effect from
October 1, 2009 to March 31, 2010 and the fiscal year
2010 standard federal rate of $39,795 that went into effect on
April 1, 2010. This update to the LTCH-PPS standard
16
federal rate for fiscal year 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 (rate
years 2008 and 2009) that resulted from changes in
documentation and coding practices less an additional reduction
of 0.5% as mandated by the PPACA. The final rule establishes a
fixed-loss amount for high cost outlier cases for fiscal year
2011 of $18,785, which is higher than the fiscal 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 effect on
April 1, 2010. The final rule includes revisions to the
relative weights for the
MS-LTC-DRGs
for fiscal year 2011 based on the standard federal rate.
Medicare
Market Basket Adjustments
The PPACA institutes a market basket payment adjustment to
LTCHs. In fiscal year 2010, LTCHs are subject to a market basket
reduction of minus 0.25% for discharges occurring after
April 1, 2010. In fiscal 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 fiscal years
2012 and 2013. Fiscal year 2014 the market basket update will be
reduced by 0.3%. Fiscal years 2015 and 2016 the market basket
update will be reduced by 0.2%. Finally, in fiscal 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.
Medicare
Reimbursement of Inpatient Rehabilitation Facility
Services
Inpatient rehabilitation facilities are paid under a prospective
payment system specifically applicable to this provider type,
which is referred to as “IRF-PPS.” Under the IRF-PPS,
each patient discharged from an inpatient rehabilitation
facility is assigned to a case mix group or “IRF-CMG”
containing patients with similar clinical conditions that are
expected to require similar amounts of resources. An inpatient
rehabilitation facility is generally paid a pre-determined fixed
amount applicable to the assigned IRF-CMG (subject to applicable
case adjustments related to length of stay and facility level
adjustments for location and low income patients). The payment
amount for each IRF-CMG is intended to reflect the average cost
of treating a Medicare patient’s condition in an inpatient
rehabilitation facility relative to patients with conditions
described by other IRF-CMGs. The IRF-PPS also includes special
payment policies that adjust the payments for some patients
based on the patient’s length of stay, the facility’s
costs, whether the patient was discharged and readmitted and
other factors. As required by Congress,
IRF-CMG
payments rates have been set to maintain budget neutrality with
total expenditures that would have been made under the previous
reasonable cost based system.
Facility
Certification Criteria
Our rehabilitation hospitals must meet certain facility criteria
to be classified as an IRF by the Medicare program, including:
(1) a provider agreement to participate as a hospital in
Medicare; (2) a preadmission screening procedure;
(3) ensuring that patients receive close medical
supervision and furnish, through the use of qualified personnel,
rehabilitation nursing, physical therapy, and occupational
therapy, plus, as needed, speech therapy, social or
psychological services, and orthotic and prosthetic services;
(4) a full-time, qualified director of rehabilitation;
(5) a plan of treatment for each inpatient that is
established, reviewed, and revised as needed by a physician in
consultation with other professional personnel who provide
services to the patient; (6) a coordinated
multidisciplinary team approach in the rehabilitation of each
inpatient, as documented by periodic clinical entries made in
the patient’s medical record to note the patient’s
status in relationship to goal attainment, and that team
conferences are held at least every two weeks to determine the
appropriateness of treatment. Failure to comply with any of the
classification criteria may result in the denial of claims for
payment or cause a hospital to lose its status as an IRF and be
paid under the prospective payment system that applies to
general acute care hospitals.
Patient
Classification Criteria
Under the IRF certification criteria in effect since 1983, in
order to qualify as an IRF, a hospital was required to satisfy
certain operational criteria as well as demonstrate that, during
its most recent
12-month
cost reporting period, it served an inpatient population of whom
at least 75% required intensive rehabilitation services for one
or more of ten conditions specified in the regulation. We refer
to such 75% requirement as the “75% rule.”
17
New inpatient rehabilitation facility certification criteria
became effective for cost reporting periods beginning on or
after July 1, 2004. In the rate year 2005 final
rule CMS adopted four major changes to the 75% rule:
(1) temporarily lowering the 75% compliance threshold,
(2) modifying and expanding from ten to 13 the medical
conditions used to determine whether a hospital qualifies as an
inpatient rehabilitation facility, (3) identifying the
conditions under which comorbidities can be used to verify
compliance with the 75% rule, and (4) changing the
timeframe used to determine compliance with the 75% rule from
“the most recent
12-month
cost reporting period” to “the most recent,
consecutive, and appropriate
12-month
period,” with the result that a determination of
non-compliance with the applicable compliance threshold will
affect the facility’s certification as an inpatient
rehabilitation facility for its cost reporting period that
begins immediately after the
12-month
review period.
Under the Deficit Reduction Act of 2005, enacted on
February 8, 2006, Congress extended the phase-in period for
the 75% rule by maintaining the compliance threshold at 60%
(rather than increasing it to the scheduled 65%) during the
12-month
period beginning on July 1, 2006. The compliance threshold
was then to increase to 65% for cost reporting periods beginning
on or after July 1, 2007 and again to 75% for cost
reporting periods beginning on or after July 1, 2008.
However, the SCHIP Extension Act included a permanent freeze in
the 75% rule patient classification criteria compliance
threshold at 60% (with comorbidities counting toward this
threshold) and a payment freeze from April 1, 2008 through
September 30, 2009.
Annual
Payment Rate Update
Fiscal Year 2009
. On August 8, 2008, CMS
published the final rule for IRF-PPS for fiscal year 2009
(affecting discharges and cost reporting periods beginning on
October 1, 2008 through September 30, 2009). The
standard payment conversion factor was established at $12,958
for fiscal year 2009, a decrease from $13,034 applicable to
discharges occurring on or after April 1, 2008. In addition
to updating the various values that compose the IRF-PPS, the
final rule increased the fiscal year 2009 outlier threshold
amount to $10,250 from $7,362 for fiscal year 2008. CMS also
updated the case-mix group relative weights and average length
of stay values.
Fiscal Year 2010
. On August 7, 2009, CMS
published its final rule establishing the annual payment rate
update for the IRF-PPS for fiscal year 2010 (affecting
discharges and cost reporting periods beginning on
October 1, 2009 through September 30, 2010). The
standard payment conversion factor was established at $13,661
for fiscal year 2010, an increase from $12,958 in fiscal year
2009. The proposed outlier threshold amount was set at $10,652,
an increase from $10,250 in fiscal year 2009. On July 22,
2010, CMS published a notice of changes to the payment rates for
IRF-PPS during the portion of fiscal year 2010 occurring 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 fiscal year 2010. The standard federal rate for
discharges occurring on or after April 1, 2010 was revised
to $13,627. This change reflects a decrease from $13,661
established in the original final rule for fiscal year 2010. In
the same notice, CMS increased the outlier threshold amount to
$10,721 for discharges occurring on or after April 1, 2010.
The outlier threshold was $10,652 for discharges occurring on or
after October 1, 2009 through March 31, 2010.
Fiscal Year 2011
. On July 22, 2010, CMS
published an update to the payment rates for IRF-PPS for fiscal
year 2011 (affecting discharges and cost reporting periods
beginning on or after October 1, 2010 through
September 30, 2011). The standard payment conversion factor
for discharges during fiscal year 2011 is revised to $13,860.
This change reflects an increase from $13,627 established in the
revised final rule for fiscal year 2010, and includes the market
basket reduction of 0.25% required by PPACA. CMS also increased
the outlier threshold amount for fiscal year 2011 to $11,410
from $10,721.
Medicare
Market Basket Adjustments
The PPACA 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%.
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Medicare
Reimbursement of Outpatient Rehabilitation
Services
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”) prevents 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. A reduction in the
Medicare Physician Fee Schedule payment rates will occur on
January 1, 2012, unless Congress again takes legislative
action to prevent the SGR formula reductions from going into
effect. 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 to annual limits for
therapy expenses. Effective January 1, 2011, the annual
limits on outpatient therapy services are $1,870 for combined
physical and speech language pathology services and $1,870 for
occupational therapy services. The per beneficiary caps were
$1,860 for calendar year 2010. These limits do not apply to
services furnished and billed by outpatient hospital
departments. We operated 944 outpatient rehabilitation clinics
at December 31, 2010, of which 93 are provider-based
outpatient rehabilitation clinics operated as departments of our
inpatient rehabilitation hospitals.
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
MMEA extends the exceptions process for outpatient therapy caps
through December 31, 2011. Unless Congress extends the
exceptions process, the therapy caps will apply to all
outpatient therapy services beginning January 1, 2012,
except those services furnished and billed by outpatient
hospital departments. In the 2011 final Medicare Physician Fee
Schedule rule CMS indicated they are also evaluating alternative
payment methodologies that would provide appropriate payment for
medically necessary and effective therapy services furnished to
Medicare beneficiaries based on patient needs rather than the
current therapy caps.
Multiple
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. Under the policy, as revised by
the Physician Payment and Therapy Relief Act of 2010, the
Medicare program will pay 100% of the practice expense component
of the therapy procedure or unit of service with the highest
Relative Value Unit (“RVU”), and then reduce payment
for the practice expense component by 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 by a single provider during the same day for the same
patient, regardless of whether those therapy services are
furnished in separate sessions. This policy is effective
January 1, 2011 and will apply to all outpatient therapy
services paid under Medicare Part B. Furthermore, the
multiple procedure payment reduction policy applies across all
therapy disciplines-occupational therapy, physical therapy, and
speech-language
pathology. Our outpatient rehabilitation therapy services are
offered in both office and other non-institutional settings and
institutional settings and, as such, are subject to the
applicable 20% or 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.
19
Other
Requirements for Payment
Historically, outpatient rehabilitation services have been
subject to scrutiny by the Medicare program for, among other
things, medical necessity for services, appropriate
documentation for services, supervision of therapy aides and
students and billing for single rather than group therapy when
services are furnished to more than one patient. CMS has issued
guidance to clarify that services performed by a student are not
reimbursed even if provided under “line of sight”
supervision of the therapist. Likewise, CMS has reiterated that
Medicare does not pay for services provided by aides regardless
of the level of supervision. CMS also has issued instructions
that outpatient physical and occupational therapy services
provided simultaneously to two or more individuals by a
practitioner should be billed as group therapy services.
Specialty
Hospital Medicaid Reimbursement
The Medicaid program is designed to provide medical assistance
to individuals unable to afford care. The program is governed by
the Social Security Act of 1965, funded jointly by each
individual state and the federal government, and administered by
state agencies. Medicaid payments are made under a number of
different systems, which include cost based reimbursement,
prospective payment systems or programs that negotiate payment
levels with individual hospitals. In addition, Medicaid programs
are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy by the state agencies and
certain government funding limitations, all of which may
increase or decrease the level of program payments to our
hospitals. Net operating revenues generated directly from the
Medicaid program represented approximately 4% of our specialty
hospital net operating revenues for the year ended
December 31, 2010.
Workers’
Compensation
Workers’ compensation is a state mandated, comprehensive
insurance program that requires employers to fund or insure
medical expenses, lost wages and other costs resulting from work
related injuries and illnesses. Workers’ compensation
benefits and arrangements vary on a
state-by-state
basis and are often highly complex. In some states, payment for
services covered by workers’ compensation programs are
subject to cost containment features, such as requirements that
all workers’ compensation injuries be treated through a
managed care program, or the imposition of payment caps. In
addition, these workers’ compensation programs may impose
requirements that affect the operations of our outpatient
rehabilitation services. Net operating revenues generated
directly from workers’ compensation programs represented
approximately 19% of our net operating revenue from outpatient
rehabilitation services and 1% of our net operating revenue from
our specialty hospitals for the year ended December 31,
2010.
Other
Medicare Regulations
Medicare
Quality Reporting
The PPACA requires that CMS establish new quality data reporting
programs for LTCHs and IRFs. By October 1, 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, its reimbursement will
be 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
fiscal years. CMS is required to establish the quality measures
applicable to fiscal year 2014 no later than October 1,
2012.
Medicare
Productivity Adjustment
PPACA implements a separate annual productivity adjustment for
the first time for hospital inpatient services beginning in
fiscal year 2012 for LTCHs and 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
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 each
20
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 general 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
CMS regulations included a number of hospital ownership and
physician referral provisions, including certain obligations
requiring physician-owned hospitals to disclose ownership or
investment interests held by immediate family members of a
referring physician. In particular, physician-owned hospitals
must furnish to patients, on request, a list of physicians or
immediate family members who own or invest in the hospital.
Moreover, a physician-owned hospital must require all physician
owners or investors who are also active members of the
hospital’s medical staff to disclose in writing their
ownership or investment interests in the hospital to all
patients they refer to the hospital. CMS can terminate the
Medicare provider agreement of a physician-owned hospital if it
fails to comply with these disclosure provisions or with the
requirement that a hospital disclose in writing to all patients
whether there is a physician
on-site
at
the hospital 24 hours per day, seven days per week.
Under the transparency and program integrity provisions of the
PPACA, the exception to the federal self-referral law (or
“Stark law”) that permits physicians to refer patients
to hospitals in which they have an ownership or investment
interest has been 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. 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. As of December 31,
2010, we operated ten hospitals that are owned in-part by
physicians.
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
21
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 history of patient or resident abuse.
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 program has been
extended to Medicare Parts C and D and Medicaid.
Other
Healthcare Regulations
Medicare Recovery Audit Contractors.
The Tax
Relief and Health Care Act of 2006 instructed CMS to contract
with third-party organizations, known as Recovery Audit
Contracts (“RACs”), to identify Medicare underpayments
and overpayments, and to authorize RACs to recoup any
overpayments. The compensation paid to each RAC is based on a
percentage of overpayment recoveries identified by the RAC. CMS
has selected and entered into contracts with four RACs, each of
which has begun their audit activities in specific
jurisdictions. RAC audits of our Medicare reimbursement may lead
to assertions that we have been overpaid, require us to incur
additional costs to respond to requests for records and pursue
the reversal of payment denials, and ultimately require us to
refund any amounts determined to have been overpaid. We cannot
predict the impact of future RAC reviews on our results of
operations or cash flows.
Fraud and Abuse Enforcement.
Various federal
and state laws prohibit the submission of false or fraudulent
claims, including claims to obtain payment under Medicare,
Medicaid and other government healthcare programs. Penalties for
violation of these laws include civil and criminal fines,
imprisonment and exclusion from participation in federal and
state healthcare programs. In recent years, federal and state
government agencies have increased the level of enforcement
resources and activities targeted at the healthcare industry. In
addition, the federal False Claims Act and similar state
statutes allow individuals to bring lawsuits on behalf of the
government, in what are known as qui tam or
“whistleblower” actions, alleging false or fraudulent
Medicare or Medicaid claims or other violations of the statute.
The use of these private enforcement actions against healthcare
providers has increased dramatically in recent years, in part
because the individual filing the initial complaint is entitled
to share in a portion of any settlement or judgment. Revisions
to the False Claims Act enacted in 2009 expanded significantly
the scope of liability, provided for new investigative tools,
and made it easier for whistleblowers to bring and maintain
False Claims Act suits on behalf of the government. See
“— Legal Proceedings.”
From time to time, various federal and state agencies, such as
the Office of the Inspector General of the Department of Health
and Human Services, issue a variety of pronouncements, including
fraud alerts, the Office of Inspector General’s Annual Work
Plan and other reports, identifying practices that may be
subject to heightened scrutiny. These pronouncements can
identify issues relating to long term acute care hospitals,
inpatient rehabilitation facilities or outpatient rehabilitation
services or providers. For example, the Office of Inspector
General’s 2009 Work Plan announced an interest in reviewing
Medicare bad debts claimed by inpatient rehabilitation
facilities and long term acute care hospitals in order to
determine whether such claims were reimbursable. The 2010 and
2011 Work Plans identified as an area of concern whether the
patient assessments instruments prepared by inpatient
rehabilitation facilities were submitted in accordance with
Medicare regulations. Among other things, the 2011 Work Plan
indicated that CMS would review the appropriateness of
provider-based designations for outpatient clinics, outlier
payments made to hospitals for beneficiaries who incur unusually
high costs, and the effectiveness of a claims processing edit
designed to capture hospital readmissions that are subject to a
single payment for both
22
inpatient stays. We monitor government publications applicable
to us to supplement and enhance our compliance efforts.
We endeavor to conduct our operations in compliance with
applicable laws, including healthcare fraud and abuse laws. If
we identify any practices as being potentially contrary to
applicable law, we will take appropriate action to address the
matter, including, where appropriate, disclosure to the proper
authorities, which may result in a voluntary refund of monies to
Medicare, Medicaid or other governmental healthcare programs.
Remuneration and Fraud Measures.
The federal
anti-kickback statute prohibits some business practices and
relationships under Medicare, Medicaid and other federal
healthcare programs. These practices include the payment,
receipt, offer or solicitation of remuneration in connection
with, to induce, or to arrange for, the referral of patients
covered by a federal or state healthcare program. Violations of
the anti-kickback law may be punished by a criminal fine of up
to $50,000 or imprisonment for each violation, or both, civil
monetary penalties of $50,000 and damages of up to three times
the total amount of remuneration, and exclusion from
participation in federal or state healthcare programs.
The Stark Law prohibits referrals for designated health services
by physicians under the Medicare and Medicaid programs to other
healthcare providers in which the physicians have an ownership
or compensation arrangement unless an exception applies.
Sanctions for violating the Stark Law include civil monetary
penalties of up to $15,000 per prohibited service provided,
assessments equal to three times the dollar value of each such
service provided and exclusion from the Medicare and Medicaid
programs and other federal and state healthcare programs. The
statute also provides a penalty of up to $100,000 for a
circumvention scheme. In addition, many states have adopted or
may adopt similar anti-kickback or anti-self-referral statutes.
Some of these statutes prohibit the payment or receipt of
remuneration for the referral of patients, regardless of the
source of the payment for the care. While we do not believe our
arrangements are in violation of these prohibitions, we cannot
assure you that governmental officials charged with the
responsibility for enforcing the provisions of these
prohibitions will not assert that one or more of our
arrangements are in violation of the provisions of such laws and
regulations.
Provider-Based Status.
The designation
“provider-based” refers to circumstances in which a
subordinate facility (e.g., a separately certified Medicare
provider, a department of a provider or a satellite facility) is
treated as part of a provider for Medicare payment purposes. In
these cases, the services of the subordinate facility are
included on the “main” provider’s cost report and
overhead costs of the main provider can be allocated to the
subordinate facility, to the extent that they are shared. We
operate 17 specialty hospitals that are treated as
provider-based satellites of certain of our other facilities, 93
of our outpatient rehabilitation clinics were provider-based and
are operated as departments of our inpatient rehabilitation
facilities, and we provide rehabilitation management and
staffing services to hospital rehabilitation departments that
may be treated as provider-based. These facilities are required
to satisfy certain operational standards in order to retain
their provider-based status.
Health Information Practices.
The Health
Insurance Portability and Accountability Act of 1996 or
“HIPAA” mandates the adoption of standards for the
exchange of electronic health information in an effort to
encourage overall administrative simplification and enhance the
effectiveness and efficiency of the healthcare industry, while
maintaining the privacy and security of health information.
Among the standards that the Department of Health and Human
Services has adopted or will adopt pursuant to the Health
Insurance Portability and Accountability Act of 1996 are
standards for electronic transactions and code sets, unique
identifiers for providers (referred to as National Provider
Identifier), employers, health plans and individuals, security
and electronic signatures, privacy and enforcement. If we fail
to comply with the HIPAA requirements, we could be subject to
criminal penalties and civil sanctions. The privacy, security
and enforcement provisions of HIPAA were enhanced by the Health
Information Technology for Economic and Clinical Health Act, or
“HITECH,” which was included in the ARRA. Among other
things, HITECH establishes security breach notification
requirements, allows enforcement of HIPAA by state attorneys
general, and increases penalties for HIPAA violations.
The Department of Health and Human Services has adopted
standards in three areas in which we are required to comply that
most affect our operations.
23
Standards relating to the privacy of individually identifiable
health information govern our use and disclosure of protected
health information and require us to impose those rules, by
contract, on any business associate to whom such information is
disclosed.
Standards relating to electronic transactions and code sets
require the use of uniform standards for common healthcare
transactions, including healthcare claims information, plan
eligibility, referral certification and authorization, claims
status, plan enrollment and disenrollment, payment and
remittance advice, plan premium payments and coordination of
benefits.
Standards for the security of electronic health information
require us to implement various administrative, physical and
technical safeguards to ensure the integrity and confidentiality
of electronic protected health information.
We maintain a HIPAA committee that is charged with evaluating
and monitoring our compliance with the Health Insurance
Portability and Accountability Act of 1996. The HIPAA committee
monitors regulations promulgated under HIPAA as they have been
adopted to date and as additional standards and modifications
are adopted. Although health information standards have had a
significant effect on the manner in which we handle health data
and communicate with payors, the cost of our compliance has not
had a material adverse effect on our business, financial
condition or results of operations. We cannot estimate the cost
of compliance with standards that have not been issued or
finalized by the Department of Health and Human Services.
In addition to HIPAA, there are numerous federal and state laws
and regulations addressing patient and consumer privacy
concerns, including unauthorized access or theft of personal
information. State statutes and regulations vary from state to
state. Lawsuits, including class actions and action by state
attorneys general, directed at companies that have experienced a
privacy or security breach also can occur. Although our policies
and procedures are aimed at complying with privacy and security
requirements and minimizing the risks of any breach of privacy
or security, there can be no assurance that a breach of privacy
or security will not occur. If there is a breach, we may be
subject to various penalties and damages and may be required to
incur costs to mitigate the impact of the breach on affected
individuals.
Compliance
Program
Our
Compliance Program
In late 1998, we voluntarily adopted our code of conduct. The
code is reviewed and amended as necessary and is the basis for
our company-wide compliance program. Our written code of conduct
provides guidelines for principles and regulatory rules that are
applicable to our patient care and business activities. These
guidelines are implemented by a compliance officer, a compliance
committee, and employee education and training. We also have
established a reporting system, auditing and monitoring
programs, and a disciplinary system as a means for enforcing the
code’s policies.
Operating
Our Compliance Program
We focus on integrating compliance responsibilities with
operational functions. We recognize that our compliance with
applicable laws and regulations depends upon individual employee
actions as well as company operations. As a result, we have
adopted an operations team approach to compliance. Our corporate
executives, with the assistance of corporate experts, designed
the programs of the compliance committee. We utilize facility
leaders for employee-level implementation of our code of
conduct. This approach is intended to reinforce our company-wide
commitment to operate in accordance with the laws and
regulations that govern our business.
Compliance
Committee
Our compliance committee is made up of members of our senior
management and in-house counsel. The compliance committee meets
on a quarterly basis and reviews the activities, reports and
operation of our compliance program. In addition, the HIPAA
committee meets on a regular basis to review compliance with
regulations promulgated under HIPAA, including amendments made
by HITECH, and provides reports to the
24
compliance committee. The vice president of compliance and audit
services meets with the audit committee on a quarterly basis to
provide an overview of the activities and operation of our
compliance program.
Compliance
Issue Reporting
In order to facilitate our employees’ ability to report
known, suspected or potential violations of our code of conduct,
we have developed a system of anonymous reporting. This
anonymous reporting may be accomplished through our toll free
compliance hotline, compliance
e-mail
address or our compliance post office box. The compliance
officer and the compliance committee are responsible for
reviewing and investigating each compliance incident in
accordance with the compliance department’s investigation
policy.
Compliance
Monitoring and Auditing / Comprehensive Training and
Education
Monitoring reports and the results of compliance for each of our
business segments are reported to the compliance committee on a
quarterly basis. We train and educate our employees regarding
the code of conduct, as well as the legal and regulatory
requirements relevant to each employee’s work environment.
New and current employees are required to acknowledge and
certify that the employee has read, understood and has agreed to
abide by the code of conduct. Additionally, all employees are
required to re-certify compliance with the code on an annual
basis.
Policies
and Procedures Reflecting Compliance Focus Areas
We review our policies and procedures for our compliance program
from time to time in order to improve operations and to ensure
compliance with requirements of standards, laws and regulations
and to reflect the ongoing compliance focus areas which have
been identified by the compliance committee.
Internal
Audit
In addition to and in support of the efforts of our compliance
department, during 2001 we established an internal audit
function. The vice president of compliance and audit services
manages the combined Compliance and Audit Department and meets
with the audit committee of the board of directors on a
quarterly basis to discuss audit results.
Available
Information
We are subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, file periodic reports, proxy statements
and other information with the SEC. Such periodic reports, proxy
statements and other information is available for inspection and
copying at the SEC’s Public Reference Room at
100 F Street, NE., Washington, DC 20549, or may be
obtained by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains a website at
http://www.sec.gov
that contains reports, proxy statements and other information
regarding issuers that file electronically with the SEC.
Our website address is
http://www.selectmedicalholdings.com
and can be used to access free of charge, through the investor
relations section, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with or
furnish it to the SEC. The information on our website is not
incorporated as a part of this annual report.
25
Executive
Officers
The following table sets forth the names, ages and titles, as
well as a brief account of the business experience, of each
person who was an executive officer of the Company as of
December 31, 2010:
|
Name
|
Age
|
Position
|
||||
|
Rocco A. Ortenzio
|
78 | Executive Chairman | ||||
|
Robert A. Ortenzio
|
53 | Chief Executive Officer | ||||
|
Patricia A. Rice
|
64 | President and Chief Operating Officer | ||||
|
David S. Chernow
|
54 | President and Chief Development and Strategy Officer | ||||
|
Martin F. Jackson
|
56 | Executive Vice President and Chief Financial Officer | ||||
|
John A. Saich
|
42 | Executive Vice President and Chief Human Resources Officer | ||||
|
James J. Talalai
|
49 | Executive Vice President and Chief Information Officer | ||||
|
Michael E. Tarvin
|
50 | Executive Vice President, General Counsel and Secretary | ||||
|
Scott A. Romberger
|
50 | Senior Vice President, Controller and Chief Accounting Officer | ||||
|
Robert G. Breighner, Jr.
|
42 | Vice President, Compliance and Audit Services and Corporate Compliance Officer | ||||
Rocco A. Ortenzio
co-founded our company and he served as
Chairman and Chief Executive Officer of Select from February
1997 until September 2001. Mr. Ortenzio has served as
Executive Chairman of Select since September 2001 and Holdings
since February 2005. He became a director of Holdings on
February 24, 2005. In 1986, he co-founded Continental
Medical Systems, Inc., and served as its Chairman and Chief
Executive Officer until July 1995. In 1979, Mr. Ortenzio
founded Rehab Hospital Services Corporation, and served as its
Chairman and Chief Executive Officer until June 1986. In 1969,
Mr. Ortenzio founded Rehab Corporation and served as its
Chairman and Chief Executive Officer until 1974.
Mr. Ortenzio is the father of Robert A. Ortenzio, our Chief
Executive Officer.
Robert A. Ortenzio
co-founded our company and has served
as a director of Select since February 1997. He became a
director of Holdings on February 24, 2005.
Mr. Ortenzio has served as our Chief Executive Officer
since January 1, 2005 and as our President and Chief
Executive Officer from September 2001 to January 1, 2005.
Mr. Ortenzio also served as our President and Chief
Operating Officer from February 1997 to September 2001. He was
an Executive Vice President and a director of Horizon/CMS
Healthcare Corporation from July 1995 until July 1996. In 1986,
Mr. Ortenzio co-founded Continental Medical Systems, Inc.,
and served in a number of different capacities, including as a
Senior Vice President from February 1986 until April 1988, as
Chief Operating Officer from April 1988 until July 1995, as
President from May 1989 until August 1996 and as Chief Executive
Officer from July 1995 until August 1996. Before co-founding
Continental Medical Systems, Inc., he was a Vice President of
Rehab Hospital Services Corporation. Until August 17, 2010,
Mr. Ortenzio served on the board of directors of Odyssey
Healthcare, Inc., a hospice healthcare company.
Mr. Ortenzio also served on the board of directors of
US Oncology, Inc. until December 30, 2010.
Mr. Ortenzio is the son of Rocco A. Ortenzio, our Executive
Chairman.
Patricia A. Rice
has served as our President and Chief
Operating Officer since January 1, 2005. Prior to this, she
served as our Executive Vice President and Chief Operating
Officer since January 2002 and as our Executive Vice President
of Operations from November 1999 to January 2002. She served as
Senior Vice President of Hospital Operations from December 1997
to November 1999. She was Executive Vice President of the
Hospital Operations Division for Continental Medical Systems,
Inc. from August 1996 until December 1997. Prior to that time,
she served in various management positions at Continental
Medical Systems, Inc. from 1987 to 1996.
David S. Chernow
has served as our President and Chief
Development and Strategy Officer since September 13, 2010.
Mr. Chernow served as a director of Select from January
2002 until February 24, 2005, and served as a director of
Holdings from August 2005 to September 13, 2010. From May
2007 to February 2010, Mr. Chernow served as the President
and Chief Executive Officer of Oncure Medical Corp., one of the
largest providers of free-
26
standing radiation oncology care in the United States. From
January 2004 to June 2007, Mr. Chernow served as the
President and Chief Executive Officer of JA Worldwide, a
nonprofit organization dedicated to the education of young
people about business. From July 2001 to January 2004, he served
as the President and Chief Executive Officer of Junior
Achievement, Inc., a predecessor of JA Worldwide. From 1999 to
2001, he was the President of the Physician Services Group at US
Oncology, Inc. Mr. Chernow co-founded American Oncology
Resources in 1992 and served as its Chief Development Officer
until the time of the merger with Physician Reliance Network,
Inc., which created US Oncology, Inc. in 1999.
Martin F. Jackson
has served as our Executive Vice
President and Chief Financial Officer since February 2007. He
served as our Senior Vice President and Chief Financial Officer
from May 1999 to February 2007. Mr. Jackson previously
served as a Managing Director in the Health Care Investment
Banking Group for CIBC Oppenheimer from January 1997 to May
1999. Prior to that time, he served as Senior Vice President,
Health Care Finance with McDonald & Company
Securities, Inc. from January 1994 to January 1997. Prior to
1994, Mr. Jackson held senior financial positions with Van
Kampen Merritt, Touche Ross, Honeywell and L’Nard
Associates. Mr. Jackson also serves as a director of
several private companies.
John A. Saich
has served as out Executive Vice President
and Chief Human Resources Officer since December 15, 2010.
He served as our Senior Vice President, Human Resources from
February 2007 to December 2010. He served as our Vice President,
Human Resources from November 1999 to January 2007. He joined
Select as Director, Human Resources and HRIS in February 1998.
Previously, Mr. Saich served as Director of Benefits and
Human Resources for Integrated Health Services in 1997 and as
Director of Human Resources for Continental Medical Systems,
Inc. from August 1993 to January 1997.
James J. Talalai
has served as our Executive Vice
President and Chief Information Officer since February 2007. He
served as our Senior Vice President and Chief Information
Officer from August 2001 to February 2007. He joined our company
in May 1997 and served in various leadership capacities within
Information Services. Before joining us, Mr. Talalai was
Director of Information Technology for Horizon/ CMS Healthcare
Corporation from 1995 to 1997. He also served as Data Center
Manager at Continental Medical Systems, Inc. in the mid-1990s.
During his career, Mr. Talalai has held development
positions with PHICO Insurance Company and with Harrisburg
HealthCare.
Michael E. Tarvin
has served as our Executive Vice
President, General Counsel and Secretary since February 2007. He
served as our Senior Vice President, General Counsel and
Secretary from November 1999 to February 2007. He served as our
Vice President, General Counsel and Secretary from February 1997
to November 1999. He was Vice President — Senior
Counsel of Continental Medical Systems from February 1993 until
February 1997. Prior to that time, he was Associate Counsel of
Continental Medical Systems from March 1992. Mr. Tarvin was
an associate at the Philadelphia law firm of Drinker
Biddle & Reath, LLP from September 1985 until March
1992.
Scott A. Romberger
has served as our Senior Vice
President and Controller since February 2007. He served as our
Vice President and Controller from February 1997 to February
2007. In addition, he has served as our Chief Accounting Officer
since December 2000. Prior to February 1997, he was Vice
President — Controller of Continental Medical Systems
from January 1991 until January 1997. Prior to that time, he
served as Acting Corporate Controller and Assistant Controller
of Continental Medical Systems from June 1990 and December 1988,
respectively. Mr. Romberger is a certified public
accountant and was employed by a national accounting firm from
April 1985 until December 1988.
Robert G. Breighner, Jr.
has served as our Vice
President, Compliance and Audit Services since August 2003. He
served as our Director of Internal Audit from November 2001 to
August 2003. Previously, Mr. Breighner was Director of
Internal Audit for Susquehanna Pfaltzgraff Co. from June 1997
until November 2001. Mr. Breighner held other positions
with Susquehanna Pfaltzgraff Co. from May 1991 until June 1997.
27
| Item 1A. | Risk Factors. |
In addition to the factors discussed elsewhere in this
Form 10-K,
the following are important factors which could cause actual
results or events to differ materially from those contained in
any forward-looking statements made by or on behalf of us.
If
there are changes in the rates or methods of government
reimbursements for our services, our net operating revenues and
profitability could decline.
Approximately 47% of our net operating revenues for the years
ended December 31, 2009 and 2010 came from the highly
regulated federal Medicare program. In recent years, through
legislative and regulatory actions, the federal government has
made substantial changes to various payment systems under the
Medicare program. President Obama has signed into law
comprehensive reforms to the healthcare system, including
changes to the methods for, and amounts of, Medicare
reimbursement. Additional reforms or other changes to these
payment systems, including modifications to the conditions on
qualification for payment, bundling payments to cover both acute
and post-acute care or the imposition of enrollment limitations
on new providers, may be proposed or could be adopted, either by
the U.S. Congress or by the Centers for
Medicare & Medicaid Services, or “CMS.” If
revised regulations are adopted, the availability, methods and
rates of Medicare reimbursements for services of the type
furnished at our facilities could change. Some of these changes
and proposed changes could adversely affect our business
strategy, operations and financial results. In addition, there
can be no assurance that any increases in Medicare reimbursement
rates established by CMS will fully reflect increases in our
operating costs.
We
conduct business in a heavily regulated industry, and changes in
regulations, new interpretations of existing regulations or
violations of regulations may result in increased costs or
sanctions that reduce our net operating revenues and
profitability.
The healthcare industry is subject to extensive federal, state
and local laws and regulations relating to:
| • | facility and professional licensure, including certificates of need; | |
| • | conduct of operations, including financial relationships among healthcare providers, Medicare fraud and abuse and physician self-referral; | |
| • | addition of facilities and services and enrollment of newly developed facilities in the Medicare program; | |
| • | payment for services; and | |
| • | safeguarding protected health information. |
Both federal and state regulatory agencies inspect, survey and
audit our facilities to review our compliance with these laws
and regulations. While our facilities intend to comply with
existing licensing, Medicare certification requirements and
accreditation standards, there can be no assurance that these
regulatory authorities will determine that all applicable
requirements are fully met at any given time. In recent years,
some regulatory agencies inspecting our facilities have applied
these requirements and standards more strictly. A determination
by any of these regulatory authorities 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 an adverse effect on our company.
In addition, there have been heightened coordinated civil and
criminal enforcement efforts by both federal and state
government agencies relating to the healthcare industry. The
ongoing investigations relate to, among other things, various
referral practices, cost reporting, billing practices, physician
ownership and joint ventures involving hospitals. In the future,
different interpretations or enforcement of these laws and
regulations could subject us to allegations of impropriety or
illegality or could require us to make changes in our
facilities, equipment, personnel, services and capital
expenditure programs. These changes may increase our operating
expenses and reduce our operating revenues. If we fail to comply
with these extensive laws and government regulations, we could
become ineligible to receive government program reimbursement,
suffer civil or criminal penalties or be required to make
significant changes to our operations. In addition, we could be
forced to expend considerable resources responding to any
related investigation or other enforcement action.
28
During July 2009, we received a subpoena from the Office of
Inspector General of the U.S. Department of Health and
Human Services seeking various documents concerning our
financial relationships with certain physicians practicing at
our hospitals in Columbus, Ohio. We understand that the subpoena
was issued in connection with a qui tam lawsuit and that the
government has been investigating the matter to determine
whether to intervene. We have produced documents in response to
the subpoena and have fully cooperated with the
government’s investigation. We are in discussions with the
government to attempt to resolve this matter in a manner
satisfactory to us and the government. Any settlement is not
expected to be material to our financial position.
Expiration
of the moratorium imposed on certain federal regulations
otherwise applicable to long term acute care hospitals operated
as “hospitals within hospitals” or as
“satellites” will have an adverse effect on our future
net operating revenues and profitability.
Effective for hospital cost reporting periods beginning on or
after October 1, 2004, long term acute care hospitals that
are operated as “hospitals within hospitals” (HIHs) or
as HIH “satellites,” are subject to a payment
reduction for those Medicare patients admitted from their host
hospitals that are in excess of a specified percentage
threshold. These HIHs and their HIH satellites are separate
hospitals located in space leased from, or located on the same
campus of, another hospital, which we refer to as
“host” hospitals. For HIHs opened after
October 1, 2004, the Medicare admissions threshold has been
established at 25% except for HIHs located in rural areas or
co-located with an MSA dominant hospital or single urban
hospital (as defined by the current regulations) in which cases
the percentage is no more than 50%, nor less than 25%. Certain
grandfathered HIHs were initially excluded from the Medicare
admission threshold in the rate year 2005 final regulations.
Grandfathered HIHs refer to certain HIHs that were in existence
on or before September 30, 1995, and grandfathered
satellite facilities refer to satellites of grandfathered HIHs
that were in existence on or before September 30, 1999.
The Medicare, Medicaid, and SCHIP Extension Act of 2007, or the
“SCHIP Extension Act,” (as amended by the American
Recovery and Reinvestment Act, the “ARRA” and the
Patient Protection and Affordable Care Act, the
“PPACA”) has limited the application of the Medicare
admission threshold on HIHs in existence on October 1,
2004. For these HIHs, the admission threshold is no lower than
50% for a five year period to commence on a long term acute care
hospital’s, or “LTCH’s,” first cost
reporting period to begin on or after October 1, 2007.
Under the SCHIP Extension Act, for HIHs located in rural areas
the percentage threshold is no more than 75% for the same five
year period. For HIHs that are co-located with MSA dominant
hospitals or single urban hospitals, the percentage threshold is
no more than 75% during the same five year period or the
percentage of total Medicare discharges in the MSA in which the
hospital is located that are from the co-located hospital.
As of December 31, 2010, we owned 81 LTCH HIHs; six of
these HIHs were subject to a maximum 25% Medicare admission
threshold, one HIH is co-located with an MSA dominant hospital
and is subject to a Medicare admission threshold of no more than
50%, nor less than 25%, 23 of these HIHs were co-located with a
MSA dominate hospital or single urban hospital and were subject
to a Medicare admission threshold of no more than 75%, 47 of
these HIHs were subject to a maximum 50% Medicare admissions
threshold, two of these HIHs were located in a rural area and
were subject to a maximum 75% Medicare admission threshold, and
two of these HIHs were grandfathered HIHs and not subject to a
Medicare admission threshold.
Because these rules are complex and are based on the volume of
Medicare admissions from our host hospitals as a percent of our
overall Medicare admissions, we cannot predict with any
certainty the impact on our future net operating revenues of
compliance with these regulations. However, after the expiration
of the five year moratorium provided by the SCHIP Extension Act,
as amended by the PPACA, we expect many of our HIHs will
experience an adverse financial impact beginning for their cost
reporting periods on or after October 1, 2012, when the
Medicare admissions thresholds decline to 25%.
29
Expiration
of the moratorium imposed on certain federal regulations
otherwise applicable to long term acute care hospitals operated
as free-standing or grandfathered “hospitals within
hospitals” or grandfathered “satellites” will
have an adverse effect on our future net operating revenues and
profitability.
For cost reporting periods beginning on or after July 1,
2007, CMS expanded the current Medicare HIH admissions threshold
to apply to Medicare patients admitted from any individual
hospital. Previously, the admissions threshold was applicable
only to Medicare HIH admissions from hospitals co-located with
an LTCH or satellite of an LTCH. Under the rate year 2008 final
rule, free-standing LTCHs and grandfathered LTCH HIHs are
subject to the Medicare admission thresholds, as well as HIHs
that admit Medicare patients from non-co-located hospitals. To
the extent that any LTCH’s or LTCH satellite
facility’s discharges that are admitted from an individual
hospital (regardless of whether the referring hospital is
co-located with the LTCH or LTCH satellite) exceed the
applicable percentage threshold during a particular cost
reporting period, the payment rate for those discharges is
subject to a downward payment adjustment. Cases admitted in
excess of the applicable threshold are reimbursed at a rate
comparable to that under general acute care inpatient
prospective payment system, or “IPPS.” IPPS rates are
generally lower than LTCH-PPS rates. Cases that reach outlier
status in the discharging hospital do not count toward the limit
and are paid under LTCH-PPS.
The SCHIP Extension Act, as amended, postponed the application
of the percentage threshold to free-standing LTCHs and
grandfathered HIHs for a five year period commencing on an
LTCH’s first cost reporting period on or after July 1,
2007. However, the SCHIP Extension Act did not postpone the
application of the percentage threshold, or the transition
period stated above, to Medicare patients discharged from an
LTCH HIH or HIH satellite that were admitted from a
non-co-located hospital. In addition, the SCHIP Extension Act,
as interpreted by CMS, did not provide relief from the
application of the threshold for patients admitted from a
co-located hospital to certain non-grandfathered HIHs. The ARRA
limits application of the admission threshold to no more than
50% of Medicare admission to grandfathered satellites from a
co-located hospital for a five year period commencing on the
first cost reporting period beginning on or after July 1,
2007.
Of the 110 long term acute care hospitals we owned as of
December 31, 2010, 29 were operated as free-standing
hospitals and two qualified as grandfathered LTCH HIHs. Because
these rules are complex and are based on the volume of Medicare
admissions from other referring hospitals as a percent of our
overall Medicare admissions, we cannot predict with any
certainty the impact on our future net operating revenues of
compliance with these regulations. However, if the rate year
2008 final rule is applied as currently written, there will be
an adverse financial impact to the net operating revenues and
profitability of many of these hospitals for cost reporting
periods on or after July 1, 2012 when the Medicare
admissions thresholds go into effect for free-standing hospitals.
The
moratorium on the Medicare certification of new long term care
hospitals and beds in existing long term care hospitals will
limit our ability to increase long term acute care hospital bed
capacity and expand into new areas.
The SCHIP Extension Act, as amended by the PPACA, imposed a five
year moratorium beginning on December 29, 2007 on the
establishment and classification of new LTCHs, LTCH satellite
facilities and LTCH beds in existing LTCH or satellite
facilities. The moratorium does not apply to LTCHs that, before
December 29, 2007, (1) began the qualifying period for
payment under the LTCH-PPS, (2) had a written agreement
with an unrelated party for the construction, renovation, lease
or demolition for a LTCH and had expended at least 10% of the
estimated cost of the project or $2,500,000 or (3) had
obtained an approved certificate of need. The moratorium also
does not apply to an increase in beds in an existing hospital or
satellite facility if the LTCH is located in a state where there
is only one other LTCH and the LTCH requests an increase in beds
following the closure or the decrease in the number of beds of
the other LTCH. Since we may still acquire LTCHs that were in
existence prior to December 29, 2007, we do not expect this
moratorium to materially impact our strategy to expand by
acquiring additional LTCHs if such LTCHs can be acquired at
attractive valuations. This moratorium, however, may still
otherwise adversely affect our ability to increase long term
acute care bed capacity in existing areas we serve or expand
into new areas.
30
Expiration
of the moratorium imposed on the payment adjustment for very
short-stay cases in our long term acute care hospitals will
reduce our future net operating revenues and
profitability.
The rate year 2008 final rule changed the payment methodology
for Medicare patients with a length of stay that is less than
the average length of stay plus one standard deviation for the
same Medicare severity diagnosis-related group, or
“MS-DRG,” under IPPS, referred to as the so-called
“IPPS comparable threshold.” Beginning with discharges
on or after July 1, 2007, for these very short-stay cases,
the rule lowered the LTCH payment to a rate based on the general
acute care hospital IPPS per diem. SSO cases with covered
lengths of stay that exceed the IPPS comparable threshold would
continue to be paid under the existing short-stay payment
policy. The SCHIP Extension Act prevented CMS from applying this
change to short-stay outlier policy for a period of three years.
The PPACA extends this prohibition by two years. CMS may not
apply the very short-stay outlier policy before
December 29, 2012. The implementation of the payment
methodology for very short-stay outliers discharged after
December 29, 2012 will reduce our future net operating
revenues and profitability.
If our
long term acute care hospitals fail to maintain their
certifications as long term acute care hospitals or if our
facilities operated as HIHs fail to qualify as hospitals
separate from their host hospitals, our net operating revenues
and profitability may decline.
We operate 111 long term acute care hospitals, all of which are
currently certified by Medicare as long term acute care
hospitals. Long term acute care hospitals must meet certain
conditions of participation to enroll in, and seek payment from,
the Medicare program as a long term acute care hospital,
including, among other things, maintaining an average length of
stay for Medicare patients in excess of 25 days. Similarly,
our HIHs must meet conditions of participation in the Medicare
program, which include additional criteria establishing
separateness from the hospital with which the HIH shares space.
If our long term acute care hospitals or HIHs fail to meet or
maintain the standards for certification as long term acute care
hospitals, they will receive payment under the general acute
care hospitals IPPS which is generally lower than payment under
the system applicable to long term acute care hospitals.
Payments at rates applicable to general acute care hospitals
would result in our long term acute care hospitals receiving
significantly less Medicare reimbursement than they currently
receive for their patient services.
Implementation
of additional patient or facility criteria for LTCHs that limit
the population of patients eligible for our hospitals’
services or change the basis on which we are paid could
adversely affect our net operating revenue and
profitability.
CMS and industry stakeholders have, for a number of years,
explored the development of facility and patient certification
criteria for LTCHs, potentially as an alternative to the current
specific payment adjustment features of LTCH-PPS. In its June
2004 report to Congress, the Medicare Payment Advisory
Commission recommended the adoption by CMS of new facility
staffing and services criteria and patient clinical
characteristics and treatment requirements for LTCHs in order to
ensure that only appropriate patients are admitted to these
facilities. The Medicare Payment Advisory Commission is an
independent federal body that advises Congress on issues
affecting the Medicare program. After the Medicare Payment
Advisory Commission’s recommendation, CMS awarded a
contract to Research Triangle Institute International to examine
such recommendation. However, while acknowledging that Research
Triangle Institute International’s findings are expected to
have a substantial impact on future Medicare policy for LTCHs,
CMS stated in the rate year 2007 final rule that many of the
specific payment adjustment features of LTCH-PPS then in place
may still be necessary and appropriate even with the development
of patient- and facility-level criteria for LTCHs. In the
preamble to the rate year 2009 LTCH-PPS proposed rule, CMS
indicated that Research Triangle Institute International
continues to work with the clinical community to make
recommendations to CMS regarding payment and treatment of
critically ill patients in LTCHs. The SCHIP Extension Act
requires the Secretary of the Department of Health and Human
Services to conduct a study and submit a report to Congress on
the establishment of national LTCH facility and patient criteria
and to consider the recommendations contained in the Medicare
Payment Advisory Commission’s June 2004 report to Congress.
Implementation of additional criteria that may limit the
population of patients eligible for our long term acute care
hospitals’ services or change the basis on which we are
paid could adversely affect our net operating revenues and
31
profitability. See “Business — Government
Regulations — Overview of U.S. and State
Government Reimbursements — Long Term Acute Care
Hospital Medicare Reimbursement.”
Decreases
in Medicare reimbursement rates received by our outpatient
rehabilitation clinics, implementation of annual caps, and
payment reductions applied to the second and subsequent therapy
services may reduce our future net operating revenues and
profitability.
Our outpatient rehabilitation clinics receive payments from the
Medicare program under a 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 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. If no further legislation is passed by Congress and signed
by the President, the SGR formula will likely reduce our
Medicare outpatient rehabilitation payment rates beginning
January 1, 2012.
Congress has established annual caps that limit the amount that
can be paid (including deductible and coinsurance amounts) for
outpatient therapy services rendered to any Medicare
beneficiary. As directed by Congress in the Deficit Reduction
Act of 2005, CMS implemented an exception process for therapy
expenses incurred in 2006. Under this process, a Medicare
enrollee (or person acting on behalf of the Medicare enrollee)
was able to request an exception from the therapy caps if the
provision of therapy services was deemed to be medically
necessary. Therapy cap exceptions were available automatically
for certain conditions and on a
case-by-case
basis upon submission of documentation of medical necessity. The
exception process has been extended by Congress several times.
Most recently, the MMEA extended the exception process through
December 31, 2011. The exception process will expire on
January 1, 2012 unless further extended by Congress. There
can be no assurance that Congress will extend it further. To
date, the implementation of the therapy caps has not had a
material adverse effect on our business. However, if the
exception process is not renewed, our future net operating
revenues and profitability may decline.
CMS adopted a multiple procedure payment reduction for therapy
services in the final update to the Medicare Physician Fee
Schedule for calendar year 2011. Under the policy, as revised by
the Physician Payment and Therapy Relief Act of 2010, the
Medicare program will pay 100% of the practice expense component
of the therapy procedure or unit of service with the highest
Relative Value Unit (“RVU”), and then reduce payment
for the practice expense component by 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 by a single provider during the same day for the same
patient, regardless of whether those therapy services are
furnished in separate sessions. This policy is effective
January 1, 2011 and will apply to all outpatient therapy
services paid under Medicare Part B. Furthermore, the
multiple procedure payment reduction policy applies across all
therapy disciplines-occupational therapy, physical therapy, and
speech-language
pathology. Our outpatient rehabilitation therapy services are
offered in both office and other non-institutional settings and
institutional settings and, as such, are subject to the
applicable 20% or 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. For both
the years ended December 31, 2009 and December 31,
2010, we received approximately 10% of our outpatient
rehabilitation net operating revenues from Medicare. See
“Business — Government Regulations.”
Our
facilities are subject to extensive federal and state laws and
regulations relating to the privacy of individually identifiable
information.
The Health Insurance Portability and Accountability Act of 1996
required the United States Department of Health and Human
Services to adopt standards to protect the privacy and security
of individually identifiable health-related information. The
department released final regulations containing privacy
standards in December 2000 and published revisions to the final
regulations in August 2002. The privacy regulations extensively
regulate the use and disclosure of individually identifiable
health-related information. The regulations also provide
patients with significant new rights related to understanding
and controlling how their health information is used or
disclosed. The security regulations require healthcare providers
to implement administrative, physical and technical practices
32
to protect the security of individually identifiable health
information that is maintained or transmitted electronically.
The Health Information Technology for Economic and Clinical
Health Act, or “HITECH,” which was signed into law in
February of 2009, enhanced the privacy, security and enforcement
provisions of the Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”) by, among other
things establishing security breach notification requirements,
allowing enforcement of HIPAA by state attorneys general, and
increasing penalties for HIPAA violations. Violations of HIPAA
or HITECH could result in civil or criminal penalties.
In addition to HIPAA, there are numerous federal and state laws
and regulations addressing patient and consumer privacy
concerns, including unauthorized access or theft of personal
information. State statutes and regulations vary from state to
state. Lawsuits, including class actions and action by state
attorneys general, directed at companies that have experienced a
privacy or security breach also can occur.
We have developed a comprehensive set of policies and procedures
in our efforts to comply with HIPAA and other privacy laws. Our
compliance officer, privacy officer and information security
officer are responsible for implementing and monitoring
compliance with our privacy and security policies and procedures
at our facilities. We believe that the cost of our compliance
with HIPAA and other federal and state privacy laws will not
have a material adverse effect on our business, financial
condition, results of operations or cash flows. However, there
can be no assurance that a breach of privacy or security will
not occur. If there is a breach, we may be subject to various
penalties and damages and may be required to incur costs to
mitigate the impact of the breach on affected individuals.
As a
result of increased post-payment reviews of claims we submit to
Medicare for our services, we may incur additional costs and may
be required to repay amounts already paid to us.
We are subject to regular post-payment inquiries, investigations
and audits of the claims we submit to Medicare for payment for
our services. These post-payment reviews are increasing as a
result of new government cost-containment initiatives, including
enhanced medical necessity reviews for Medicare patients
admitted to LTCHs, and audits of Medicare claims under the
Recovery Audit Contractor program. These additional post-payment
reviews may require us to incur additional costs to respond to
requests for records and to pursue the reversal of payment
denials, and ultimately may require us to refund amounts paid to
us by Medicare that are determined to have been overpaid.
We may
be adversely affected by negative publicity which can result in
increased governmental and regulatory scrutiny and possibly
adverse regulatory changes.
Negative press coverage can result in increased governmental and
regulatory scrutiny and possibly adverse regulatory changes. On
February 10, 2010, the New York Times published an article
focusing on our Company and the long term acute care hospital
industry entitled “Long-Term Care Hospitals Face Little
Scrutiny.” On March 8, 2010, we received a letter from
the United States Senate Finance Committee in response to the
New York Times article asking us to respond to a variety of
questions regarding our long-term care hospitals. On
March 23, 2010, we responded to the letter. On May 25,
2010, we received
follow-up
questions from the Committee, which we responded to on
June 4, 2010. Adverse publicity such as articles in the New
York Times and increased governmental scrutiny can have a
negative impact on our reputation with referral sources and
patients and on the morale and performance of our employees,
both of which could adversely affect our businesses and results
of operations.
Future
acquisitions or joint ventures may use significant resources,
may be unsuccessful and could expose us to unforeseen
liabilities.
As part of our growth strategy, we may pursue acquisitions or
joint ventures of specialty hospitals, outpatient rehabilitation
clinics and other related healthcare facilities and services.
These acquisitions or joint ventures may involve significant
cash expenditures, debt incurrence, additional operating losses
and expenses that could have a material adverse effect on our
financial condition and results of operations.
We may not be able to successfully integrate acquired
businesses, such as Regency Hospital, L.L.C., into ours, and
therefore we may not be able to realize the intended benefits
from an acquisition. If we fail to successfully integrate
acquisitions, our financial condition and results of operations
may be materially adversely effected.
33
Acquisitions could result in difficulties integrating acquired
operations, technologies and personnel into our business. Such
difficulties may divert significant financial, operational and
managerial resources from our existing operations and make it
more difficult to achieve our operating and strategic
objectives. We may fail to retain employees or patients acquired
through acquisitions, which may negatively impact the
integration efforts. Acquisitions could also have a negative
impact on our results of operations if it is subsequently
determined that goodwill or other acquired intangible assets are
impaired, thus resulting in an impairment charge in a future
period.
In addition, acquisitions involve risks that the acquired
businesses will not perform in accordance with expectations;
that we may become liable for unforeseen financial or business
liabilities of the acquired businesses, including liabilities
for failure to comply with healthcare regulations; that the
expected synergies associated with acquisitions will not be
achieved; and that business judgments concerning the value,
strengths and weaknesses of businesses acquired will prove
incorrect, which could have an material adverse effect on out
financial condition and results of operations.
Future
cost containment initiatives undertaken by private third-party
payors may limit our future net operating revenues and
profitability.
Initiatives undertaken by major insurers and managed care
companies to contain healthcare costs affect the profitability
of our specialty hospitals and outpatient rehabilitation
clinics. These payors attempt to control healthcare costs by
contracting with hospitals and other healthcare providers to
obtain services on a discounted basis. We believe that this
trend may continue and may limit reimbursements for healthcare
services. If insurers or managed care companies from whom we
receive substantial payments reduce the amounts they pay for
services, our profit margins may decline, or we may lose
patients if we choose not to renew our contracts with these
insurers at lower rates.
If we
fail to maintain established relationships with the physicians
in the areas we serve, our net operating revenues may
decrease.
Our success is partially dependent upon the admissions and
referral practices of the physicians in the communities our
hospitals and our outpatient rehabilitation clinics serve, and
our ability to maintain good relations with these physicians.
Physicians referring patients to our hospitals and clinics are
generally not our employees and, in many of the local areas that
we serve, most physicians have admitting privileges at other
hospitals and are free to refer their patients to other
providers. If we are unable to successfully cultivate and
maintain strong relationships with these physicians, our
hospitals’ admissions and clinics’ businesses may
decrease, and our net operating revenues may decline.
Changes
in federal or state law limiting or prohibiting certain
physician referrals may preclude physicians from investing in
our hospitals or referring to hospitals in which they already
own an interest.
The federal self referral law, or “Stark Law,”
prohibits a physician who has a financial relationship with an
entity from referring his or her Medicare or Medicaid patients
to that entity for certain designated health services, including
inpatient and outpatient hospital services. Under the
transparency and program integrity provisions of the PPACA, the
exception to the Stark Law that previously permitted physicians
to refer patients to hospitals in which they have an ownership
or investment interest has been 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. 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. Furthermore,
initiatives are underway in some states to restrict physician
referrals to physician-owned hospitals. Currently, ten of our
hospitals have physicians as minority owners. The aggregate
revenue of these ten hospitals was $178.2 million for the
year ended December 31, 2010, or approximately 7.5% of our
revenues for the year ended December 31, 2010. The range of
physician minority ownership of these ten hospitals was 2.1% to
49.0%, with the average physician minority ownership of
34
11.5% as of the year ended December 31, 2010. There can be
no assurance that new legislation or regulation prohibiting or
limiting physician referrals to physician-owned hospitals will
not be successfully enacted in the future. If such federal or
state laws are adopted, among other outcomes, physicians who
have invested in our hospitals could be precluded from referring
to, investing in or continuing to be physician owners of a
hospital. In addition, expansion of our physician-owned
hospitals may be limited, and the revenues, profitability and
overall financial performance of our hospitals may be negatively
affected.
Shortages
in qualified nurses or therapists could increase our operating
costs significantly.
Our specialty hospitals are highly dependent on nurses for
patient care and our outpatient rehabilitation clinics are
highly dependant on therapists for patient care. The
availability of qualified nurses and therapists nationwide has
declined in recent years, and the salaries for nurses and
therapists have risen accordingly. We cannot assure you we will
be able to attract and retain qualified nurses or therapists in
the future. Additionally, the cost of attracting and retaining
nurses and therapists may be higher than we anticipate, and as a
result, our profitability could decline.
Competition
may limit our ability to acquire hospitals and clinics and
adversely affect our growth.
We have historically faced limited competition in acquiring
specialty hospitals and outpatient rehabilitation clinics, but
we may face heightened competition in the future. Our
competitors may acquire or seek to acquire many of the hospitals
and clinics that would be suitable acquisition candidates for
us. This increased competition could hamper our ability to
acquire companies, or such increased competition may cause us to
pay a higher price than we would otherwise pay in a less
competitive environment. Increased competition from both
strategic and financial buyers could limit our ability to grow
by acquisitions or make our cost of acquisitions higher and
therefore decrease our profitability.
If we
fail to compete effectively with other hospitals, clinics and
healthcare providers in our local areas, our net operating
revenues and profitability may decline.
The healthcare business is highly competitive, and we compete
with other hospitals, rehabilitation clinics and other
healthcare providers for patients. If we are unable to compete
effectively in the specialty hospital and outpatient
rehabilitation businesses, our net operating revenues and
profitability may decline. Many of our specialty hospitals
operate in geographic areas where we compete with at least one
other hospital that provides similar services. Our outpatient
rehabilitation clinics face competition from a variety of local
and national outpatient rehabilitation providers. Other
outpatient rehabilitation clinics in local areas we serve may
have greater name recognition and longer operating histories
than our clinics. The managers of these clinics may also have
stronger relationships with physicians in their communities,
which could give them a competitive advantage for patient
referrals.
Our
business operations could be significantly disrupted if we lose
key members of our management team.
Our success depends to a significant degree upon the continued
contributions of our senior officers and key employees, both
individually and as a group. Our future performance will be
substantially dependent in particular on our ability to retain
and motivate five key employees, Rocco A. Ortenzio, our
Executive Chairman, Robert A. Ortenzio, our Chief Executive
Officer, Patricia A. Rice, our President and Chief Operating
Officer, David S. Chernow, our President and Chief Strategy
Officer and Martin F. Jackson, our Executive Vice President and
Chief Financial Officer. We currently have an employment
agreement in place with each of Messrs. Rocco and Robert
Ortenzio, Mr. Chernow and Ms. Rice and a change in
control agreement with Mr. Jackson. Each of these
individuals also has a significant equity ownership in our
company. We have no reason to believe that we will lose the
services of any of these individuals in the foreseeable future;
however, we currently have no effective replacement for any of
these individuals due to their experience, reputation in the
industry and special role in our operations. We also do not
maintain any key life insurance policies for any of our
employees. The loss of the services of any of these individuals
would disrupt significant aspects of our business, could prevent
us from successfully executing our business strategy and could
have a material adverse affect on our results of operations.
35
Significant
legal actions could subject us to substantial uninsured
liabilities and in the future we may not be able to obtain
insurance coverage at a reasonable price.
Physicians, hospitals and other healthcare providers have become
subject to an increasing number of legal actions alleging
malpractice, product liability or related legal theories. Many
of these actions involve large claims and significant defense
costs. We are also subject to lawsuits under federal and state
whistleblower statutes designed to combat fraud and abuse in the
healthcare industry. These whistleblower lawsuits are not
covered by insurance and can involve significant monetary
damages and award bounties to private plaintiffs who
successfully bring the suits. See “Legal Proceedings”
and Note 17 in our audited consolidated financial
statements.
We currently maintain professional malpractice liability
insurance and general liability insurance coverages under a
combination of policies with a total annual aggregate limit of
$30.0 million. Our insurance for the professional liability
coverage is written on a “claims-made” basis and our
commercial general liability coverage is maintained on an
“occurrence” basis. These coverages apply after 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. We review our insurance
program annually and may make adjustments to the amount of
insurance coverage and self-insured retentions in future years.
There can be no assurance that malpractice insurance will be
available in certain states in the future nor that we will be
able to obtain insurance coverage at a reasonable price. Since
our professional liability insurance is on a claims-made basis,
any failure to obtain malpractice insurance in any state in the
future would increase our exposure not only to claims arising in
such state in the future but also to claims arising from
injuries that may have already occurred but which had not been
reported during the period in which we previously had insurance
coverage in that state. In addition, our insurance coverage does
not cover punitive damages and may not cover all claims against
us. See “Business — Government
Regulations — Other Healthcare Regulations.”
Concentration
of ownership among our existing executives, directors and
principal stockholders may prevent new investors from
influencing significant corporate decisions.
Welsh Carson and Thoma Cressey beneficially own approximately
43.9% and 8.3%, respectively, of Holdings’ outstanding
common stock as of March 1, 2011. Our executives, directors
and principal stockholders, including Welsh Carson and Thoma
Cressey, beneficially own, in the aggregate, approximately 69.6%
of Holdings’ outstanding common stock as of March 1,
2011. As a result, these stockholders have significant control
over our management and policies and are able to exercise
influence over all matters requiring stockholder approval,
including the election of directors, amendment of our
certificate of incorporation and approval of significant
corporate transactions. The directors elected by these
stockholders are able to make decisions affecting our capital
structure, including decisions to issue additional capital
stock, implement stock repurchase programs and incur
indebtedness. This influence may have the effect of deterring
hostile takeovers, delaying or preventing changes in control or
changes in management, or limiting the ability of our other
stockholders to approve transactions that they may deem to be in
their best interest.
We are
a holding company and therefore depend on our subsidiaries to
service our obligations under our indebtedness and for any funds
to pay dividends to our stockholders. Our ability to repay our
indebtedness or pay dividends to our stockholders depends
entirely upon the performance of our subsidiaries and their
ability to make distributions.
We have no operations of our own and derive all of our revenues
and cash flow from our subsidiaries. Our subsidiaries are
separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts due under our
10% senior subordinated notes and senior floating rate
notes, or to make any funds available therefor, whether by
dividend, distribution, loan or other payments. In addition, any
of our rights in the assets of any of our subsidiaries upon any
liquidation or reorganization of any subsidiary will be subject
to the prior claims of that subsidiary’s creditors,
including lenders under our senior secured credit facility and
holders of Select’s
7
5
/
8
% senior
subordinated notes. Holdings’ total consolidated balance
sheet liabilities as of December 31, 2010 were
$1,906.7 million, of which $1,430.8 million
constituted indebtedness, including $506.8 million of
indebtedness (excluding $29.0 million of letters of credit)
under our senior secured credit facility, $611.5 million of
Select’s
7
5
/
8
% senior
subordinated notes, $139.2 million of our 10% senior
subordinated notes and $167.3 million of our senior
floating rate notes. As of such date, we would have been able to
borrow up to an additional $246.0 million
36
under our senior secured credit facility. We and our restricted
subsidiaries may incur additional debt in the future, including
borrowings under our senior secured credit facility.
We depend on our subsidiaries, which conduct the operations of
the business, for dividends and other payments to generate the
funds necessary to meet our financial obligations, including
payments of principal and interest on our indebtedness. We would
also depend on our subsidiaries for any funds to pay dividends
to our stockholders. In the event our subsidiaries are unable to
pay dividends to us, we may not be able to service debt, pay
obligations or pay dividends on common stock. The terms of our
senior secured credit facility and the terms of the indentures
governing Select’s
7
5
/
8
% senior
subordinated notes restrict Select and its subsidiaries from, in
each case, paying dividends or otherwise transferring its assets
to us. Such restrictions include, among others, financial
covenants, prohibition of dividends in the event of a default
and limitations on the total amount of dividends. In addition,
legal and contractual restrictions in agreements governing other
current and future indebtedness, as well as financial condition
and operating requirements of our subsidiaries, currently limit
and may, in the future, limit our ability to obtain cash from
our subsidiaries. The earnings from other available assets of
our subsidiaries may not be sufficient to pay dividends or make
distributions or loans to enable us to make payments in respect
of our indebtedness when such payments are due. In addition,
even if such earnings were sufficient, we cannot assure you that
the agreements governing the current and future indebtedness of
our subsidiaries will permit such subsidiaries to provide us
with sufficient dividends, distributions or loans to fund
interest and principal payments on our indebtedness when due. If
our subsidiaries are unable to make dividends or otherwise
distribute funds to us, we may not be able to satisfy the terms
of our indebtedness, there will not be sufficient funds
remaining to make distributions to our stockholders and the
value of your investment in our common stock will be materially
decreased.
Our
substantial indebtedness may limit the amount of cash flow
available to invest in the ongoing needs of our
business.
We have a substantial amount of indebtedness. As of
December 31, 2010, we had approximately
$1,430.8 million of total indebtedness. For the years ended
December 31, 2009 and December 31, 2010, we paid cash
interest of $126.7 million and $105.9 million,
respectively on our indebtedness.
Our indebtedness could have important consequences to you. For
example, it:
| • | requires us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, acquisitions and other general corporate purposes; | |
| • | increases our vulnerability to adverse general economic or industry conditions; | |
| • | limits our flexibility in planning for, or reacting to, changes in our business or the industries in which we operate; | |
| • | makes us more vulnerable to increases in interest rates, as borrowings under our senior secured credit facility and the senior floating rate notes are at variable rates; | |
| • | limits our ability to obtain additional financing in the future for working capital or other purposes, such as raising the funds necessary to repurchase all notes tendered to us upon the occurrence of specified changes of control in our ownership; and | |
| • | places us at a competitive disadvantage compared to our competitors that have less indebtedness. |
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources.”
Our
senior secured credit facility requires Select to comply with
certain financial covenants, the default of which may result in
the acceleration of certain of our indebtedness.
Our senior secured credit facility requires Select to maintain
certain interest expense coverage ratios and leverage ratios
which become more restrictive over time. For the four
consecutive fiscal quarters ended
37
December 31, 2010, Select was required to maintain an
interest expense coverage ratio (its ratio of consolidated
EBITDA to cash interest expense) for the prior four consecutive
quarters of at least 2.00 to 1.00. As of December 31, 2010,
Select was required to maintain its leverage ratio (its ratio of
total indebtedness to consolidated EBITDA for the prior four
consecutive fiscal quarters) at less than 4.50 to 1.00. For the
four quarters ended December 31, 2010, Select’s
interest expense coverage ratio was 3.12 to 1.00 and
Select’s leverage ratio was 3.39 to 1.00.
While Select has never defaulted on compliance with any of these
financial covenants, its ability to comply with these ratios in
the future may be affected by events beyond its control.
Inability to comply with the required financial ratios could
result in a default under our senior secured credit facility. In
the event of any default under our senior secured credit
facility, the lenders under our senior secured credit facility
could elect to terminate borrowing commitments and declare all
borrowings outstanding, together with accrued and unpaid
interest and other fees, to be immediately due and payable. Any
default under our senior secured credit facility that results in
the acceleration of the outstanding indebtedness under our
senior secured credit facility would also constitute an event of
default under Select’s
7
5
/
8
% senior
subordinated notes and the senior floating rate notes, and the
trustee or holders of each such notes could elect to declare
such notes to be immediately due and payable.
Despite
our substantial level of indebtedness, we and our subsidiaries
may be able to incur additional indebtedness. This could further
exacerbate the risks described above.
We and our subsidiaries may be able to incur additional
indebtedness in the future. Although our senior secured credit
facility, the indentures governing each of Select’s
7
5
/
8
% senior
subordinated notes and the senior floating rate notes each
contain or will contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and the indebtedness
incurred in compliance with these restrictions could be
substantial. Also, these restrictions do not prevent us or our
subsidiaries from incurring obligations that do not constitute
indebtedness. As of December 31, 2010, we had
$246.0 million of revolving loan availability under our
senior secured credit facility (after giving effect to
$29.0 million of outstanding letters of credit). In
addition, to the extent new debt is added to our and our
subsidiaries’ current debt levels, the substantial leverage
risks described above would increase.
Our
inability to access external sources of financing when our
senior secured credit facility, Tranche B term loans and
Tranche B-1
term loans terminate could have a material adverse effect on our
business, operating results and financial
condition.
Our Tranche B term loans mature on February 24, 2012
and
Tranche B-1
term loans mature on August 22, 2014. Our revolving credit
facility will terminate on August 22, 2013. Our inability
to refinance our revolving credit facility, Tranche B term
loans and
Tranche B-1
term loans prior to their scheduled termination or maturity
could cause an event of default under our senior secured credit
facility because we may not otherwise have cash available to
make final repayments of principal under our revolving credit
facility, Tranche B term loans and
Tranche B-1
term loans. If an event of default were to occur under our
senior secured credit facility due to our failure to make
repayments of principal upon the termination or maturity of our
revolving credit facility, Tranche B term loans or
Tranche B-1
term loans, then an event of default would also occur under
Select’s
7
5
/
8
% senior
subordinated notes, our senior floating rate notes and our
10% senior subordinated notes. Upon an event of default
under our senior secured credit facility, Select’s
7
5
/
8
% senior
subordinated notes, our senior floating rate notes and our
10% senior subordinated notes, our lenders will be entitled
to take various actions, including all actions permitted to be
taken by a secured creditor, and our business, operating results
and financial condition could be adversely affected.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
We currently lease most of our facilities, including clinics,
offices, specialty hospitals and our corporate headquarters. We
own 25 of our specialty hospitals.
38
We lease all but two of our outpatient rehabilitation clinics
and related offices, which, as of December 31, 2010
included 873 leased outpatient rehabilitation clinics throughout
the United States. We also lease the majority of our long term
acute care hospital facilities except for the facilities
described above. As of December 31, 2010, in our specialty
hospitals we had 78 hospital within hospital leases and 13
free-standing building leases.
We lease our corporate headquarters from companies owned by a
related party affiliated with us through common ownership or
management. Our corporate headquarters is approximately
132,138 square feet and is located in Mechanicsburg,
Pennsylvania. We lease several other administrative spaces
related to administrative and operational support functions. As
of December 31, 2010, this was comprised of 9 locations
throughout the United States with approximately
45,945 square feet in total.
The following is a list of our consolidated hospitals and the
number of beds at each hospital as of December 31, 2010.
|
Hospital Name
|
Type
|
City
|
State
|
Beds
|
||||||
|
Select Specialty Hospital — Birmingham
|
LTCH | Birmingham | AL | 38 | ||||||
|
Regency Hospital of Northwest Arkansas
|
LTCH | Fayetteville | AR | 25 | ||||||
|
Select Specialty Hospital — Fort Smith
|
LTCH | Fort Smith | AR | 34 | ||||||
|
Select Specialty Hospital — Little Rock
|
LTCH | Little Rock | AR | 43 | ||||||
|
Regency Hospital of Northwest Arkansas
|
LTCH | Springdale | AR | 25 | ||||||
|
Select Specialty Hospital — Arizona (Phoenix Downtown
Campus)
|
LTCH | Phoenix | AZ | 33 | ||||||
|
Select Specialty Hospital — Phoenix
|
LTCH | Phoenix | AZ | 48 | ||||||
|
Select Specialty Hospital — Arizona (Scottsdale Campus)
|
LTCH | Scottsdale | AZ | 29 | ||||||
|
Select Specialty Hospital — Colorado Springs
|
LTCH | Colorado Springs | CO | 30 | ||||||
|
Select Specialty Hospital — Denver
|
LTCH | Denver | CO | 37 | ||||||
|
Select Specialty Hospital — Denver (South Campus)
|
LTCH | Denver | CO | 28 | ||||||
|
Select Specialty Hospital — Wilmington
|
LTCH | Wilmington | DE | 35 | ||||||
|
Select Specialty Hospital — Orlando (South Campus)
|
LTCH | Edgewood | FL | 40 | ||||||
|
Select Specialty Hospital — Gainesville
|
LTCH | Gainesville | FL | 44 | ||||||
|
Select Specialty Hospital — Palm Beach
|
LTCH | Lake Worth | FL | 60 | ||||||
|
Select Specialty Hospital — Miami
|
LTCH | Miami | FL | 47 | ||||||
|
Select Specialty Hospital — Orlando (North Campus)
|
LTCH | Orlando | FL | 35 | ||||||
|
Select Specialty Hospital — Panama City
|
LTCH | Panama City | FL | 30 | ||||||
|
Select Specialty Hospital — Pensacola
|
LTCH | Pensacola | FL | 54 | ||||||
|
Select Specialty Hospital — Tallahassee
|
LTCH | Tallahassee | FL | 29 | ||||||
|
Regency Hospital of South Atlanta
|
LTCH | East Point | GA | 40 | ||||||
|
Regency Hospital of Central Georgia
|
LTCH | Macon | GA | 34 | ||||||
|
Select Specialty Hospital — Atlanta
|
LTCH | Atlanta | GA | 30 | ||||||
|
Select Specialty Hospital — Augusta
|
LTCH | Augusta | GA | 80 | ||||||
|
Select Specialty Hospital — Savannah
|
LTCH | Savannah | GA | 40 | ||||||
|
Select Specialty Hospital — Quad Cities
|
LTCH | Davenport | IA | 50 | ||||||
|
Regency Hospital of Northwest Indiana
|
LTCH | East Chicago | IN | 38 | ||||||
|
Regency Hospital of Northwest Indiana (Porter Campus)
|
LTCH | Portage | IN | 23 | ||||||
|
Select Specialty Hospital — Beech Grove
|
LTCH | Beech Grove | IN | 45 | ||||||
|
Select Specialty Hospital — Evansville
|
LTCH | Evansville | IN | 60 | ||||||
|
Select Specialty Hospital — Fort Wayne
|
LTCH | Fort Wayne | IN | 32 | ||||||
|
Select Specialty Hospital — Northwest Indiana
|
LTCH | Hammond | IN | 70 | ||||||
|
Select Specialty Hospital — Kansas City
|
LTCH | Kansas City | KS | 40 | ||||||
|
Select Specialty Hospital — Topeka
|
LTCH | Topeka | KS | 34 | ||||||
|
Select Specialty Hospital — Wichita
|
LTCH | Wichita | KS | 60 | ||||||
|
Select Specialty Hospital — Lexington
|
LTCH | Lexington | KY | 41 | ||||||
|
Regency Hospital of Covington
|
LTCH | Covington | LA | 38 | ||||||
|
Select Specialty Hospital — Northwest Detroit
|
LTCH | Detroit | MI | 36 | ||||||
|
Select Specialty Hospital — Flint
|
LTCH | Flint | MI | 26 | ||||||
|
Select Specialty Hospital — Grosse Pointe
|
LTCH | Grosse Pointe Farms | MI | 30 | ||||||
|
Select Specialty Hospital — Kalamazoo
|
LTCH | Kalamazoo | MI | 25 | ||||||
|
Select Specialty Hospital — Macomb County
|
LTCH | Mount Clemens | MI | 36 | ||||||
39
|
Hospital Name
|
Type
|
City
|
State
|
Beds
|
||||||
|
Great Lakes Specialty Hospital — Hackley, LLC
|
LTCH | Muskegon | MI | 31 | ||||||
|
Great Lakes Specialty Hospital — Oak, LLC
|
LTCH | Muskegon | MI | 20 | ||||||
|
Select Specialty Hospital — Pontiac
|
LTCH | Pontiac | MI | 30 | ||||||
|
Select Specialty Hospital — Saginaw
|
LTCH | Saginaw | MI | 32 | ||||||
|
Select Specialty Hospital — Downriver
|
LTCH | Taylor | MI | 40 | ||||||
|
Select Specialty Hospital — Ann Arbor
|
LTCH | Ypsilanti | MI | 36 | ||||||
|
Regency Hospital of Minneapolis
|
LTCH | Golden Valley | MN | 92 | ||||||
|
Select Specialty Hospital — Western Missouri
|
LTCH | Kansas City | MO | 34 | ||||||
|
Select Specialty Hospital — Springfield
|
LTCH | Springfield | MO | 44 | ||||||
|
Select Specialty Hospital — St. Louis
|
LTCH | St. Charles | MO | 33 | ||||||
|
SSM Select Rehab St. Louis, LLC
|
IRF | St. Louis | MO | 58 | ||||||
|
Regency Hospital of Southern Mississippi
|
LTCH | Hattiesburg | MS | 33 | ||||||
|
Regency Hospital of Jackson
|
LTCH | Jackson | MS | 36 | ||||||
|
Regency Hospital of Meridian
|
LTCH | Meridian | MS | 40 | ||||||
|
Select Specialty Hospital — Gulfport
|
LTCH | Gulfport | MS | 61 | ||||||
|
Select Specialty Hospital — Jackson
|
LTCH | Jackson | MS | 53 | ||||||
|
Select Specialty Hospital — Durham
|
LTCH | Durham | NC | 30 | ||||||
|
Select Specialty Hospital — Greensboro
|
LTCH | Greensboro | NC | 30 | ||||||
|
Select Specialty Hospital — Winston-Salem
|
LTCH | Winston-Salem | NC | 42 | ||||||
|
Select Specialty Hospital — Omaha Central
|
LTCH | Omaha | NE | 52 | ||||||
|
Kessler Institute for Rehabilitation (Welkind Campus)
|
IRF | Chester | NJ | 72 | ||||||
|
Select Specialty Hospital — Northeast New Jersey
|
LTCH | Rochelle Park | NJ | 62 | ||||||
|
Kessler Institute for Rehabilitation (North Campus)
|
IRF | Saddle Brook | NJ | 112 | ||||||
|
Kessler Institute for Rehabilitation (West Campus)
|
IRF | West Orange | NJ | 152 | ||||||
|
Regency Hospital of North Central Ohio (Akron Campus)
|
LTCH | Barberton | OH | 45 | ||||||
|
Regency Hospital of Cincinnati
|
LTCH | Cincinnati | OH | 39 | ||||||
|
Regency Hospital of Columbus
|
LTCH | Columbus | OH | 43 | ||||||
|
Regency Hospital of North Central Ohio (Cleveland West Campus)
|
LTCH | Middleburg Heights | OH | 43 | ||||||
|
Regency Hospital of North Central Ohio (Ravenna Campus)
|
LTCH | Ravenna | OH | 19 | ||||||
|
Regency Hospital of Toledo
|
LTCH | Sylvania | OH | 45 | ||||||
|
Regency Hospital of North Central Ohio (Cleveland East Campus)
|
LTCH | Warrensville Heights | OH | 44 | ||||||
|
Select Specialty Hospital — Akron
|
LTCH | Akron | OH | 60 | ||||||
|
Select Specialty Hospital — Northeast Ohio (Canton
Campus)
|
LTCH | Canton | OH | 30 | ||||||
|
Select Specialty Hospital — Cincinnati
|
LTCH | Cincinnati | OH | 36 | ||||||
|
Select Specialty Hospital — Columbus
|
LTCH | Columbus | OH | 152 | ||||||
|
Select Specialty Hospital — Columbus (Mt. Carmel
Campus)
|
LTCH | Columbus | OH | 24 | ||||||
|
Select Specialty Hospital — Youngstown (Boardman
Campus)
|
LTCH | Warren | OH | 20 | ||||||
|
Select Specialty Hospital — Youngstown
|
LTCH | Youngstown | OH | 31 | ||||||
|
Select Specialty Hospital — Zanesville
|
LTCH | Zanesville | OH | 35 | ||||||
|
Select Specialty Hospital — Oklahoma City
|
LTCH | Oklahoma City | OK | 72 | ||||||
|
Select Specialty Hospital — Tulsa Midtown
|
LTCH | Tulsa | OK | 56 | ||||||
|
Select Specialty Hospital — Central Pennsylvania (Camp
Hill Campus)
|
LTCH | Camp Hill | PA | 31 | ||||||
|
Select Specialty Hospital — Danville
|
LTCH | Danville | PA | 30 | ||||||
|
Select Specialty Hospital — Erie
|
LTCH | Erie | PA | 50 | ||||||
|
Select Specialty Hospital — Central Pennsylvania
(Harrisburg Campus)
|
LTCH | Harrisburg | PA | 38 | ||||||
|
Penn State Hershey Rehabilitation
|
IRF | Hummelstown | PA | 54 | ||||||
|
Select Specialty Hospital — Johnstown
|
LTCH | Johnstown | PA | 39 | ||||||
|
Select Specialty Hospital — Laurel Highlands
|
LTCH | Latrobe | PA | 40 | ||||||
|
Select Specialty Hospital — McKeesport
|
LTCH | McKeesport | PA | 30 | ||||||
|
Select Specialty Hospital — Pittsburgh
|
LTCH | Pittsburgh | PA | 32 | ||||||
|
Select Specialty Hospital — Central Pennsylvania (York
Campus)
|
LTCH | York | PA | 23 | ||||||
40
|
Hospital Name
|
Type
|
City
|
State
|
Beds
|
||||||
|
Regency Hospital of South Carolina
|
LTCH | Florence | SC | 40 | ||||||
|
Regency Hospital of Greenville
|
LTCH | Greenville | SC | 32 | ||||||
|
Select Specialty Hospital — Sioux Falls
|
LTCH | Sioux Falls | SD | 24 | ||||||
|
Select Specialty Hospital —
Tri-Cities
|
LTCH | Bristol | TN | 33 | ||||||
|
Select Specialty Hospital — Knoxville
|
LTCH | Knoxville | TN | 35 | ||||||
|
Select Specialty Hospital — North Knoxville
|
LTCH | Knoxville | TN | 33 | ||||||
|
Select Specialty Hospital — Memphis
|
LTCH | Memphis | TN | 39 | ||||||
|
Select Specialty Hospital — Nashville
|
LTCH | Nashville | TN | 47 | ||||||
|
Regency Hospital of Fort Worth
|
LTCH | Fort Worth | TX | 44 | ||||||
|
Rehabilitation Institute of North Texas, LLC
|
IRF | Frisco | TX | 44 | ||||||
|
Regency Hospital of Odessa
|
LTCH | Odessa | TX | 36 | ||||||
|
Select Specialty Hospital — Dallas
|
LTCH | Carrollton | TX | 60 | ||||||
|
Select Specialty Hospital — South Dallas
|
LTCH | DeSoto | TX | 100 | ||||||
|
Select Specialty Hospital — Houston (Houston Heights)
|
LTCH | Houston | TX | 158 | ||||||
|
Select Specialty Hospital — Houston (Houston Medical
Center)
|
LTCH | Houston | TX | 86 | ||||||
|
Select Specialty Hospital — Houston (Houston West)
|
LTCH | Houston | TX | 56 | ||||||
|
Select Specialty Hospital — Longview
|
LTCH | Longview | TX | 32 | ||||||
|
Select Specialty Hospital — Midland
|
LTCH | Midland | TX | 29 | ||||||
|
Select Specialty Hospital — San Antonio
|
LTCH | San Antonio | TX | 44 | ||||||
|
Select Specialty Hospital — Madison
|
LTCH | Madison | WI | 58 | ||||||
|
Select Specialty Hospital — Milwaukee
|
LTCH | Milwaukee | WI | 34 | ||||||
|
Select Specialty Hospital — Milwaukee (St Luke’s
Campus)
|
LTCH | Milwaukee | WI | 29 | ||||||
|
Select Specialty Hospital — Charleston
|
LTCH | Charleston | WV | 32 | ||||||
|
Total Beds:
|
5,163 | |||||||||
| Item 3. | Legal Proceedings. |
To cover claims arising out of the operations of the
Company’s specialty hospitals and outpatient rehabilitation
facilities, the Company maintains professional malpractice
liability insurance and general liability insurance. The Company
also maintains umbrella liability insurance covering claims
which, due to their nature or amount, are not covered by or not
fully covered by the Company’s other insurance policies.
These insurance policies also do not generally cover punitive
damages and are subject to various deductibles and policy
limits. Significant legal actions as well as the cost and
possible lack of available insurance could subject the Company
to substantial uninsured liabilities.
The Company is subject to legal proceedings and claims that
arise in the ordinary course of business, which include
malpractice claims covered under insurance policies, subject to
self-insured retention of $2.0 million per medical incident
for professional liability claims and $2.0 million per
occurrence for general liability claims. In the Company’s
opinion, the outcome of these actions will not have a material
adverse effect on its financial position or results of
operations.
Healthcare providers are subject to lawsuits under the qui tam
provisions of the federal False Claims Act. Qui tam lawsuits
typically remain under seal (hence, usually unknown to the
defendant) for some time while the government decides whether or
not to intervene on behalf of a private qui tam plaintiff (known
as a relator) and take the lead in the litigation. These
lawsuits can involve significant monetary damages and penalties
and award bounties to private plaintiffs who successfully bring
the suits. The Company has been a defendant in these cases in
the past, and may be named as a defendant in similar cases from
time to time in the future.
During July 2009, the Company received a subpoena from the
Office of Inspector General of the U.S. Department of
Health and Human Services seeking various documents concerning
the Company’s financial relationships with certain
physicians practicing at its hospitals in Columbus, Ohio. The
Company understands that the subpoena was issued in connection
with a qui tam lawsuit and that the government has been
investigating the matter to determine whether to intervene. The
Company has produced documents in response to the subpoena and
has fully cooperated with the government’s investigation.
The Company is in discussions with the government to attempt to
41
resolve this matter in a manner satisfactory to the Company and
the government. Any settlement is not expected to be material to
our financial position.
| Item 4. | Reserved. |
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market
Information
Our common stock has been quoted on the New York Stock Exchange
under the symbol “SEM” since our initial public
offering on September 25, 2009. Prior to that date there
was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sales
prices of our common stock, reported by the New York Stock
Exchange.
| Market Prices | ||||||||
|
Fiscal Year Ended
December 31, 2009
|
High | Low | ||||||
|
Third Quarter (beginning September 25, 2009)
|
$ | 10.55 | $ | 9.35 | ||||
|
Fourth Quarter
|
$ | 10.88 | $ | 8.61 | ||||
| Market Prices | ||||||||
|
Fiscal Year Ended
December 31, 2010
|
High | Low | ||||||
|
First Quarter
|
$ | 10.81 | $ | 7.85 | ||||
|
Second Quarter
|
$ | 9.05 | $ | 6.70 | ||||
|
Third Quarter
|
$ | 7.99 | $ | 5.95 | ||||
|
Fourth Quarter
|
$ | 7.79 | $ | 5.62 | ||||
Holders
At the close of business on March 1, 2011, we had
154,543,141 shares of common stock issued and outstanding.
As of that date, there were 112 registered holders of record.
This does not reflect beneficial stockholders who hold their
stock in nominee or “street” name through brokerage
firms.
Dividend
Policy
We have not paid or declared any dividends on our common stock
and do not anticipate paying any dividends on our common stock
in the foreseeable future. We intend to retain future earnings
to finance the ongoing operations and growth of our business.
Any future determination relating to our dividend policy will be
made at the discretion of our board of directors and will depend
on conditions at that time, including our financial condition,
results of operations, contractual restrictions, capital
requirements, business prospects and other factors our board of
directors may deem relevant.
Securities
Authorized For Issuance Under Equity Compensation
Plans
For information regarding securities authorized for issuance
under equity compensation plans, see Part III
“Item 12 — Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.”
42
Stock
Performance Graph
The graph below compares the cumulative total stockholder return
on $100 invested at the opening of the market on
September 25, 2009, the date the Company’s initial
public offering was priced for initial sale, through and
including the market close on December 31, 2010 with the
cumulative total return of the same time period on the same
amount invested in the Standard & Poor’s 500
Index (“S&P 500”), and the Morgan Stanley
Healthcare Provider Index (“RXH”), an equal-dollar
weighted index of 16 companies involved in the business of
hospital management and medical/nursing services. The chart
below the graph sets forth the actual numbers depicted on the
graph.
| 09/25/09 | 09/30/09 | 12/31/09 | 03/31/10 | 06/30/10 | 09/30/10 | 12/31/10 | |||||||||||||||||||||||||||||
|
Select Medical Holding Corporation (SEM)
|
$ | 100.00 | $ | 100.70 | $ | 106.20 | $ | 84.40 | $ | 67.80 | $ | 77.00 | $ | 73.10 | |||||||||||||||||||||
|
Morgan Stanley Healthcare Provider Index (RXH)
|
$ | 100.00 | $ | 102.31 | $ | 102.32 | $ | 117.81 | $ | 102.46 | $ | 103.42 | $ | 124.38 | |||||||||||||||||||||
|
S&P 500
|
$ | 100.00 | $ | 100.72 | $ | 106.25 | $ | 111.43 | $ | 98.21 | $ | 108.74 | $ | 119.83 | |||||||||||||||||||||
Purchase
of Equity Securities by the Issuer
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. The program will
remain in effect until January 31, 2012, unless extended by
out board of directors. In the year ended December 31,
2010, we purchased a total of 6,905,700 shares of our
common stock at an average purchase price of $6.37. The
following table sets forth the monthly purchases made under this
program during the last quarter of the year ended
December 31, 2010:
|
Total Number of
|
Approximate Dollar
|
|||||||||||||||
|
Shares Purchased as
|
Value of Shares
|
|||||||||||||||
|
Part of Publicly
|
that May Yet Be
|
|||||||||||||||
|
Total Number of
|
Average Price Paid
|
Announced Plans or
|
Purchased Under the
|
|||||||||||||
|
Period
|
Shares Purchased | Per Share | Programs | Plans or Programs | ||||||||||||
|
October 2010
|
— | — | — | — | ||||||||||||
|
November 2010
|
2,343,369 | $ | 6.19 | 2,343,369 | $ | 85,437,770 | ||||||||||
|
December 2010
|
4,562,331 | $ | 6.46 | 4,562,331 | $ | 55,856,585 | ||||||||||
|
Total 2010
|
6,905,700 | $ | 6.37 | 6,905,700 | $ | 55,856,585 | ||||||||||
43
| Item 6. | Selected Financial Data. |
You should read the following selected historical consolidated
financial data in conjunction with our consolidated financial
statements and the accompanying notes. You should also read
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which is contained
elsewhere herein. The historical financial data as of
December 31, 2006, 2007, 2008, 2009 and 2010 and for the
years ended December 31, 2006, 2007, 2008, 2009 and 2010
have been derived from consolidated financial statements audited
by PricewaterhouseCoopers LLP, an independent registered public
accounting firm. The selected historical consolidated financial
data as of December 31, 2009 and 2010, and for the years
ended December 31, 2008, 2009 and 2010 have been derived
from our consolidated financial information included elsewhere
herein. The selected historical consolidated financial data as
of December 31, 2006, 2007 and 2008 and for the years ended
December 31, 2006 and 2007 have been derived from our
audited consolidated financial information not included
elsewhere herein.
44
| Select Medical Holdings Corporation | |||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||
| 2006 (1)(2) | 2007 (1)(2) | 2008 (1)(2) | 2009 | 2010 | |||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||
|
Statement of Operations Data:
|
|||||||||||||||||||||
|
Net operating revenues
|
$ | 1,851,498 | $ | 1,991,666 | $ | 2,153,362 | $ | 2,239,871 | $ | 2,390,290 | |||||||||||
|
Operating
expenses
(3)(4)
|
1,546,956 | 1,740,484 | 1,885,168 | 1,933,052 | 2,085,447 | ||||||||||||||||
|
Depreciation and amortization
|
46,668 | 57,297 | 71,786 | 70,981 | 68,706 | ||||||||||||||||
|
Income from operations
|
257,874 | 193,885 | 196,408 | 235,838 | 236,137 | ||||||||||||||||
|
Gain on early retirement of
debt
(5)
|
— | — | 912 | 13,575 | — | ||||||||||||||||
|
Equity in losses of unconsolidated subsidiaries
|
— | — | — | — | (440 | ) | |||||||||||||||
|
Other income (expense)
|
— | (167 | ) | — | (632 | ) | 632 | ||||||||||||||
|
Interest expense,
net
(6)
|
(130,538 | ) | (138,052 | ) | (145,423 | ) | (132,377 | ) | (112,337 | ) | |||||||||||
|
Income from continuing operations before income taxes
|
127,336 | 55,666 | 51,897 | 116,404 | 123,992 | ||||||||||||||||
|
Income tax expense
|
43,521 | 18,699 | 26,063 | 37,516 | 41,628 | ||||||||||||||||
|
Income from continuing operations
|
83,815 | 36,967 | 25,834 | 78,888 | 82,364 | ||||||||||||||||
|
Income from discontinued operations, net of tax
|
12,818 | — | — | — | — | ||||||||||||||||
|
Net income
|
96,633 | 36,967 | 25,834 | 78,888 | 82,364 | ||||||||||||||||
|
Less: Net income attributable to non-controlling
interests
(7)
|
1,754 | 1,537 | 3,393 | 3,606 | 4,720 | ||||||||||||||||
|
Net income attributable to Select Medical Holdings Corporation
|
94,879 | 35,430 | 22,441 | 75,282 | 77,644 | ||||||||||||||||
|
Less: Preferred dividends
|
22,663 | 23,807 | 24,972 | 19,537 | — | ||||||||||||||||
|
Net income (loss) available to common stockholders and
participating securities
|
$ | 72,216 | $ | 11,623 | $ | (2,531 | ) | $ | 55,745 | $ | 77,644 | ||||||||||
|
Income (loss) per common share:
|
|||||||||||||||||||||
|
Basic:
|
|||||||||||||||||||||
|
Income (loss) from continuing operations
|
$ | 0.88 | $ | 0.17 | $ | (0.04 | ) | $ | 0.61 | $ | 0.49 | ||||||||||
|
Income from discontinued operations, net of tax
|
0.18 | — | — | — | — | ||||||||||||||||
|
Net income (loss)
|
$ | 1.06 | $ | 0.17 | $ | (0.04 | ) | $ | 0.61 | $ | 0.49 | ||||||||||
|
Diluted:
|
|||||||||||||||||||||
|
Income (loss) from continuing operations
|
$ | 0.88 | $ | 0.17 | $ | (0.04 | ) | $ | 0.61 | $ | 0.48 | ||||||||||
|
Income from discontinued operations, net of tax
|
0.18 | — | — | — | — | ||||||||||||||||
|
Net income (loss)
|
$ | 1.06 | $ | 0.17 | $ | (0.04 | ) | $ | 0.61 | $ | 0.48 | ||||||||||
|
Weighted average common shares outstanding:
|
|||||||||||||||||||||
|
Basic
|
54,055 | 57,086 | 59,566 | 85,587 | 159,184 | ||||||||||||||||
|
Diluted
|
54,055 | 57,086 | 59,566 | 86,045 | 159,442 | ||||||||||||||||
|
Balance Sheet Data (at end of period):
|
|||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 81,600 | $ | 4,529 | $ | 64,260 | $ | 83,680 | $ | 4,365 | |||||||||||
|
Working capital (deficit)
|
59,468 | 14,730 | 118,370 | 156,685 | (70,232 | ) | |||||||||||||||
|
Total assets
|
2,182,524 | 2,495,046 | 2,579,469 | 2,588,146 | 2,722,086 | ||||||||||||||||
|
Total debt
|
1,538,503 | 1,755,635 | 1,779,925 | 1,405,571 | 1,430,769 | ||||||||||||||||
|
Total Select Medical Holdings Corporation stockholders’
equity
|
(169,139 | ) | (165,889 | ) | (174,204 | ) | 738,988 | 783,880 | |||||||||||||
45
| Select Medical Corporation | |||||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||
| 2006 (1) | 2007 (1) | 2008 (1) | 2009 | 2010 | |||||||||||||||||
| (In thousands) | |||||||||||||||||||||
|
Statement of Operations Data:
|
|||||||||||||||||||||
|
Net operating revenues
|
$ | 1,851,498 | $ | 1,991,666 | $ | 2,153,362 | $ | 2,239,871 | $ | 2,390,290 | |||||||||||
|
Operating
expenses
(3)(4)
|
1,546,956 | 1,740,484 | 1,885,168 | 1,933,052 | 2,085,447 | ||||||||||||||||
|
Depreciation and amortization
|
46,668 | 57,297 | 71,786 | 70,981 | 68,706 | ||||||||||||||||
|
Income from operations
|
257,874 | 193,885 | 196,408 | 235,838 | 236,137 | ||||||||||||||||
|
Gain on early retirement of
debt
(5)
|
— | — | 912 | 12,446 | — | ||||||||||||||||
|
Equity in losses of unconsolidated subsidiaries
|
— | — | — | — | (440 | ) | |||||||||||||||
|
Other income (expense)
|
1,366 | (4,494 | ) | (2,802 | ) | 3,204 | 632 | ||||||||||||||
|
Interest expense,
net
(6)
|
(95,995 | ) | (103,394 | ) | (110,418 | ) | (99,451 | ) | (84,472 | ) | |||||||||||
|
Income from continuing operations before income taxes
|
163,245 | 85,997 | 84,100 | 152,037 | 151,857 | ||||||||||||||||
|
Income tax expense
|
56,089 | 29,315 | 37,334 | 49,987 | 51,380 | ||||||||||||||||
|
Income from continuing operations
|
107,156 | 56,682 | 46,766 | 102,050 | 100,477 | ||||||||||||||||
|
Income from discontinued operations, net of tax
|
12,818 | — | — | — | — | ||||||||||||||||
|
Net income
|
119,974 | 56,682 | 46,766 | 102,050 | 100,477 | ||||||||||||||||
|
Less: Net income attributable to non-controlling
interests
(7)
|
1,754 | 1,537 | 3,393 | 3,606 | 4,720 | ||||||||||||||||
|
Net income attributable to Select Medical Corporation
|
$ | 118,220 | $ | 55,145 | $ | 43,373 | $ | 98,444 | $ | 95,757 | |||||||||||
|
Balance Sheet Data (at end of period):
|
|||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 81,600 | $ | 4,529 | $ | 64,260 | $ | 83,680 | $ | 4,365 | |||||||||||
|
Working capital (deficit)
|
70,957 | 9,169 | 100,127 | 153,231 | (73,481 | ) | |||||||||||||||
|
Total assets
|
2,177,642 | 2,490,777 | 2,562,425 | 2,585,092 | 2,719,572 | ||||||||||||||||
|
Total debt
|
1,230,718 | 1,446,525 | 1,469,322 | 1,100,987 | 1,124,292 | ||||||||||||||||
|
Total Select Medical Corporation stockholders’ equity
|
614,002 | 624,171 | 630,315 | 1,037,064 | 1,084,594 | ||||||||||||||||
| (1) | Adjusted for the adoption of an amendment issued by the FASB in December 2007 to ASC Topic 810, “Consolidation.” See Note 1, Organization and Significant Accounting Policies — Non-controlling Interests, in our audited consolidated financial statements. | |
| (2) | Adjusted for the clarification by the FASB that stated share based payment awards that have not vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. See Note 14 in our audited consolidated financial statements for additional information. | |
| (3) | Operating expenses include cost of services, general and administrative expenses, and bad debt expenses. | |
| (4) | Includes stock compensation expense related to restricted stock, stock options and long term incentive compensation for the years ended December 31, 2006, 2007, 2008, 2009 and 2010. | |
| (5) | In the year ended December 31, 2008, we paid approximately $1.0 million to repurchase and retire a portion of Select’s 7 5 / 8 % senior subordinated notes. These notes had a carrying value of $2.0 million. The gain on early retirement of debt recognized was net of the write-off of unamortized deferred financing costs related to the debt. During the year ended December 31, 2009, we paid approximately $30.1 million to repurchase and retire a portion of Select’s 7 5 / 8 % senior subordinated notes. These notes had a carrying value of $46.5 million. The gain on early retirement of debt recognized was net of the write-off of unamortized deferred financing costs related to the debt. These gains were offset by the write-off of deferred financing costs of $2.9 million that occurred due to our early prepayment on the term loan portion of our credit facility. In addition, Holdings paid $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. The gain on early retirement of debt recognized was net of the write-off of unamortized deferred financing costs related to the debt. | |
| (6) | Interest expense, net equals interest expense minus interest income. | |
| (7) | Reflects interests held by other parties in subsidiaries, limited liability companies and limited partnerships owned and controlled by us. |
46
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read this discussion together with the
“Selected Financial Data” and consolidated financial
statements and accompanying notes included elsewhere herein.
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
December 31, 2010, we operated 111 long term acute care
hospitals and seven acute medical rehabilitation hospitals in
28 states, and 944 outpatient rehabilitation clinics in
36 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 hospital segment and our outpatient rehabilitation
segment. We had net operating revenues of $2,390.3 million
for the year ended December 31, 2010. Of this total, we
earned approximately 71% of our net operating revenues from our
specialty hospitals and approximately 29% from our outpatient
rehabilitation business. Our specialty hospital segment consists
of hospitals designed to serve the needs of long term stay acute
patients and hospitals designed to serve patients that require
intensive medical rehabilitation care. Patients are typically
admitted to our specialty 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.
Significant
2010 Events
Share
Repurchase Program
In November 2010 our board of directors authorized a program to
repurchase up to $100.0 million worth of shares of our
common stock. The program will remain in effect until
January 31, 2012, unless extended by our board of
directors. Funding for this program has come from cash on hand
and borrowings under our revolving credit facility. Select has
repurchased 6,905,700 shares at a cost of
$44.1 million, which includes related transaction costs
through December 31, 2010.
Purchase
of Regency Hospital Company, L.L.C.
On September 1, 2010, we 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 non-controlling
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.
Extension
to Revolving Credit Facility
On June 7, 2010 we entered into an Assignment and
Assumption and Amendment No. 4 (“Amendment
No. 4”) to Select’s senior secured credit
facility (the “Credit Agreement”) with a group of
lenders and JPMorgan Chase Bank, N.A. as administrative agent.
Amendment No. 4 extended the maturity of all
$300.0 million of commitments under Select’s revolving
credit facility from February 24, 2011 to August 22,
2013, and made related technical changes to the Credit
Agreement. The applicable margin percentage for extended
revolving loans and the commitment fee rate for extended
revolving commitments have increased and will be determined
based on a pricing grid set forth in Amendment No. 4. Under
the pricing grid, the applicable margin percentage for revolving
ABR loans ranges from 2% per annum to 3% per annum, the
applicable margin percentage for revolving Eurodollar
47
loans ranges from 3% per annum to 4% per annum, and the
commitment fee rate for extended revolving commitments ranges
from 0.375% to 0.75%.
On June 7, 2010, we also entered into an Amendment
No. 4-A
to the Credit Agreement with a group of lenders and JPMorgan
Chase Bank, N.A. as administrative agent. Amendment
No. 4-A
made a technical change to the Credit Agreement that permits us
to refinance existing indebtedness with the proceeds of new
indebtedness, including the refinancing of existing senior
subordinated indebtedness with the proceeds of new senior
subordinated indebtedness.
Summary
Financial Results
Year
Ended December 31, 2010
For the year ended December 31, 2010, our net operating
revenues increased 6.7% to $2,390.3 million compared to
$2,239.9 million for the year ended December 31, 2009.
This increase in net operating revenues resulted from a 9.3%
increase in our specialty hospital net operating revenue and a
0.9% increase in our outpatient rehabilitation net operating
revenue. The increase in our specialty hospital revenue is
principally due to the hospitals we opened and acquired in 2009
and 2010. We had income from operations for the year ended
December 31, 2010 of $236.1 million compared to
$235.8 million for the year ended December 31, 2009.
The small increase in our income from operations is principally
related to a reduction in our general and administrative
expenses offset in part by a decline in profitability of our
specialty hospitals opened as of January 1, 2009 and
operated throughout both periods. Holdings’ interest
expense for the year ended December 31, 2010 was
$112.3 million compared to $132.5 million for the year
ended December 31, 2009. Select’s interest expense for
the year ended December 31, 2010 was $84.5 million
compared to $99.5 million for the year ended
December 31, 2009. The decrease in interest expense for
both Holdings and Select is attributable to a reduction in
outstanding debt balances that occurred during 2009 and lower
interest rates that resulted from the expiration of interest
rate swaps that carried higher fixed interest rates.
Cash flow from operations provided $144.5 million of cash
for the year ended December 31, 2010 for Holdings and
$170.1 million of cash for the year ended December 31,
2010 for Select. The difference between Holdings and Select
primarily relates to interest payments on Holdings’ senior
subordinated notes and senior floating rate notes.
2010
Quarterly Results
The following is a summary of certain of our quarterly financial
data for the year ended December 31, 2010. See Note 20
to our audited consolidated financial statements for additional
quarterly financial data.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net operating revenues:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 411,685 | $ | 403,079 | $ | 419,798 | $ | 467,603 | $ | 1,702,165 | ||||||||||
|
Outpatient rehabilitation
|
173,065 | 176,785 | 168,438 | 169,729 | 688,017 | |||||||||||||||
|
Other
|
63 | 13 | 14 | 18 | 108 | |||||||||||||||
|
Total company
|
$ | 584,813 | $ | 579,877 | $ | 588,250 | $ | 637,350 | $ | 2,390,290 | ||||||||||
|
Income (loss) from operations:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 71,938 | $ | 62,445 | $ | 47,045 | $ | 58,014 | $ | 239,442 | ||||||||||
|
Outpatient rehabilitation
|
14,662 | 21,013 | 15,386 | 12,267 | 63,328 | |||||||||||||||
|
Other
|
(13,951 | ) | (10,882 | ) | (20,477 | ) | (21,323 | ) | (66,633 | ) | ||||||||||
|
Total company
|
$ | 72,649 | $ | 72,576 | $ | 41,954 | $ | 48,958 | $ | 236,137 | ||||||||||
48
Specialty
hospitals
Net operating revenues in our specialty hospitals are affected
by our occupancy and the amount of payments we received from the
patients we treat. Our third and fourth quarter net operating
revenues were positively affected by the addition of the
hospitals acquired in the Regency transaction. We typically
experience our highest occupancy during the first quarter due to
the higher incident of illnesses over the winter months. Our
occupancy percentages were 70%, 68%, 65% and 66% for the first,
second, third and fourth quarters, respectively. Our patient
population is predominately Medicare which represented on
average 64% of our patient days in 2010. During 2010 we
experienced a reduction in the payment rates we receive from the
Medicare program due to regulatory changes. Overall, our net
revenue per patient day was $1,491, $1,474, 1,478 and 1,457 for
the first, second, third and fourth quarters, respectively. Our
net revenue per patient day is affected by the severity of the
patients we treat. We generally see our most complex cases in
the first quarter, which results in a increase in the severity
of our patients and our payments. We completed the Regency
acquisition on September 1, 2010 which added incremental
revenues of $22.8 million in the third quarter and
$71.1 million in the fourth quarter of 2010.
Income from operations generated by our specialty hospitals
declined throughout 2010 as a result of the decline in our net
revenue per patient day discussed above, higher patient care
costs that are discussed in greater detail under “Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009 — Operating Expenses,” a
$4.0 million charge due to an increase in our workers
compensation program costs incurred during the third quarter and
the underperformance of the hospitals we acquired in the Regency
transaction. The principal reason for the underperformance of
the Regency hospitals is due to lower than expected net
operating revenue which has resulted from the transition of the
Regency hospitals onto Select’s information technology
platforms which include Select’s patient accounting system
and charge capture systems. The conversion resulted in a
reduction in gross charges for patient care services. While
gross charges are generally not utilized by payors in
compensating us, Medicare does compute its payments for outlier
cases based on gross charges for those specific patient
discharges. We estimate that our payments from Medicare for
outlier cases at the Regency hospitals was approximately
$6.0 million lower for the period from September 1,
2010 through December 31, 2010 than if these patient
discharges had been remitted and paid under the legacy Regency
systems. While we experienced a current reduction in revenue as
a result of this transition, the Medicare system annually
recalibrates for each hospital the rate at which it pays for
outlier cases. This revised rate is based on the relationship of
costs to gross charges. Since these hospitals experienced a
decline in gross charges, the relationship of cost to gross
charges will increase and result in a higher revised rate for
outlier cases. Thus, assuming our mix and volume of outlier
cases at the Regency hospitals remain consistent in subsequent
periods, we anticipate receiving higher payments for these
outlier cases in the future. Because each hospital has a
different Medicare reporting year, the twelve month period over
which we would receive higher payments on outlier cases would
vary by hospital but could begin to occur in the third quarter
of 2011 and extend through first quarter of 2013.
Outpatient
rehabilitation
Our outpatient rehabilitation net operating revenue is comprised
of services provided in our outpatient rehabilitation clinics
and through contractual relationships with nursing facilities,
schools, hospitals, assisted living and senior care centers. Our
patient volumes have remained consistent in our rehabilitation
clinics and we typically experienced our greatest patient
volumes during the second quarter. Our net revenue per visit has
remained consistent throughout 2010 at $101 to $102 per patient
visit. Our contract services experienced a decline in net
operating revenues as 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.
Additionally, during the fourth quarter we experienced higher
labor costs in our contact services business as we adjusted our
treatment models to adapt to RUGS IV/MDS 3.0 rules that became
effective on October 1, 2010. We were able to partially
offset some of the lost net revenue through the addition of new
contracts in the fourth quarter of 2010. Our income from
operations in the third and fourth quarter was adversely
affected from the loss of the contract services locations. This
is explained in greater detail under “Year Ended
December 31, 2010 Compared to Year Ended December 31,
2009 — Adjusted EBITDA — Outpatient
Rehabilitation.”
49
Other
The loss from operations for the “Other” category is
primarily related to our general and administrative expenses.
Our general and administrative and expenses were greater by
$2.2 million and $6.8 million in the third and fourth
quarters resulting from the additional costs we incurred related
to the transition and closing of the Regency corporate office
which was completed in December 2010. Additionally during the
third quarter we incurred a $4.8 million charge due to an
increase in employee healthcare costs.
Year
Ended December 31, 2009
For the year ended December 31, 2009, our net operating
revenues increased 4.0% to $2,239.9 million compared to
$2,153.4 million for the year ended December 31, 2008.
This increase in net operating revenues resulted from a 4.7%
increase in our specialty hospital net operating revenue and a
2.6% increase in our outpatient rehabilitation net operating
revenue from the prior year. The increase in our specialty
hospital revenue was principally due to the hospitals we opened
in 2008. The increase in our outpatient rehabilitation revenue
was principally due to an increase in contract services based
revenue. We had income from operations for the year ended
December 31, 2009 of $235.8 million compared to
$196.4 million for the year ended December 31, 2008.
The increase in income from operations was principally related
to an increase in profitability of our specialty hospitals
opened as of January 1, 2008 and operated throughout both
periods, an improvement in the operating results of the
hospitals opened in 2008 and the growth in our contract services
business, offset by the compensation costs of $22.0 million
we incurred in connection with our initial public offering of
common stock. Holdings’ interest expense for the year ended
December 31, 2009 was $132.5 million compared to
$145.9 million for the year ended December 31, 2008.
Select’s interest expense for the year ended
December 31, 2009 was $99.5 million compared to
$110.9 million for the year ended December 31, 2008.
The decrease in interest expense for both Holdings and Select
was attributable to a reduction in outstanding debt balances
during the year ended December 31, 2009.
Cash flow from operations provided $165.6 million of cash
for the year ended December 31, 2009 for Holdings and
$198.5 million of cash for the year ended December 31,
2009 for Select. The difference between Holdings and Select
primarily relates to interest payments on Holdings’ senior
subordinated notes and senior floating rate notes.
Regulatory
Changes
The Medicare program reimburses us for services furnished to
Medicare beneficiaries, which are generally persons age 65
and older, those who are chronically disabled, and those
suffering from end stage renal disease. Net operating revenues
generated directly from the Medicare program represented
approximately 46% of our consolidated net operating revenues for
the year ended December 31, 2008, 47% for the year ended
December 31, 2009, and 47% for the year ended
December 31, 2010.
The Medicare program reimburses our long term acute care
hospitals, inpatient rehabilitation facilities and outpatient
rehabilitation providers, using different payment methodologies.
Those payment methodologies are complex and are described
elsewhere in this report under “Business —
Government Regulation.” The following is a summary of some
of the more significant healthcare regulatory changes that have
affected our financial performance in the periods covered by
this report or are likely to affect our financial performance
and financial condition in the future.
Medicare
Reimbursement of Long Term Acute Care Hospital
Services
In the last few years, there have been significant regulatory
changes affecting long term acute care hospitals that have
affected our net operating revenues and, in some cases, caused
us to change our operating models and strategies. We have been
subject to regulatory changes that occur through the rulemaking
procedures of the Centers for Medicare & Medicaid
Services, or “CMS.” Historically, rule updates
occurred twice each year. All Medicare payments to our long term
acute care hospitals are made in accordance with a prospective
payment system specifically applicable to long term acute care
hospitals, referred to as “LTCH-PPS.” Proposed rules
specifically related to LTCHs were generally published in
January, finalized in May and effective on July 1st of
each year. Additionally, LTCHs are subject to annual updates to
the rules related to the inpatient prospective payment system
for general acute care hospitals, or “IPPS,” that are
typically proposed in May, finalized in August and effective on
50
October 1st of each year. In the annual payment rate
update for the 2009 fiscal year, CMS consolidated the two
historical annual updates into one annual update. The final rule
adopted a
15-month
rate update for fiscal year 2009 and moved the LTCH-PPS from a
July-June update cycle to an October-September cycle. Beginning
fiscal year 2010 the LTCH updates will begin October 1,
coinciding with the start of the federal fiscal year.
The following is a summary of significant changes to the
Medicare prospective payment system for long term acute care
hospitals during 2009 and 2010.
Rate Year 2009.
On May 9, 2008, CMS
published its annual payment rate update for the 2009 LTCH-PPS
rate year, or “RY 2009” (affecting discharges and cost
reporting periods beginning on or after July 1, 2008). The
final rule adopted a
15-month
rate update, from July 1, 2008 through September 30,
2009 and moved LTCH-PPS from a July-June update cycle to the
same update cycle as the general acute care hospital inpatient
rule (October — September). For RY 2009, the rule
established a 2.7% update to the standard federal rate. The
standard federal rate for RY 2009 was set at $39,114, an
increase from the revised RY 2008 standard federal rate of
$38,086 applied to discharges occurring on or after
April 1, 2008 through June 30, 2008. The rule
increased the fixed-loss amount for high cost outlier cases by
$2,222 to $22,960.
Fiscal Year 2009.
On August 19, 2008, CMS
published the IPPS final rule for fiscal year 2009 (affecting
discharges and cost reports beginning on or after
October 1, 2008 through September 30, 2009), which
made limited revisions to the classifications of cases in
MS-LTC-DRGs.
June 3, 2009 Interim Final Rule.
On
June 3, 2009, CMS published an interim final rule in which
CMS adopted a new table of MS-LTC-DRG relative weights that
applied to the remainder of fiscal year 2009 (June 3, 2009
through September 30, 2009). This interim final rule
revised the MS-LTC-DRG relative weights for payment under the
LTCH-PPS for fiscal year 2009 due to CMS’s misapplication
of its established methodology in the calculation of the budget
neutrality factor in the fiscal year 2009 rule making. This
error resulted in relative weights that were higher, by
approximately 3.9% for all of fiscal year 2009 (October 1,
2008 through September 30, 2009). However, CMS only applied
the corrected weights to the remainder of fiscal year 2009 (from
June 3, 2009 through September 30, 2009), which had
the effect of reducing reimbursement by approximately 3.9%.
Fiscal Year 2010.
On August 27, 2009, CMS
published its annual payment rate update for the 2010 LTCH-PPS
fiscal year (affecting discharges and cost reporting periods
beginning on or after October 1, 2009 through
September 30, 2010). The increase in the standard federal
rate used a 2.0% update factor based on the market basket update
of 2.5% less an adjustment of 0.5% to account for changes in
documentation and coding practices. As a result, the standard
federal rate for fiscal year 2010 was set at $39,897, an
increase from $39,114 in rate year 2009. The fixed loss amount
for high cost outlier cases was set at $18,425. This was a
decrease from the fixed loss amount in the 2009 rate year of
$22,960.
On June 2, 2010, CMS published a notice of changes to the
payment rates for LTCH-PPS during the portion of fiscal 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 fiscal
year 2010. This change to the LTCH-PPS standard federal rate for
the remainder of fiscal year 2010 included an additional
reduction of 0.25% as mandated by the PPACA. The notice revised
the fixed-loss amount for high cost outlier cases for fiscal
year 2010 discharges occurring on or after April 1, 2010 to
$18,615, which is higher than the fiscal year 2010 fixed-loss
amount of $18,425 in effect from October 1, 2009 to
March 31, 2010.
Fiscal Year 2011
.
On August 16,
2010, CMS published the policies and payment rates for LTCH-PPS
for fiscal year 2011 (affecting discharges and cost reporting
periods beginning on or after October 1, 2010 through
September 30, 2011). The standard federal rate for fiscal
year 2011 is $39,600, which is a decrease from the fiscal year
2010 standard federal rate of $39,897 in effect from
October 1, 2009 to March 31, 2010 and the fiscal year
2010 standard federal rate of $39,795 that went into effect on
April 1, 2010. This update 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 (rate years 2008 and
2009) that resulted from changes in documentation and
coding practices less an additional reduction of 0.5% as
mandated by the PPACA. The final rule establishes a fixed-loss
amount for high cost outlier cases for fiscal year 2011 of
$18,785, which is higher than the fiscal year 2010 fixed-loss
amount of $18,425 in effect from October 1, 2009 to
March 31, 2010 and the $18,615 that
51
went into effect on April 1, 2010. The final rule includes
revisions to the relative weights for each of the MS-LTC-DRGs
for fiscal year 2011.
Extension
of Changes Made by the Medicare, Medicaid, and SCHIP Extension
Act of 2007
On March 23, 2010, President Obama signed into law, the
“Patient Protection and Affordable Care Act”
(“PPACA”). The PPACA adopts significant changes to the
Medicare program that are particularly relevant to our long term
acute care hospitals, inpatient rehabilitation facilities and
outpatient rehabilitation services. Among other changes, the
PPACA applies a market basket payment adjustment to LTCHs and
IRFs. In addition, the PPACA includes a two-year extension to
sections of the Medicare, Medicaid, and SCHIP Extension Act of
2007 (“SCHIP Extension Act”), as amended by the
American Recovery and Reinvestment Act of 2009
(“ARRA”). The two-year extension applies the relief
granted 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 the
SCHIP Extension Act. These changes are described further below.
Medicare
Market Basket Adjustments
The PPACA institutes a market basket payment adjustment to
LTCHs. In fiscal year 2010, LTCHs were subject to a market
basket reduction of minus 0.25% for discharges occurring after
April 1, 2010 through September 30, 2010. In fiscal
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 fiscal years 2012 and 2013. Fiscal year
2014 the market basket update will be reduced by 0.3%. Fiscal
years 2015 and 2016 the market basket update will be reduced by
0.2%. Finally, in fiscal 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.
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 general acute care
hospitals.
25 Percent
Rule
The 25 Percent 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 caused the LTCH to exceed the
applicable percentage thresholds for discharged Medicare
patients. The SCHIP Extension Act, as amended by the ARRA and
the PPACA, has limited the application of the 25 Percent
Rule, as described elsewhere in this report under
“Business — Government Regulation.” After
the expiration of the regulatory relief provided by the SCHIP
Extension Act, the ARRA and PPACA, our LTCHs will be subject to
a downward payment adjustment for any Medicare patients who were
admitted from a co-located or a non-co-located hospital and that
exceed the applicable percentage threshold of all Medicare
patients discharged from the LTCH during the cost reporting
period.
One-Time
Budget Neutrality Adjustment
The regulations governing LTCH-PPS authorizes CMS 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. The
SCHIP Extension Act precluded CMS from implementing the one-time
prospective adjustment to the LTCH standard federal rate 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. In the rate year 2009 final rule, CMS
estimated this
52
one-time adjustment would result in a negative adjustment of
3.75% to the LTCH base rate. 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
general acute 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
IPPS, 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 subject to certain exceptions. PPACA extends this
moratorium by two years. The moratorium will now expire on
December 28, 2012.
Medicare
Reimbursement of Inpatient Rehabilitation Facility
Services
The following is a summary of significant changes to the
Medicare prospective payment system for inpatient rehabilitation
facilities during 2009 and 2010.
Fiscal Year 2009.
On August 8, 2008, CMS
published the final rule for the inpatient rehabilitation
facility prospective payment system (“IRF-PPS”) for
fiscal year 2009 (affecting discharges and cost reporting
periods beginning on or after October 1, 2008 through
September 30, 2009). The final rule included changes to the
IRF-PPS regulations designed to implement portions of the SCHIP
Extension Act. In particular, the patient classification
criteria compliance threshold was established at 60 percent
(with comorbidities counting toward this threshold). In addition
to updating the various values that compose the IRF-PPS, the
final rule updated the outlier threshold amount to $10,250 from
$7,362 for fiscal year 2008.
Fiscal Year 2010.
On August 7, 2009, CMS
published its final rule establishing the annual payment rate
update for the IRF-PPS for fiscal year 2010 (affecting
discharges and cost reporting periods beginning on or after
October 1, 2009 through September 30, 2010). The
standard federal rate is established at $13,661 for fiscal year
2010, an increase from $12,958 in fiscal year 2009. The outlier
threshold amount was set at $10,652, an increase from $10,250 in
fiscal year 2009.
In the same final rule, CMS adopted new coverage criteria,
including requirements for preadmission screening,
post-admission evaluations, and individualized treatment
planning that emphasize the role of physicians in ordering and
overseeing beneficiaries’ IRF care. Among other things, the
rule requires IRF services to be ordered by a rehabilitation
physician with specialized training and experience in
rehabilitation services and be coordinated by an
interdisciplinary team meeting the rule’s specifications.
The interdisciplinary team must meet weekly to review the
patient’s progress and make any needed adjustments to the
individualized plan of care. IRFs must use qualified personnel
to provide required rehabilitation nursing, physical therapy,
occupational therapy,
speech-language
pathology, social services, psychological services, and
prosthetic and orthotic services (CMS notes that it also is
considering adopting specific standards on the use of group
therapies at a future date). The rule also includes new
documentation requirements, including a requirement that IRFs
submit patient assessment data on Medicare Advantage patients.
On July 22, 2010, CMS published a notice of changes to the
payment rates for IRF-PPS during the portion of fiscal year 2010
occurring on or after April 1, 2010 through
September 30, 2010. The PPACA mandates a market basket
reduction of 0.25% for fiscal year 2010. The standard federal
rate for discharges occurring on or after April 1, 2010 was
revised to $13,627. This change reflects a decrease from $13,661
established in the original final rule for fiscal year 2010. In
the same notice, CMS increased the outlier threshold amount to
$10,721 for discharges
53
occurring on or after April 1, 2010 for the remainder of
the fiscal year. The outlier threshold was $10,652 for
discharges occurring on or after October 1, 2009 through
March 31, 2010.
Fiscal Year 2011.
On July 22, 2010, CMS
published an update to the payment rates for IRF-PPS for fiscal
year 2011 (affecting discharges and cost reporting periods
beginning on or after October 1, 2010 through
September 30, 2011). The standard federal rate for
discharges during fiscal year 2011 is revised to $13,860. This
change reflects an increase from $13,627 established in the
revised final rule for fiscal year 2010, and includes the market
basket reduction of 0.25% required by PPACA. CMS also increased
the outlier threshold amount for fiscal year 2011 to $11,410
from $10,721.
Medicare
Market Basket Adjustments
The PPACA institutes 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 annual productivity adjustment for
the first time for hospital inpatient services beginning in
fiscal year 2012 for LTCHs and 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
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.
Medicare
Reimbursement of Outpatient Rehabilitation
Services
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”) prevents 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. A reduction in the
Medicare Physician Fee Schedule payment rates will occur on
January 1, 2012, unless Congress again takes legislative
action to prevent the SGR formula reductions from going into
effect. 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 to annual limits for
therapy expenses. Effective January 1, 2011, the annual
limits on outpatient therapy services are $1,870 for combined
physical and speech language pathology services and $1,870 for
occupational therapy services. The per beneficiary caps were
$1,860 for calendar year 2010. These limits do not apply to
services furnished and billed by outpatient hospital
departments. We operated 944 outpatient rehabilitation clinics
at December 31, 2010, of which 93 are provider-based
outpatient rehabilitation clinics operated as departments of our
inpatient rehabilitation hospitals.
54
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
MMEA extends the exceptions process for outpatient therapy caps
through December 31, 2011. Unless Congress extends the
exceptions process, the therapy caps will apply to all
outpatient therapy services beginning January 1, 2012,
except those services furnished and billed by outpatient
hospital departments. In the 2011 final Medicare Physician Fee
Schedule rule CMS indicated they are also evaluating alternative
payment methodologies that would provide appropriate payment for
medically necessary and effective therapy services furnished to
Medicare beneficiaries based on patient needs rather than the
current therapy caps.
Multiple
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. Under the policy, as revised by
the Physician Payment and Therapy Relief Act of 2010, the
Medicare program will pay 100% of the practice expense component
of the therapy procedure or unit of service with the highest
Relative Value Unit (“RVU”), and then reduce payment
for the practice expense component by 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 by a single provider during the same day for the same
patient, regardless of whether those therapy services are
furnished in separate sessions. This policy is effective
January 1, 2011 and will apply to all outpatient therapy
services paid under Medicare Part B. Furthermore, the
multiple procedure payment reduction policy applies across all
therapy disciplines-occupational therapy, physical therapy, and
speech-language
pathology. Our outpatient rehabilitation therapy services are
offered in both office and other non-institutional settings and
institutional settings and, as such, are subject to the
applicable 20% or 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.
Development
of New Specialty Hospitals and Clinics
In addition to the growth of our business through the
acquisition and integration of other businesses, we have also
grown our business through specialty hospital and outpatient
rehabilitation facility development opportunities. Since our
inception in 1997 through December 31, 2010, we have
internally developed 63 specialty hospitals and 299 outpatient
rehabilitation facilities. The SCHIP Extension Act instituted a
three year moratorium on the development of new LTCHs, and the
PPACA extended this moratorium by two years. As a result, we
have stopped all new LTCH development with the exception of one
new hospital under development that we acquired in the Regency
acquisition. We will 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 the local areas that we currently
serve where we can benefit from existing referral relationships
and brand awareness to produce incremental growth.
Critical
Accounting Matters
Merger
Transactions
On February 24, 2005, EGL Acquisition Corp. was merged with
and into Select, with Select continuing as the surviving
corporation and a wholly owned subsidiary of Holdings. The
merger was completed pursuant to an agreement and plan of
merger, dated as of October 17, 2004, among EGL Acquisition
Corp., Holdings and Select. Upon the consummation of the merger,
all of the capital stock of Holdings was owned by an investor
group that included Welsh, Carson, Anderson, & Stowe
(“Welsh Carson”), Thoma Cressey Bravo (“Thoma
Cressey”), and certain other “rollover” investors
that participated in the merger. We refer to the merger and the
related transactions collectively as the “Merger.”
As a result of the Merger transactions, the majority of
Select’s assets and liabilities were adjusted to their fair
value as of February 25, 2005. The excess of the total
purchase price over the fair value of Select’s tangible and
55
identifiable intangible assets was allocated to goodwill.
Additionally, a portion of the equity related to our continuing
stockholders was recorded at the stockholder’s predecessor
basis and a corresponding portion of the fair value of the
acquired assets was reduced accordingly. By definition, our
statements of financial position and results of operations
subsequent to the Merger transactions are not comparable to the
same statements for the periods prior to the Merger transactions
due to the resulting change in basis.
Sources
of Revenue
Our net operating revenues are derived from a number of sources,
including commercial, managed care, private and governmental
payors. Our net operating revenues include amounts estimated by
management to be reimbursable from each of the applicable payors
and the federal Medicare program. Amounts we receive for
treatment of patients are generally less than the standard
billing rates. We account for the differences between the
estimated reimbursement rates and the standard billing rates as
contractual adjustments, which we deduct from gross revenues to
arrive at net operating revenues.
Net operating revenues generated directly from the Medicare
program from all segments represented approximately 47%, 47% and
46% of net operating revenues for the years ended
December 31, 2010, 2009 and 2008, respectively.
Approximately 61%, 63% and 63% of our specialty hospital
revenues for the years ended December 31, 2010, 2009 and
2008, respectively, were received for services provided to
Medicare patients.
Most of our specialty hospitals receive bi-weekly periodic
interim payments from Medicare instead of being paid on an
individual claim basis. Under a periodic interim payment
methodology, Medicare estimates a hospital’s claim volume
based on historical trends and makes bi-weekly interim payments
to us based on these estimates. Twice a year per hospital,
Medicare reconciles the differences between the actual claim
data and the estimated payments. To the extent our actual
hospital’s experience is different from the historical
trends used by Medicare to develop the estimate, the periodic
interim payment will result in our being either temporarily
over-paid or under-paid for our Medicare claims. At each balance
sheet date, we record any aggregate under-payment as an account
receivable or any aggregate over-payment as a payable to
third-party payors on our balance sheet. The timing of receipt
of bi-weekly periodic interim payments can have an impact on our
accounts receivable balance and our days sales outstanding as of
the end of any reporting period.
Contractual
Adjustments
Net operating revenues include amounts estimated by us to be
reimbursable by Medicare and Medicaid under prospective payment
systems and provisions of cost-reimbursement and other payment
methods. In addition, we are reimbursed by non-governmental
payors using a variety of payment methodologies. Amounts we
receive for treatment of patients covered by these programs are
generally less than the standard billing rates. Contractual
allowances are calculated and recorded through our internally
developed systems. In our specialty hospital segment our billing
system automatically calculates estimated Medicare reimbursement
and associated contractual allowances. For non-governmental
payors in our specialty hospital segment, we manually calculate
the contractual allowance for each patient based upon the
contractual provisions associated with the specific payor. In
our outpatient segment, we perform provision testing, using
internally developed systems, whereby we monitor a payors’
historical paid claims data and compare it against the
associated gross charges. This difference is determined as a
percentage of gross charges and is applied against gross billing
revenue to determine the contractual allowances for the period.
Additionally, these contractual percentages are applied against
the gross receivables on the balance sheet to determine that
adequate contractual reserves are maintained for the gross
accounts receivables reported on the balance sheet. We account
for any difference as additional contractual adjustments to
gross revenues to arrive at net operating revenues in the period
that the difference is determined. We believe the processes
described above and used in recording our contractual
adjustments have resulted in reasonable estimates determined on
a consistent basis.
Allowance
for Doubtful Accounts
Substantially all of our accounts receivable are related to
providing healthcare services to patients. Collection of these
accounts receivable is our primary source of cash and is
critical to our operating performance. Our primary
56
collection risks relate to non-governmental payors who insure
these patients, and deductibles, co-payments and self-insured
amounts owed by the patient. Deductibles, co-payments and
self-insured amounts are an immaterial portion of our net
accounts receivable balance. At December 31, 2010,
deductibles, co-payments and self-insured amounts owed by the
patient accounted for approximately 0.3% of our net accounts
receivable balance before doubtful accounts. Our general policy
is to verify insurance coverage prior to the date of admission
for a patient admitted to our hospitals or in the case of our
outpatient rehabilitation clinics, we verify insurance coverage
prior to their first therapy visit. Our estimate for the
allowance for doubtful accounts is calculated by providing a
reserve allowance based upon the age of an account balance.
Generally we reserve as uncollectible all governmental accounts
over 365 days and non-governmental accounts over
180 days from discharge. This method is monitored based on
our historical cash collections experience. Collections are
impacted by the effectiveness of our collection efforts with
non-governmental payors and regulatory or administrative
disruptions with the fiscal intermediaries that pay our
governmental receivables.
We estimate bad debts for total accounts receivable within each
of our operating units. We believe our policies have resulted in
reasonable estimates determined on a consistent basis. We
believe that we collect substantially all of our third-party
insured receivables (net of contractual allowances) which
include receivables from governmental agencies. To date, we
believe there has not been a material difference between our bad
debt allowances and the ultimate historical collection rates on
accounts receivable. We review our overall reserve adequacy by
monitoring historical cash collections as a percentage of net
revenue less the provision for bad debts. Uncollected accounts
are written off the balance sheet when they are turned over to
an outside collection agency, or when management determines that
the balance is uncollectible, whichever occurs first.
The following table is an aging of our net (after allowances for
contractual adjustments but before doubtful accounts) accounts
receivable (in thousands):
| Balance as of December 31, | |||||||||||||||||
| 2009 | 2010 | ||||||||||||||||
|
Over 90
|
Over 90
|
||||||||||||||||
| 0-90 Days | Days | 0-90 Days | Days | ||||||||||||||
|
Medicare and Medicaid
|
$ | 117,991 | $ | 8,307 | $ | 123,657 | $ | 14,538 | |||||||||
|
Commercial insurance, and other
|
176,195 | 47,943 | 192,069 | 67,584 | |||||||||||||
|
Total net accounts receivable
|
$ | 294,186 | $ | 56,250 | $ | 315,726 | $ | 82,122 | |||||||||
The approximate percentage of total net accounts receivable
(after allowance for contractual adjustments but before doubtful
accounts) summarized by aging categories is as follows:
| As of December 31, | |||||||||
| 2009 | 2010 | ||||||||
|
0 to 90 days
|
83.9 | % | 79.4 | % | |||||
|
91 to 180 days
|
6.6 | % | 8.3 | % | |||||
|
181 to 365 days
|
4.7 | % | 6.0 | % | |||||
|
Over 365 days
|
4.8 | % | 6.3 | % | |||||
|
Total
|
100.0 | % | 100.0 | % | |||||
The approximate percentage of total net accounts receivable
(after allowance for contractual adjustments but before doubtful
accounts) summarized by insured status is as follows:
| As of December 31, | |||||||||
| 2009 | 2010 | ||||||||
|
Government payors and insured receivables
|
99.5 | % | 99.7 | % | |||||
|
Self-pay receivables (including deductible and co-payments)
|
0.5 | % | 0.3 | % | |||||
|
Total
|
100.0 | % | 100.0 | % | |||||
57
Insurance
Under a number of our insurance programs, which include our
employee health insurance program and certain components under
our property and casualty insurance program, we are liable for a
portion of our losses. In these cases we accrue for our losses
under an occurrence based principle whereby we estimate the
losses that will be incurred by us in a given accounting period
and accrue that estimated liability. Where we have substantial
exposure, we utilize actuarial methods in estimating the losses.
In cases where we have minimal exposure, we will estimate our
losses by analyzing historical trends. We monitor these programs
quarterly and revise our estimates as necessary to take into
account additional information. At December 31, 2010 and
December 31, 2009, we have recorded a liability of
$73.6 million and $60.8 million, respectively, for our
estimated losses under these insurance programs.
Related
Party Transactions
We are party to various rental and other agreements with
companies affiliated with us through common ownership. Our
payments to these related parties amounted to $3.8 million
and $4.0 million for the years ended December 31, 2010
and 2009, respectively. Our future commitments are related to
commercial office space we lease for our corporate headquarters
in Mechanicsburg, Pennsylvania. These future commitments as of
December 31, 2010 amount to $41.5 million through
2023. These transactions and commitments are described more
fully in the notes to our consolidated financial statements
included herein. The Company’s practice is that any such
transaction must receive the prior approval of both the audit
and compliance committee and a majority of non-interested
members of the board of directors. In addition, it is the
Company’s practice that, prior to any related party
transaction for the lease of office space, that an independent
third-party appraisal is obtained that supports the amount of
rent that the Company is obligated to pay for such leased space.
Goodwill
and Other Intangible Assets
Goodwill and certain other indefinite-lived intangible assets
are subject to periodic impairment evaluations. Our most recent
impairment assessment was completed during the fourth quarter of
2010, which indicated that there was no impairment with respect
to goodwill or other recorded intangible assets. The majority of
our goodwill resides in our specialty hospital reporting unit.
In performing periodic impairment tests, the fair value of the
reporting unit is compared to the carrying value, including
goodwill and other intangible assets. If the carrying value
exceeds the fair value, an impairment condition exists, which
results in an impairment loss equal to the excess carrying
value. Impairment tests are required to be conducted at least
annually, or when events or conditions occur that might suggest
a possible impairment. These events or conditions include, but
are not limited to, a significant adverse change in the business
environment, regulatory environment or legal factors; a current
period operating or cash flow loss combined with a history of
such losses or a projection of continuing losses; or a sale or
disposition of a significant portion of a reporting unit. The
occurrence of one of these events or conditions could
significantly impact an impairment assessment, necessitating an
impairment charge and adversely affecting our results of
operations. For purposes of goodwill impairment assessment, we
have defined our reporting units as specialty hospitals,
outpatient rehabilitation clinics and contract therapy with
goodwill having been allocated among reporting units based on
the relative fair value of those divisions when the Merger
occurred in 2005 and based on subsequent acquisitions.
To determine the fair value of our reporting units, we use a
discounted cash flow approach. Included in the discounted cash
flow are assumptions regarding revenue growth rates, internal
development of specialty hospitals and rehabilitation clinics,
future EBITDA margin estimates, future selling, general and
administrative expense rates and the weighted average cost of
capital for our industry. We also must estimate residual values
at the end of the forecast period and future capital expenditure
requirements. Each of these assumptions requires us to use our
knowledge of (1) our industry, (2) our recent
transactions, and (3) reasonable performance expectations
for our operations. If any one of the above assumptions changes
or fails to materialize, the resulting decline in our estimated
fair value could result in a material impairment charge to the
goodwill associated with any one of the reporting units.
58
Realization
of Deferred Tax Assets
Deferred tax assets and liabilities are required to be
recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets
and liabilities. Deferred tax assets are also required to be
reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be
realized. As part of the process of preparing our consolidated
financial statements, we estimate our income taxes based on our
actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. We also recognize as deferred tax
assets the future tax benefits from net operating loss carry
forwards. We evaluate the realizability of these deferred tax
assets by assessing their valuation allowances and by adjusting
the amount of such allowances, if necessary. Among the factors
used to assess the likelihood of realization are our projections
of future taxable income streams, the expected timing of the
reversals of existing temporary differences, and the impact of
tax planning strategies that could be implemented to avoid the
potential loss of future tax benefits. However, changes in tax
codes, statutory tax rates or future taxable income levels could
materially impact our valuation of tax accruals and assets and
could cause our provision for income taxes to vary significantly
from period to period.
At December 31, 2010, we had deferred tax liabilities in
excess of deferred tax assets of approximately
$28.4 million for both Holdings and Select principally due
to depreciation deductions that have been accelerated for tax
purposes. This amount includes approximately $16.6 million
of valuation reserves related primarily to state net operating
losses.
Uncertain
Tax Positions
We record and review quarterly our uncertain tax positions.
Reserves for uncertain tax positions are established for
exposure items related to various federal and state tax matters.
Income tax reserves are recorded when an exposure is identified
and when, in the opinion of management, it is more likely than
not that a tax position will not be sustained and the amount of
the liability can be estimated. While we believe that our
reserves for uncertain tax positions are adequate, the
settlement of any such exposures at amounts that differ from
current reserves may require us to materially increase or
decrease our reserves for uncertain tax positions.
Stock
Based Compensation
We measure the compensation costs of share-based compensation
arrangements based on the grant-date fair value and recognize
the costs in the financial statements over the period during
which employees are required to provide services. Our
share-based compensation arrangements comprise both stock
options and restricted share plans. We value employee stock
options using the Black-Scholes option valuation method that
uses assumptions that relate to the expected volatility of our
common stock, the expected dividend yield of our stock, the
expected life of the options and the risk free interest rate.
Such compensation amounts, if any, are amortized over the
respective vesting periods or period of service of the option
grant. We value restricted stock grants by using the public
market price of our stock on the date of grant.
59
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. The operating
statistics reflect data for the period of time these operations
were managed by us.
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Specialty hospital
data
(1)
:
|
||||||||||||
|
Number of hospitals — start of period
|
87 | 93 | 94 | |||||||||
|
Number of hospital
start-ups
|
7 | 1 | 1 | |||||||||
|
Number of hospitals acquired
|
2 | 2 | 23 | |||||||||
|
Number of hospitals closed/sold
|
(1 | ) | (2 | ) | (2 | ) | ||||||
|
Number of hospitals consolidated
|
(2 | ) | — | — | ||||||||
|
Number of hospitals owned — end of period
|
93 | 94 | 116 | |||||||||
|
Number of hospitals managed — end of period
|
— | 1 | 2 | |||||||||
|
Total hospitals (all) — end of period
|
93 | 95 | 118 | |||||||||
|
Available licensed beds
|
4,222 | 4,233 | 5,163 | |||||||||
|
Admissions
|
41,177 | 42,674 | 45,990 | |||||||||
|
Patient days
|
1,005,719 | 1,015,500 | 1,119,566 | |||||||||
|
Average length of stay (days)
|
24 | 24 | 24 | |||||||||
|
Net revenue per patient
day
(2)
|
$ | 1,444 | $ | 1,495 | $ | 1,474 | ||||||
|
Occupancy rate
|
67 | % | 67 | % | 67 | % | ||||||
|
Percent patient days — Medicare
|
65 | % | 64 | % | 64 | % | ||||||
|
Outpatient rehabilitation data:
|
||||||||||||
|
Number of clinics owned — start of period
|
918 | 880 | 883 | |||||||||
|
Number of clinics acquired
|
4 | 24 | 1 | |||||||||
|
Number of clinic
start-ups
|
17 | 13 | 23 | |||||||||
|
Number of clinics closed/sold
|
(59 | ) | (34 | ) | (32 | ) | ||||||
|
Number of clinics owned — end of period
|
880 | 883 | 875 | |||||||||
|
Number of clinics managed — end of period
|
76 | 78 | 69 | |||||||||
|
Total number of clinics (all) — end of period
|
956 | 961 | 944 | |||||||||
|
Number of visits
|
4,533,727 | 4,502,049 | 4,567,153 | |||||||||
|
Net revenue per
visit
(3)
|
$ | 102 | $ | 102 | $ | 101 | ||||||
| (1) | Specialty hospitals consist of long term acute care hospitals and inpatient rehabilitation facilities. | |
| (2) | Net revenue per patient day is calculated by dividing specialty hospital direct 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 contract services revenue. |
60
Results
of Operations
The following table outlines, for the periods indicated,
selected operating data as a percentage of net operating
revenues:
| Select Medical Holdings Corporation | ||||||||||||
|
Year
|
Year
|
Year
|
||||||||||
|
Ended
|
Ended
|
Ended
|
||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Net operating revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost of
services
(1)
|
83.2 | 81.3 | 82.9 | |||||||||
|
General and administrative
|
2.2 | 3.2 | 2.6 | |||||||||
|
Bad debt expense
|
2.2 | 1.8 | 1.7 | |||||||||
|
Depreciation and amortization
|
3.3 | 3.2 | 2.9 | |||||||||
|
Income from operations
|
9.1 | 10.5 | 9.9 | |||||||||
|
Gain on early retirement of debt
|
0.0 | 0.6 | — | |||||||||
|
Equity in losses of unconsolidated subsidiaries
|
— | — | (0.0 | ) | ||||||||
|
Other income (expense)
|
— | (0.0 | ) | 0.0 | ||||||||
|
Interest expense, net
|
(6.7 | ) | (5.9 | ) | (4.7 | ) | ||||||
|
Income before income taxes
|
2.4 | 5.2 | 5.2 | |||||||||
|
Income tax expense
|
1.2 | 1.7 | 1.7 | |||||||||
|
Net income
|
1.2 | 3.5 | 3.5 | |||||||||
|
Net income attributable to non-controlling interests
|
0.2 | 0.2 | 0.2 | |||||||||
|
Net income attributable to Holdings
|
1.0 | % | 3.3 | % | 3.3 | % | ||||||
| Select Medical Corporation | ||||||||||||
|
Year
|
Year
|
Year
|
||||||||||
|
Ended
|
Ended
|
Ended
|
||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Net operating revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost of
services
(1)
|
83.2 | 81.3 | 82.9 | |||||||||
|
General and administrative
|
2.2 | 3.2 | 2.6 | |||||||||
|
Bad debt expense
|
2.2 | 1.8 | 1.7 | |||||||||
|
Depreciation and amortization
|
3.3 | 3.2 | 2.9 | |||||||||
|
Income from operations
|
9.1 | 10.5 | 9.9 | |||||||||
|
Gain on early retirement of debt
|
0.0 | 0.6 | — | |||||||||
|
Equity in losses of unconsolidated subsidiaries
|
— | — | (0.0 | ) | ||||||||
|
Other income (expense)
|
(0.1 | ) | 0.1 | 0.0 | ||||||||
|
Interest expense, net
|
(5.1 | ) | (4.4 | ) | (3.5 | ) | ||||||
|
Income before income taxes
|
3.9 | 6.8 | 6.4 | |||||||||
|
Income tax expense
|
1.7 | 2.2 | 2.2 | |||||||||
|
Net income
|
2.2 | 4.6 | 4.2 | |||||||||
|
Net income attributable to non-controlling interests
|
0.2 | 0.2 | 0.2 | |||||||||
|
Net income attributable to Select
|
2.0 | % | 4.4 | % | 4.0 | % | ||||||
61
The following tables summarize selected financial data by
business segment, for the periods indicated:
| Select Medical Holdings Corporation | ||||||||||||||||||||
|
%
|
%
|
|||||||||||||||||||
|
Year Ended
|
Year Ended
|
Year Ended
|
Change
|
Change
|
||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
2008-
|
2009-
|
||||||||||||||||
| 2008 | 2009 | 2010 | 2009 | 2010 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net operating revenues:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 1,488,412 | $ | 1,557,821 | $ | 1,702,165 | 4.7 | % | 9.3 | % | ||||||||||
|
Outpatient rehabilitation
|
664,760 | 681,892 | 688,017 | 2.6 | 0.9 | |||||||||||||||
|
Other
(3)
|
190 | 158 | 108 | (16.8 | ) | (31.6 | ) | |||||||||||||
|
Total company
|
$ | 2,153,362 | $ | 2,239,871 | $ | 2,390,290 | 4.0 | % | 6.7 | % | ||||||||||
|
Income (loss) from operations:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 192,450 | $ | 247,891 | $ | 239,442 | 28.8 | % | (3.4 | )% | ||||||||||
|
Outpatient rehabilitation
|
52,964 | 64,109 | 63,328 | 21.0 | (1.2 | ) | ||||||||||||||
|
Other
(3)
|
(49,006 | ) | (76,162 | ) | (66,633 | ) | (55.4 | ) | 12.5 | |||||||||||
|
Total company
|
$ | 196,408 | $ | 235,838 | $ | 236,137 | 20.1 | % | 0.1 | % | ||||||||||
|
Adjusted
EBITDA:
(2)
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 236,388 | $ | 290,370 | $ | 284,558 | 22.8 | % | (2.0 | )% | ||||||||||
|
Outpatient rehabilitation
|
77,279 | 89,072 | 83,772 | 15.3 | (6.0 | ) | ||||||||||||||
|
Other
(3)
|
(43,380 | ) | (49,215 | ) | (61,251 | ) | (13.5 | ) | (24.5 | ) | ||||||||||
|
Adjusted EBITDA
margins:
(2)
|
||||||||||||||||||||
|
Specialty hospitals
|
15.9 | % | 18.6 | % | 16.7 | % | ||||||||||||||
|
Outpatient rehabilitation
|
11.6 | 13.1 | 12.2 | |||||||||||||||||
|
Other
(3)
:
|
N/M | N/M | N/M | |||||||||||||||||
|
Total assets:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 1,910,402 | $ | 1,936,416 | $ | 2,162,726 | ||||||||||||||
|
Outpatient rehabilitation
|
504,869 | 497,925 | 481,828 | |||||||||||||||||
|
Other
(3)
|
164,198 | 153,805 | 77,532 | |||||||||||||||||
|
Total company
|
$ | 2,579,469 | $ | 2,588,146 | $ | 2,722,086 | ||||||||||||||
|
Purchases of property and equipment, net:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 40,069 | $ | 46,452 | $ | 39,237 | ||||||||||||||
|
Outpatient rehabilitation
|
13,271 | 9,940 | 9,449 | |||||||||||||||||
|
Other
(3)
|
3,164 | 1,485 | 3,075 | |||||||||||||||||
|
Total company
|
$ | 56,504 | $ | 57,877 | $ | 51,761 | ||||||||||||||
62
| Select Medical Corporation | ||||||||||||||||||||
|
%
|
%
|
|||||||||||||||||||
|
Year Ended
|
Year Ended
|
Year Ended
|
Change
|
Change
|
||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
2008-
|
2009-
|
||||||||||||||||
| 2008 | 2009 | 2010 | 2009 | 2010 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net operating revenues:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 1,488,412 | $ | 1,557,821 | $ | 1,702,165 | 4.7 | % | 9.3 | % | ||||||||||
|
Outpatient rehabilitation
|
664,760 | 681,892 | 688,017 | 2.6 | 0.9 | |||||||||||||||
|
Other
(3)
|
190 | 158 | 108 | (16.8 | ) | (31.6 | ) | |||||||||||||
|
Total company
|
$ | 2,153,362 | $ | 2,239,871 | $ | 2,390,290 | 4.0 | % | 6.7 | % | ||||||||||
|
Income (loss) from operations:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 192,450 | $ | 247,891 | $ | 239,442 | 28.8 | % | (3.4 | )% | ||||||||||
|
Outpatient rehabilitation
|
52,964 | 64,109 | 63,328 | 21.0 | (1.2 | ) | ||||||||||||||
|
Other
(3)
|
(49,006 | ) | (76,162 | ) | (66,633 | ) | (55.4 | ) | 12.5 | |||||||||||
|
Total company
|
$ | 196,408 | $ | 235,838 | $ | 236,137 | 20.1 | % | 0.1 | % | ||||||||||
|
Adjusted
EBITDA:
(2)
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 236,388 | $ | 290,370 | $ | 284,558 | 22.8 | % | (2.0 | )% | ||||||||||
|
Outpatient rehabilitation
|
77,279 | 89,072 | 83,772 | 15.3 | (6.0 | ) | ||||||||||||||
|
Other
(3)
|
(43,380 | ) | (49,215 | ) | (61,251 | ) | (13.5 | ) | (24.5 | ) | ||||||||||
|
Adjusted EBITDA
margins:
(2)
|
||||||||||||||||||||
|
Specialty hospitals
|
15.9 | % | 18.6 | % | 16.7 | % | ||||||||||||||
|
Outpatient rehabilitation
|
11.6 | 13.1 | 12.2 | |||||||||||||||||
|
Other
(3)
:
|
N/M | N/M | N/M | |||||||||||||||||
|
Total assets:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 1,910,402 | $ | 1,936,416 | $ | 2,162,726 | ||||||||||||||
|
Outpatient rehabilitation
|
504,869 | 497,925 | 481,828 | |||||||||||||||||
|
Other
(3)
|
147,154 | 150,751 | 75,018 | |||||||||||||||||
|
Total company
|
$ | 2,562,425 | $ | 2,585,092 | $ | 2,719,572 | ||||||||||||||
|
Purchases of property and equipment, net:
|
||||||||||||||||||||
|
Specialty hospitals
|
$ | 40,069 | $ | 46,452 | $ | 39,237 | ||||||||||||||
|
Outpatient rehabilitation
|
13,271 | 9,940 | 9,449 | |||||||||||||||||
|
Other
(3)
|
3,164 | 1,485 | 3,075 | |||||||||||||||||
|
Total company
|
$ | 56,504 | $ | 57,877 | $ | 51,761 | ||||||||||||||
63
The following tables reconcile same hospitals information:
|
Year Ended
|
||||||||
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| (In thousands) | ||||||||
|
Net operating revenue
|
||||||||
|
Specialty hospitals net operating revenue
|
$ | 1,488,412 | $ | 1,557,821 | ||||
|
Less: Specialty hospitals in development, acquired, opened or
closed after 1/1/08
|
56,363 | 108,806 | ||||||
|
Specialty hospitals same store net operating revenue
|
$ | 1,432,049 | $ | 1,449,015 | ||||
|
Adjusted
EBITDA
(2)
|
||||||||
|
Specialty hospitals Adjusted
EBITDA
(2)
|
$ | 236,388 | $ | 290,370 | ||||
|
Less: Specialty hospitals in development, acquired, opened or
closed after 1/1/08
|
(24,303 | ) | (1,452 | ) | ||||
|
Specialty hospitals same store Adjusted
EBITDA
(2)
|
$ | 260,691 | $ | 291,822 | ||||
|
All specialty hospitals Adjusted EBITDA
margin
(2)
|
15.9 | % | 18.6 | % | ||||
|
Specialty hospitals same store Adjusted EBITDA
margin
(2)
|
18.2 | % | 20.1 | % | ||||
|
Year Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2010 | |||||||
| (In thousands) | ||||||||
|
Net operating revenue
|
||||||||
|
Specialty hospitals net operating revenue
|
$ | 1,557,821 | $ | 1,702,165 | ||||
|
Less: Specialty hospitals in development, acquired, opened or
closed after 1/1/09
|
15,203 | 142,563 | ||||||
|
Specialty hospitals same store net operating revenue
|
$ | 1,542,618 | $ | 1,559,602 | ||||
|
Adjusted
EBITDA
(2)
|
||||||||
|
Specialty hospitals Adjusted
EBITDA
(2)
|
$ | 290,370 | $ | 284,558 | ||||
|
Less: Specialty hospitals in development, acquired, opened or
closed after 1/1/09
|
(5,821 | ) | (2,478 | ) | ||||
|
Specialty hospitals same store Adjusted
EBITDA
(2)
|
$ | 296,191 | $ | 287,036 | ||||
|
All specialty hospitals Adjusted EBITDA
margin
(2)
|
18.6 | % | 16.7 | % | ||||
|
Specialty hospitals same store Adjusted EBITDA
margin
(2)
|
19.2 | % | 18.4 | % | ||||
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 on early retirement of debt, stock compensation expense, equity in losses of unconsolidated subsidiaries, other income (expense) and long term incentive compensation. We believe that the presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating units. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, cash flows |
64
| generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See Note 13 to our audited consolidated financial statements for a reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our segment performance. | ||
| (3) | Other includes our general and administrative services and non-healthcare services. |
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
In the following discussion, we address the results of
operations of Select and Holdings. With the exception of
incremental interest expense, other income (expense), gain on
early retirement of debt and income taxes, the results of
operations of Holdings are identical to those of Select.
Therefore, discussion related to net operating revenue,
operating expenses, Adjusted EBITDA, income from operations and
non-controlling interest is identical for Holdings and Select.
Net
Operating Revenues
Our net operating revenues increased by 6.7% to
$2,390.3 million for the year ended December 31, 2010
compared to $2,239.9 million for the year ended
December 31, 2009.
Specialty Hospitals.
Our specialty hospital
net operating revenues increased by 9.3% to
$1,702.2 million for the year ended December 31, 2010
compared to $1,557.8 million for the year December 31,
2009. For the year ended December 31, 2010, the hospitals
opened in 2009 and 2010 increased net operating revenues by
$4.9 million and the hospitals acquired in 2009 and 2010
increased net operating revenues by $127.1 million. These
increases were offset partially by the loss of revenues from
closed and sold hospitals, which accounted for $4.6 million
of the difference in net operating revenues between the year
ended December 31, 2009 and December 31, 2010.
Additionally, net operating revenues for the specialty hospitals
opened as of January 1, 2009 and operated by us throughout
both periods increased by $17.0 million to
$1,559.6 million for the year ended December 31, 2010,
compared to $1,542.6 million for the year ended
December 31, 2009. Our patient days for these same store
hospitals increased 2.0% and was attributable to an increase in
both our Medicare and Non-Medicare patient days. The occupancy
percentage in our same store hospitals was 68% for both the year
ended December 31, 2010 and December 31, 2009. Our
average net revenue per patient day in our same store hospitals
decreased 0.9% to $1,484 for the year ended December 31,
2010 from $1,497 for the year ended December 31, 2009. This
decline in net revenue per patient day resulted from a decline
in our Medicare net revenue per patient day associated with 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. Additionally we
experienced further reductions in the standard federal rate per
case as mandated by PPACA of 0.25% effective April 1, 2010
and 0.5% effective October 1, 2010. These reductions in
Medicare payments were partially offset by the annual payment
update that became effective October 1, 2009. During 2009
we also realized additional reimbursement on our outlier cases
because higher costs incurred at the free-standing hospitals we
developed and opened during 2007 and 2008 had the effect of
increasing our net revenue per patient day for 2009.
Outpatient Rehabilitation.
Our outpatient
rehabilitation net operating revenues increased 0.9% to
$688.0 million for the year ended December 31, 2010
compared to $681.9 million for the year ended
December 31, 2009. The increase in our outpatient
rehabilitation net operating revenues is due to an increase in
the volume of patient visits at our outpatient rehabilitation
clinics. The number of patient visits in our outpatient
rehabilitation clinics increased 1.4% for the year ended
December 31, 2010 to 4,567,153 visits compared to 4,502,049
visits for the year ended December 31, 2009. The increase
in patient visits is principally due to the clinics acquired in
December 2009. Net revenue per visit in our clinics was $101 for
the year ended December 31, 2010 and $102 for the year
ended December 31, 2009.
65
Operating
Expenses
Our operating expenses include our cost of services, general and
administrative expense and bad debt expense. Our operating
expenses increased by $152.3 million to
$2,085.4 million for the year ended December 31, 2010
compared to $1,933.1 million for the year ended
December 31, 2009. As a percentage of our net operating
revenues, our operating expenses were 87.2% for the year ended
December 31, 2010 compared to 86.3% for the year ended
December 31, 2009. Our cost of services, a major component
of which is labor expense, were $1,982.2 million for the
year ended December 31, 2010 compared to
$1,819.8 million for the year ended December 31, 2009.
The principal cause of this increase was increased costs
associated with the hospital operations acquired in 2009 and
2010 and higher costs in our same store hospitals. Our labor
costs in these same store hospitals in 2010 were 73 basis
points higher and our other operating costs included in costs of
services were 22 basis points higher. Our labor costs were
primarily higher due to increased patient care hours that
resulted from a higher acuity patient population. Additionally,
the labor costs in 2010 included a $4.0 million charge due
to an increase in our workers compensation program costs
incurred during the three months ended September 30, 2010.
The increase in our
non-labor
operating costs which are included in cost of services was
caused by increasing onsite physician services at certain
hospitals, increased equipment leasing costs and increased
purchases of minor equipment and supplies. Additionally our
facility rent expense, which is a component of these
non-labor
operating costs, was $118.3 million for the year ended
December 31, 2010 compared to $117.1 million for the
year ended December 31, 2009. General and administrative
expenses were $62.1 million for the year ended
December 31, 2010 compared to $72.4 million for the
year ended December 31, 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 general and administrative
expenses included $9.0 million of
non-recurring
costs related to the transition and closing of the Regency
corporate office. Additionally in 2010 we incurred a
$4.8 million charge due to an increase in employee
healthcare costs and experienced increases in costs including
additional corporate administrative costs to support the Regency
hospitals. These 2010 increases were offset by a reduction in
incentive compensation for executive officers of
$7.0 million for 2010 compared to 2009. Our bad debt
expense as a percentage of net operating revenue declined
slightly to 1.7% for the year ended December 31, 2010
compared to 1.8% for the year ended December 31, 2009.
Adjusted
EBITDA
Specialty Hospitals.
Adjusted EBITDA decreased
by 2.0% to $284.6 million for the year ended
December 31, 2010 compared to $290.4 million for the
year ended December 31, 2009. Our Adjusted EBITDA margins
decreased to 16.7% for the year ended December 31, 2010
from 18.6% for the year ended December 31, 2009. The
hospitals opened as of January 1, 2009 and operated by us
throughout both periods had Adjusted EBITDA of
$287.0 million for the year ended December 31, 2010, a
decrease of $9.2 million or 3.1% over the Adjusted EBITDA
of $296.2 million for these hospitals for the year ended
December 31, 2009. Our Adjusted EBITDA margin in these same
store hospitals decreased to 18.4% for the year ended
December 31, 2010 from 19.2% for the year ended
December 31, 2009. The principal reason for the decline in
our Adjusted EBITDA and Adjusted EBITDA margin for these same
store hospitals was a decline in our net revenue per patient day
due to a decline in payment rates and higher relative costs of
services as a percentage of net operating revenues. These
changes were described above under “Net Operating
Revenues — Specialty Hospitals” and
“Operating Expenses.” We experienced a slight
reduction in the bad debt expense in these hospitals which had
the effect of increasing our Adjusted EBITDA and Adjusted EBITDA
margin. The hospitals acquired in 2009 and 2010 had Adjusted
EBITDA of $1.3 million for 2010 compared to Adjusted EBITDA
losses of $0.5 million in 2009. Our hospitals opened during
2009 and 2010 incurred Adjusted EBITDA losses of
$3.3 million in 2010 compared to $1.2 million in 2009.
Our closed and sold hospitals had Adjusted EBITDA losses of
$0.5 million in 2010 compared to $4.1 million in 2009.
Outpatient Rehabilitation.
Adjusted EBITDA was
$83.8 million for the year ended December 31, 2010
compared to $89.1 million for the year ended
December 31, 2009. Our Adjusted EBITDA margins decreased to
12.2% for the year ended December 31, 2010 from 13.1% for
the year ended December 31, 2009. The decrease in Adjusted
EBITDA and Adjusted EBITDA margin was primarily the result of a
decline in the performance of our
66
contract services business. This decline was due to the loss of
a significant group of locations where our contract was
cancelled when our customer sold its business. This was a
long-term mature contract that had historically generated higher
Adjusted EBITDA and Adjusted EBITDA margins than our typical
contracts. Additionally, our contract services group has secured
new contracts to replace the lost business, although these new
contracts have generated lower Adjusted EBITDA and Adjusted
EBITDA margins during their start-up period. We also experienced
higher labor costs in our contract services business during the
fourth quarter of 2010 as we adjusted our treatment models to
adapt to RUGS IV/MDS 3.0 rules that became effective on
October 1, 2010.
Other.
The Adjusted EBITDA loss was
$61.3 million for the year ended December 31, 2010
compared to an Adjusted EBITDA loss of $49.2 million for
the year ended December 31, 2009 and is primarily related
to our general and administrative expenses. This increased loss
is related to general and administrative expenses described
above under “Operating Expenses” and was principally
related to $9.0 million of additional costs we incurred
related to the transition and closing of the Regency corporate
office. The remainder of the increase is due to increases in our
costs including additional corporate administrative costs to
support the Regency hospitals. The non-recurring charges
incurred in 2009 ($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) are excluded
from the computation of Adjusted EBITDA.
Income
from Operations
For the year ended December 31, 2010 we experienced income
from operations of $236.1 million compared to
$235.8 million for the year ended December 31, 2009.
The small increase in our income from operations is principally
related to a reduction in our general and administrative
expenses described above, offset in part by a decline in
profitability of our specialty hospitals opened as of
January 1, 2009 and operated throughout both periods.
Gain
on Early Retirement of Debt
Select Medical Corporation.
For the year ended
December 31, 2009, we paid approximately $30.1 million
to repurchase and retire a portion of our
7
5
/
8
% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized on the transactions
which was net of the write-off of unamortized deferred financing
costs related to the repurchased debt. These gains were offset
by the write-off of deferred financing costs of
$2.9 million that occurred due to our early pre-payment on
the term loan portion of our credit facility.
Select Medical Holdings Corporation.
For the
year ended December 31, 2009, we paid approximately
$30.1 million to repurchase and retire a portion of our
7
5
/
8
% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized on the transactions
which was net of the write-off of unamortized deferred financing
costs related to the debt. In addition, for the year ended
December 31, 2009, we paid approximately $6.5 million
to repurchase and retire a portion of Holdings’ senior
floating rate notes. These notes have a carrying value of
$7.7 million. A gain on early retirement of debt in the
amount of $1.1 million was recognized on the transaction
which was net of the write-off of unamortized deferred financing
costs related to the repurchased debt. These gains were offset
by the write-off of deferred financing costs of
$2.9 million related to term loans under our credit
facility that we repaid with proceeds from our initial public
offering of common stock.
Interest
Expense
Select Medical Corporation.
Interest expense
was $84.5 million for the year ended December 31, 2010
compared to $99.5 million for the year ended
December 31, 2009. 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 from the expiration of interest rate swaps
that carried higher fixed interest rates.
Select Medical Holdings Corporation.
Interest
expense was $112.3 million for the year ended
December 31, 2010 compared to $132.5 million for the
year ended December 31, 2009. 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, repurchases of our senior floating rate
notes and the repayment of a portion of our senior
67
secured credit facility with proceeds from Holdings’
initial public offering of common stock and a reduction in rate
that has resulted from the expiration of interest rate swaps
that carried higher fixed interest rates.
Income
Taxes
Select Medical Corporation.
We recorded income
tax expense of $51.4 million for the year ended
December 31, 2010. The expense represented an effective tax
rate of 33.8%. We recorded income tax expense of
$50.0 million for the year ended December 31, 2009.
The expense represented an effective tax rate of 32.9%. Our
effective tax rate for the year ended December 31, 2010 is
below the statutory rate due to the reversal of certain
valuation allowances that had been provided on losses in
previous years. A substantial portion of this reversal in our
valuation allowance relates to our ability to utilize a Federal
capital loss generated in 2007 to offset a taxable capital gain
on a recently completed transaction. The lower effective tax
rate we experienced for the year ended December 31, 2009 is
lower than the statutory rate principally because of tax refunds
and associated interest we received related to the resolution of
federal tax returns that occurred before the Merger.
Select Medical Holdings Corporation.
We
recorded income tax expense of $41.6 million for the year
ended December 31, 2010. The expense represented an
effective tax rate of 33.6%. We recorded income tax expense of
$37.5 million for the year ended December 31, 2009.
The expense represented an effective tax rate of 32.2%. Our low
effective tax rate for the year ended December 31, 2010 is
below the statutory rate due to the reversal of certain
valuation allowances that had been provided on losses in
previous years. A substantial portion of this reversal in our
valuation allowance relates to our ability to utilize a Federal
capital loss generated in 2007 to offset a taxable capital gain
on a recently completed transaction. The effective tax rate we
experienced for the year ended December 31, 2009 is lower
than the statutory rate principally because of refunds and
associated interest we received related to the resolution of
federal tax returns that occurred before the Merger.
Non-Controlling
Interests
Non-controlling interests in consolidated earnings were
$4.7 million for the year ended December 31, 2010 and
$3.6 million for the year ended December 31, 2009.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Net
Operating Revenues
Our net operating revenues increased by 4.0% to
$2,239.9 million for the year ended December 31, 2009
compared to $2,153.4 million for the year ended
December 31, 2008.
Specialty Hospitals.
Our specialty hospital
net operating revenues increased by 4.7% to
$1,557.8 million for the year ended December 31, 2009
compared to $1,488.4 million for the year ended
December 31, 2008. For the year ended December 31,
2009, the hospitals opened in 2008 and 2009 increased net
operating revenues by $58.8 million from the prior year and
the hospitals acquired in 2008 and 2009 increased net operating
revenues by $14.0 million from the prior year. These
increases were offset partially by the loss of revenues from
hospitals that closed during 2008 and 2009, which accounted for
$20.4 million of the difference in net operating revenues
between the year ended December 31, 2008 and
December 31, 2009. Net operating revenues for the specialty
hospitals opened as of January 1, 2008 and operated by us
throughout both periods increased by $17.0 million to
$1,449.0 million for the year ended December 31, 2009,
compared to $1,432.1 million for the year ended
December 31, 2008. Our patient days for these same store
hospitals decreased 2.1%, which was attributable to a decline in
our Medicare patient days. The occupancy percentage in our same
store hospitals decreased to 69% for the year ended
December 31, 2009 from 70% for the year ended
December 31, 2008. The effect on net operating revenues
from the decrease in patient days was offset by an increase in
our average net revenue per patient day. Our average net revenue
per patient day in our same store hospitals increased 3.7% to
$1,497 for the year ended December 31, 2009 from $1,443 for
the year ended December 31, 2008. This increase in net
revenue per patient day was primarily the result of an increase
in the Medicare base rate used to determine our discharge based
payments and an increase in the case mix index of our patients
which adjusts the base rate to compensate us for differences in
the severity of the cases we treat.
68
Outpatient Rehabilitation.
Our outpatient
rehabilitation net operating revenues increased 2.6% to
$681.9 million for the year ended December 31, 2009
compared to $664.8 million for the year ended
December 31, 2008. The increase in our outpatient
rehabilitation net operating revenues is due to an increase in
contracted services based revenue resulting from new business,
offset by a reduction in the net operating revenues generated by
our outpatient rehabilitation clinics. The number of patient
visits in our outpatient rehabilitation clinics decreased 0.7%
for the year ended December 31, 2009 to 4,502,049 visits
compared to 4,533,727 visits for the year ended
December 31, 2008. The decline in visits, which principally
occurred during the first quarter of 2009, was the result of
various factors in numerous locations where we operate,
including staffing shortages and increased competition. Net
revenue per visit in our clinics was $102 for both the year
ended December 31, 2009 and 2008.
Operating
Expenses
Our operating expenses increased by $47.9 million to
$1,933.1 million for the year ended December 31, 2009
compared to $1,885.2 million for the year ended
December 31, 2008. The principal component of this increase
were compensation costs of $22.0 million that we incurred
in connection with our initial public offering of common stock.
Our operating expenses include our cost of services, general and
administrative expense and bad debt expense. As a percentage of
our net operating revenues, our operating expenses were 86.3%
for the year ended December 31, 2009 compared to 87.6% for
the year ended December 31, 2008. Our cost of services, a
major component of which is labor expense, were
$1,819.8 million for the year ended December 31, 2009
compared to $1,791.8 million for the year ended
December 31, 2008. This increase in cost of services was
principally the result of an increase in costs in our specialty
hospital segment. The increase in cost of services we
experienced in the specialty hospital segment was due to an
increase in patient volume in the hospitals we opened or
acquired in 2008 and 2009. Another component of cost of services
is facility rent expense, which was $117.1 million for the
year ended December 31, 2009 compared to
$110.2 million for the year ended December 31, 2008.
General and administrative expenses were $72.4 million for
the year ended December 31, 2009 compared to
$45.5 million for the year ended December 31, 2008.
The increase of $26.9 million in general and administrative
expense is primarily due to an increase in compensation costs
primarily the result of an $18.3 million payment under our
Long Term Cash Incentive Plan paid in connection with our
initial public offering 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. Our bad debt expense as a percentage of net
operating revenues declined to 1.8% for the year ended
December 31, 2009 compared to 2.2% for the year ended
December 31, 2008. The reduction resulted from improved
collection activity.
Adjusted
EBITDA
Specialty Hospitals.
Adjusted EBITDA increased
by 22.8% to $290.4 million for the year ended
December 31, 2009 compared to $236.4 million for the
year ended December 31, 2008. Our Adjusted EBITDA margins
increased to 18.6% for the year ended December 31, 2009
from 15.9% for the year ended December 31, 2008. The
hospitals opened as of January 1, 2008 and operated by us
throughout both periods had Adjusted EBITDA of
$291.8 million for the year ended December 31, 2009,
an increase of $31.1 million or 11.9% over the Adjusted
EBITDA of $260.7 million for these hospitals for the year
ended December 31, 2008. Our Adjusted EBITDA margin in
these same store hospitals increased to 20.1% for the year ended
December 31, 2009 from 18.2% for the year ended
December 31, 2008. The principal reason for the growth in
our Adjusted EBITDA and Adjusted EBITDA margin for these same
store hospitals was an increase in our net revenue per patient
day due to an increase in the payment rates for our Medicare
cases while we controlled our costs related to these cases. We
were also able to reduce the bad debt expense in these
hospitals, which had the effect of increasing our Adjusted
EBITDA and Adjusted EBITDA margin. We also reduced the Adjusted
EBITDA losses in our recently opened hospitals. Our hospitals
opened during 2008 incurred Adjusted EBITDA losses of
$2.0 million for the year ended December 31, 2009
compared to Adjusted EBITDA losses of $22.7 million
incurred for the year ended December 31, 2008. We only
opened one new hospital in 2009.
Outpatient Rehabilitation.
Adjusted EBITDA
increased by 15.3% to $89.1 million for the year ended
December 31, 2009 compared to $77.3 million for the
year ended December 31, 2008. Our Adjusted EBITDA margins
increased to 13.1% for the year ended December 31, 2009
from 11.6% for the year ended December 31, 2008. The
increase in Adjusted EBITDA was primarily the result of the
growth in our contract services business. We
69
also had improvement in our clinic based business, which was the
result of improvements in the performance of the outpatient
clinics acquired from HealthSouth Corporation.
Other.
The Adjusted EBITDA loss was
$49.2 million for the year ended December 31, 2009
compared to an Adjusted EBITDA loss of $43.4 million for
the year ended December 31, 2008 and is primarily related
to our general and administrative expenses. The increase of
$5.8 million is principally related to increases in salary
related costs.
Income
from Operations
For the year ended December 31, 2009 we experienced income
from operations of $235.8 million compared to
$196.4 million for the year ended December 31, 2008.
The increase in income from operations resulted primarily from
the significantly reduced losses at our hospitals opened in 2008
and the improved operating performance at our specialty
hospitals opened as of January 1, 2008 and operated by us
throughout both periods. This was offset by the compensation
costs of $22.0 million we incurred in connection with our
initial public offering of common stock.
Gain
on Early Retirement of Debt
Select Medical Corporation.
For the year ended
December 31, 2009, we paid approximately $30.1 million
to repurchase and retire a portion of our
7
5
/
8
% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized on the transactions
which was net of the write-off of unamortized deferred financing
costs related to the repurchased debt. These gains were offset
by the write-off of deferred financing costs of
$2.9 million related to our prepayments of term loans under
our credit facility with proceeds from our initial public
offering of common stock.
Select Medical Holdings Corporation.
For the
year ended December 31, 2009, we paid approximately
$30.1 million to repurchase and retire a portion of our
7
5
/
8
% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized on the transactions
which was net of the write-off of unamortized deferred financing
costs related to the debt. In addition, for the year ended
December 31, 2009, we paid approximately $6.5 million
to repurchase and retire a portion of Holdings’ senior
floating rate notes. These notes have a carrying value of
$7.7 million. A gain on early retirement of debt in the
amount of $1.1 million was recognized on the transaction
which was net of the write-off of unamortized deferred financing
costs related to the repurchased debt. These gains were offset
by the write-off of deferred financing costs of
$2.9 million related to our prepayments of term loans under
our credit facility with proceeds from our initial public
offering of common stock.
Interest
Expense
Select Medical Corporation.
Interest expense
was $99.5 million for the year ended December 31, 2009
compared to $110.9 million for the year ended
December 31, 2008. The decrease in interest expense is
related to a reduction in outstanding debt balances in 2009.
Select Medical Holdings Corporation.
Interest
expense was $132.5 million for the year ended
December 31, 2009 compared to $145.9 million for the
year ended December 31, 2008. The decrease in interest
expense is related to a reduction in outstanding debt balances
in 2009.
Income
Taxes
Select Medical Corporation.
We recorded income
tax expense of $50.0 million for the year ended
December 31, 2009. The expense represented an effective tax
rate of 32.9%. We recorded income tax expense of
$37.3 million for the year ended December 31, 2008.
The expense represented an effective tax rate of 44.4%. The
lower effective tax rate we experienced for the year ended
December 31, 2009 is principally due to tax refunds and
associated interest we received related to the resolution of
federal tax returns that occurred before the Merger. Our
effective tax rate for 2008 was higher than our expected blended
federal and state tax rate as a result of an increase in
valuation reserves due to our inability to use state net
operating losses of the entities acquired from HealthSouth
Corporation and excess federal capital losses that can only be
offset by future capital gains.
70
Select Medical Holdings Corporation.
We
recorded income tax expense of $37.5 million for the year
ended December 31, 2009. The expense represented an
effective tax rate of 32.2%. We recorded income tax expense of
$26.1 million for the year ended December 31, 2008.
The expense represented an effective tax rate of 50.2%. The
lower effective tax rate we experienced for the year ended
December 31, 2009 is principally due to tax refunds and
associated interest we received related to the resolution of
federal tax returns that occurred before the Merger. Our
effective tax rate for 2008 was higher than our expected blended
federal and state tax rate as a result of an increase in
valuation reserves due to our inability to use state net
operating losses of the entities acquired from HealthSouth
Corporation and excess federal capital losses that can only be
offset by future capital gains.
Non-Controlling
Interests
Non-controlling interests in consolidated earnings were
$3.6 million for the year ended December 31, 2009 and
$3.4 million for the year ended December 31, 2008.
Liquidity
and Capital Resources
Year
Ended December 31, 2010, Year Ended December 31, 2009
and the Year Ended December 31, 2008
| Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2008 | 2009 | 2010 | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
|
Cash flows provided by operating activities
|
$ | 107,438 | $ | 165,639 | $ | 144,537 | $ | 140,245 | $ | 198,478 | $ | 170,064 | ||||||||||||
|
Cash flows used in investing activities
|
(60,438 | ) | (77,917 | ) | (216,998 | ) | (60,438 | ) | (77,917 | ) | (216,998 | ) | ||||||||||||
|
Cash flows provided by (used in) financing activities
|
12,731 | (68,302 | ) | (6,854 | ) | (20,076 | ) | (101,141 | ) | (32,381 | ) | |||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
59,731 | 19,420 | (79,315 | ) | 59,731 | 19,420 | (79,315 | ) | ||||||||||||||||
|
Cash and cash equivalents at beginning of period
|
4,529 | 64,260 | 83,680 | 4,529 | 64,260 | 83,680 | ||||||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 64,260 | $ | 83,680 | $ | 4,365 | $ | 64,260 | $ | 83,680 | $ | 4,365 | ||||||||||||
Operating activities for Select provided $170.1 million for
the year ended December 31, 2010. The decrease in cash flow
provided by operating activities in comparison to our operating
cash flow provided by operating activities for the year ended
December 31, 2009 is principally related to the increase in
our accounts receivable at December 31, 2010. Our days
sales outstanding were 51 days at December 31, 2010
compared to 49 days at December 31, 2009 and falls
within our historical range of days sales outstanding.
Operating activities for Select provided $198.5 million for
the year ended December 31, 2009. The increase in cash flow
provided by operating activities in comparison to our operating
cash flow provided by operating activities for the year ended
December 21, 2008 is principally related to the increase in
our net income and a decline in our accounts receivable during
the year ended December 31, 2009. Our days sales
outstanding were 49 days at December 31, 2009 compared
to 53 days at December 31, 2008. The reduction in days
sales outstanding between December 31, 2008 and
December 31, 2009 is primarily related to a reduction in
our non-governmental accounts receivable that resulted from
improved collections activities in our business offices.
Operating activities for Select generated $140.2 million in
cash during the year ended December 31, 2008. The increase
in cash flow provided by operating activities in comparison to
our operating cash flow provided by operating activities for the
year ended December 31, 2007 is principally related to a
reduction in the cash taxes we paid during 2008. Our days sales
outstanding were 53 days at December 31, 2008 compared
to 48 days at December 31, 2007. The increase in days
sales outstanding between December 31, 2007 and
December 31, 2008 is
71
primarily related to the timing of the periodic interim payments
we received from Medicare for the services provided at our
specialty hospitals.
The operating cash flow of Select exceeds the operating cash
flow of Holdings by $25.5 million, $32.8 million and
$32.8 million for the years ended December 31, 2010,
2009 and 2008, respectively. The difference relates to interest
payments on Holdings’ indebtedness.
Investing activities used $217.0 million,
$77.9 million and $60.4 million of cash flow for the
years ended December 31, 2010, 2009, and 2008,
respectively. Of this amount, we incurred acquisition related
payments of $165.8 million, $21.4 million and
$7.6 million, respectively in 2010, 2009 and 2008. The
acquisition payments in 2010 related principally to the
acquisition of Regency which was $165.6 million. The
acquisition payments for 2009 and 2008 relate primarily to small
acquisitions of outpatient businesses and specialty hospitals.
Investing activities also used cash for the purchases of
property and equipment of $51.8 million, $57.9 million
and $56.5 million in 2010, 2009, and 2008, respectively. We
sold business units and real property which generated
$0.6 million, $1.3 million and $3.4 million in
cash during the years ended December 31, 2010, 2009 and
2008, respectively.
Financing activities for Select used $32.4 million of cash
flow for the year ended December 31, 2010. The primary
usage of cash was related to dividends paid to Holdings of
$69.7 million to fund interest payments and stock
repurchases and was offset by an net borrowing under our
revolving senior secured credit facility.
Financing activities for Select used $101.1 million of cash
flow for the year ended December 31, 2009. The primary
usage of cash related to net payments on our senior secured
credit facility of $323.4 million, the repurchase of a
portion of Select’s
7
5
/
8
% senior
subordinated notes for $30.1 million, repayment of bank
overdrafts of $21.1 million, dividends paid to Holdings to
fund interest payments of $39.4 million and
$2.8 million in distributions related to non-controlling
interests, offset by an additional investment in Select by
Holdings of $316.0 million which primarily related to the
net proceeds from Holdings’ initial public offering of
common stock.
Financing activities for Select used $20.1 million of cash
for the year ended December 31, 2008. The cash usage
resulted primarily from dividends paid to Holdings to fund
interest payments of $33.4 million, payments on seller and
other debt of $5.6 million, distributions to
non-controlling interests of $2.0 million, payment of
initial public offering costs of $1.3 million and
repurchase of Select’s
7
5
/
8
% senior
subordinated notes of $1.0 million, offset by borrowings on
our senior secured credit facility of $23.2 million.
The difference in cash flows provided by (used in) financing
activities of Holdings compared to Select of $25.5 million,
$32.8 million and $32.8 million for the years ended
December 31, 2010, 2009 and 2008, respectively, relates to
dividends paid by Select to Holdings to service Holdings’
interest obligations related to its indebtedness.
Capital
Resources
Select Medical Corporation.
Select had a net
working capital deficit of $73.5 million at
December 31, 2010 compared to net working capital of
$153.2 million at December 31, 2009. The decrease in
net working capital is primarily due to an increase in our
current portion of long-term debt related to scheduled principal
payments due within the next twelve months on our Tranche B
Term Loans and the use of cash to fund in part the purchase
price for the Regency acquisition.
Select Medical Holdings Corporation.
Holdings
had a net working capital deficit of $70.2 million at
December 31, 2010 compared to net working capital of
$156.7 million at December 31, 2009. The decrease in
net working capital is primarily due to an increase in our
current portion of long-term debt related to scheduled principal
payments due within the next twelve months on our Tranche B
Term Loans and the use of cash to fund in part the purchase
price for the Regency acquisition.
At December 31, 2010 our senior secured credit facility (as
described below), consists 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 |
72
| • | $191.3 million in term loans that mature on February 24, 2012 (the “Tranche B Term Loans”), and | |
| • | $290.6 million in term loans that mature on August 22, 2014 (the “Tranche B-1 Term Loans”). |
The interest rates per annum applicable to loans, other than
swingline loans and
Tranche B-1
Term Loans, under our senior secured credit facility are, at our
option, equal to either an alternate base rate or an adjusted
LIBOR rate for a one, two, three or six month interest period,
or a nine or twelve month period if available, in each case,
plus an applicable margin percentage. The interest rates per
annum applicable to the
Tranche B-1
Term Loans under our senior credit facility are, at our option,
equal to either an alternate base rate or an adjusted LIBOR rate
for a three or six month interest period, or a nine or twelve
month period if available, in each case, plus an applicable
margin percentage. The alternate base rate is the greater of
(1) JPMorgan Chase Bank, N.A.’s prime rate and
(2) one-half of 1% over the weighted average of rates on
overnight Federal funds as published by the Federal Reserve Bank
of New York. The adjusted LIBOR rate is determined by reference
to settlement rates established for deposits in dollars in the
London interbank market for a period equal to the interest
period of the loan and the maximum reserve percentages
established by the Board of Governors of the United States
Federal Reserve to which our lenders are subject. The applicable
margin percentage for borrowings under our revolving loans is
subject to change based upon the ratio of Select’s leverage
ratio (as defined in the credit agreement). The applicable
margin percentage for revolving loans is currently
(1) 2.75% for alternate base rate loans and (2) 3.75%
for adjusted LIBOR loans. The applicable margin percentages for
the Tranche B Term Loans are (1) 1.00% for alternate
base rate loans and (2) 2.00% for adjusted LIBOR loans. The
applicable margin percentages for the
Tranche B-1
Term Loans are (1) 2.75% for alternate base rate loans and
(2) 3.75% for adjusted LIBOR loans.
Our senior secured credit facility requires Select to maintain
certain interest expense coverage ratios and leverage ratios
(both as defined in our senior secured credit facility) which
becomes more restrictive over time. For the four consecutive
fiscal quarters ended December 31, 2010, Select was
required to maintain an interest expense coverage ratio (its
ratio of consolidated EBITDA (as defined in our senior secured
credit facility) to cash interest expense) for the prior four
consecutive fiscal quarters of at least 2.00 to 1.00.
Select’s interest expense coverage ratio was 3.12 to 1.00
for such period. As of December 31, 2010, Select was
required to maintain its leverage ratio (its ratio of total
indebtedness to consolidated EBITDA for the prior four
consecutive fiscal quarters) at less than 4.50 to 1.00.
Select’s leverage ratio was 3.39 to 1.00 as of
December 31, 2010.
Also, as of December 31, 2010, we had $246.0 million
of availability under our revolving loan facility (after giving
effect to $29.0 million of outstanding letters of credit).
Our initial public offering of common stock triggered the
mandatory prepayment obligation under our senior secured credit
facility in the amount of 50% of the net proceeds we received in
the offering. On October 5, 2009 we repaid to the lenders
under the senior secured credit facility $139.4 million, of
which $57.3 million was applied to Tranche B term
loans and $82.1 million was applied to
Tranche B-1
term loans. On October 16, 2009, we made an additional
$12.1 million voluntary prepayment of Tranche B Term
Loans with a portion of the initial public offering proceeds.
On October 28, 2009, the underwriters purchased an
additional 3,602,700 shares pursuant to their
over-allotment option. We received $33.9 million of net
proceeds from the exercise of the over-allotment option. On
November 3, 2009 we repaid $16.9 million of debt under
our senior secured credit facility, of which $6.7 million
was applied to Tranche B term loans and $10.2 million
was applied to
Tranche B-1
term loans.
On August 5, 2009 we entered into Amendment No. 3 to
our senior secured credit facility with a group of holders of
Tranche B term loans and JPMorgan Chase Bank, N.A., as
administrative agent. Amendment No. 3 extended the maturity
of $384.5 million principal amount of Tranche B term
loans from February 24, 2012 to August 22, 2014, and
made related technical changes to our senior secured credit
facility. Holders of Tranche B term loans that extended the
maturity of their Tranche B term loans now hold
Tranche B-1
term loans that mature on August 22, 2014, and holders of
Tranche B term loans that did not extend the maturity of
their Tranche B term loans continue to hold Tranche B
term loans that mature on February 24, 2012.
On June 7, 2010 we entered into an Assignment and
Assumption and Amendment No. 4 (“Amendment
No. 4”) to our senior secured credit facility with 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 our revolving credit
73
facility from February 24, 2011 to August 22, 2013,
and made related technical changes to our senior secured credit
facility. The applicable margin percentage for extended
revolving loans and the commitment fee rate for extended
revolving commitments have increased and will be determined
based on a pricing grid set forth in Amendment No. 4. Under
the pricing grid, the applicable margin percentage for revolving
ABR loans ranges from 2% per annum to 3% per annum, the
applicable margin percentage for revolving Eurodollar loans
ranges from 3% per annum to 4% per annum, and the commitment fee
rate for extended revolving commitments ranges from 0.375% to
0.75%.
On June 7, 2010, we also entered into an Amendment
No. 4-A
to our senior secured credit facility with a group of lenders
and JPMorgan Chase Bank, N.A. as administrative agent. Amendment
No. 4-A
made a technical change to our senior secured credit facility
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.
On February 24, 2005, EGL Acquisition Corp. issued and sold
$660.0 million in aggregate principal amount of
7
5
/
8
% senior
subordinated notes due 2015, which Select assumed in connection
with the Merger. The net proceeds of the offering were used to
finance a portion of the funds needed to consummate the Merger
with EGL Acquisition Corp. The notes were issued under an
indenture between EGL Acquisition Corp. and U.S. Bank
Trust National Association, as trustee. Interest on the
notes is payable semi-annually in arrears on February 1 and
August 1 of each year. The notes are guaranteed by all of
Select’s wholly-owned subsidiaries, subject to certain
exceptions. On or after February 1, 2010, the 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. Upon a
change of control of Holdings, each holder of notes may require
us to repurchase all or any portion of the holder’s notes
at a purchase price equal to 101% of the principal amount plus
accrued and unpaid interest to the date of purchase.
During 2008, we paid approximately $1.0 million to
repurchase and retire a portion of the
7
5
/
8
% senior
subordinated notes. These notes had a carrying value of
$2.0 million. A gain on early retirement of debt in the
amount of $0.9 million was recognized, which was net of the
write-off of unamortized deferred financing costs related to the
debt.
During 2009, we paid approximately $30.1 million to
repurchase and retire additional
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 unamortized deferred financing costs related to
the debt.
On September 29, 2005, Holdings sold $175.0 million of
senior floating rate notes due 2015, which bear interest at a
rate per annum, reset semi-annually, equal to the
6-month
LIBOR plus 5.75%. Interest is payable semi-annually in arrears
on March 15 and September 15 of each year, with the principal
due in full on September 15, 2015. The senior floating rate
notes are general unsecured obligations of Holdings and are not
guaranteed by Select or any of its subsidiaries. The net
proceeds of the issuance of the senior floating rate notes,
together with cash was used to reduce the amount of our
preferred stock, to make a payment to participants in our
long-term incentive plan and to pay related fees and expenses.
During 2009, we paid approximately $6.5 million to
repurchase and retire a portion of Holdings senior floating rate
notes. These notes had a carrying value of $7.7 million. A
gain on early retirement of debt in the amount of
$1.1 million was recognized, which was net of the write-off
of unamortized deferred financing costs related to the debt.
We may from time to time seek to retire or purchase our
outstanding debt through cash purchases
and/or
exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases
or exchanges, if any, may be funded from operating cash flows or
other sources and will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other
factors. The amounts involved may be material.
Holdings has authorized a program to repurchase up to
$100.0 million worth of shares of our common stock. The
program will remain in effect until January 31, 2012,
unless extended by the board of directors. Through
December 31, 2010, Select has repurchased
6,905,700 shares at a cost of $44.1 million, which
includes related
74
transaction costs. We anticipate funding this program through
available operating cash flow and borrowings under our senior
secured credit facility.
We have begun discussions with our financial advisors regarding
refinancing both our senior secured credit facility and
7
5
/
8
% senior
subordinated notes during the second quarter of 2011. These
discussions are preliminary, and we can provide no assurance
that we will be able to successfully refinance either our
current senior secured credit facility or the
7
5
/
8
% senior
subordinated notes, or that the refinancing, if it occurs, will
not be delayed beyond the second quarter of 2011, or that the
terms of any new indebtedness will be as favorable as the terms
of our existing indebtedness.
We believe our internally generated cash flows and borrowing
capacity under our senior secured credit facility will be
sufficient to finance operations over the next twelve months.
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
with the exception of one new hospital under development that we
acquired in the Regency acquisition. 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.
Commitments
and Contingencies
The following tables summarize contractual obligations at
December 31, 2010, and the effect such obligations are
expected to have on liquidity and cash flow in future periods.
Reserves for uncertain tax positions of $23.6 million have
been excluded from the tables below as we cannot reasonably
estimate the amounts or periods in which these liabilities will
be paid.
Select
Medical Holdings Corporation:
|
Contractual
Obligations
|
Total | 2011 | 2012-2014 | 2015-2016 | After 2016 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
7
5
/
8
% senior
subordinated notes
|
$ | 611,500 | $ | — | $ | — | $ | 611,500 | $ | — | ||||||||||
|
Senior secured credit facility
|
506,844 | 146,401 | 360,443 | — | — | |||||||||||||||
|
10% senior subordinated
notes
(1)
|
139,177 | — | — | 139,177 | — | |||||||||||||||
|
Senior floating rate notes
|
167,300 | — | — | 167,300 | — | |||||||||||||||
|
Seller notes
|
886 | 608 | 278 | — | — | |||||||||||||||
|
Capital lease obligations
|
1,166 | 298 | 686 | 182 | — | |||||||||||||||
|
Other debt obligations
|
3,896 | 2,072 | 285 | 95 | 1,444 | |||||||||||||||
|
Total debt
|
1,430,769 | 149,379 | 361,692 | 918,254 | 1,444 | |||||||||||||||
|
Interest
(2)
|
363,511 | 87,819 | 248,776 | 26,689 | 227 | |||||||||||||||
|
Letters of credit outstanding
|
29,041 | 464 | 28,577 | — | — | |||||||||||||||
|
Purchase obligations
|
5,531 | 3,298 | 2,226 | 7 | — | |||||||||||||||
|
Construction contracts
|
9,879 | 9,879 | — | — | — | |||||||||||||||
|
Naming, promotional and sponsorship agreement
|
48,524 | 2,742 | 8,612 | 6,080 | 31,090 | |||||||||||||||
|
Operating leases
|
747,497 | 125,513 | 226,011 | 71,161 | 324,812 | |||||||||||||||
|
Related party operating leases
|
41,501 | 3,360 | 10,297 | 6,099 | 21,745 | |||||||||||||||
|
Total contractual cash obligations
|
$ | 2,676,253 | $ | 382,454 | $ | 886,191 | $ | 1,028,290 | $ | 379,318 | ||||||||||
75
Select
Medical Corporation:
|
Contractual
Obligations
|
Total | 2011 | 2012-2014 | 2015-2016 | After 2016 | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
7
5
/
8
% senior
subordinated notes
|
$ | 611,500 | $ | — | $ | — | $ | 611,500 | $ | — | ||||||||||
|
Senior secured credit facility
|
506,844 | 146,401 | 360,443 | — | — | |||||||||||||||
|
Seller notes
|
886 | 608 | 278 | — | — | |||||||||||||||
|
Capital lease obligations
|
1,166 | 298 | 686 | 182 | — | |||||||||||||||
|
Other debt obligations
|
3,896 | 2,072 | 285 | 95 | 1,444 | |||||||||||||||
|
Total debt
|
1,124,292 | 149,379 | 361,692 | 611,777 | 1,444 | |||||||||||||||
|
Interest
(2)
|
239,292 | 62,385 | 172,472 | 4,208 | 227 | |||||||||||||||
|
Letters of credit outstanding
|
29,041 | 464 | 28,577 | — | — | |||||||||||||||
|
Purchase obligations
|
5,531 | 3,298 | 2,226 | 7 | — | |||||||||||||||
|
Construction contracts
|
9,879 | 9,879 | — | — | — | |||||||||||||||
|
Naming, promotional and sponsorship agreement
|
48,524 | 2,742 | 8,612 | 6,080 | 31,090 | |||||||||||||||
|
Operating leases
|
747,497 | 125,513 | 226,011 | 71,161 | 324,812 | |||||||||||||||
|
Related party operating leases
|
41,501 | 3,360 | 10,297 | 6,099 | 21,745 | |||||||||||||||
|
Total contractual cash obligations
|
$ | 2,245,557 | $ | 357,020 | $ | 809,887 | $ | 699,332 | $ | 379,318 | ||||||||||
| (1) | Reflects the balance sheet liability of Holdings’ 10% senior subordinated notes calculated in accordance with GAAP. The balance sheet liability so reflected is less than the $150.0 million aggregate principal amount of such notes that were issued with an original issued discount. The remaining unamortized original issue discount was $10.8 million at December 31, 2010. Interest on the 10% senior subordinated notes accrued on the full principal amount thereof and Holdings will be obligated to repay the full principal thereof at maturity or upon any mandatory or voluntary prepayment thereof. On any interest payment date on or after February 24, 2010, Holdings may be obligated to pay an amount of accrued original issue discount on the 10% senior subordinated notes if necessary to ensure that the notes will not be considered “applicable high yield discount obligations” within the meaning of the Internal Revenue Code of 1986, as amended. The $150.0 million aggregate principal payable at maturity on our 10% senior subordinated notes would be reduced by prior payments of accrued original issue discount. | |
| (2) | The interest obligation for the senior secured credit facility was calculated using the average interest rate at December 31, 2010 of 2.3%, and 4.0% for the Term B and Term B-1 loans, respectively. The interest obligation was calculated using the stated interest rate for the 7 5 / 8 % senior subordinated notes and the 10% senior subordinated notes, 6.2% for the senior floating rate notes and 6.0% for seller notes, capital lease obligations and other debt obligations. |
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”) issued Accounting Standards Update
(“ASU”)
2010-06,
“Fair Value Measurements and Disclosures (Topic
820) — Improving Disclosures about Fair Value
Measurements” (“Update
2010-06”),
which amends the guidance on fair value to add new requirements
for disclosures about transfers into and out of Levels 1
and 2 and separate disclosures about purchases, sales,
issuances,
76
and settlements relating to Level 3 measurements. It also
clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to
measure fair value. We adopted update
2010-06
on
January 1, 2010, except for the requirement to provide the
Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of Update
2010-06
did
not have an impact on our consolidated financial statements. We
currently have no Level 3 measurements.
| Item 7A. | 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 December 31, 2010, Select had
$506.8 million in term and revolving loans outstanding
under its senior secured credit facility and Holdings had $167.3
million in senior floating rate notes outstanding, which bear
interest at variable rates. Each eighth point change in interest
rates on the variable rate portion of our long-term indebtedness
would result in a $0.8 million annual change in interest
expense on our term loans.
| Item 8. | Financial Statements and Supplementary Data. |
See Consolidated Financial Statements and Notes thereto
commencing at
Page F-1.
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | 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 December 31, 2010 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
fourth quarter of the year ended December 31, 2010 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
On September 1, 2010, Select completed the acquisition of
all the issued and outstanding equity securities of Regency
Hospital Company, L.L.C. (“Regency”). During 2010, we
transferred all accounting for Regency to our headquarters and
began integrating Regency into our existing internal control
procedures. The Regency integration may lead us to change our
controls in future periods, but we do not expect changes to
significantly affect our internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining an
adequate system of internal control over our financial
reporting. In order to evaluate the effectiveness of internal
control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, management has
conducted an assessment, including testing, using the criteria
on Internal Control — Integrated Framework, issued by
the Committee of Sponsoring Organizations of the Treadway
77
Commission (COSO) as of December 31, 2010. Our system of
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation and fair presentation of financial
statements for external purposes in accordance with
U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness of internal
control over financial reporting to future periods are subject
to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Regency has been excluded from management’s annual report
on internal control over financial reporting as of
December 31, 2010 because it was acquired by us in a
purchase business combination in September 2010. Regency
represented 11.0% and 4.0% of our consolidated total assets and
total net operating revenues, respectively, as of and for the
year ended December 31, 2010.
Management assessed the effectiveness of the Company’s
internal control over financial reporting, excluding the
recently completed Regency acquisition, as of December 31,
2010. This assessment was based on criteria for effective
internal control over financial reporting described in
“Internal Control — Integrated Framework,”
issued by COSO. Based on this assessment, management concludes
that, as of December 31, 2010, internal control over
financial reporting, excluding Regency, was effective to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in
accordance with U.S. generally accepted accounting
principles. The effectiveness of the Company’s internal
control over financial reporting as of December 31, 2010
has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm as stated in their report
which appears herein.
| Item 9B. | Other Information. |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information regarding directors and nominees for directors
of the Company, including identification of the audit committee
and audit committee financial expert, and Compliance with
Section 16(a) of the Exchange Act is presented under the
headings “Corporate Governance — Committees of
the Board of Directors,” “Election of Directors
— Directors and Nominees” and
“Section 16(a) Beneficial Ownership Reporting
Compliance” in the Company’s definitive proxy
statement for use in connection with the 2011 Annual Meeting of
Stockholders (the “Proxy Statement”) to be filed
within 120 days after the end of the Company’s fiscal
year ended December 31, 2010. The information contained
under these headings is incorporated herein by reference.
Information regarding the executive officers of the Company is
included in this Annual Report on
Form 10-K
under Item 1 of Part I as permitted by
Instruction 3 to Item 401(b) of
Regulation S-K.
We have adopted a written code of business conduct and ethics,
known as our code of conduct, which applies to all of our
directors, officers, and employees, as well as a code of ethics
applicable to our senior financial officers, including our chief
executive officer, our chief financial officer and our chief
accounting officer. Our code of conduct and code of ethics for
senior financial officers are available on our Internet website,
www.selectmedicalholdings.com. Our code of conduct and code of
ethics for senior financial officers may also be obtained by
contacting investor relations at
(717) 972-1100.
Any amendments to our code of conduct or code of ethics for
senior financial officers or waivers from the provisions of the
codes for our chief executive officer, our chief financial
officer and our chief accounting officer will be disclosed on
our Internet website promptly following the date of such
amendment or waiver.
| Item 11. | Executive Compensation. |
Information concerning executive compensation is presented under
the headings “Executive Compensation” and
“Compensation Committee Report” in the Proxy
Statement. The information contained under these headings is
incorporated herein by reference.
78
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information with respect to security ownership of certain
beneficial owners and management is set forth under the heading
“Security Ownership of Certain Beneficial Owners and
Directors and Officers” in the Proxy Statement. The
information contained under this heading is incorporated herein
by reference.
Equity
Compensation Plan Information
Set forth in the table below is a list of all of our equity
compensation plans and the number of securities to be issued on
exercise of equity rights, average exercise price, and number of
securities that would remain available under each plan if
outstanding equity rights were exercised as of December 31,
2010.
|
Number of
|
||||||||||||
|
Securities
|
||||||||||||
|
Remaining
|
||||||||||||
|
Available
|
||||||||||||
|
for Future
|
||||||||||||
|
Number of
|
Issuance Under
|
|||||||||||
|
Securities to be
|
Equity
|
|||||||||||
|
Issued Upon
|
Weighted-Average
|
Compensation
|
||||||||||
|
Exercise of
|
Exercise Price of
|
Plans
|
||||||||||
|
Outstanding
|
Outstanding
|
(Excluding Securities
|
||||||||||
|
Options, Warrants
|
Options, Warrants
|
Reflected in
|
||||||||||
|
and Rights
|
and Rights
|
Column (a))
|
||||||||||
|
Plan Category
|
(a) | (b) | (c) | |||||||||
|
Equity compensation plans approved by security holders:
|
||||||||||||
|
Select Medical Holdings Corporation 2005 Equity Incentive Plan
|
2,715,839 | $ | 8.09 | 3,455,397 | ||||||||
|
Director equity incentive plan
|
63,000 | $ | 7.62 | 12,000 | ||||||||
| Item 13. | Certain Relationships, Related Transactions and Director Independence. |
Information concerning related transactions is presented under
the heading “Certain Relationships, Related Transactions
and Director Independence” in the Proxy Statement. The
information contained under this heading is incorporated herein
by reference.
| Item 14. | Principal Accountant Fees and Services. |
Information concerning principal accountant fees and services is
presented under the heading “Ratification of Appointment of
Independent Registered Public Accounting Firm” in the Proxy
Statement. The information contained under this heading is
incorporated herein by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) The following documents are filed as part of this
report:
1) Financial Statements: See Index to Financial Statements
appearing on
page F-1
of this report.
| 2) | Financial Statement Schedule: See Schedule II — Valuation and Qualifying Accounts appearing on page F-54 of this report. |
3) The following exhibits are filed as part of, or
incorporated by reference into, this report:
79
|
Number
|
Description
|
|||
| 2 | .1 | Purchase and Sale Agreement by and among Regency Hospital Company, L.L.C., the Sellers named therein, the Representative named therein, Intensiva Healthcare Corporation and Select Medical Corporation, dated June 18, 2010, incorporated herein by reference to Exhibit 2.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on June 23, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 2 | .2 | Amendment No. 1 to Purchase and Sale Agreement by and among Regency Hospital Company, L.L.C., Waud Capital Partners, L.L.C. and Intensiva Healthcare Corporation, dated September 1, 2010, incorporated herein by reference to Exhibit 2.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select Medical Corporation filed on September 7, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 3 | .1 | Amended and Restated Certificate of Incorporation of Select Medical Corporation, incorporated by reference to Exhibit 3.1 of Select Medical Corporation’s Form S-4 filed June 15, 2005 (Reg. no. 001-31441). | ||
| 3 | .2 | Form of Restated Certificate of Incorporation of Select Medical Holdings Corporation, incorporated by reference to Exhibit 3.3 of Select Medical Holdings Corporation’s Form S-1/A filed September 21, 2009 (Reg No. 333-152514). | ||
| 3 | .3 | Amended and Restated Bylaws of Select Medical Corporation, as amended, incorporated by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 3 | .4 | Amended and Restated Bylaws of Select Medical Holdings Corporation, as amended, incorporated by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 4 | .1 | Registration Rights Agreement, dated as of February 24, 2005, among Select Medical Holdings Corporation, Welsh, Carson, Anderson & Stowe IX, L.P., WCAS Capital Partners IV, L.P., each of the entities and individuals listed on Schedule I thereto and each of the other entities and individuals from time to time listed on Schedule II thereto, incorporated by reference to Exhibit 10.77 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .1 | Credit Agreement, dated as of February 24, 2005, among Select Medical Holdings Corporation, Select Medical Corporation, as Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association, as Syndication Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC Inc., as Co-Documentation Agents, incorporated by reference to Exhibit 10.1 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .2 | Guarantee and Collateral Agreement, dated as of February 24, 2005, among Select Medical Holdings Corporation, Select Medical Corporation, the Subsidiaries of Select Medical Corporation identified therein and JPMorgan Chase Bank, N.A., as Collateral Agent, incorporated by reference to Exhibit 10.2 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .3 | Amended and Restated Senior Management Agreement, dated as of May 7, 1997, between Select Medical Corporation, John Ortenzio, Martin Ortenzio, Select Investments II, Select Partners, L.P. and Rocco Ortenzio, incorporated by reference to Exhibit 10.34 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .4 | Amendment No. 1, dated as of January 1, 2000, to Amended and Restated Senior Management Agreement, dated as of May 7, 1997, between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.35 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .5 | Employment Agreement, dated as of March 1, 2000, between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.16 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
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| 10 | .6 | Amendment No. 1 to Employment Agreement, dated as of August 8, 2000, between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.17 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .7 | Amendment No. 2 to Employment Agreement, dated as of February 23, 2001, between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.47 of Select Medical Corporation’s Registration Statement on Form S-1 March 30, 2001 (Reg. No. 333-48856). | ||
| 10 | .8 | Amendment No. 3 to Employment Agreement, dated as of April 24, 2001, between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.50 of Select Medical Corporation’s Registration Statement on Form S-4 filed June 26, 2001 (Reg. No. 333-63828). | ||
| 10 | .9 | Amendment No. 4 to Employment Agreement, dated as of September 17, 2001, between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.52 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499). | ||
| 10 | .10 | Amendment No. 5 to Employment Agreement, dated as of February 24, 2005, between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.10 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .11 | Employment Agreement, dated as of March 1, 2000, between Select Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.14 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .12 | Amendment No. 1 to Employment Agreement, dated as of August 8, 2000, between Select Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.15 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .13 | Amendment No. 2 to Employment Agreement, dated as of February 23, 2001, between Select Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.48 of Select Medical Corporation’s Registration Statement on Form S-1 filed March 30, 2001 (Reg. No. 333-48856). | ||
| 10 | .14 | Amendment No. 3 to Employment Agreement, dated as of September 17, 2001, between Select Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.53 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499). | ||
| 10 | .15 | Amendment No. 4 to Employment Agreement, dated as of December 10, 2004, between Select Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 99.3 of Select Medical Corporation’s Current Report on Form 8-K filed December 16, 2004 (Reg. No. 001-31441). | ||
| 10 | .16 | Amendment No. 5 to Employment Agreement, dated as of February 24, 2005, between Select Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.16 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .17 | Employment Agreement, dated as of March 1, 2000, between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.19 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .18 | Amendment No. 1 to Employment Agreement, dated as of August 8, 2000, between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.20 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .19 | Amendment No. 2 to Employment Agreement, dated as of February 23, 2001, between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.49 of Select Medical Corporation’s Registration Statement on Form S-1 filed March 30, 2001 (Reg. No. 333-48856). | ||
| 10 | .20 | Amendment No. 3 to Employment Agreement, dated as of December 10, 2004, between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 99.2 of Select Medical Corporation’s Current Report on Form 8-K filed December 16, 2004 (Reg. No. 001-31441). | ||
| 10 | .21 | Amendment No. 4 to Employment Agreement, dated as of February 24, 2005, between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.21 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
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| 10 | .22 | Amendment No. 5 to Employment Agreement, dated as of April 27, 2005, between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.46 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .23 | Amendment No. 6 to Employment Agreement, dated as of February 13, 2008, between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.27 of Select Medical Holdings Corporation’s Form S-1 filed July 24, 2008 (Reg. No. 333-152514). | ||
| 10 | .24 | Amendment No. 1 to Restricted Stock Award Agreement, dated as of February 13, 2008, between Select Medical Holdings Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.29 of Select Medical Holdings Corporation’s Form S-1 filed July 24, 2008 (Reg. No. 333-152514). | ||
| 10 | .25 | Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation and Martin F. Jackson, incorporated by reference to Exhibit 10.11 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .26 | Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select Medical Corporation and Martin F. Jackson, incorporated by reference to Exhibit 10.52 of Select Medical Corporation’s Registration Statement on Form S-1 filed March 30, 2001 (Reg. No. 333-48856). | ||
| 10 | .27 | Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between Select Medical Corporation and Martin F. Jackson, incorporated by reference to Exhibit 10.24 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .28 | Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation and James J. Talalai, incorporated by reference to Exhibit 10.58 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499). | ||
| 10 | .29 | Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select Medical Corporation and James J. Talalai, incorporated by reference to Exhibit 10.59 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499). | ||
| 10 | .30 | Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between Select Medical Corporation and James J. Talalai, incorporated by reference to Exhibit 10.35 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .31 | Other Senior Management Agreement, dated as of March 28, 1997, between Select Medical Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.21 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .32 | Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.22 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .33 | Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select Medical Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.54 of Select Medical Corporation’s Registration Statement on Form S-1 filed March 30, 2001 (Reg. No. 333-48856). | ||
| 10 | .34 | Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between Select Medical Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.39 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .35 | Change of Control Agreement, dated as of March 1, 2000, between Select Medical Corporation and Scott A. Romberger, incorporated by reference to Exhibit 10.56 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499). | ||
| 10 | .36 | Amendment to Change of Control Agreement, dated as of February 23, 2001, between Select Medical Corporation and Scott A. Romberger, incorporated by reference to Exhibit 10.57 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499). | ||
| 10 | .37 | Second Amendment to Change of Control Agreement, dated as of February 24, 2005, between Select Medical Corporation and Scott A. Romberger, incorporated by reference to Exhibit 10.42 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
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| 10 | .38 | Form of Unit Award Agreement, incorporated by reference to Exhibit 10.54 of Select Medical Holdings Corporation’s Form S-1 filed July 24, 2008 (Reg. No. 333-152514). | ||
| 10 | .39 | Office Lease Agreement, dated as of May 18, 1999, between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.24 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .40 | First Addendum to Lease Agreement, dated as of June 1999, between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.25 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .41 | Second Addendum to Lease Agreement, dated as of February 1, 2000, between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.26 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .42 | Third Addendum to Lease Agreement, dated as of May 17, 2001, between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.52 of Select Medical Corporation’s Registration Statement on Form S-4 filed June 26, 2001 (Reg. No. 333-63828). | ||
| 10 | .43 | Fourth Addendum to Lease Agreement, dated as of September 1, 2001, by and between Old Gettysburg Associates and Select Medical Corporation, incorporated by reference to Exhibit 10.54 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Reg. No. 000-32499). | ||
| 10 | .44 | Fifth Addendum to Lease Agreement, dated as of February 19, 2004, by and between Old Gettysburg Associates and Select Medical Corporation, incorporated by reference to Exhibit 10.59 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .45 | Sixth Addendum to Lease Agreement, dated as of April 25, 2008, by and between Old Gettysburg Associates and Select Medical Corporation, incorporated by reference to Exhibit 10.63 of Select Medical Holdings Corporation’s Form S-1 filed July 24, 2008 (Reg. No. 333-152514). | ||
| 10 | .46 | Office Lease Agreement, dated as of June 17, 1999, between Select Medical Corporation and Old Gettysburg Associates III, incorporated by reference to Exhibit 10.27 of Select Medical Corporation’s Registration Statement on Form S-1 filed October 27, 2000 (Reg. No. 333-48856). | ||
| 10 | .47 | First Addendum to Lease Agreement, dated as of April 25, 2008, between Old Gettysburg Associates III and Select Medical Corporation, incorporated by reference to Exhibit 10.65 of Select Medical Holdings Corporation’s Form S-1 filed July 24, 2008 (Reg. No. 333-152514). | ||
| 10 | .48 | Office Lease Agreement, dated as of May 15, 2001, by and between Select Medical Corporation and Old Gettysburg Associates II, incorporated by reference to Exhibit 10.53 of Select Medical Corporation’s Registration Statement on Form S-4 filed June 26, 2001 (Reg. No. 333-63828). | ||
| 10 | .49 | First Addendum to Lease Agreement, dated as of February 26, 2002, by and between Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.2 of Select Medical Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (Reg. No. 000-32499). | ||
| 10 | .50 | Second Addendum to Lease Agreement, dated as of February 26, 2002, by and between Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.3 of Select Medical Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (Reg. No. 000-32499). | ||
| 10 | .51 | Third Addendum to Lease Agreement, dated as of February 26, 2002, by and between Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.4 of Select Medical Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (Reg. No. 000-32499). | ||
| 10 | .52 | Fourth Addendum to Lease Agreement, dated as of October 1, 2008, by and between Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.70 of Select Medical Holdings Corporation’s Form S-1/A filed November 25, 2008 (Reg. No. 333-152514). | ||
| 10 | .53 | Fifth Addendum to Lease Agreement, dated April 13, 2009, by and between Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.71 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
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| 10 | .54 | Office Lease Agreement, dated as of October 29, 2003, by and between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.74 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (Reg. No. 001-31441). | ||
| 10 | .55 | First Addendum to Lease Agreement, dated November 1, 2008, by and between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.72 of Select Medical Holdings Corporation’s Form S-1/A filed November 25, 2008 (Reg. No. 333-152514). | ||
| 10 | .56 | Second Addendum to Lease Agreement, dated April 13, 2009, by and between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.74 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .57 | Office Lease Agreement, dated as of October 29, 2003, by and between Select Medical Corporation and Old Gettysburg Associates II, incorporated by reference to Exhibit 10.75 of Select Medical Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (Reg. No. 001-31441). | ||
| 10 | .58 | First Addendum to Lease Agreement, dated October 1, 2008, by and between Select Medical Corporation and Old Gettysburg Associates II, LP, incorporated by reference to Exhibit 10.74 of Select Medical Holdings Corporation’s Form S-1/A filed November 25, 2008 (Reg. No. 333-152514). | ||
| 10 | .59 | Second Addendum to Lease Agreement, dated April 13, 2009, by and between Select Medical Corporation and Old Gettysburg Associates II, LP, incorporated by reference to Exhibit 10.77 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .60 | Office Lease Agreement, dated as of March 19, 2004, by and between Select Medical Corporation and Old Gettysburg Associates II, incorporated by reference to Exhibit 10.3 of Select Medical Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004 (Reg. No. 001-31441). | ||
| 10 | .61 | Office Lease Agreement, dated as of March 19, 2004, by and between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.4 of Select Medical Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004 (Reg. No. 001-31441). | ||
| 10 | .62 | First Addendum to Lease Agreement, dated March 6, 2009, by and between Old Gettysburg Associates II, LP and Select Medical Corporation, incorporated by reference to Exhibit 10.80 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .63 | Second Addendum to Lease Agreement, dated April 13, 2009, by and between Old Gettysburg Associates II, LP and Select Medical Corporation, incorporated by reference to Exhibit 10.81 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .64 | Office Lease Agreement, dated August 25, 2006, between Old Gettysburg Associates IV, L.P. and Select Medical Corporation, incorporated by reference to Exhibit 10.1 of Select Medical Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (Reg. No. 001-31441). | ||
| 10 | .65 | Office Lease Agreement, dated August 10, 2005, among Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.1 of Select Medical Corporation’s Current Report on Form 8-K filed August 16, 2005 (Reg. No. 001-31441). | ||
| 10 | .66 | First Addendum to Lease Agreement, dated April 13, 2009, by and between Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.84 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .67 | Office Lease Agreement, dated October 5, 2006, by and between Select Medical Corporation and Old Gettysburg Associates, incorporated by reference to Exhibit 10.76 of Select Medical Holdings Corporation’s Form S-1 filed July 25, 2008 (Reg. No. 333-152514). | ||
| 10 | .68 | Naming, Promotional and Sponsorship Agreement, dated as of October 1, 1997, between NovaCare, Inc. and the Philadelphia Eagles Limited Partnership, assumed by Select Medical Corporation in a Consent and Assumption Agreement dated November 19, 1999 by and among NovaCare, Inc., Select Medical Corporation and the Philadelphia Eagles Limited Partnership, incorporated by reference to Exhibit 10.36 of Select Medical Corporation’s Registration Statement on Form S-1 filed December 7, 2000 (Reg. No. 333-48856). | ||
| 10 | .69 | First Amendment to Naming, Promotional and Sponsorship Agreement, dated as of January 1, 2004, between Select Medical Corporation and Philadelphia Eagles, LLC, incorporated by reference to Exhibit 10.63 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
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| 10 | .70 | Select Medical Holdings Corporation 2005 Equity Incentive Plan, as amended and restated, incorporated by reference to Exhibit 10.88 of Select Medical Holdings Corporation’s Form S-1/A filed September 9, 2009 (Reg. No. 333-152514). | ||
| 10 | .71 | Select Medical Holdings Corporation 2005 Equity Incentive Plan for Non-Employee Directors, as amended and restated, incorporated by reference to Exhibit 10.89 of Select Medical Holdings Corporation’s Form S-1/A filed September 9, 2009 (Reg. No. 333-152514). | ||
| 10 | .72 | Amendment No. 6 to Employment Agreement between Select Medical Corporation and Rocco A. Ortenzio, incorporated by reference to Exhibit 10.95 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .73 | Amendment No. 6 to Employment Agreement between Select Medical Corporation and Robert A. Ortenzio, incorporated by reference to Exhibit 10.96 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .74 | Amendment No. 7 to Employment Agreement between Select Medical Corporation and Patricia A. Rice, incorporated by reference to Exhibit 10.97 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .75 | Third Amendment to Change of Control Agreement between Select Medical Corporation and Michael E. Tarvin, incorporated by reference to Exhibit 10.100 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .76 | Third Amendment to Change of Control Agreement between Select Medical Corporation and James J. Talalai, incorporated by reference to Exhibit 10.101 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .77 | Third Amendment to Change of Control Agreement between Select Medical Corporation and Scott A. Romberger, incorporated by reference to Exhibit 10.102 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .78 | Third Amendment to Change of Control Agreement between Select Medical Corporation and Martin F. Jackson, incorporated by reference to Exhibit 10.103 of Select Medical Holdings Corporation’s Form S-1/A filed June 18, 2009 (Reg. No. 333-152514). | ||
| 10 | .79 | Amendment No. 1, dated as of September 26, 2005, to Credit Agreement, dated as of February 24, 2005, among Select Medical Holdings Corporation, Select Medical Corporation, as Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association, as Syndication Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC Inc., as Co-Documentation Agents, incorporated by reference to Exhibit 10.2 of Select Medical Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (Reg. No. 001-31441). | ||
| 10 | .80 | Amendment No. 2 and Waiver, dated as of March 19, 2007, to Credit Agreement, dated as of February 24, 2005, among Select Medical Holdings Corporation, Select Medical Corporation, as Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association, as Syndication Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC Inc., as Co-Documentation Agents, incorporated by reference to Exhibit 10.1 of Select Medical Corporation’s Current Report on Form 8-K filed March 23, 2007 (Reg. No. 001-31441). | ||
| 10 | .81 | Incremental Facility Amendment, dated as of March 28, 2007, to Credit Agreement, dated as of February 24, 2005, among Select Medical Holdings Corporation, Select Medical Corporation, as Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association, as Syndication Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC Inc., as Co-Documentation Agents, incorporated by reference to Exhibit 10.1 of Select Medical Corporation’s Current Report on Form 8-K filed March 30, 2007 (Reg. No. 001-31441). | ||
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| 10 | .82 | Amendment No. 3, dated as of August 5, 2009, to Credit Agreement, dated as of February 24, 2005, among Select Medical Holdings Corporation, Select Medical Corporation, as Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association, as Syndication Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC Inc., as Co-Documentation Agents, incorporated by reference to Exhibit 10.109 of Select Medical Holdings Corporation’s Form S-1/A filed August 25, 2009 (Reg. No. 333-152514). | ||
| 10 | .83 | Indenture governing 7 5 / 8 % Senior Subordinated Notes due 2015 among Select Medical Corporation, the Guarantors named therein and U.S. Bank Trust National Association, dated February 24, 2005, incorporated by reference to Exhibit 4.4 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .84 | Form of 7 5 / 8 % Senior Subordinated Notes due 2015 (included in Exhibit 4.4), incorporated by reference to Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .85 | Exchange and Registration Rights Agreement, dated as of February 24, 2005, by and among Select Medical Corporation, the Guarantors named therein, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Wachovia Capital Markets, LLC, CIBC World Markets Corp. and PNC Capital Markets, Inc., incorporated by reference to Exhibit 4.6 of Select Medical Corporation’s Form S-4 filed June 16, 2005 (Reg. No. 333-125846). | ||
| 10 | .86 | Registration Rights Agreement, dated as of February 24, 2005, between Select Medical Holdings Corporation, WCAS Capital Partners IV, L.P., Rocco A. Ortenzio, Robert A. Ortenzio, John M. Ortenzio, Martin J. Ortenzio, Martin J. Ortenzio Descendants Trust and Ortenzio Family Foundation, incorporated by reference to Exhibit 10.78 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .87 | Indenture governing Senior Floating Rate Notes due 2015 among Select Medical Holdings Corporation and U.S. Bank Trust National Association, dated September 29, 2005, incorporated by reference to Exhibit 4.7 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .88 | Form of Senior Floating Rate Notes due 2015 (included in Exhibit 4.7), incorporated by reference to Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .89 | Exchange and Registration Rights Agreement, dated as of September 29, 2005, by and among Select Medical Holdings Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC and J.P. Morgan Securities Inc., incorporated by reference to Exhibit 4.9 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .90 | 10% Senior Subordinated Note due December 31, 2015 in favor of WCAS Capital Partners IV, L.P., amended and restated as of September 29, 2005, incorporated by reference to Exhibit 10.69 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .91 | 10% Senior Subordinated Note due December 31, 2015 in favor of Rocco A. Ortenzio, amended and restated as of September 29, 2005, incorporated by reference to Exhibit 10.70 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .92 | 10% Senior Subordinated Note due December 31, 2015 in favor of Robert A. Ortenzio, amended and restated as of September 29, 2005, incorporated by reference to Exhibit 10.71 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .93 | 10% Senior Subordinated Note due December 31, 2015 in favor of John M. Ortenzio, amended and restated as of September 29, 2005, incorporated by reference to Exhibit 10.72 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .94 | 10% Senior Subordinated Note due December 31, 2015 in favor of Martin J. Ortenzio, amended and restated as of September 29, 2005, incorporated by reference to Exhibit 10.73 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .95 | 10% Senior Subordinated Note due December 31, 2015 in favor of Martin J. Ortenzio Descendants Trust, amended and restated as of September 29, 2005, incorporated by reference to Exhibit 10.74 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
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| 10 | .96 | 10% Senior Subordinated Note due December 31, 2015 in favor of Ortenzio Family Foundation, amended and restated as of September 29, 2005, incorporated by reference to Exhibit 10.75 of Select Medical Holdings Corporation’s Form S-4 filed April 13, 2006 (Reg. No. 333-133284). | ||
| 10 | .97 | Form of Restricted Stock Agreement under the 2005 Equity Incentive Plan, incorporated by reference to Exhibit 10.119 of the Annual Report on Form 10-K of Select Medical Holdings Corporation and Select Medical Corporation filed on March 17, 2010 ( Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .98 | Assignment and Assumption and Amendment No. 4, dated June 7, 2010, to Credit Agreement dated as of February 24, 2005, as amended, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporation and CIBC Inc. as Co-Documentation Agents, and the Lenders named therein, incorporated by herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on August 12, 2010 (Reg Nos. 001-34465 and 001-31441). | ||
| 10 | .99 | Amendment No. 4-A, dated June 7, 2010, to Credit Agreement dated as of February 24, 2005, as amended, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, Wachovia Bank, National Association as Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporation and CIBC Inc. as Co-Documentation Agents, and the Lenders named therein, incorporated by herein by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on August 12, 2010 (Reg Nos. 001-34465 and 001-31441). | ||
| 10 | .100 | Second Addendum to Lease Agreement, dated August 1, 2010, by and between Old Gettysburg Associates II and Select Medical Corporation, incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .101 | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and Bryan C. Cressey, incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .102 | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and James E. Dalton, Jr., incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .103 | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and James S. Ely, III, incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .104 | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and William H. Frist, M.D., incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .105 | Restricted Stock Award Agreement, dated August 11, 2010, by and between Select Medical Holdings Corporation and Leopold Swergold, incorporated by reference to Exhibit 10.6 of the Quarterly Report on Form 10-Q of Select Medical Holdings Corporation and Select Medical Corporation filed on November 12, 2010 (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .106 | 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. (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .107 | 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 filed on September 15, 2010. (Reg. Nos. 001-34465 and 001-31441). | ||
87
|
Number
|
Description
|
|||
| 10 | .108 | Amendment No. 7 to Employment Agreement, dated November 10, 2010, by and between Select Medical Corporation and Rocco A. Ortenzio, incorporated herein be reference to Exhibit 10.1 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select filed on November 15, 2010. (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .109 | Amendment No. 7 to Employment Agreement, dated November 10, 2010, by and between Select Medical Corporation and Robert A. Ortenzio, incorporated herein be reference to Exhibit 10.2 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select filed on November 15, 2010. (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .110 | Amendment No. 8 to Employment Agreement, dated November 10, 2010, by and between Select Medical Corporation and Patricia A. Rice, incorporated herein be reference to Exhibit 10.3 of the Current Report on Form 8-K of Select Medical Holdings Corporation and Select filed on November 15, 2010. (Reg. Nos. 001-34465 and 001-31441). | ||
| 10 | .111 | Fourth Amendment to Change of Control Agreement between Select Medical Corporation and Martin F. Jackson. | ||
| 10 | .112 | Amendment No. 8 to Employment Agreement between Select Medical Corporation and Robert A. Ortenzio. | ||
| 10 | .113 | Amendment No. 8 to Employment Agreement between Select Medical Corporation and Rocco A. Ortenzio. | ||
| 10 | .114 | Amendment No. 9 to Employment Agreement between Select Medical Corporation and Patricia A. Rice. | ||
| 10 | .115 | Fourth Amendment to Change of Control Agreement between Select Medical Corporation and Scott A. Romberger. | ||
| 10 | .116 | Fourth Amendment to Change of Control Agreement between Select Medical Corporation and James J. Talalai. | ||
| 10 | .117 | Fourth Amendment to Change of Control Agreement between Select Medical Corporation and Michael E. Tarvin. | ||
| 12 | Statement of Ratio of Earnings to Fixed Charges. | |||
| 21 | .1 | Subsidiaries of Select Medical Holdings Corporation. | ||
| 23 | Consent of PricewaterhouseCoopers LLP. | |||
| 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. | ||
88
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 holdings
Corporation
Select Medical Corporation
Select Medical Corporation
| By: |
/s/ Michael
E. Tarvin
|
Michael E. Tarvin
(Executive Vice President, General Counsel and
Secretary)
Secretary)
Date: March 9, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated as
of March 9, 2011.
|
/s/ Rocco
A. Ortenzio
Rocco
A. Ortenzio
Director and Executive Chairman |
/s/ Robert
A. Ortenzio
Director and Chief Executive Officer (principal executive officer) |
|||
|
/s/ Martin
F. Jackson
Martin
F. Jackson
Executive Vice President and Chief Financial Officer (principal financial officer) |
/s/ Scott
A. Romberger
Senior Vice President, Controller and Chief Accounting Officer (principal accounting officer) |
|||
|
/s/ Russell
L. Carson
Russell
L. Carson
Director |
/s/ Bryan
C. Cressey
Director |
|||
|
/s/ James
E. Dalton, Jr.
James
E. Dalton, Jr.
Director |
/s/ James
S. Ely III
Director |
|||
|
/s/ William
H. Frist, M.D.
William
H. Frist, M.D.
Director |
/s/ Thomas
A. Scully
Director |
|||
|
/s/ Leopold
Swergold
Leopold
Swergold
Director |
89
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
| F-2 | ||
| F-4 | ||
| F-5 | ||
| F-7 | ||
| F-9 | ||
| F-11 | ||
| F-54 |
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of Select Medical Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Select Medical Corporation and its
subsidiaries at December 31, 2010 and December 31,
2009, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule, and on the Company’s internal control
over financial reporting based on our audits (which was an
integrated audit in 2010). We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control
Over Financial Reporting, management has excluded Regency
Hospital Company, L.L.C. from its assessment of internal control
over financial reporting as of December 31, 2010 because it
was acquired by the Company in a purchase business combination
during 2010. We have also excluded Regency Hospital Company,
L.L.C. from our audit of internal control over financial
reporting. Regency Hospital L.L.C. is a wholly-owned subsidiary
whose total assets and total net operating revenues represent
11% and 4%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31,
2010.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 9, 2011
F-2
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Select Medical Holdings Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Select Medical Holdings Corporation
and its subsidiaries at December 31, 2010 and
December 31, 2009, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule, and on the Company’s internal control
over financial reporting based on our audits (which was an
integrated audit in 2010). We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control
Over Financial Reporting, management has excluded Regency
Hospital Company, L.L.C. from its assessment of internal control
over financial reporting as of December 31, 2010 because it
was acquired by the Company in a purchase business combination
during 2010. We have also excluded Regency Hospital Company,
L.L.C. from our audit of internal control over financial
reporting. Regency Hospital L.L.C. is a wholly-owned subsidiary
whose total assets and total net operating revenues represent
11% and 4%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31,
2010.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 9, 2011
F-3
|
|
FINANCIAL INFORMATION |
| ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
|
Select Medical
|
||||||||||||||||
| Holdings Corporation | Select Medical Corporation | |||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|||||||||||||
| 2009 | 2010 | 2009 | 2010 | |||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current Assets:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 83,680 | $ | 4,365 | $ | 83,680 | $ | 4,365 | ||||||||
|
Accounts receivable, net of allowance for doubtful accounts of
$43,357 and $44,416 in 2009 and 2010, respectively
|
307,079 | 353,432 | 307,079 | 353,432 | ||||||||||||
|
Current deferred tax asset
|
34,448 | 30,654 | 34,448 | 30,654 | ||||||||||||
|
Prepaid income taxes
|
11,179 | 12,699 | 11,179 | 12,699 | ||||||||||||
|
Other current assets
|
24,240 | 28,176 | 24,240 | 28,176 | ||||||||||||
|
Total Current Assets
|
460,626 | 429,326 | 460,626 | 429,326 | ||||||||||||
|
Property and equipment, net
|
466,131 | 532,100 | 466,131 | 532,100 | ||||||||||||
|
Goodwill
|
1,548,269 | 1,631,252 | 1,548,269 | 1,631,252 | ||||||||||||
|
Other identifiable intangibles
|
65,297 | 80,119 | 65,297 | 80,119 | ||||||||||||
|
Assets held for sale
|
11,342 | 11,342 | 11,342 | 11,342 | ||||||||||||
|
Other assets
|
36,481 | 37,947 | 33,427 | 35,433 | ||||||||||||
|
Total Assets
|
$ | 2,588,146 | $ | 2,722,086 | $ | 2,585,092 | $ | 2,719,572 | ||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||
|
Current Liabilities:
|
||||||||||||||||
|
Bank overdrafts
|
$ | — | $ | 18,792 | $ | — | $ | 18,792 | ||||||||
|
Current portion of long-term debt and notes payable
|
4,145 | 149,379 | 4,145 | 149,379 | ||||||||||||
|
Accounts payable
|
73,434 | 74,193 | 73,434 | 74,193 | ||||||||||||
|
Accrued payroll
|
62,035 | 63,760 | 62,035 | 63,760 | ||||||||||||
|
Accrued vacation
|
41,013 | 46,588 | 41,013 | 46,588 | ||||||||||||
|
Accrued interest
|
32,919 | 30,937 | 23,473 | 21,586 | ||||||||||||
|
Accrued restructuring
|
4,256 | 6,754 | 4,256 | 6,754 | ||||||||||||
|
Accrued other
|
84,234 | 103,856 | 97,134 | 116,456 | ||||||||||||
|
Due to third party payors
|
1,905 | 5,299 | 1,905 | 5,299 | ||||||||||||
|
Total Current Liabilities
|
303,941 | 499,558 | 307,395 | 502,807 | ||||||||||||
|
Long-term debt, net of current portion
|
1,401,426 | 1,281,390 | 1,096,842 | 974,913 | ||||||||||||
|
Non-current deferred tax liability
|
52,681 | 59,074 | 52,681 | 59,074 | ||||||||||||
|
Other non-current liabilities
|
60,543 | 66,650 | 60,543 | 66,650 | ||||||||||||
|
Total Liabilities
|
1,818,591 | 1,906,672 | 1,517,461 | 1,603,444 | ||||||||||||
|
Commitments and Contingencies
|
||||||||||||||||
|
Stockholders’ Equity:
|
||||||||||||||||
|
Common stock of Holdings, $0.001 par value,
700,000,000 shares authorized, 159,980,554 shares and
154,519,025 shares issued and outstanding in 2009 and 2010,
respectively
|
160 | 155 | — | — | ||||||||||||
|
Common stock of Select, $0.01 par value, 100 shares issued
and outstanding
|
— | — | — | — | ||||||||||||
|
Capital in excess of par
|
578,648 | 535,628 | 822,664 | 834,894 | ||||||||||||
|
Retained earnings
|
169,094 | 248,097 | 223,314 | 249,700 | ||||||||||||
|
Accumulated other comprehensive loss
|
(8,914 | ) | — | (8,914 | ) | — | ||||||||||
|
Total Select Medical Holdings Corporation and Select Medical
Corporation Stockholders’ Equity
|
738,988 | 783,880 | 1,037,064 | 1,084,594 | ||||||||||||
|
Non-controlling interest
|
30,567 | 31,534 | 30,567 | 31,534 | ||||||||||||
|
Total Equity
|
769,555 | 815,414 | 1,067,631 | 1,116,128 | ||||||||||||
|
Total Liabilities and Equity
|
$ | 2,588,146 | $ | 2,722,086 | $ | 2,585,092 | $ | 2,719,572 | ||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SELECT
MEDICAL HOLDINGS CORPORATION
| For the Year Ended December 31, | ||||||||||||
| 2008 (1) | 2009 | 2010 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Net operating revenues
|
$ | 2,153,362 | $ | 2,239,871 | $ | 2,390,290 | ||||||
|
Costs and expenses:
|
||||||||||||
|
Cost of services
|
1,791,841 | 1,819,771 | 1,982,179 | |||||||||
|
General and administrative
|
45,523 | 72,409 | 62,121 | |||||||||
|
Bad debt expense
|
47,804 | 40,872 | 41,147 | |||||||||
|
Depreciation and amortization
|
71,786 | 70,981 | 68,706 | |||||||||
|
Total costs and expenses
|
1,956,954 | 2,004,033 | 2,154,153 | |||||||||
|
Income from operations
|
196,408 | 235,838 | 236,137 | |||||||||
|
Other income and expense:
|
||||||||||||
|
Gain on early retirement of debt
|
912 | 13,575 | — | |||||||||
|
Equity in losses of unconsolidated subsidiaries
|
— | — | (440 | ) | ||||||||
|
Other income (expense)
|
— | (632 | ) | 632 | ||||||||
|
Interest income
|
471 | 92 | — | |||||||||
|
Interest expense
|
(145,894 | ) | (132,469 | ) | (112,337 | ) | ||||||
|
Income before income taxes
|
51,897 | 116,404 | 123,992 | |||||||||
|
Income tax expense
|
26,063 | 37,516 | 41,628 | |||||||||
|
Net income
|
25,834 | 78,888 | 82,364 | |||||||||
|
Less: Net income attributable to non-controlling interests
|
3,393 | 3,606 | 4,720 | |||||||||
|
Net income attributable to Select Medical Holdings Corporation
|
22,441 | 75,282 | 77,644 | |||||||||
|
Less: Preferred dividends
|
24,972 | 19,537 | — | |||||||||
|
Net income (loss) available to common stockholders and
participating securities
|
$ | (2,531 | ) | $ | 55,745 | $ | 77,644 | |||||
|
Income (loss) per common
share
(2)
:
|
||||||||||||
|
Basic
|
$ | (0.04 | ) | $ | 0.61 | $ | 0.49 | |||||
|
Diluted
|
$ | (0.04 | ) | $ | 0.61 | $ | 0.48 | |||||
| (1) | Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 1, Organization and Significant Accounting Policies, for additional information. | |
| (2) | Adjusted for the clarification by the Financial Accounting Standards Board that stated share based payment awards that have not vested meet the definition of a participating security provided the right to receive the dividend is non-forfeitable and non-contingent. See Note 14 for additional information. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SELECT
MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Year Ended December 31, | ||||||||||||
| 2008 (1) | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Net operating revenues
|
$ | 2,153,362 | $ | 2,239,871 | $ | 2,390,290 | ||||||
|
Costs and expenses:
|
||||||||||||
|
Cost of services
|
1,791,841 | 1,819,771 | 1,982,179 | |||||||||
|
General and administrative
|
45,523 | 72,409 | 62,121 | |||||||||
|
Bad debt expense
|
47,804 | 40,872 | 41,147 | |||||||||
|
Depreciation and amortization
|
71,786 | 70,981 | 68,706 | |||||||||
|
Total costs and expenses
|
1,956,954 | 2,004,033 | 2,154,153 | |||||||||
|
Income from operations
|
196,408 | 235,838 | 236,137 | |||||||||
|
Other income and expense:
|
||||||||||||
|
Gain on early retirement of debt
|
912 | 12,446 | — | |||||||||
|
Equity in losses of unconsolidated subsidiaries
|
— | — | (440 | ) | ||||||||
|
Other income (expense)
|
(2,802 | ) | 3,204 | 632 | ||||||||
|
Interest income
|
471 | 92 | — | |||||||||
|
Interest expense
|
(110,889 | ) | (99,543 | ) | (84,472 | ) | ||||||
|
Income before income taxes
|
84,100 | 152,037 | 151,857 | |||||||||
|
Income tax expense
|
37,334 | 49,987 | 51,380 | |||||||||
|
Net income
|
46,766 | 102,050 | 100,477 | |||||||||
|
Less: Net income attributable to non-controlling interests
|
3,393 | 3,606 | 4,720 | |||||||||
|
Net income attributable to Select Medical Corporation
|
$ | 43,373 | $ | 98,444 | $ | 95,757 | ||||||
| (1) | Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 1, Organization and Significant Accounting Policies, for additional information. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
| Select Medical Holdings Corporation Stockholders | ||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Common
|
Common
|
Capital in
|
Other
|
|||||||||||||||||||||||||||||
|
Comprehensive
|
Stock
|
Stock
|
Excess
|
Retained
|
Comprehensive
|
Non-controlling
|
||||||||||||||||||||||||||
| Total | Income | Issued | Par Value | of Par | Earnings | Income (Loss) | Interests (1) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
|
Balance at December 31,
2007
(1)
|
$ | (160,128 | ) | 61,550 | $ | 61 | $ | (291,103 | ) | $ | 130,716 | $ | (5,563 | ) | $ | 5,761 | ||||||||||||||||
|
Net income
|
25,834 | $ | 25,834 | 22,441 | 3,393 | |||||||||||||||||||||||||||
|
Unrealized loss on interest rate swap, net of tax
|
(7,649 | ) | (7,649 | ) | (7,649 | ) | ||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 18,185 | $ | 18,185 | ||||||||||||||||||||||||||||
|
Vesting of restricted stock
|
2,037 | 2,037 | ||||||||||||||||||||||||||||||
|
Exercise of stock options
|
90 | 25 | — | 90 | ||||||||||||||||||||||||||||
|
Repurchase of common shares
|
(318 | ) | (109 | ) | — | (318 | ) | |||||||||||||||||||||||||
|
Stock option expense
|
56 | 56 | ||||||||||||||||||||||||||||||
|
Sale of subsidiary shares to non-controlling interest
|
1,378 | 1,378 | ||||||||||||||||||||||||||||||
|
Purchase of subsidiary shares from non-controlling interests
|
(789 | ) | (789 | ) | ||||||||||||||||||||||||||||
|
Distributions to non-controlling interests
|
(1,957 | ) | (1,957 | ) | ||||||||||||||||||||||||||||
|
Other
|
17 | 17 | ||||||||||||||||||||||||||||||
|
Accretion of dividends on preferred stock
|
(24,972 | ) | (24,972 | ) | ||||||||||||||||||||||||||||
|
Balance at December 31,
2008
(1)
|
$ | (166,401 | ) | 61,466 | $ | 61 | $ | (289,238 | ) | $ | 128,185 | $ | (13,212 | ) | $ | 7,803 | ||||||||||||||||
|
Net income
|
78,888 | $ | 78,888 | 75,282 | 3,606 | |||||||||||||||||||||||||||
|
Unrealized gain on interest rate swap, net of tax
|
4,298 | 4,298 | 4,298 | |||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 83,186 | $ | 83,186 | ||||||||||||||||||||||||||||
|
Issuance of common stock in connection with initial public
offering, net of issuance costs
|
312,531 | 33,603 | 34 | 312,497 | ||||||||||||||||||||||||||||
|
Conversion of preferred stock
|
535,407 | 64,277 | 65 | 535,342 | ||||||||||||||||||||||||||||
|
Deemed dividend on conversion of preferred stock
|
— | 14,836 | (14,836 | ) | ||||||||||||||||||||||||||||
|
Issuance and vesting of restricted stock
|
4,905 | 614 | — | 4,905 | ||||||||||||||||||||||||||||
|
Exercise of stock options
|
146 | 37 | — | 146 | ||||||||||||||||||||||||||||
|
Repurchase of common shares
|
(81 | ) | (16 | ) | — | (81 | ) | |||||||||||||||||||||||||
|
Stock option expense
|
241 | 241 | ||||||||||||||||||||||||||||||
|
Non-cash equity contribution from non-controlling interests
|
21,940 | 21,940 | ||||||||||||||||||||||||||||||
|
Distributions to non-controlling interests
|
(2,766 | ) | (2,766 | ) | ||||||||||||||||||||||||||||
|
Other
|
(16 | ) | (16 | ) | ||||||||||||||||||||||||||||
|
Accretion of dividends on preferred stock
|
(19,537 | ) | (19,537 | ) | ||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 769,555 | 159,981 | $ | 160 | $ | 578,648 | $ | 169,094 | $ | (8,914 | ) | $ | 30,567 | ||||||||||||||||||
|
Net income
|
82,364 | $ | 82,364 | 77,644 | 4,720 | |||||||||||||||||||||||||||
|
Unrealized gain on interest rate swap, net of tax
|
8,914 | 8,914 | 8,914 | |||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 91,278 | $ | 91,278 | ||||||||||||||||||||||||||||
|
Issuance and vesting of restricted stock
|
1,068 | 1,380 | 1 | 1,067 | ||||||||||||||||||||||||||||
|
Repurchase of common shares
|
(44,144 | ) | (6,906 | ) | (7 | ) | (30,660 | ) | (13,477 | ) | ||||||||||||||||||||||
|
Stock option expense
|
1,168 | 1,168 | ||||||||||||||||||||||||||||||
|
Exercise of stock options
|
242 | 64 | 1 | 241 | ||||||||||||||||||||||||||||
|
Reclassification of deemed dividend
|
— | (14,836 | ) | 14,836 | ||||||||||||||||||||||||||||
|
Distributions to non-controlling interests
|
(4,431 | ) | (4,431 | ) | ||||||||||||||||||||||||||||
|
Other
|
678 | 678 | ||||||||||||||||||||||||||||||
|
Balance at December 31, 2010
|
$ | 815,414 | 154,519 | $ | 155 | $ | 535,628 | $ | 248,097 | $ | — | $ | 31,534 | |||||||||||||||||||
| (1) | Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 1, Organization and Significant Accounting Policies, for additional information. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
SELECT
MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND INCOME (LOSS)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND INCOME (LOSS)
| Select Medical Corporation Stockholders | ||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Common
|
Common
|
Capital in
|
Other
|
|||||||||||||||||||||||||||||
|
Comprehensive
|
Stock
|
Stock Par
|
Excess
|
Retained
|
Comprehensive
|
Non-controlling
|
||||||||||||||||||||||||||
| Total | Income | Issued | Value | of Par | Earnings | Income (Loss) | Interests (1) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
|
Balance at December 31,
2007
(1)
|
$ | 629,932 | — | $ | — | $ | 478,911 | $ | 150,203 | $ | (4,943 | ) | $ | 5,761 | ||||||||||||||||||
|
Net income
|
46,766 | $ | 46,766 | 43,373 | 3,393 | |||||||||||||||||||||||||||
|
Unrealized loss on interest rate swap, net of tax
|
(6,493 | ) | (6,493 | ) | (6,493 | ) | ||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 40,273 | $ | 40,273 | ||||||||||||||||||||||||||||
|
Additional investment by Holdings
|
90 | 90 | ||||||||||||||||||||||||||||||
|
Net change in dividends payable to Holdings
|
500 | 500 | ||||||||||||||||||||||||||||||
|
Dividends declared and paid to Holdings
|
(33,419 | ) | (33,419 | ) | ||||||||||||||||||||||||||||
|
Contribution related to restricted stock awards and stock option
issuances by Holdings
|
2,093 | 2,093 | ||||||||||||||||||||||||||||||
|
Sale of subsidiary shares to non-controlling interest
|
1,378 | 1,378 | ||||||||||||||||||||||||||||||
|
Purchase of subsidiary shares from non-controlling interests
|
(789 | ) | (789 | ) | ||||||||||||||||||||||||||||
|
Distributions to non-controlling interests
|
(1,957 | ) | (1,957 | ) | ||||||||||||||||||||||||||||
|
Other
|
17 | 17 | ||||||||||||||||||||||||||||||
|
Balance at December 31,
2008
(1)
|
$ | 638,118 | — | — | $ | 481,094 | $ | 160,657 | $ | (11,436 | ) | $ | 7,803 | |||||||||||||||||||
|
Net income
|
102,050 | $ | 102,050 | 98,444 | 3,606 | |||||||||||||||||||||||||||
|
Unrealized gain on interest rate swap, net of tax
|
2,522 | 2,522 | 2,522 | |||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 104,572 | $ | 104,572 | ||||||||||||||||||||||||||||
|
Federal tax benefit of losses contributed by Holdings
|
23,747 | 23,747 | ||||||||||||||||||||||||||||||
|
Additional investment by Holdings
|
312,677 | 312,677 | ||||||||||||||||||||||||||||||
|
Net change in dividends payable to Holdings
|
3,600 | 3,600 | ||||||||||||||||||||||||||||||
|
Dividends declared and paid to Holdings
|
(39,387 | ) | (39,387 | ) | ||||||||||||||||||||||||||||
|
Contribution related to restricted stock awards and stock option
issuances by Holdings
|
5,146 | 5,146 | ||||||||||||||||||||||||||||||
|
Equity contribution from non-controlling interests
|
21,940 | 21,940 | ||||||||||||||||||||||||||||||
|
Distributions to non-controlling interests
|
(2,766 | ) | (2,766 | ) | ||||||||||||||||||||||||||||
|
Other
|
(16 | ) | (16 | ) | ||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 1,067,631 | — | — | $ | 822,664 | $ | 223,314 | $ | (8,914 | ) | $ | 30,567 | |||||||||||||||||||
|
Net income
|
100,477 | $ | 100,477 | 95,757 | 4,720 | |||||||||||||||||||||||||||
|
Unrealized gain on interest rate swap, net of tax
|
8,914 | 8,914 | 8,914 | |||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 109,391 | $ | 109,391 | ||||||||||||||||||||||||||||
|
Federal tax benefit of losses contributed by Holdings
|
9,752 | 9,752 | ||||||||||||||||||||||||||||||
|
Additional investment by Holdings
|
242 | 242 | ||||||||||||||||||||||||||||||
|
Net change in dividends payable to Holdings
|
300 | 300 | ||||||||||||||||||||||||||||||
|
Dividends declared and paid to Holdings
|
(69,671 | ) | (69,671 | ) | ||||||||||||||||||||||||||||
|
Contribution related to restricted stock awards and stock option
issuances by Holdings
|
2,236 | 2,236 | ||||||||||||||||||||||||||||||
|
Distributions to non-controlling interests
|
(4,431 | ) | (4,431 | ) | ||||||||||||||||||||||||||||
|
Other
|
678 | 678 | ||||||||||||||||||||||||||||||
|
Balance at December 31, 2010
|
$ | 1,116,128 | — | $ | — | $ | 834,894 | $ | 249,700 | $ | — | $ | 31,534 | |||||||||||||||||||
| (1) | Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 1, Organization and Significant Accounting Policies, for additional information. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
| For the Year Ended December 31, | ||||||||||||
| 2008 (1) | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Operating activities
|
||||||||||||
|
Net income
|
$ | 25,834 | $ | 78,888 | $ | 82,364 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
71,786 | 70,981 | 68,706 | |||||||||
|
Provision for bad debts
|
47,804 | 40,872 | 41,147 | |||||||||
|
Gain on early retirement of debt
|
(912 | ) | (13,575 | ) | — | |||||||
|
Loss (gain) from disposal of assets
|
546 | (122 | ) | 484 | ||||||||
|
Non-cash loss (gain) from interest rate swaps
|
— | 632 | (632 | ) | ||||||||
|
Non-cash stock compensation expense
|
2,093 | 5,147 | 2,236 | |||||||||
|
Amortization of debt discount
|
1,492 | 1,681 | 1,893 | |||||||||
|
Deferred income taxes
|
21,756 | 27,103 | 9,450 | |||||||||
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
||||||||||||
|
Accounts receivable
|
(88,545 | ) | (35,455 | ) | (64,329 | ) | ||||||
|
Other current assets
|
8,230 | (1,117 | ) | 1,595 | ||||||||
|
Other assets
|
16,913 | 6,114 | 808 | |||||||||
|
Accounts payable
|
(1,351 | ) | 963 | (7,161 | ) | |||||||
|
Due to third-party payors
|
(9,363 | ) | (3,804 | ) | (1,902 | ) | ||||||
|
Accrued expenses
|
11,155 | (12,669 | ) | 9,878 | ||||||||
|
Net cash provided by operating activities
|
107,438 | 165,639 | 144,537 | |||||||||
|
Investing activities
|
||||||||||||
|
Purchases of property and equipment
|
(56,504 | ) | (57,877 | ) | (51,761 | ) | ||||||
|
Proceeds from sale of business units
|
2,666 | — | — | |||||||||
|
Proceeds from sale of property
|
743 | 1,341 | 565 | |||||||||
|
Insurance proceeds
|
281 | — | — | |||||||||
|
Acquisition of businesses, net of cash acquired
|
(7,624 | ) | (21,381 | ) | (165,802 | ) | ||||||
|
Net cash used in investing activities
|
(60,438 | ) | (77,917 | ) | (216,998 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Proceeds from initial public offering, net of fees
|
— | 315,866 | — | |||||||||
|
Payment of initial public offering costs
|
(1,326 | ) | (1,737 | ) | — | |||||||
|
Borrowings on revolving credit facility
|
407,000 | 193,000 | 227,000 | |||||||||
|
Payments on revolving credit facility
|
(377,000 | ) | (343,000 | ) | (202,000 | ) | ||||||
|
Payment on credit facility term loan
|
(6,800 | ) | (173,433 | ) | (1,223 | ) | ||||||
|
Repurchase of
7
5
/
8
% senior
subordinated notes
|
(1,040 | ) | (30,114 | ) | — | |||||||
|
Repurchase of senior floating rate notes
|
— | (6,468 | ) | — | ||||||||
|
Borrowings of other debt
|
— | 7,189 | 6,347 | |||||||||
|
Principal payments on seller and other debt
|
(5,630 | ) | (7,275 | ) | (7,436 | ) | ||||||
|
Repurchase of common and preferred stock
|
(612 | ) | (80 | ) | (44,144 | ) | ||||||
|
Proceeds from issuance of common stock
|
90 | 146 | 241 | |||||||||
|
Proceeds from (repayment of) bank overdrafts
|
6 | (21,130 | ) | 18,792 | ||||||||
|
Equity contribution and loans from non-controlling interests
|
— | 1,500 | — | |||||||||
|
Distributions to non-controlling interests
|
(1,957 | ) | (2,766 | ) | (4,431 | ) | ||||||
|
Net cash provided by (used in) financing activities
|
12,731 | (68,302 | ) | (6,854 | ) | |||||||
|
Net increase (decrease) in cash and cash equivalents
|
59,731 | 19,420 | (79,315 | ) | ||||||||
|
Cash and cash equivalents at beginning of period
|
4,529 | 64,260 | 83,680 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 64,260 | $ | 83,680 | $ | 4,365 | ||||||
|
Supplemental Cash Flow Information
|
||||||||||||
|
Cash paid for interest
|
$ | 135,838 | $ | 126,695 | $ | 105,939 | ||||||
|
Cash paid for taxes
|
$ | 5,313 | $ | 18,084 | $ | 37,809 | ||||||
| (1) | Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 1, Organization and Significant Accounting Policies, for additional information. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
SELECT
MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year Ended December 31, | ||||||||||||
| 2008 (1) | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Operating activities
|
||||||||||||
|
Net income
|
$ | 46,766 | $ | 102,050 | $ | 100,477 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
71,786 | 70,981 | 68,706 | |||||||||
|
Provision for bad debts
|
47,804 | 40,872 | 41,147 | |||||||||
|
Gain on early retirement of debt
|
(912 | ) | (12,446 | ) | — | |||||||
|
Loss (gain) from disposal of assets
|
546 | (122 | ) | 484 | ||||||||
|
Non-cash loss (gain) from interest rate swaps
|
2,802 | (3,204 | ) | (632 | ) | |||||||
|
Non-cash stock compensation expense
|
2,093 | 5,147 | 2,236 | |||||||||
|
Deferred income taxes
|
33,027 | 27,103 | 9,450 | |||||||||
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
||||||||||||
|
Accounts receivable
|
(88,545 | ) | (35,455 | ) | (64,329 | ) | ||||||
|
Other current assets
|
8,230 | (1,117 | ) | 1,595 | ||||||||
|
Other assets
|
16,355 | 5,567 | 268 | |||||||||
|
Accounts payable
|
(1,351 | ) | 963 | (7,161 | ) | |||||||
|
Due to third-party payors
|
(9,363 | ) | (3,804 | ) | (1,902 | ) | ||||||
|
Accrued expenses
|
11,007 | 1,943 | 19,725 | |||||||||
|
Net cash provided by operating activities
|
140,245 | 198,478 | 170,064 | |||||||||
|
Investing activities
|
||||||||||||
|
Purchases of property and equipment
|
(56,504 | ) | (57,877 | ) | (51,761 | ) | ||||||
|
Proceeds from sale of business units
|
2,666 | — | — | |||||||||
|
Proceeds from sale of property
|
743 | 1,341 | 565 | |||||||||
|
Insurance proceeds
|
281 | — | — | |||||||||
|
Acquisition of businesses, net of cash acquired
|
(7,624 | ) | (21,381 | ) | (165,802 | ) | ||||||
|
Net cash used in investing activities
|
(60,438 | ) | (77,917 | ) | (216,998 | ) | ||||||
|
Financing activities
|
||||||||||||
|
Equity investment by Holdings
|
90 | 316,012 | 241 | |||||||||
|
Payment of initial public offering costs
|
(1,326 | ) | (1,737 | ) | — | |||||||
|
Borrowings on revolving credit facility
|
407,000 | 193,000 | 227,000 | |||||||||
|
Payments on revolving credit facility
|
(377,000 | ) | (343,000 | ) | (202,000 | ) | ||||||
|
Payment on credit facility term loan
|
(6,800 | ) | (173,433 | ) | (1,223 | ) | ||||||
|
Repurchase of
7
5
/
8
% senior
subordinated notes
|
(1,040 | ) | (30,114 | ) | — | |||||||
|
Borrowings of other debt
|
— | 7,189 | 6,347 | |||||||||
|
Principal payments on seller and other debt
|
(5,630 | ) | (7,275 | ) | (7,436 | ) | ||||||
|
Dividends paid to Holdings
|
(33,419 | ) | (39,387 | ) | (69,671 | ) | ||||||
|
Proceeds from (repayment of) bank overdrafts
|
6 | (21,130 | ) | 18,792 | ||||||||
|
Equity contribution and loans from non-controlling interests
|
— | 1,500 | — | |||||||||
|
Distributions to non-controlling interests
|
(1,957 | ) | (2,766 | ) | (4,431 | ) | ||||||
|
Net cash used in financing activities
|
(20,076 | ) | (101,141 | ) | (32,381 | ) | ||||||
|
Net increase (decrease) in cash and cash equivalents
|
59,731 | 19,420 | (79,315 | ) | ||||||||
|
Cash and cash equivalents at beginning of period
|
4,529 | 64,260 | 83,680 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 64,260 | $ | 83,680 | $ | 4,365 | ||||||
|
Supplemental Cash Flow Information
|
||||||||||||
|
Cash paid for interest
|
$ | 102,957 | $ | 93,876 | $ | 80,424 | ||||||
|
Cash paid for taxes
|
$ | 5,313 | $ | 18,084 | $ | 37,809 | ||||||
| (1) | Adjusted for the adoption of an amendment issued by the Financial Accounting Standards Board in December 2007 to ASC topic 810, “Consolidation.” See Note 1, Organization and Significant Accounting Policies, for additional information. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
| 1. | Organization and Significant Accounting Policies |
Business
Description
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. Holdings was originally owned by
an investor group that 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. Refer to Note 8,
Stockholders’
Equity — Initial Public Offering,
for additional
information. Generally accepted accounting principles
(“GAAP”) require that any amounts recorded or incurred
(such as goodwill and compensation expense) by the parent as a
result of the Merger or for the benefit of the subsidiary be
“pushed down” and recorded in Select’s
consolidated financial statements. Holdings and Select and their
subsidiaries are collectively referred to as the
“Company.” The consolidated financial statements of
Holdings include the accounts of its wholly-owned subsidiary
Select. Holdings conducts substantially all of its business
through Select and its subsidiaries.
The Company provides long term acute care hospital services and
inpatient acute rehabilitative hospital care through its
specialty hospital segment and provides physical, occupational
and speech rehabilitation services through its outpatient
rehabilitation segment. The Company’s 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 medical rehabilitation care.
Patients are typically admitted to the Company’s specialty
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. The
Company’s outpatient rehabilitation segment consists of
clinics and contract services that provide physical,
occupational and speech rehabilitation services. The
Company’s outpatient rehabilitation patients are typically
diagnosed with musculoskeletal impairments that restrict their
ability to perform normal activities of daily living. The
Company operated 93, 95 and 118 specialty hospitals at
December 31, 2008, 2009 and 2010, respectively. At
December 31, 2008, 2009 and 2010, the Company operated 956,
961, and 944 outpatient clinics, respectively. At
December 31, 2008, 2009 and 2010, the Company had
operations in the District of Columbia and 42, 42 and
41 states, respectively.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries, limited liability
companies and limited partnerships the Company and its
subsidiaries control through ownership of general and limited
partnership or membership interests. All significant
intercompany balances and transactions are eliminated in
consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. Cash equivalents are stated at cost which
approximates market value.
F-11
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accounts
Receivable and Allowance for Doubtful Accounts
The Company reports accounts receivable at estimated net
realizable amounts from services rendered from federal, state,
managed care health plans, commercial insurance companies,
workers’ compensation and patients. Substantially all of
the Company’s accounts receivable are related to providing
healthcare services to patients. Collection of these accounts
receivable is the Company’s primary source of cash and is
critical to its operating performance. The Company’s
primary collection risks relate to non-governmental payors who
insure these patients and deductibles, co-payments and
self-insured amounts owed by the patient. Deductibles,
co-payments and self-insured amounts are an immaterial portion
of the Company’s net accounts receivable balance and
accounted for approximately 0.5% and 0.3% of the net accounts
receivable balance before doubtful accounts at December 31,
2009 and December 31, 2010, respectively. The
Company’s general policy is to verify insurance coverage
prior to the date of admission for a patient admitted to the
Company’s hospitals or in the case of the Company’s
outpatient rehabilitation clinics, the Company verifies
insurance coverage prior to their first therapy visit. The
Company’s estimate for the allowance for doubtful accounts
is calculated by providing a reserve allowance based upon the
age of an account balance. Generally the Company has reserved as
uncollectible all governmental accounts over 365 days and
non-governmental accounts over 180 days from discharge.
This method is monitored based on historical cash collections
experience. Collections are impacted by the effectiveness of the
Company’s collection efforts with non-governmental payors
and regulatory or administrative disruptions with the fiscal
intermediaries that pay the Company’s governmental
receivables.
The Company has historically collected substantially all of its
third-party insured receivables (net of contractual allowances)
which include receivables from governmental agencies. The
Company reviews its overall reserve adequacy by monitoring
historical cash collections as a percentage of net revenue less
the provision for bad debts.
Uncollected accounts are written off the balance sheet when they
are turned over to an outside collection agency, or when
management determines that the balance is uncollectible,
whichever occurs first.
Property
and Equipment
Property and equipment are stated at cost net of accumulated
depreciation. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the
assets or the term of the lease, as appropriate. The general
range of useful lives is as follows:
|
Leasehold improvements
|
5 years | |||
|
Furniture and equipment
|
3 – 20 years | |||
|
Buildings
|
40 years | |||
|
Building Improvements
|
5 – 25 years | |||
|
Land Improvements
|
2 – 25 years |
The Company reviews the realizability of long-lived assets
whenever events or circumstances occur which indicate recorded
costs may not be recoverable. Gains or losses related to the
retirement or disposal of property and equipment are reported as
a component of income from operations.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of cash balances
and trade receivables. The Company invests its excess cash with
large financial institutions. The Company grants unsecured
credit to its patients, most of who reside in the service area
of the Company’s facilities and are insured under
third-party payor agreements. Because of the geographic
diversity of the Company’s facilities and non-governmental
third-party payors, Medicare represents the Company’s only
significant concentration of credit risk.
F-12
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income
Taxes
Deferred tax assets and liabilities are required to be
recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets
and liabilities. Deferred tax assets are also required to be
reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be
realized. As part of the process of preparing its consolidated
financial statements, the Company estimates income taxes based
on its actual current tax exposure together with assessing
temporary differences resulting from differing treatment of
items for tax and accounting purposes. The Company also
recognizes as deferred tax assets the future tax benefits from
net operating loss carry forwards. The Company evaluates the
realizability of these deferred tax assets by assessing their
valuation allowances and by adjusting the amount of such
allowances, if necessary. Among the factors used to assess the
likelihood of realization are projections of future taxable
income streams, the expected timing of the reversals of existing
temporary differences, and the impact of tax planning strategies
that could be implemented to avoid the potential loss of future
tax benefits.
Reserves for uncertain tax positions are established for
exposure items related to various federal and state tax matters.
Income tax reserves are recorded when an exposure is identified
and when, in the opinion of management, it is more likely than
not that a tax position will not be sustained and the amount of
the liability can be estimated.
Intangible
Assets
Goodwill and certain other indefinite-lived intangible assets
are no longer amortized, but instead are subject to periodic
impairment evaluations. In performing periodic impairment tests,
the fair value of the reporting unit is compared to the carrying
value, including goodwill and other intangible assets. If the
carrying value exceeds the fair value, an impairment condition
exists, which results in an impairment loss equal to the excess
carrying value. The Company uses a discounted cash flow approach
to determine the fair value of its reporting units. Included in
the discounted cash flow are assumptions regarding revenue
growth rates, future Adjusted EBITDA margin estimates, future
selling, general and administrative expense rates and the
weighted average cost of capital for the Company’s
industry. The Company also must estimate residual values at the
end of the forecast period and future capital expenditure
requirements.
Identifiable assets and liabilities acquired in connection with
business combinations accounted for under the purchase method
are recorded at their respective fair values. Deferred income
taxes have been recorded to the extent of differences between
the fair value and the tax basis of the assets acquired and
liabilities assumed. Company management has allocated the
intangible assets between identifiable intangibles and goodwill.
Intangible assets other than goodwill primarily consist of the
values assigned to trademarks, non-compete agreements,
certificates of need, accreditations and contract therapy
relationships. Management believes that the estimated useful
lives established are reasonable based on the economic factors
applicable to each of the intangible assets.
The approximate useful life of each class of intangible assets
is as follows:
|
Trademarks
|
Indefinite | |||
|
Certificates of need
|
Indefinite | |||
|
Accreditations
|
Indefinite | |||
|
Non-compete agreements
|
6-7 years | |||
|
Contract therapy relationships
|
5 years |
The Company reviews the realizability of intangible assets
whenever events or circumstances occur which indicate recorded
costs may not be recoverable.
If the expected future cash flows (undiscounted) are less than
the carrying amount of such assets, the Company recognizes an
impairment loss for the difference between the carrying amount
of the assets and their estimated fair value.
F-13
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Due to
Third-Party Payors
Due to third-party payors represents the difference between
amounts received under interim payment plans from third-party
payors, principally Medicare and Medicaid, for services rendered
and amounts estimated to be reimbursed by those third-party
payors upon settlement of cost reports.
Insurance
Risk Programs
Under a number of the Company’s insurance programs, which
include the Company’s employee health insurance program,
its workers’ compensation, professional liability insurance
programs and certain components under its property and casualty
insurance program, the Company is liable for a portion of its
losses. In these situations the Company accrues for its losses
under an occurrence-based principle whereby the Company
estimates the losses that will be incurred in a respective
accounting period and accrues that estimated liability. Where
the Company has substantial exposure, actuarial methods are
utilized in estimating the losses. In cases where the Company
has minimal exposure, losses are estimated by analyzing
historical trends. These programs are monitored quarterly and
estimates are revised as necessary to take into account
additional information. Provisions for losses for professional
liability risks retained by the Company have been discounted at
4% for all periods. At December 31, 2009 and 2010
respectively, the Company had recorded a liability of
$60.8 million and $73.6 million related to these
programs. If the Company did not discount the provisions for
losses for professional liability risks, the aggregate liability
for all of the insurance risk programs would be approximately
$66.4 million and $77.5 million at December 31,
2009 and 2010 respectively.
Non-Controlling
Interests
On January 1, 2009, the Company adopted an amendment issued
by the FASB in December 2007 to ASC topic 810,
“Consolidation.” Upon adoption of this amendment,
minority interest is now referred to as non-controlling interest
and has been reclassified from the mezzanine section of the
balance sheet to the equity section. In addition,
non-controlling interest is now deducted from net income to
obtain net income attributable to each of the Holdings and
Select. The Company’s statement of operations and statement
of cash flows for the year ended December 31, 2008 have
been revised to show this change in presentation.
The interests held by other parties in subsidiaries, limited
liability companies and limited partnerships owned and
controlled by the Company are reported in the equity section of
the consolidated balance sheets as non-controlling interests.
Non-controlling interests reported in the consolidated
statements of operations reflect the respective interests in the
income or loss of the subsidiaries, limited liability companies
and limited partnerships attributable to the other parties, the
effect of which is removed from the Company’s consolidated
results of operations.
Revenue
Recognition
Net operating revenues consists primarily of patient and
contract therapy revenues and are recognized as services are
rendered.
Patient service revenue is reported net of provisions for
contractual allowances from third-party payors and patients. The
Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its
established billing rates. The differences between the estimated
program reimbursement rates and the standard billing rates are
accounted for as contractual adjustments, which are deducted
from gross revenues to arrive at net operating revenues. Payment
arrangements include prospectively determined rates per
discharge, reimbursed costs, discounted charges, per diem and
per visit payments. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are
determined. Accounts receivable resulting from such payment
arrangements are recorded net of contractual allowances.
F-14
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A significant portion of the Company’s net operating
revenues are generated directly from the Medicare program. Net
operating revenues generated directly from the Medicare program
represented approximately 46%, 47% and 47% of the Company’s
net operating revenues for the years ended December 31,
2008, 2009 and 2010, respectively. Approximately 31% and 27% of
the Company’s accounts receivable (after allowances for
contractual adjustments but before doubtful accounts) at
December 31, 2009 and 2010, respectively, are from this
payor source. As a provider of services to the Medicare program,
the Company is subject to extensive regulations. The inability
of any of the Company’s specialty hospitals or clinics to
comply with regulations can result in changes in that specialty
hospital’s or clinic’s net operating revenues
generated from the Medicare program.
Contract therapy revenues are comprised primarily of billings
for services rendered to nursing homes, hospitals, schools and
other third parties under the terms of contractual arrangements
with these entities.
Other
Comprehensive Income
Holdings
Included in accumulated other comprehensive loss at
December 31, 2008 and 2009 was cumulative losses of
$13.2 million (net of tax) and $8.9 million (net of
tax), respectively, on interest rate swaps accounted for as cash
flow hedges.
Select
Included in accumulated other comprehensive loss at
December 31, 2008 and 2009 was cumulative losses of
$11.4 million (net of tax) and $8.9 million (net of
tax), respectively, on interest rate swaps accounted for as cash
flow hedges.
Fair
Value Measurements
The Company measures its interest rate swaps at fair value on a
recurring basis. The Company determined 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 considered 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
Company’s last hedging agreement matured on
November 22, 2010.
Financial
Instruments and Hedging
The Company has in the past entered into derivatives to manage
interest rate risk. Derivatives were limited in use and not
entered into for speculative purposes. The Company has entered
into interest rate swaps to manage interest rate risk on a
portion of its long-term borrowings. All derivatives were
recognized at fair value on the balance sheet. The effective
portion of gains or losses on interest rate swaps designated as
hedges were initially deferred in stockholders’ equity as a
component of other comprehensive income. These deferred gains or
losses were subsequently reclassified into earnings as an
adjustment to interest expense over the same period in which the
related interest payments being hedged are recognized in
expense. The ineffective portion of changes in fair value of the
interest rate swaps were immediately recognized in the other
income and expense section of the consolidated statement of
operations.
Treasury
Stock
Shares the Company repurchases in the open market or through
privately negotiated transactions are accounted for using the
par value method. For the year ended December 31, 2010, the
Company repurchased and retired 6,905,700 shares.
F-15
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
Based Compensation
The Company measures the compensation costs of share-based
compensation arrangements based on the grant-date fair value and
recognizes the costs in the financial statements over the period
during which employees are required to provide services.
Share-based compensation arrangements comprise both stock
options and restricted share plans. Employee stock options are
valued using the Black-Scholes option valuation method which
uses assumptions that relate to the expected volatility of the
Company’s common stock, the expected dividend yield of the
Company’s stock, the expected life of the options and the
risk free interest rate. Such compensation amounts, if any, are
amortized over the respective vesting periods or periods of
service of the option grant. The Company values restricted stock
grants by using the public market price of its stock on the date
of grant.
Recent
Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”)
2010-06,
“Fair Value Measurements and Disclosures (Topic
820) — Improving Disclosures about Fair Value
Measurements” (“Update
2010-06”),
which amends the guidance on fair value to add new requirements
for disclosures about transfers into and out of Levels 1
and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures
about the level of disaggregation and about inputs and valuation
techniques used to measure fair value. The Company adopted
update
2010-06
on
January 1, 2010, except for the requirement to provide the
Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption of Update
2010-06
did
not have an impact on the Company’s consolidated financial
statements. The Company currently has no Level 3
measurements.
| 2. | Acquisitions |
For
the Year Ended December 31, 2008
The Company repurchased a non-controlling interest in one of its
outpatient clinics and acquired the assets of three outpatient
rehabilitation businesses. The aggregate consideration for these
transactions totaled $5.7 million in cash and a
$1.0 million note payable. The Company also acquired two
specialty hospitals for $0.3 million in cash and paid a
$1.6 million working capital adjustment related to the
acquisition of the outpatient rehabilitation clinics of
substantially all of the outpatient rehabilitation division of
HealthSouth Corporation.
For
the Year Ended December 31, 2009
The Company purchased a controlling interest of 51% in an entity
that operates inpatient rehabilitation hospitals and outpatient
rehabilitation clinics for $21.0 million in cash. Also,
during the year ended December 31, 2009, the Company
purchased an outpatient rehabilitation business for
approximately $0.4 million in cash and a $0.3 million
note.
For
the Year Ended December 31, 2010
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
non-controlling 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 $94.4 million
and a pre-tax loss of $12.9 million for the four months
ended December 31, 2010. Regency’s operations have
been included in the specialty hospitals segment.
F-16
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. 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 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
|
22,656 | |||
|
Other current assets
|
5,053 | |||
|
Property and equipment
|
82,688 | |||
|
Other assets
|
3,379 | |||
|
Current liabilities
|
(47,366 | ) | ||
|
Other liabilities
|
(1,531 | ) | ||
|
Net tangible assets acquired
|
64,879 | |||
|
Tradename
|
16,529 | |||
|
Accreditations
|
856 | |||
|
Certificates of need
|
456 | |||
|
Goodwill
|
82,896 | |||
| $ | 165,616 | |||
Also, during the year ended December 31, 2010, the Company
purchased an outpatient rehabilitation business for
approximately $0.2 million in cash.
F-17
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information with respect to all businesses acquired in purchase
transactions is as follows:
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash paid (net of cash acquired)
|
$ | 7,624 | $ | 21,381 | $ | 165,802 | ||||||
|
Notes issued
|
1,001 | 284 | — | |||||||||
| 8,625 | 21,665 | 165,802 | ||||||||||
|
Liabilities assumed
|
253 | 137 | 48,479 | |||||||||
| 8,878 | 21,802 | 214,281 | ||||||||||
|
Fair value of assets acquired, principally accounts receivable
and property and equipment
|
1,120 | 2,034 | 113,894 | |||||||||
|
Trademark
|
— | — | 16,529 | |||||||||
|
Accreditations
|
— | — | 856 | |||||||||
|
Certificates of need
|
— | — | 456 | |||||||||
|
Non-controlling interest
|
461 | (21,840 | ) | (437 | ) | |||||||
|
Cost in excess of fair value of net assets acquired (goodwill)
|
$ | 7,297 | $ | 41,608 | $ | 82,983 | ||||||
The following pro forma unaudited results of operations have
been prepared assuming the acquisition of Regency occurred at
the beginning of the periods presented. The acquisitions of the
other businesses acquired are not reflected in this pro forma
information as their impact is not material. These results are
not necessarily indicative of results of future operations nor
of the results that would have actually occurred had the
acquisition been consummated as of the beginning of the periods
presented.
| For the Year Ended December 31, | ||||||||
| 2009 | 2010 | |||||||
| (In thousands, except per share data) | ||||||||
|
Net revenue
|
$ | 2,615,911 | $ | 2,625,235 | ||||
|
Net income:
|
||||||||
|
Select Medical Corporation
|
$ | 111,940 | $ | 98,463 | ||||
|
Select Medical Holdings Corporation
|
$ | 88,874 | $ | 80,378 | ||||
|
Income per common share of Select Medical Holdings Corporation:
|
||||||||
|
Basic
|
$ | 0.73 | $ | 0.47 | ||||
|
Diluted
|
$ | 0.72 | $ | 0.47 | ||||
| 3. | Assets Held For Sale and Sale of Business Units |
Assets
Held for Sale
At December 31, 2009 and 2010, the Company had two properties
classified as assets held for sale totaling $11.3 million,
respectively. The Company sold three properties during 2008 and
one property during 2009 for consideration totaling
approximately $3.8 million and $1.2 million,
respectively. The Company recognized losses on the 2008 property
dispositions of approximately $0.4 million and a gain on
the 2009 property disposition of approximately $0.1 million.
F-18
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Sale of
Business Units
During the year ended December 31, 2008, the Company sold
interests in two of its hospitals for $2.7 million. The
Company recognized a gain on these transactions of
$1.1 million.
| 4. | Property and Equipment |
Property and equipment consists of the following:
| December 31, | ||||||||
| 2009 | 2010 | |||||||
| (In thousands) | ||||||||
|
Land
|
$ | 49,340 | $ | 68,569 | ||||
|
Leasehold improvements
|
85,541 | 110,734 | ||||||
|
Buildings
|
257,480 | 333,007 | ||||||
|
Furniture and equipment
|
208,216 | 226,411 | ||||||
|
Construction-in-progress
|
38,801 | 19,520 | ||||||
| 639,378 | 758,241 | |||||||
|
Less: accumulated depreciation
|
173,247 | 226,141 | ||||||
|
Total property and equipment
|
$ | 466,131 | $ | 532,100 | ||||
Depreciation expense was $62.6 million, $61.8 million
and $64.1 million for the years ended December 31,
2008, 2009 and 2010, respectively.
| 5. | Intangible Assets |
Goodwill and certain other indefinite-lived intangible assets
are no longer amortized, but instead are subject to periodic
impairment evaluations. The Company’s most recent
impairment assessment was completed during the fourth quarter of
2010 utilizing financial information as of October 1, 2010,
which indicated that there was no impairment with respect to
goodwill or other recorded intangible assets. The majority of
the Company’s goodwill resides in its specialty hospital
reporting unit. In performing periodic impairment tests, the
fair value of the reporting unit is compared to the carrying
value, including goodwill and other intangible assets. If the
carrying value exceeds the fair value, an impairment condition
exists, which results in an additional fair value review of all
assets in the reporting unit. To the extent that the recomputed
value of the goodwill is less than the carrying value, an
impairment loss would result. Impairment tests are required to
be conducted at least annually, or when events or conditions
occur that might suggest a possible impairment. These events or
conditions include, but are not limited to, a significant
adverse change in the business environment, regulatory
environment or legal factors; a current period operating or cash
flow loss combined with a history of such losses or a projection
of continuing losses; or a sale or disposition of a significant
portion of a reporting unit. The occurrence of one of these
events or conditions could significantly impact an impairment
assessment, necessitating an impairment charge. For purposes of
goodwill impairment assessment, the Company has defined its
reporting units as specialty hospitals, outpatient
rehabilitation clinics and contract therapy with goodwill having
been allocated among reporting units based on the relative fair
value of those divisions when the Merger occurred in 2005 and
based on subsequent acquisitions.
To determine the fair value of its reporting units, the Company
used a discounted cash flow approach. Included in this analysis
are assumptions regarding revenue growth rates, future Adjusted
EBITDA margin estimates, future selling, general and
administrative expense rates and the industry’s weighted
average cost of capital and market multiples. The Company also
must estimate residual values at the end of the forecast period
and future capital expenditure requirements. Each of these
assumptions requires the Company to use its knowledge of
(1) its industry, (2) its recent transactions, and
(3) reasonable performance expectations for its operations.
If any one of the above
F-19
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
assumptions changes or fails to materialize, the resulting
decline in the Company’s estimated fair value could result
in a material impairment charge to the goodwill associated with
any one of the reporting units.
Intangible assets consist of the following:
| As of December 31, 2009 | ||||||||
|
Gross Carrying
|
Accumulated
|
|||||||
| Amount | Amortization | |||||||
| (In thousands) | ||||||||
|
Amortized intangible assets
|
||||||||
|
Contract therapy relationships
|
$ | 20,456 | $ | (19,774 | ) | |||
|
Non-compete agreements
|
25,909 | (20,698 | ) | |||||
|
Total
|
$ | 46,365 | $ | (40,472 | ) | |||
|
Indefinite-lived intangible assets
|
||||||||
|
Goodwill
|
$ | 1,548,269 | ||||||
|
Trademarks
|
47,858 | |||||||
|
Certificates of need
|
10,207 | |||||||
|
Accreditations
|
1,339 | |||||||
|
Total
|
$ | 1,607,673 | ||||||
| As of December 31, 2010 | ||||||||
|
Gross Carrying
|
Accumulated
|
|||||||
| Amount | Amortization | |||||||
| (In thousands) | ||||||||
|
Amortized intangible assets
|
||||||||
|
Contract therapy relationships
|
$ | 20,456 | $ | (20,456 | ) | |||
|
Non-compete agreements
|
25,909 | (24,263 | ) | |||||
|
Total
|
$ | 46,365 | $ | (44,719 | ) | |||
|
Indefinite-lived intangible assets
|
||||||||
|
Goodwill
|
$ | 1,631,252 | ||||||
|
Trademarks
|
64,387 | |||||||
|
Certificates of need
|
11,891 | |||||||
|
Accreditations
|
2,195 | |||||||
|
Total
|
$ | 1,709,725 | ||||||
The Company’s accreditations and trademarks have renewal
terms. The costs to renew these intangibles are expensed as
incurred. At December 31, 2010, the accreditations and
trademarks have a weighted average time until next renewal of
1.5 years and 4.76 years, respectively.
Amortization expense for intangible assets with finite lives
follows:
| For the Year Ended December 31 | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Amortization expense
|
$ | 8,830 | $ | 8,831 | $ | 4,247 | ||||||
F-20
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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
HealthSouth non-compete, the Kessler non-compete, the SemperCare
non-compete and the Company’s contract therapy
relationships are approximately five, six, seven and five years,
respectively. During 2010 the non-compete agreement related to
the acquisition of Kessler Rehabilitation Corporation and the
Company’s contract therapy relationships were fully
amortized. Amortization expense related to the remaining
intangible assets for each of the next five years commencing
January 1, 2011 is approximately as follows (in thousands):
|
Year
|
Amount | |||
|
2011
|
$ | 1,306 | ||
|
2012
|
340 | |||
|
2013
|
0 | |||
|
2014
|
0 | |||
|
2015
|
0 | |||
The changes in the carrying amount of goodwill for the
Company’s reportable segments for the years ended
December 31, 2009 and 2010 are as follows:
|
Specialty
|
Outpatient
|
|||||||||||
| Hospitals | Rehabilitation | Total | ||||||||||
| (In thousands) | ||||||||||||
|
Balance as of January 1, 2009
|
$ | 1,227,848 | $ | 278,813 | $ | 1,506,661 | ||||||
|
Goodwill acquired during year
|
19,865 | 21,743 | 41,608 | |||||||||
|
Balance as of December 31, 2009
|
1,247,713 | 300,556 | 1,548,269 | |||||||||
|
Goodwill acquired during year
|
82,896 | 87 | 82,983 | |||||||||
|
Balance as of December 31, 2010
|
$ | 1,330,609 | $ | 300,643 | $ | 1,631,252 | ||||||
| 6. | 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.
Also, related to the acquisition of all the issued and
outstanding equity securities of Regency (Note 2) 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.
F-21
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes the Company’s restructuring
activity:
|
Lease
|
||||||||||||||||
|
Termination
|
||||||||||||||||
| Costs | Severance | Other | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
January 1, 2008
|
$ | 10,677 | $ | 3,945 | $ | 862 | $ | 15,484 | ||||||||
|
Amounts paid in 2008
|
(3,630 | ) | (2,953 | ) | (793 | ) | (7,376 | ) | ||||||||
|
December 31, 2008
|
7,047 | 992 | 69 | 8,108 | ||||||||||||
|
Amounts paid in 2009
|
(3,369 | ) | (483 | ) | — | (3,852 | ) | |||||||||
|
Revision of estimate
|
578 | (509 | ) | (69 | ) | — | ||||||||||
|
December 31, 2009
|
4,256 | — | — | 4,256 | ||||||||||||
|
2010 acquisition restructuring reserve
|
4,308 | — | — | 4,308 | ||||||||||||
|
Amounts paid in 2010
|
(1,108 | ) | — | — | (1,108 | ) | ||||||||||
|
Revision of estimate
|
(702 | ) | — | — | (702 | ) | ||||||||||
|
December 31, 2010
|
$ | 6,754 | $ | — | $ | — | $ | 6,754 | ||||||||
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 lease cost related to the Regency acquisition.
| 7. |
|
The components of long-term debt and notes payable are shown in
the following tables:
|
Holdings
|
||||||||
| December 31, | ||||||||
| 2009 | 2010 | |||||||
| (In thousands) | ||||||||
|
7
5
/
8
% senior
subordinated notes
|
$ | 611,500 | $ | 611,500 | ||||
|
Senior secured credit facility:
|
||||||||
|
Revolving Loan
|
— | 25,000 | ||||||
|
Tranche B Term Loan
|
191,753 | 191,268 | ||||||
|
Tranche B-1
Term Loan
|
291,314 | 290,576 | ||||||
|
10% senior subordinated notes
|
137,284 | 139,177 | ||||||
|
Senior floating rate notes
|
167,300 | 167,300 | ||||||
|
Seller notes
|
971 | 886 | ||||||
|
Other
|
5,449 | 5,062 | ||||||
|
Total debt
|
1,405,571 | 1,430,769 | ||||||
|
Less: current maturities
|
4,145 | 149,379 | ||||||
|
Total long-term debt
|
$ | 1,401,426 | $ | 1,281,390 | ||||
F-22
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Select
|
||||||||
| December 31, | ||||||||
| 2009 | 2010 | |||||||
| (In thousands) | ||||||||
|
7
5
/
8
% senior
subordinated notes
|
$ | 611,500 | $ | 611,500 | ||||
|
Senior secured credit facility:
|
||||||||
|
Revolving Loan
|
— | 25,000 | ||||||
|
Tranche B Term Loan
|
191,753 | 191,268 | ||||||
|
Tranche B-1
Term Loan
|
291,314 | 290,576 | ||||||
|
Seller notes
|
971 | 886 | ||||||
|
Other
|
5,449 | 5,062 | ||||||
|
Total debt
|
1,100,987 | 1,124,292 | ||||||
|
Less: current maturities
|
4,145 | 149,379 | ||||||
|
Total long-term debt
|
$ | 1,096,842 | $ | 974,913 | ||||
Senior
Secured Credit Facility
On March 19, 2007, Select entered into an Amendment
No. 2 and Waiver to its senior secured credit facility
(“Amendment No. 2”), and on March 28, 2007,
Select entered into an Incremental Facility Amendment with a
group of lenders and JPMorgan Chase Bank, N.A. as administrative
agent. Amendment No. 2 increased the general exception to
the prohibition on asset sales under Select’s senior
secured credit facility from $100.0 million to
$200.0 million, relaxed certain financial covenants
starting March 31, 2007 and waived Select’s
requirement to prepay certain term loan borrowings following its
fiscal year ended December 31, 2006. The Incremental
Facility Amendment provided to Select an incremental term loan
of $100.0 million, the proceeds of which was used to pay a
portion of the purchase price for substantially all of the
outpatient rehabilitation division of Health South Corporation.
On August 5, 2009, Select entered into Amendment No. 3
to its senior secured credit facility with a group of holders of
Tranche B term loans and JPMorgan Chase Bank, N.A., as
administrative agent. Amendment No. 3 extended the maturity
of $384.5 million principal amount of Trance B term loans
from February 24, 2012 to August 22, 2014. Holders of
Tranche B term loans that extended the maturity of their
Tranche B term loans now hold
Tranche B-1
term loans that mature on August 22, 2014, and holders of
Tranche B term loans that did not extend the maturity of
their Tranche B term loans continue to hold Tranche B
term loans that mature on February 24, 2012. The applicable
rate for the
Tranche B-1
term loans under Select’s senior secured credit facility
was set at 3.75% for adjusted LIBOR loans and 2.75% for
alternate base rate loans. Select may apply future voluntary
prepayments entirely to Tranche B term loans or pro rata
between Tranche B term loans and
Tranche B-1
term loans. Under the terms of Amendment No. 3, if, prior
to August 5, 2011, Select’s senior secured credit
facility is amended to reduce the applicable rate for
Tranche B-1
term loans, then Select will be required to pay a fee in an
amount equal to 1% of the outstanding
Tranche B-1
term loans held by those holders of
Tranche B-1
term loans that agree to amend the senior secured credit
facility to reduce the applicable rate. In addition, if, prior
to August 5, 2011, Select makes any prepayment of
Tranche B-1
term loans with proceeds of any term loan indebtedness, Select
will be required to pay a fee to holders of
Tranche B-1
term loans in an amount equal to 1% of the outstanding
Tranche B-1
term loans that are being prepaid.
On June 7, 2010 Select entered into an Assignment and
Assumption and Amendment No. 4 (“Amendment
No. 4”) to its senior secured credit facility with 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 revolving
credit facility from February 24, 2011 to August 22,
2013, and made related technical changes to
F-23
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
its senior secured credit facility. The applicable margin
percentage for extended revolving loans and the commitment fee
rate for extended revolving commitments have increased and will
be determined based on a pricing grid set forth in Amendment
No. 4. Under the pricing grid, the applicable margin
percentage for revolving ABR loans ranges from 2% per annum to
3% per annum, the applicable margin percentage for revolving
Eurodollar loans ranges from 3% per annum to 4% per annum, and
the commitment fee rate for extended revolving commitments
ranges from 0.375% to 0.75%.
On June 7, 2010, Select also entered into an Amendment
No. 4-A
to its senior secured credit facility with a group of lenders
and JPMorgan Chase Bank, N.A. as administrative agent. Amendment
No. 4-A
made a technical change to the senior secured credit facility
that permits Select 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.
At December 31, 2010 our senior secured credit facility
consisted 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, | |
| • | $191.3 million in Tranche B term loans that mature on February 24, 2012, and | |
| • | $290.6 million in Tranche B-1 term loans that mature on August 22, 2014. |
The interest rates per annum applicable to loans, other than
swingline loans and
Tranche B-1
term loans, under Select’s senior secured credit facility
are, at Select’s option, equal to either an alternate base
rate or an adjusted LIBOR rate for a one, two, three or six
month interest period, or a nine or twelve month period if
available, in each case, plus an applicable margin percentage.
The interest rates per annum applicable to
Tranche B-1
term loans under Select’s senior credit facility are, at
Select’s option, equal to either an alternate base rate or
an adjusted LIBOR rate for a three or six month interest period,
or a nine or twelve month period if available, in each case,
plus an applicable margin percentage. The alternate base rate is
the greater of (1) JPMorgan Chase Bank, N.A.’s prime
rate and (2) one-half of 1% over the weighted average of
rates on overnight Federal funds as published by the Federal
Reserve Bank of New York. The adjusted LIBOR rate is determined
by reference to settlement rates established for deposits in
dollars in the London interbank market for a period equal to the
interest period of the loan and the maximum reserve percentages
established by the Board of Governors of the United States
Federal Reserve to which Select’s lenders are subject. The
applicable margin percentage for borrowings under Select’s
revolving loans is subject to change based upon the ratio of
Select’s total indebtedness to consolidated EBITDA (as
defined in the credit agreement). The applicable margin
percentage for revolving loans is currently (1) 2.75% for
alternate base rate loans and (2) 3.75% for adjusted LIBOR
loans. The applicable margin percentages for Tranche B term
loans are (1) 1.00% for alternate base rate loans and
(2) 2.00% for adjusted LIBOR loans. The applicable margin
percentages for
Tranche B-1
term loans are (1) 2.75% for alternate base rate loans and
(2) 3.75% for adjusted LIBOR loans. The weighted average
interest rate for the years ended December 31, 2009 and
2010 was 5.9%.
On the last business day of each calendar quarter Select is
required to pay a commitment fee in respect of any unused
commitment under the revolving credit facility. The annual
commitment fee is currently 0.50% and is subject to adjustment
based upon the ratio of Select’s total indebtedness to its
consolidated EBITDA (as defined in the credit agreement).
Availability under the revolving credit facility at
December 31, 2010 was approximately $246.0 million.
Select is authorized to issue up to $50.0 million in
letters of credit. Letters of credit reduce the capacity under
the revolving credit facility and bear interest at applicable
margins based on financial ratio tests. Approximately
$29.0 million in letters of credit were outstanding at
December 31, 2010.
The senior secured credit facility requires Select to comply on
a quarterly basis with certain financial covenants, including an
interest coverage ratio test and a maximum leverage ratio test.
In addition, the senior secured credit facility includes various
negative covenants, including with respect to indebtedness,
liens, investments, permitted businesses and transactions and
other matters, as well as certain customary representations and
F-24
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
warranties, affirmative covenants and events of default
including payment defaults, breach of representations and
warranties, covenant defaults, cross defaults to certain
indebtedness, certain events of bankruptcy, certain events under
ERISA, material judgments, actual or asserted failure of any
guaranty or security document supporting the senior secured
credit facility to be in full force and effect and change of
control. If such an event of default occurs, the lenders under
the senior secured credit facility are entitled to take various
actions, including the acceleration of amounts due under the
senior secured credit facility and all actions permitted to be
taken by a secured creditor. As of December 31, 2010,
Select was in compliance with all debt covenants related to the
senior secured credit facility.
Select’s senior secured credit facility is guaranteed by
Holdings and substantially all of Select’s current
subsidiaries and will be guaranteed by substantially all of
Select’s future subsidiaries and secured by substantially
all of its existing and future property and assets and by a
pledge of its capital stock and the capital stock of its
subsidiaries.
During the year ended December 31, 2009, the Company made
$168.4 million in prepayments on the term loan portion of
its senior secured credit facility from the proceeds from the
Company’s initial public offering of common stock
(Note 8). Of these payments $156.3 million were
mandatory repayments representing 50% of the net proceeds from
the Company’s initial public offering and
$12.1 million were voluntary. In connection with these
prepayments, the Company wrote-off $2.9 million of
unamortized deferred financing costs related to the term loan
portion of its senior secured credit facility that is reported
in the gain on early retirement of debt on the consolidated
statement of operations.
Senior
Subordinated Notes
On February 24, 2005, EGL Acquisition Corp. sold
$660.0 million of
7
5
/
8
% Senior
Subordinated Notes due 2015 which Select assumed in the Merger.
The net proceeds of the offering were used to finance a portion
of the Merger consideration, refinance certain of Select’s
existing indebtedness, and pay related fees and expenses. The
senior subordinated notes are unconditionally guaranteed on a
senior subordinated basis by all of Select’s wholly-owned
subsidiaries (the “Subsidiary Guarantors”). Certain of
Select’s subsidiaries that were not wholly-owned by Select
did not guarantee the senior subordinated notes (the
“Non-Guarantor Subsidiaries”). The guarantees of the
senior subordinated notes are subordinated in right of payment
to all existing and future senior indebtedness of the Subsidiary
Guarantors, including any borrowings or guarantees by those
subsidiaries under the senior secured credit facility. The
senior subordinated notes rank equally in right of payment with
all of Select’s existing and future senior subordinated
indebtedness and senior to all of Select’s existing and
future subordinated indebtedness. The senior subordinated notes
were not guaranteed by Holdings.
Select will be entitled at its option to redeem all or a portion
of the senior subordinated notes at the following redemption
prices (expressed in percentages of principal amount on the
redemption date), plus accrued interest to the redemption date,
if redeemed during the twelve-month period commencing on
February 1st of the years set forth below:
|
Year
|
Redemption Price | |||
|
2010
|
103.813 | % | ||
|
2011
|
102.542 | % | ||
|
2012
|
101.271 | % | ||
|
2013 and thereafter
|
100.000 | % | ||
Select is not required to make any mandatory redemption or
sinking fund payments with respect to the senior subordinated
notes. However, upon the occurrence of any change of control of
Select, each holder of the senior subordinated notes shall have
the right to require Select to repurchase such holder’s
notes at a purchase price in cash equal to 101% of the principal
amount thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase.
F-25
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The indenture governing the senior subordinated notes contains
customary events of default and affirmative and negative
covenants that, among other things, limit Select’s ability
and the ability of its restricted subsidiaries to incur or
guarantee additional indebtedness, pay dividends or make other
equity distributions, purchase or redeem capital stock, make
certain investments, enter into arrangements that restrict
dividends from subsidiaries, transfer and sell assets, engage in
certain transactions with affiliates and effect a consolidation
or merger. As of December 31, 2010, Select was in
compliance with all debt covenants related to the senior
subordinated notes.
During the year ended December 31, 2008, Select repurchased
a portion of the senior subordinated notes outstanding for
approximately $1.0 million. These notes had a carrying
value of $2.0 million. A gain on early retirement of debt
in the amount of $0.9 million was recognized on the
transaction which included the write-off of the unamortized
deferred financing costs related to the debt.
During the year ended December 31, 2009, the Company paid
approximately $30.1 million to repurchase and retire a
portion of the outstanding 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.
Senior
Floating Rate Notes
On September 29, 2005, Holdings, whose primary asset is its
investment in Select, issued $175.0 million of Senior
Floating Rate Notes, due 2015. The senior floating rate notes
are senior unsecured obligations of Holdings and bear interest
at a floating rate, reset semi-annually, equal to
6-month
LIBOR plus 5.75%. Simultaneously with the financing, Select
entered into two interest rate swap agreements, effectively
fixing the interest rate of the notes for four years. The senior
floating rate notes are not guaranteed by Select or any of its
subsidiaries.
Payment of interest expense on the senior floating rate notes is
expected to be funded through periodic dividends from Select.
The terms of Select’s senior secured credit facility, as
well as the indenture governing Select’s senior
subordinated notes, and certain other agreements, restrict
Select and certain of its subsidiaries from making payments or
transferring assets to Holdings, including dividends, loans or
other distributions. Such restrictions include prohibition of
dividends in an event of default and limitations on the total
amount of dividends paid to Holdings. In the event these
agreements do not permit such subsidiaries to provide Holdings
with sufficient distributions to fund interest and principal
payments on the senior floating rate notes when due, Holdings
may default on its notes unless other sources of funding are
available.
Holdings will be entitled at its option to redeem all or a
portion of the senior floating rate notes at the following
redemption prices (expressed in percentages of principal amount
on the redemption date) plus accrued interest to the redemption
date, if redeemed during the twelve month period commencing on
September 15th of the years set forth below:
|
Year
|
Redemption Price | |||
|
2010
|
101.00 | % | ||
|
2011
|
100.00 | % | ||
Holdings is not required to make any mandatory redemption or
sinking fund payments with respect to the senior floating rate
notes. However, upon the occurrence of any change of control of
Holdings, each holder of the senior floating rate notes shall
have the right to require Holdings to repurchase such notes at a
purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase.
The indenture governing the senior floating rate notes contains
customary events of default and affirmative and negative
covenants that, among other things, limit Holdings’ ability
and the ability of its restricted subsidiaries, including
Select, to: incur additional indebtedness and issue or sell
preferred stock; pay dividends on, redeem or repurchase capital
stock; make certain investments; create certain liens; sell
certain assets; incur obligations that
F-26
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
restrict the ability of its subsidiaries to make dividends or
other payments; guarantee indebtedness; engage in transactions
with affiliates; create or designate unrestricted subsidiaries;
and consolidate, merge or transfer all or substantially all of
its assets and the assets of its subsidiaries on a consolidated
basis. As of December 31, 2010, Holdings was in compliance
with all debt covenants related to the senior floating rate
notes.
During the year ended December 31, 2009, the Company paid
approximately $6.5 million to repurchase and retire a
portion of the outstanding 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 2009 which was net of the write off of
$0.1 million in unamortized deferred financing costs
related to the debt.
10%
Senior Subordinated Notes
On February 24, 2005, Holdings issued 10% senior
subordinated notes to WCAS Capital Partners IV, L.P., an
investment fund affiliated with Welsh Carson, Rocco A. Ortenzio,
Robert A. Ortenzio and certain other investors who are members
of or affiliated with the Ortenzio family, for an aggregate
purchase price of $150.0 million. The 10% senior
subordinated notes had preferred and common shares attached
which were recorded at the estimated fair market value on the
date of issuance. These shares were recorded as a discount to
the senior subordinated notes and are amortized using the
interest method. These 10% senior subordinated notes mature
on December 31, 2015.
Maturities
of Long-Term Debt and Notes Payable
Maturities of the Company’s long-term debt for the years
after 2010 are approximately as follows:
| Holdings | Select | |||||||
| (In thousands) | ||||||||
|
2011
|
149,379 | 149,379 | ||||||
|
2012
|
51,373 | 51,373 | ||||||
|
2013
|
28,278 | 28,278 | ||||||
|
2014
|
282,041 | 282,041 | ||||||
|
2015
|
918,212 | 611,735 | ||||||
|
2016 and beyond
|
1,486 | 1,486 | ||||||
| 8. | Stockholders’ Equity |
Initial
Public Offering
On September 30, 2009, Holdings completed an initial public
offering of 30,000,000 shares at a price to the public of
$10.00 per share, and on October 28, 2009, the underwriters
exercised their over-allotment option to purchase an additional
3,602,700 shares at a price to the public of $10.00 per
share. The total net proceeds to Holdings after deducting
underwriting discounts and commissions and offering expenses was
approximately $312.5 million. The Company used the proceeds
from the offering to repay $258.4 million of revolving and
term loans outstanding under Select’s senior secured credit
facility and make payments to executive officers under the Long
Term Cash Incentive Plan of $18.0 million. The remaining
proceeds were used for general corporate purposes.
Preferred
Stock
Holdings was authorized to issue 7,500,000 shares of
participating preferred stock and had 6,644,536 shares of
participating preferred stock outstanding at December 31,
2008. Holdings repurchased 4,461 shares of participating
preferred stock during the year ended December 31, 2008.
The participating preferred stock accrued dividends at an annual
dividend rate of 5%, compounded quarterly on March 31,
June 30, September 30 and December 31 of each year.
Dividends earned during the year ended December 31, 2008
and 2009 amounted to $25.0 million and $19.5 million,
respectively and were charged against retained earnings. Each
share of participating preferred stock
F-27
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
was entitled to one vote on all matters submitted to
stockholders of Holdings. The participating preferred stock
ranked senior to the common stock with respect to dividend
rights and rights upon liquidation. The liquidation preference
was equal to the original cost of a share of the participating
preferred stock ($26.90 per share) plus all accrued and unpaid
dividends thereon less the amount of any previously declared and
paid special dividends.
Upon completion of Holdings’ initial public offering,
Holdings’ 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) 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. |
On September 30, 2009 the Company’s certificate of
incorporation was restated to authorize the issuance of
70,000,000 shares of 0.001 par value preferred stock.
Currently, there are no shares of preferred stock outstanding.
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.
On September 30, 2009, Holdings restated its certificate of
incorporation to authorized the issuance of
700,000,000 shares of $0.001 par value common stock.
Holdings had 61,465,611 and 159,980,544 shares of common
stock outstanding at December 31, 2008 and 2009,
respectively. During the year ended December 31, 2008,
Holdings issued 24,589 shares and repurchased
30,000 shares of common stock. In addition, during the year
ended December 31, 2008, 78,799 shares of restricted
common stock were forfeited. During the year ended
December 31, 2009, Holdings issued 33,640,542 shares,
of which 33,602,700 shares were shares issued in connection
with the Company’s initial public offering of stock, issued
64,276,974 related to the conversion of its participating
preferred stock and repurchased 16,200 shares of common
stock. In addition, during the year ended December 31,
2008, 613,610 shares of restricted common stock were
granted.
In November 2010, the board of directors of Holdings authorized
a program to repurchase up to $100.0 million worth of
shares of its common stock. The program will remain in effect
until January 31, 2012, unless extended by the board of
directors. Funding for this program has come from cash on hand
and borrowings under the revolving credit facility. Through
December 31, 2010, the Company has repurchased
6,905,700 shares at a cost of $44.1 million which
includes related transaction costs. Also during the year ended
December 31, 2010, the Company granted
1,380,000 shares of restricted stock and issued
64,181 shares of common stock related to the exercise of
stock options.
| 9. | Long-Term Incentive Compensation |
On June 2, 2005, Holdings adopted a Long-Term Cash
Incentive Plan (“cash plan”). On August 12, 2009,
the board of directors amended the Cash Plan to provide for
payment under the Cash Plan of $18.0 million upon the
completion of an initial public offering on or prior to
March 31, 2010. Since the initial public offering was
completed before March 31, 2010, the Company paid out the
$18.0 million (Note 8), which is included in general
and administrative expenses for the year ended December 31,
2009. Following this payment, all units under the Cash Plan were
forfeited and participants in the Cash Plan are not entitled to
any further benefits or payments under the cash plan.
F-28
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | Stock Option and Restricted Stock Plans |
On February 25, 2005, Holdings adopted the Select Medical
Holdings Corporation 2005 Equity Incentive Plan (the
“Plan”). The equity incentive plan provides for grants
of restricted stock and stock options of Holdings. In addition,
on August 10, 2005 the board of directors of Holdings
authorized a director equity incentive plan (“Director
Plan”) for non-employee directors. On November 8, 2005
the board of directors of Holdings formally approved the
Director Plan and on August 12, 2009, the board of
directors and stockholders of Holdings approved an amendment and
restatement of the Director Plan. This amendment authorized
Holdings to issue under the Director Plan options to purchase up
to 75,000 shares of its common stock and restricted stock
awards covering up to 150,000 shares of its common stock.
The options generally vest over five years and have an option
term not to exceed ten years. The fair value of the options
granted was estimated using the Black-Scholes option pricing
model assuming an expected volatility of 36%, no dividend yield,
an expected life of five years and a risk free rate of 4.5% in
2008 and expected volatility of 36%, no dividend yield, an
expected life of five years and a risk free rate of 3.4% in 2009
and expected volatility of 36%, no dividend yield, an expected
life of five years and a risk free rate of 3.4% for 2010. The
following is a summary of stock option grants under the Plan and
Director Plan from January 1, 2008 through
December 31, 2010:
|
Number of Options
|
Fair Value of
|
|||||||||||
| Granted | Exercise Price | Common Stock | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
February 13, 2008
|
60 | $ | 8.33 | $ | 3.27 | |||||||
|
May 13, 2008
|
8 | 8.33 | 3.27 | |||||||||
|
August 20, 2008
|
121 | 10.00 | 10.00 | |||||||||
|
November 13, 2008
|
6 | 10.00 | 10.00 | |||||||||
|
March 3, 2009
|
15 | 10.00 | 10.00 | |||||||||
|
August 12, 2009
|
12 | 10.00 | 10.00 | |||||||||
|
November 23, 2009
|
1,430 | 9.18 | 9.18 | |||||||||
|
February 10, 2010
|
30 | 8.90 | 8.90 | |||||||||
|
May 11, 2010
|
10 | 8.66 | 8.66 | |||||||||
|
August 11, 2010
|
15 | 6.94 | 6.94 | |||||||||
Stock option transactions and other information related to the
Plan are as follows:
|
Weighted Average
|
||||||||||||
| Price Per Share | Shares | Exercise Price | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Balance, January 1, 2009
|
$ | 3.33-10.00 | 1,431 | $ | 6.70 | |||||||
|
Granted
|
9.18-10.00 | 1,445 | 9.19 | |||||||||
|
Exercised
|
3.33-8.33 | (38 | ) | 3.87 | ||||||||
|
Canceled
|
3.33-10.00 | (44 | ) | 7.83 | ||||||||
|
Balance, December 31, 2009
|
$ | 3.33-10.00 | 2,794 | $ | 8.01 | |||||||
|
Granted
|
6.94-8.90 | 55 | 8.32 | |||||||||
|
Exercised
|
3.33-8.33 | (64 | ) | 3.75 | ||||||||
|
Canceled
|
8.33-10.00 | (69 | ) | 8.81 | ||||||||
|
Balance, December 31, 2010
|
$ | 3.33-10.00 | 2,716 | $ | 8.09 | |||||||
F-29
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Additional information with respect to the outstanding options
as of December 31, 2010 for the Plan is as follows:
|
Weighted
|
||||||||||||||
|
Average
|
||||||||||||||
|
Number
|
Remaining
|
Number
|
||||||||||||
|
Exercise Price
|
Outstanding | Contractual Life | Exercisable | |||||||||||
| (In thousands, except per share amounts) | ||||||||||||||
|
$3.00 – 4.00
|
406 | 3.99 | 400 | |||||||||||
|
6.00 – 7.00
|
15 | 9.61 | — | |||||||||||
|
8.00 – 9.00
|
776 | 6.21 | 534 | |||||||||||
|
9.01 – 10.00
|
1,519 | 8.75 | 332 | |||||||||||
The weighted average remaining contractual term for all
outstanding options is 7.32 years and the weighted average
remaining contractual term of exercisable options is
5.98 years.
The total intrinsic value of options exercised for the years
ended December 31, 2010, 2009 and 2008 was
$0.3 million, $0.2 million and $0.1 million
respectively. The aggregate intrinsic value of options
outstanding and options exercisable at December 31, 2010
was $1.6 million and $1.6 million, respectively.
Transactions and other information related to the
Director’s Plan are as follows:
|
Weighted Average
|
||||||||||||
| Price Per Share | Shares | Exercise Price | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Balance, January 1, 2009
|
$ | 3.33-10.00 | 51 | $ | 7.06 | |||||||
|
Granted
|
10.00 | 12 | 10.00 | |||||||||
|
Balance, December 31, 2009
|
$ | 3.33-10.00 | 63 | $ | 7.62 | |||||||
|
Granted
|
— | — | — | |||||||||
|
Balance, December 31, 2010
|
$ | 3.33-10.00 | 63 | $ | 7.62 | |||||||
Additional information with respect to the outstanding options
as of December 31, 2010 for the Director’s Plan is as
follows:
|
Weighted
|
||||||||||||||
|
Average
|
||||||||||||||
|
Number
|
Remaining
|
Number
|
||||||||||||
|
Exercise Price
|
Outstanding | Contractual Life | Exercisable | |||||||||||
| (In thousands, except per share amounts) | ||||||||||||||
|
$3.00 – 4.00
|
18 | 4.61 | 18 | |||||||||||
|
8.00 – 9.00
|
18 | 6.24 | 13 | |||||||||||
|
9.01 – 10.00
|
27 | 8.12 | 8 | |||||||||||
The weighted average remaining contractual term for all
outstanding options is 6.58 years and the weighted average
remaining contractual term of exercisable options is
5.84 years.
The aggregate intrinsic value of options outstanding and options
exercisable at December 31, 2010 were $0.1 million.
Prior to the Company’s initial public offering of common
stock, the fair value of the restricted stock awards were
determined by estimating the per share fair value of common
equity on a minority, non-marketable basis utilizing a version
of the income approach referred to as “The
Probability-Weighted Expected Return Method.” This method
estimates the value of common stock based upon an analysis of
future values assuming an initial public offering, sale and
continued operation as a viable private enterprise. Subsequent
to the Company’s initial public
F-30
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
offering of common stock, the fair value of the Company’s
restricted stock is based on the closing stock price on the date
grant.
The following is a summary of restricted stock issuances from
January 1, 2008 through December 31, 2010:
| Number of Shares Issued | Fair Value of Common Stock | |||||||
|
August 12, 2009
|
364 | $ | 10.00 | |||||
|
November 23, 2009
|
250 | 9.18 | ||||||
|
August 11, 2010
|
30 | 6.94 | ||||||
|
September 13, 2010
|
1,000 | 7.48 | ||||||
|
November 11, 2010
|
300 | 6.29 | ||||||
|
December 17, 2010
|
50 | 7.07 | ||||||
Stock compensation expense for each of the next five years,
based on restricted stock awards granted as of December 31,
2010, is estimated to be as follows:
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Stock compensation expense
|
$ | 2,402 | $ | 2,408 | $ | 2,342 | $ | 1,765 | $ | 1,339 | ||||||||||
The Company recognized the following stock compensation expense
related to restricted stock and stock option awards:
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Stock compensation expense:
|
||||||||||||
|
Included in general and administrative
|
$ | 1,953 | $ | 4,775 | $ | 763 | ||||||
|
Included in cost of services
|
140 | 372 | 1,473 | |||||||||
|
Total
|
$ | 2,093 | $ | 5,147 | $ | 2,236 | ||||||
| 11. | Income Taxes |
Significant components of the Company’s tax provision from
continuing operations for the years ended December 31,
2008, 2009, and 2010 are as follows:
| Holdings | ||||||||||||
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (262 | ) | $ | 3,200 | $ | 25,102 | |||||
|
State and local
|
4,569 | 7,213 | 7,076 | |||||||||
|
Total current
|
4,307 | 10,413 | 32,178 | |||||||||
|
Deferred
|
21,756 | 27,103 | 9,450 | |||||||||
|
Total income tax provision
|
$ | 26,063 | $ | 37,516 | $ | 41,628 | ||||||
F-31
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Select | ||||||||||||
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (262 | ) | $ | 15,671 | $ | 34,854 | |||||
|
State and local
|
4,569 | 7,213 | 7,076 | |||||||||
|
Total current
|
4,307 | 22,884 | 41,930 | |||||||||
|
Deferred
|
33,027 | 27,103 | 9,450 | |||||||||
|
Total income tax provision
|
$ | 37,334 | $ | 49,987 | $ | 51,380 | ||||||
The differences between the expected income tax provision from
operations and income taxes computed at the federal statutory
rate of 35% were as follows:
| Holdings | ||||||||||||
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Expected federal tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State and local taxes, net of federal benefit
|
6.0 | 5.4 | 4.6 | |||||||||
|
Other permanent differences
|
2.2 | 1.1 | 0.9 | |||||||||
|
Valuation allowance
|
8.4 | (0.6 | ) | (4.8 | ) | |||||||
|
Uncertain tax positions
|
2.3 | 0.5 | (0.8 | ) | ||||||||
|
IRS audit settlements
|
— | (8.0 | ) | — | ||||||||
|
Non-controlling interest
|
(3.5 | ) | (1.0 | ) | (1.3 | ) | ||||||
|
Other
|
(0.2 | ) | (0.1 | ) | — | |||||||
|
Total
|
50.2 | % | 32.3 | % | 33.6 | % | ||||||
| Select | ||||||||||||
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Expected federal tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State and local taxes, net of federal benefit
|
3.5 | 4.0 | 3.7 | |||||||||
|
Other permanent differences
|
1.3 | 0.9 | 0.8 | |||||||||
|
Valuation allowance
|
5.1 | (0.4 | ) | (4.0 | ) | |||||||
|
Uncertain tax positions
|
1.4 | 0.4 | (0.7 | ) | ||||||||
|
IRS audit settlements
|
— | (6.2 | ) | — | ||||||||
|
Non-controlling interest
|
(1.9 | ) | (0.8 | ) | (1.1 | ) | ||||||
|
Other
|
— | — | 0.1 | |||||||||
|
Total
|
44.4 | % | 32.9 | % | 33.8 | % | ||||||
During 2009 the Company settled with the Internal Revenue
Service a refund of previously paid federal income taxes that
resulted from the acceleration of tax amortization in years
prior to the Merger. This tax refund also included interest
income. It is the Company’s policy to include interest
related to income taxes as part of the income tax classification.
F-32
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of deferred tax assets and liabilities is as follows:
| Holdings | ||||||||
| December 31, | ||||||||
| 2009 | 2010 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets (liabilities) — current
|
||||||||
|
Allowance for doubtful accounts
|
$ | 4,461 | $ | 3,419 | ||||
|
Compensation and benefit related accruals
|
25,937 | 27,000 | ||||||
|
Malpractice insurance
|
2,402 | 2,112 | ||||||
|
Restructuring reserve
|
1,700 | 2,683 | ||||||
|
Inpatient medical services
|
— | (4,138 | ) | |||||
|
Net operating loss carry forwards
|
559 | 558 | ||||||
|
Interest rate swap
|
4,598 | — | ||||||
|
Other accruals, net
|
467 | 1,670 | ||||||
|
Net deferred tax asset — current
|
40,124 | 33,304 | ||||||
|
Deferred tax assets (liabilities) — non-current
|
||||||||
|
Expenses not currently deductible for tax
|
190 | 346 | ||||||
|
Excess capital loss carry forwards
|
6,418 | 6,381 | ||||||
|
Net operating loss carry forwards
|
26,133 | 27,158 | ||||||
|
Restricted stock
|
(145 | ) | 304 | |||||
|
Compensation and benefit related accruals
|
4,140 | 5,859 | ||||||
|
Malpractice insurance
|
9,947 | 11,011 | ||||||
|
Depreciation and amortization
|
(79,776 | ) | (92,470 | ) | ||||
|
Other
|
(2,892 | ) | (3,690 | ) | ||||
|
Net deferred tax liability — non-current
|
(35,985 | ) | (45,101 | ) | ||||
|
Net deferred taxes before valuation allowance
|
4,139 | (11,797 | ) | |||||
|
Valuation allowance
|
(22,372 | ) | (16,623 | ) | ||||
|
Net deferred taxes
|
$ | (18,233 | ) | $ | (28,420 | ) | ||
F-33
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Select | ||||||||
| December 31, | ||||||||
| 2009 | 2010 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets (liabilities) — current
|
||||||||
|
Allowance for doubtful accounts
|
$ | 4,461 | $ | 3,419 | ||||
|
Compensation and benefit related accruals
|
25,937 | 27,000 | ||||||
|
Malpractice insurance
|
2,402 | 2,112 | ||||||
|
Restructuring reserve
|
1,700 | 2,683 | ||||||
|
Inpatient medical services
|
— | (4,138 | ) | |||||
|
Net operating loss carry forwards
|
559 | 558 | ||||||
|
Interest rate swap
|
4,598 | — | ||||||
|
Other accruals, net
|
467 | 1,670 | ||||||
|
Net deferred tax asset — current
|
40,124 | 33,304 | ||||||
|
Deferred tax assets (liabilities) — non-current
|
||||||||
|
Expenses not currently deductible for tax
|
190 | 346 | ||||||
|
Excess capital loss carry forwards
|
6,418 | 6,381 | ||||||
|
Net operating loss carry forwards
|
26,133 | 27,158 | ||||||
|
Restricted stock
|
(145 | ) | 304 | |||||
|
Compensation and benefit related accruals
|
4,140 | 5,859 | ||||||
|
Malpractice insurance
|
9,947 | 11,011 | ||||||
|
Depreciation and amortization
|
(79,776 | ) | (92,470 | ) | ||||
|
Other
|
(2,892 | ) | (3,690 | ) | ||||
|
Net deferred tax liability — non-current
|
(35,985 | ) | (45,101 | ) | ||||
|
Net deferred taxes before valuation allowance
|
4,139 | (11,797 | ) | |||||
|
Valuation allowance
|
(22,372 | ) | (16,623 | ) | ||||
|
Net deferred taxes
|
$ | (18,233 | ) | (28,420 | ) | |||
The valuation allowance is primarily attributable to the
uncertainty regarding the realization of state net operating
losses, capital losses and other net deferred tax assets of loss
entities. The net deferred tax liabilities at December 31,
2009 and 2010 of approximately $18.2 million and
$28.4 million, respectively, consist of items which have
been recognized for tax reporting purposes, but which will
increase tax on returns to be filed in the future, and include
the use of net operating loss carryforwards. The Company has
performed an assessment of positive and negative evidence
regarding the realization of the deferred tax assets. This
assessment included a review of legal entities with three years
of cumulative losses, estimates of projected future taxable
income and the impact of tax-planning strategies that management
plans to implement. Although realization is not assured, based
on the Company’s assessment, it has concluded that it is
more likely than not that such assets, net of the existing
valuation allowance, will be realized.
F-34
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The total state net operating losses are approximately
$577.0 million. State net operating loss carry forwards
expire and are subject to gross valuation allowances as follows
(in thousands):
|
State Net
|
Gross
|
|||||||
|
Operating
|
Valuation
|
|||||||
| Losses | Allowance | |||||||
|
2011
|
6,495 | 6,495 | ||||||
|
2012
|
12,323 | 12,317 | ||||||
|
2013
|
57,888 | 56,177 | ||||||
|
2014
|
13,829 | 8,963 | ||||||
|
Thereafter through 2030
|
486,074 | 312,008 | ||||||
Reserves
for Uncertain Tax Positions:
The Company and its subsidiaries are subject to
U.S. federal income tax as well as income tax of multiple
state jurisdictions. Significant judgment is required in
evaluating the Company’s tax positions and determining its
provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which
the ultimate tax determination is uncertain. The Company
establishes reserves for tax-related uncertainties based on
estimates of whether, and the extent to which, additional taxes
will be due. These reserves are established when it is believed
that certain positions might be challenged despite the
Company’s belief that its tax return positions are fully
supportable. The Company adjusts these reserves in light of
changing facts and circumstances, such as the outcome of a tax
audit. The provision for income taxes includes the impact of
reserve provisions and changes to reserves that are considered
appropriate.
The reconciliation of the Company’s unrecognized tax
benefits is as follows (in thousands):
|
Gross tax contingencies — January 1, 2008
|
$ | 21,413 | ||
|
Reductions for tax positions taken in prior periods due
primarily to statute expiration
|
(839 | ) | ||
|
Additions for existing tax positions taken
|
1,918 | |||
|
Gross tax contingencies — December 31, 2008
|
$ | 22,492 | ||
|
Reductions for tax positions taken in prior periods due
primarily to statute expiration
|
(1,774 | ) | ||
|
Additions for existing tax positions taken
|
2,017 | |||
|
Gross tax contingencies — December 31, 2009
|
22,735 | |||
|
Regency Management Company contingencies
|
915 | |||
|
Reductions for tax positions taken in prior periods due
primarily to statute expiration
|
(2,972 | ) | ||
|
Additions for existing tax positions taken
|
1,632 | |||
|
Gross tax contingencies — December 31, 2010
|
$ | 22,310 | ||
As of December 31, 2009 and 2010, the Company had
$22.7 million and $22.3 million of unrecognized tax
benefits, respectively, all of which, if fully recognized, would
affect the Company’s effective income tax rate.
As of December 31, 2010, changes to the Company’s
gross unrecognized tax benefits that are reasonably possible in
the next 12 months are not material. The Company’s
policy is to include interest related to income taxes in income
tax expense. As of December 31, 2009 and December 31,
2010, the Company had accrued interest related to income taxes
of $1.0 million and $1.1 million, respectively, net of
federal income taxes. Interest recognized for the years ended
December 31, 2008, 2009 and 2010 was $0.3 million,
$0.4 million, and $0.4 million, respectively, net of
federal income tax benefits.
The Company has substantially concluded all U.S. federal
income tax matters for years through 2005. Substantially all
material state, local and foreign income tax matters have been
concluded through 2005.
F-35
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 12. | Retirement Savings Plan |
The Company sponsors a defined contribution retirement savings
plan for substantially all of its employees. Employees who are
not classified as HCE’s (highly compensated employees) may
contribute up to 30% of their salary; HCE’s may contribute
up to 6% of their salary. The Plan provides a discretionary
company match which is determined annually. Currently, the
Company matches 25% of the first 6% of compensation employees
contribute to the plan. The employees vest in the employer
contributions over a three-year period beginning on the
employee’s hire date. The expense incurred by the Company
related to this plan was $11.7 million, $8.4 million
and $6.0 million during the years ended December 31,
2008, 2009 and 2010, respectively.
| 13. | 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, stock compensation expense, long-term
incentive compensation, depreciation and amortization, gain on
early retirement of debt, equity in losses of unconsolidated
subsidiaries and other income (expense).
The following table summarizes selected financial data for the
Company’s reportable segments:
| Year Ended December 31, 2008 | ||||||||||||||||
|
Specialty
|
Outpatient
|
|||||||||||||||
| Hospitals | Rehabilitation | All Other | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Net revenue
|
$ | 1,488,412 | $ | 664,760 | $ | 190 | $ | 2,153,362 | ||||||||
|
Adjusted EBITDA
|
236,388 | 77,279 | (43,380 | ) | 270,287 | |||||||||||
|
Total
assets
(1)
:
|
||||||||||||||||
|
Select Medical Corporation
|
1,910,402 | 504,869 | 147,154 | 2,562,425 | ||||||||||||
|
Select Medical Holdings Corporation
|
1,910,402 | 504,869 | 164,198 | 2,579,469 | ||||||||||||
|
Capital expenditures
|
40,069 | 13,271 | 3,164 | 56,504 | ||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||
|
Specialty
|
Outpatient
|
|||||||||||||||
| Hospitals | Rehabilitation | All Other | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Net revenue
|
$ | 1,557,821 | $ | 681,892 | $ | 158 | $ | 2,239,871 | ||||||||
|
Adjusted EBITDA
|
290,370 | 89,072 | (49,215 | ) | 330,227 | |||||||||||
|
Total
assets
(1)
:
|
||||||||||||||||
|
Select Medical Corporation
|
1,936,416 | 497,925 | 150,751 | 2,585,092 | ||||||||||||
|
Select Medical Holdings Corporation
|
1,936,416 | 497,925 | 153,805 | 2,588,146 | ||||||||||||
|
Capital expenditures
|
46,452 | 9,940 | 1,485 | 57,877 | ||||||||||||
F-36
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2010 | ||||||||||||||||
|
Specialty
|
Outpatient
|
|||||||||||||||
| Hospitals | Rehabilitation | All Other | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Net revenue
|
$ | 1,702,165 | $ | 688,017 | $ | 108 | $ | 2,390,290 | ||||||||
|
Adjusted EBITDA
|
284,558 | 83,772 | (61,251 | ) | 307,079 | |||||||||||
|
Total
assets
(1)
:
|
||||||||||||||||
|
Select Medical Corporation
|
2,162,726 | 481,828 | 75,018 | 2,719,572 | ||||||||||||
|
Select Medical Holdings Corporation
|
2,162,726 | 481,828 | 77,532 | 2,722,086 | ||||||||||||
|
Capital expenditures
|
39,237 | 9,449 | 3,075 | 51,761 | ||||||||||||
| (1) | The specialty hospital segment includes $12.5 million, $11.3 million and $11.3 million in real estate assets held for sale on December 31, 2008, 2009 and 2010, respectively. |
A reconciliation of Adjusted EBITDA to income before income
taxes is as follows:
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
Specialty
|
Outpatient
|
|||||||||||||||||||
| Hospitals | Rehabilitation | All Other | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Adjusted EBITDA
|
$ | 236,388 | $ | 77,279 | (43,380 | ) | ||||||||||||||
|
Depreciation and amortization
|
(43,938 | ) | (24,315 | ) | (3,533 | ) | ||||||||||||||
|
Stock compensation expense
|
— | — | (2,093 | ) | ||||||||||||||||
|
Select
|
||||||||||||||||||||
|
Medical
|
Select
|
|||||||||||||||||||
|
Holdings
|
Medical
|
|||||||||||||||||||
| Corporation | Corporation | |||||||||||||||||||
|
Income (loss) from operations
|
$ | 192,450 | $ | 52,964 | $ | (49,006 | ) | $ | 196,408 | $ | 196,408 | |||||||||
|
Gain on early retirement of debt
|
912 | 912 | ||||||||||||||||||
|
Other expense
|
— | (2,802 | ) | |||||||||||||||||
|
Interest expense, net
|
(145,423 | ) | (110,418 | ) | ||||||||||||||||
|
Income before income taxes
|
$ | 51,897 | $ | 84,100 | ||||||||||||||||
F-37
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
Specialty
|
Outpatient
|
|||||||||||||||||||
| Hospitals | Rehabilitation | All Other | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Adjusted EBITDA
|
$ | 290,370 | $ | 89,072 | $ | (49,215 | ) | |||||||||||||
|
Depreciation and amortization
|
(42,479 | ) | (24,963 | ) | (3,539 | ) | ||||||||||||||
|
Long-term incentive compensation
|
— | — | (18,261 | ) | ||||||||||||||||
|
Stock compensation expense
|
— | — | (5,147 | ) | ||||||||||||||||
|
Select
|
||||||||||||||||||||
|
Medical
|
Select
|
|||||||||||||||||||
|
Holdings
|
Medical
|
|||||||||||||||||||
| Corporation | Corporation | |||||||||||||||||||
|
Income (loss) from operations
|
$ | 247,891 | $ | 64,109 | $ | (76,162 | ) | $ | 235,838 | $ | 235,838 | |||||||||
|
Gain on early retirement of debt
|
13,575 | 12,446 | ||||||||||||||||||
|
Other income (expense)
|
(632 | ) | 3,204 | |||||||||||||||||
|
Interest expense, net
|
(132,377 | ) | (99,451 | ) | ||||||||||||||||
|
Income before income taxes
|
$ | 116,404 | $ | 152,037 | ||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
Specialty
|
Outpatient
|
|||||||||||||||||||
| Hospitals | Rehabilitation | All Other | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Adjusted EBITDA
|
$ | 284,558 | $ | 83,772 | $ | (61,251 | ) | |||||||||||||
|
Depreciation and amortization
|
(45,116 | ) | (20,444 | ) | (3,146 | ) | ||||||||||||||
|
Stock compensation expense
|
— | — | (2,236 | ) | ||||||||||||||||
|
Select
|
||||||||||||||||||||
|
Medical
|
Select
|
|||||||||||||||||||
|
Holdings
|
Medical
|
|||||||||||||||||||
| Corporation | Corporation | |||||||||||||||||||
|
Income (loss) from operations
|
$ | 239,442 | $ | 63,328 | $ | (66,633 | ) | $ | 236,137 | $ | 236,137 | |||||||||
|
Equity in losses of unconsolidated subsidiaries
|
(440 | ) | (440 | ) | ||||||||||||||||
|
Other income (expense)
|
632 | 632 | ||||||||||||||||||
|
Interest expense, net
|
(112,337 | ) | (84,472 | ) | ||||||||||||||||
|
Income before income taxes
|
$ | 123,992 | $ | 151,857 | ||||||||||||||||
| 14. | Income (Loss) per 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 (losses) per share for each class of stock
participation rights in undistributed earnings (losses).
Effective January 1, 2009 the Financial Accounting
Standards Board 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
F-38
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. The earnings per share calculations for the
year ended December 31, 2008 has been revised to reflect
this clarification; however, the clarification had no impact on
earnings per share for the year ended December 31, 2008.
Under the two class method:
(a) Income from continuing operations is reduced by the
contractual amount of dividends in the current period for each
class of stock.
(b) The remaining income (loss) is allocated to common
stock, unvested restricted stock and participating preferred
stock to the extent that each security may share in income
(loss), as if all of the earnings (losses) for the period had
been distributed. The total income (loss) allocated to each
security is determined by adding together the amount allocated
for dividends and the amount allocated for participation
features.
(c) The income (loss) allocated to common stock is then
divided by the weighted average number of outstanding shares to
which the earnings (losses) are allocated to determine the
income (loss) per share for common stock.
In applying the two-class method, the Company determined that
undistributed earnings should be allocated equally on a per
share basis between the common stock, unvested restricted stock
and participating preferred stock due to the equal participation
rights of the common stock, unvested restricted stock and
participating preferred stock (i.e., the voting conversion
rights) and losses should be allocated equally on a per share
basis between common stock and participating preferred stock.
The following table sets forth for the periods indicated the
calculation of income (loss) per share in the Company’s
Consolidated Statement of Operations and the differences between
basic weighted average shares
F-39
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
outstanding and diluted weighted average shares outstanding used
to compute basic and diluted earnings per share, respectively:
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Numerator:
|
||||||||||||
|
Net income attributable to Select Medical Holdings Corporation
|
$ | 22,441 | $ | 75,282 | $ | 77,644 | ||||||
|
Less: Preferred dividends
|
24,972 | 19,537 | — | |||||||||
|
Less: Earnings allocated to unvested restricted stockholders
|
— | 429 | 322 | |||||||||
|
Less: Earnings (losses) allocated to preferred stockholders
|
(254 | ) | 3,025 | — | ||||||||
|
Net income (loss) available to common stockholders
|
$ | (2,277 | ) | $ | 52,291 | $ | 77,322 | |||||
|
Denominator:
|
||||||||||||
|
Weighted average shares — basic
|
59,566 | 85,587 | 159,184 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Stock options
|
— | 458 | 258 | |||||||||
|
Weighted average shares — diluted
|
59,566 | 86,045 | 159,442 | |||||||||
|
Basic income (loss) per common share:
|
$ | (0.04 | ) | $ | 0.61 | $ | 0.49 | |||||
|
Diluted income (loss) per common share:
|
$ | (0.04 | ) | $ | 0.61 | $ | 0.48 | |||||
The following amounts are shown here for informational and
comparative purposes only since their inclusion would be
anti-dilutive:
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Stock options
|
1,140 | 142 | 2,390 | |||||||||
| 15. | 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 $483.1 million and $506.8 million at
December 31, 2009 and December 31, 2010, respectively.
The fair value of Select’s senior secured credit facility
was $471.0 million and $497.7 million at
December 31, 2009 and December 31, 2010, respectively.
The fair value of Select’s senior secured credit facility
was based on quoted market prices for this debt in the
syndicated loan market.
The carrying value of the
7
5
/
8
% senior
subordinated notes was $611.5 million at both
December 31, 2009 and December 31, 2010. The fair
value of the
7
5
/
8
% senior
subordinated notes was $593.2 million and
$616.1 million at December 31, 2009 and
December 31, 2010, respectively. The fair value of this
registered debt was based on quoted market prices.
F-40
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The carrying value of the senior floating rate notes was
$167.3 million at both December 31, 2009 and
December 31, 2010. The fair value of the senior floating
rate notes was $155.6 million and $156.0 million at
December 31, 2009 and December 31, 2010, respectively.
The fair value of this registered debt was based on quoted
market prices.
Interest
Rate Swaps
The Company is exposed to the impact of interest rate changes.
In the past the Company entered into interest rate swap
agreements to manage the impact of the interest rate changes on
earnings and cash flows. For the portion of the swaps that
qualified as a hedge, the interest rate swaps were reflected at
fair value in the consolidated balance sheet and the related
loss of $7.6 million, net of tax, a gain of
$4.3 million, net of tax and a gain of $8.9 million,
net of tax was recorded in Holdings’ stockholders’
equity as a component of other comprehensive income (loss) for
the years ended December 31, 2008, 2009 and 2010,
respectively. Select recorded a loss of $6.5 million, net
of tax, a gain of $2.5 million, net of tax, and a gain of
$8.9 million, net of tax for the years ended
December 31, 2008, 2009 and 2010, respectively, related to
the swaps in stockholder’s equity as a component of other
comprehensive income (loss). At December 31, 2010, Select
has no outstanding interest swap contracts.
| 16. | Related Party Transactions |
The Company is party to various rental and other agreements with
companies owned by related parties affiliated through common
ownership or management. The Company made rental and other
payments aggregating $3.3 million during the year ended
December 31, 2008, $4.0 million during the year ended
December 31, 2009 and $3.9 million during the year
ended December 31, 2010 to the affiliated companies.
As of December 31, 2010, future rental commitments under
outstanding agreements with the affiliated companies are
approximately as follows (in thousands):
|
2011
|
3,360 | |||
|
2012
|
3,452 | |||
|
2013
|
3,447 | |||
|
2014
|
3,398 | |||
|
2015
|
2,990 | |||
|
Thereafter
|
24,854 | |||
| $ | 41,501 | |||
| 17. | Commitments and Contingencies |
Leases
The Company leases facilities and equipment from unrelated
parties under operating leases. Minimum future lease obligations
on long-term non-cancelable operating leases in effect at
December 31, 2010 are approximately as follows (in
thousands):
|
2011
|
125,513 | |||
|
2012
|
98,302 | |||
|
2013
|
72,851 | |||
|
2014
|
54,858 | |||
|
2015
|
41,026 | |||
|
Thereafter
|
354,947 | |||
| $ | 747,497 | |||
Total rent expense for operating leases, including cancelable
leases, for the years ended December 31, 2008, 2009 and
2010 was $139.3 million, $145.3 million and
$154.8 million, respectively.
F-41
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Facility rent expense for the years ended December 31,
2008, 2009 and 2010 was $110.2 million, $117.1 million
and $118.3 million, respectively.
Construction
Commitments
At December 31, 2010, the Company has 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 $9.9 million.
Other
In March 2000, the Company entered into three-year employment
agreements with three of its executive officers. Under these
agreements, the three executive officers currently receive a
combined total annual salary of $2.4 million subject to
adjustment by the Company’s board of directors. The
employment agreements also contain a change in control provision
and provides that the three executive officers will receive
long-term disability insurance. At the end of each
12-month
period beginning March 1, 2000, the term of each employment
agreement automatically extends for an additional year unless
one of the executives or the Company gives written notice to the
other not less than three months prior to the end of that
12-month
period that they do not want the term of the employment
agreement to continue.
In September 2010, the Company entered into a three year
employment agreement with David Chernow. Under this agreement,
Mr. Chernow currently receives a total annual salary of
$640,000 per year. The employment agreement also contains a
change of control provision. Except in connection with a change
of control, if Select terminates Mr. Chernow’s
employment for any reason other than for cause and other than
due to death or disability, Mr. Chernow will be entitled to
receive an amount equal to twelve months of his base salary,
payable over the twelve month period following such termination.
After three years the term of the employment agreement will
automatically renew for successive one year terms unless either
Mr. Chernow or Select provides notice of non-renewal to the
other party at least 60 days prior to the expiration of the
then current term.
The Company has entered into change in control agreements with
six other members of senior management.
A subsidiary of the Company has entered into a naming,
promotional and sponsorship agreement with an NFL team for the
team’s headquarters complex that requires a payment of
$2.7 million in 2011. Each successive annual payment
increases by 2.3% through 2025. The naming, promotional and
sponsorship agreement is in effect until 2025.
Litigation
To cover claims arising out of the operations of the
Company’s specialty hospitals and outpatient rehabilitation
facilities, the Company maintains professional malpractice
liability insurance and general liability insurance. The Company
also maintains umbrella liability insurance covering claims
which, due to their nature or amount, are not covered by or not
fully covered by the Company’s other insurance policies.
These insurance policies also do not generally cover punitive
damages and are subject to various deductibles and policy
limits. Significant legal actions as well as the cost and
possible lack of available insurance could subject the Company
to substantial uninsured liabilities.
The Company is subject to legal proceedings and claims that
arise in the ordinary course of business, which include
malpractice claims covered under insurance policies, subject to
self-insured retention of $2.0 million per medical incident
for professional liability claims and $2.0 million per
occurrence for general liability claims. In the Company’s
opinion, the outcome of these actions will not have a material
adverse effect on its financial position or results of
operations.
F-42
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Health care providers are subject to lawsuits under the qui tam
provisions of the federal False Claims Act. Qui tam lawsuits
typically remain under seal (hence, usually unknown to the
defendant) for some time while the government decides whether or
not to intervene on behalf of a private qui tam plaintiff (known
as a relator) and take the lead in the litigation. These
lawsuits can involve significant monetary damages and penalties
and award bounties to private plaintiffs who successfully bring
the suits. The Company has been a defendant in these cases in
the past, and may be named as a defendant in similar cases from
time to time in the future.
During July 2009, the Company received a subpoena from the
Office of Inspector General of the U.S. Department of
Health and Human Services seeking various documents concerning
the Company’s financial relationships with certain
physicians practicing at its hospitals in Columbus, Ohio. The
Company understands that the subpoena was issued in connection
with a qui tam lawsuit and that the government has been
investigating the matter to determine whether to intervene. The
Company has produced documents in response to the subpoena and
has fully cooperated with the government’s investigation.
The Company is in discussions with the government to attempt to
resolve this matter in a manner satisfactory to the Company and
the government. Any settlement is not expected to be material to
the Company’s financial position.
| 18. | Supplemental Disclosures of Cash Flow Information |
Non-cash investing and financing activities are comprised of the
following for the years ended December 31, 2008, 2009 and
2010:
| For the Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (In thousands) | ||||||||||||
|
Dividends declared to Holdings (Select Medical
Corporation)
(1)
|
$ | 16,500 | $ | 12,900 | $ | 12,600 | ||||||
|
Notes issued with acquisitions (Note 2)
|
1,001 | 284 | — | |||||||||
|
Liabilities assumed with acquisitions (Note 2)
|
253 | 137 | 48,479 | |||||||||
| (1) | Recorded in accrued other liabilities on the consolidated balance sheet of Select Medical Corporation. |
| 19. | 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 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, 2009 and
2010 the years ended December 31, 2008, 2009 and 2010.
The equity method has been used by Select with respect to
investments in subsidiaries. The equity method has been used by
Subsidiary Guarantors with respect to investments in
Non-Guarantor Subsidiaries. Separate financial statements for
Subsidiary Guarantors are not presented.
F-43
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth the Non-Guarantor Subsidiaries at
December 31, 2010:
Caritas Rehab Services, LLC
Elizabethtown Physical Therapy, P.S.C.
Great Lakes Specialty Hospital — Hackley, LLC
Great Lakes Specialty Hospital — Oak, LLC
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.
Penn State Hershey Rehabilitation, LLC
Philadelphia Occupational Health, P.C.
Rehabilitation Physician Services, P.C.
Regency Hospital of Fort Worth, LLP
Select LifeCare Western Michigan, LLC
Select Physical Therapy of Las Vegas Limited Partnership
Select Specialty — Downriver, LLC
Select Specialty Hospital — Akron, LLC
Select Specialty Hospital — Evansville, LLC
Select Specialty Hospital — Central Pennsylvania, L.P.
Select Specialty Hospital — Houston, L.P.
Select Specialty Hospital — Gulf Coast, Inc.
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.
F-44
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Balance Sheet
December 31, 2010
December 31, 2010
|
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 subsidiaries
|
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
|
— | — | — | — | — | |||||||||||||||
|
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 subsidiaries. | |
| (b) | Elimination of investments in subsidiaries’ retained earnings. |
F-45
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Operations
For the
Year Ended December 31, 2010
|
Select Medical
|
||||||||||||||||||||
|
Corporation (Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net operating revenues
|
$ | 107 | $ | 2,060,001 | $ | 330,182 | $ | — | $ | 2,390,290 | ||||||||||
|
Costs and expenses:
|
||||||||||||||||||||
|
Cost of services
|
1,473 | 1,703,096 | 277,610 | — | 1,982,179 | |||||||||||||||
|
General and administrative
|
53,035 | 9,086 | — | — | 62,121 | |||||||||||||||
|
Bad debt expense
|
— | 34,267 | 6,880 | — | 41,147 | |||||||||||||||
|
Depreciation and amortization
|
2,837 | 57,267 | 8,602 | — | 68,706 | |||||||||||||||
|
Total costs and expenses
|
57,345 | 1,803,716 | 293,092 | — | 2,154,153 | |||||||||||||||
|
Income (loss) from operations
|
(57,238 | ) | 256,285 | 37,090 | — | 236,137 | ||||||||||||||
|
Other income and expense:
|
||||||||||||||||||||
|
Intercompany interest and royalty fees
|
(4,057 | ) | 4,026 | 31 | — | — | ||||||||||||||
|
Intercompany management fees
|
101,878 | (86,451 | ) | (15,427 | ) | — | — | |||||||||||||
|
Equity in losses of unconsolidated subsidiaries
|
— | (440 | ) | — | — | (440 | ) | |||||||||||||
|
Other income
|
632 | — | — | — | 632 | |||||||||||||||
|
Interest expense
|
(44,921 | ) | (34,965 | ) | (4,586 | ) | — | (84,472 | ) | |||||||||||
|
Income (loss) before income taxes
|
(3,706 | ) | 138,455 | 17,108 | — | 151,857 | ||||||||||||||
|
Income tax expense (benefit)
|
(7,097 | ) | 56,271 | 2,206 | — | 51,380 | ||||||||||||||
|
Equity in earnings of subsidiaries
|
92,366 | 10,647 | — | (103,013 | )(a) | — | ||||||||||||||
|
Net income
|
95,757 | 92,831 | 14,902 | (103,013 | ) | 100,477 | ||||||||||||||
|
Less: Net income attributable to non-controlling interests
|
— | — | 4,720 | — | 4,720 | |||||||||||||||
|
Net income attributable to Select Medical Corporation
|
$ | 95,757 | $ | 92,831 | $ | 10,182 | $ | (103,013 | ) | $ | 95,757 | |||||||||
| (a) | Elimination of equity in earnings of subsidiaries. |
F-46
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Cash Flows
For the
Year Ended December 31, 2010
|
Select Medical
|
||||||||||||||||||||
|
Corporation (Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating activities
|
||||||||||||||||||||
|
Net income
|
$ | 95,757 | $ | 92,831 | $ | 14,902 | $ | (103,013 | )(a) | $ | 100,477 | |||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||||||||||
|
Depreciation and amortization
|
2,837 | 57,267 | 8,602 | — | 68,706 | |||||||||||||||
|
Provision for bad debts
|
— | 34,267 | 6,880 | — | 41,147 | |||||||||||||||
|
Loss from disposal of assets
|
4 | 329 | 151 | — | 484 | |||||||||||||||
|
Non-cash gain from interest rate swaps
|
(632 | ) | — | — | — | (632 | ) | |||||||||||||
|
Non-cash stock compensation expense
|
2,236 | — | — | — | 2,236 | |||||||||||||||
|
Deferred income taxes
|
9,450 | — | — | — | 9,450 | |||||||||||||||
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
||||||||||||||||||||
|
Equity in earnings of subsidiaries
|
(92,366 | ) | (10,647 | ) | — | 103,013 | (a) | — | ||||||||||||
|
Intercompany
|
19,079 | (4,664 | ) | (14,415 | ) | — | — | |||||||||||||
|
Accounts receivable
|
— | (42,549 | ) | (21,780 | ) | — | (64,329 | ) | ||||||||||||
|
Other current assets
|
826 | (1,008 | ) | 1,777 | — | 1,595 | ||||||||||||||
|
Other assets
|
107 | (1,032 | ) | 1,193 | — | 268 | ||||||||||||||
|
Accounts payable
|
2,798 | (9,971 | ) | 12 | — | (7,161 | ) | |||||||||||||
|
Due to third-party payors
|
— | (4,390 | ) | 2,488 | — | (1,902 | ) | |||||||||||||
|
Accrued expenses
|
(25,160 | ) | 42,387 | 2,498 | — | 19,725 | ||||||||||||||
|
Net cash provided by operating activities
|
14,936 | 152,820 | 2,308 | — | 170,064 | |||||||||||||||
|
Investing activities
|
||||||||||||||||||||
|
Purchases of property and equipment
|
(3,078 | ) | (33,186 | ) | (15,497 | ) | — | (51,761 | ) | |||||||||||
|
Proceeds from sale of property
|
— | 565 | — | — | 565 | |||||||||||||||
|
Acquisition of businesses, net of cash acquired
|
— | (165,802 | ) | — | — | (165,802 | ) | |||||||||||||
|
Net cash used in investing activities
|
(3,078 | ) | (198,423 | ) | (15,497 | ) | — | (216,998 | ) | |||||||||||
|
Financing activities
|
||||||||||||||||||||
|
Equity investment by Holdings
|
241 | — | — | — | 241 | |||||||||||||||
|
Borrowings on revolving credit facility
|
227,000 | — | — | — | 227,000 | |||||||||||||||
|
Payments on revolving credit facility
|
(202,000 | ) | — | — | — | (202,000 | ) | |||||||||||||
|
Payments on credit facility term loan
|
(1,223 | ) | — | (1,223 | ) | |||||||||||||||
|
Borrowings of other debt
|
5,564 | — | 783 | — | 6,347 | |||||||||||||||
|
Principal payments on seller and other debt
|
(5,589 | ) | (946 | ) | (901 | ) | — | (7,436 | ) | |||||||||||
|
Dividends paid to Holdings
|
(69,671 | ) | — | — | — | (69,671 | ) | |||||||||||||
|
Proceeds from bank overdrafts
|
18,792 | — | — | — | 18,792 | |||||||||||||||
|
Intercompany debt reallocation
|
(65,763 | ) | 47,818 | 17,945 | — | — | ||||||||||||||
|
Distributions to non-controlling interests
|
— | — | (4,431 | ) | — | (4,431 | ) | |||||||||||||
|
Net cash provided by (used in) financing activities
|
(92,649 | ) | 46,872 | 13,396 | — | (32,381 | ) | |||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(80,791 | ) | 1,269 | 207 | — | (79,315 | ) | |||||||||||||
|
Cash and cash equivalents at beginning of period
|
80,940 | 2,298 | 442 | — | 83,680 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 149 | $ | 3,567 | $ | 649 | $ | — | $ | 4,365 | ||||||||||
| (a) | Elimination of equity in earnings of subsidiaries. |
F-47
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Balance Sheet
December 31,
2009
|
Select Medical
|
||||||||||||||||||||
|
Corporation (Parent
|
Subsidiary
|
Non-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
|
9,537 | 20,983 | 3,928 | — | 34,448 | |||||||||||||||
|
Prepaid income taxes
|
11,179 | — | — | — | 11,179 | |||||||||||||||
|
Other current assets
|
5,386 | 13,588 | 5,266 | — | 24,240 | |||||||||||||||
|
Total Current Assets
|
107,042 | 319,539 | 34,045 | — | 460,626 | |||||||||||||||
|
Property and equipment, net
|
6,649 | 409,258 | 50,224 | — | 466,131 | |||||||||||||||
|
Investment in subsidiaries
|
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
|
$ | 2,289,622 | $ | 2,423,707 | $ | 86,580 | $ | (2,214,817 | ) | $ | 2,585,092 | |||||||||
|
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
|
(3,145 | ) | 49,475 | 6,351 | — | 52,681 | ||||||||||||||
|
Other non-current liabilities
|
60,543 | — | — | — | 60,543 | |||||||||||||||
|
Total Liabilities
|
1,252,558 | 281,172 | (16,269 | ) | — | 1,517,461 | ||||||||||||||
|
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 interest
|
— | — | 30,567 | — | 30,567 | |||||||||||||||
|
Total Equity
|
1,037,064 | 2,142,535 | 102,849 | (2,214,817 | ) | 1,067,631 | ||||||||||||||
|
Total Liabilities and Equity
|
$ | 2,289,622 | $ | 2,423,707 | $ | 86,580 | $ | (2,214,817 | ) | $ | 2,585,092 | |||||||||
| (a) | Elimination of investments in subsidiaries. | |
| (b) | Elimination of investment in subsidiaries’ retained earnings. |
F-48
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Operations
For the
Year Ended December 31, 2009
|
Select Medical
|
||||||||||||||||||||
|
Corporation (Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net operating revenues
|
$ | 158 | $ | 1,991,471 | $ | 248,242 | $ | — | $ | 2,239,871 | ||||||||||
|
Costs and expenses:
|
||||||||||||||||||||
|
Cost of services
|
372 | 1,610,333 | 209,066 | — | 1,819,771 | |||||||||||||||
|
General and administrative
|
72,264 | 145 | — | — | 72,409 | |||||||||||||||
|
Bad debt expense
|
— | 35,113 | 5,759 | — | 40,872 | |||||||||||||||
|
Depreciation and amortization
|
3,224 | 61,505 | 6,252 | — | 70,981 | |||||||||||||||
|
Total costs and expenses
|
75,860 | 1,707,096 | 221,077 | — | 2,004,033 | |||||||||||||||
|
Income (loss) from operations
|
(75,702 | ) | 284,375 | 27,165 | — | 235,838 | ||||||||||||||
|
Other income and expense:
|
||||||||||||||||||||
|
Intercompany interest and royalty fees
|
(7,459 | ) | 7,412 | 47 | — | — | ||||||||||||||
|
Intercompany management fees
|
118,367 | (108,042 | ) | (10,325 | ) | — | — | |||||||||||||
|
Gain on early retirement of debt
|
12,446 | — | — | — | 12,446 | |||||||||||||||
|
Other income
|
3,204 | — | — | — | 3,204 | |||||||||||||||
|
Interest income
|
65 | 27 | — | — | 92 | |||||||||||||||
|
Interest expense
|
(62,244 | ) | (34,015 | ) | (3,284 | ) | — | (99,543 | ) | |||||||||||
|
Income (loss) before income taxes
|
(11,323 | ) | 149,757 | 13,603 | — | 152,037 | ||||||||||||||
|
Income tax expense (benefit)
|
(7,045 | ) | 56,030 | 1,002 | — | 49,987 | ||||||||||||||
|
Equity in earnings of subsidiaries
|
102,722 | 9,778 | — | (112,500 | )(a) | — | ||||||||||||||
|
Net income
|
98,444 | 103,505 | 12,601 | (112,500 | ) | 102,050 | ||||||||||||||
|
Less: Net income attributable to non-controlling interests
|
— | — | 3,606 | — | 3,606 | |||||||||||||||
|
Net income attributable to Select Medical Corporation
|
$ | 98,444 | $ | 103,505 | $ | 8,995 | $ | (112,500 | ) | $ | 98,444 | |||||||||
| (a) | Elimination of equity in earnings of subsidiaries. |
F-49
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Cash Flows
For the
Year Ended December 31, 2009
|
Select Medical
|
||||||||||||||||||||
|
Corporation (Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating activities
|
||||||||||||||||||||
|
Net income
|
$ | 98,444 | $ | 103,505 | $ | 12,601 | $ | (112,500 | )(a) | $ | 102,050 | |||||||||
|
Adjustments to reconcile net income to net cash
|
||||||||||||||||||||
|
provided by operating activities:
|
||||||||||||||||||||
|
Depreciation and amortization
|
3,224 | 61,505 | 6,252 | — | 70,981 | |||||||||||||||
|
Provision for bad debts
|
— | 35,113 | 5,759 | — | 40,872 | |||||||||||||||
|
Gain on early retirement of debt
|
(12,446 | ) | — | — | — | (12,446 | ) | |||||||||||||
|
Loss (gain) from disposal of assets and sale of business units
|
11 | 639 | (772 | ) | — | (122 | ) | |||||||||||||
|
Non-cash gain from interest rate swaps
|
(3,204 | ) | — | — | — | (3,204 | ) | |||||||||||||
|
Non-cash stock compensation expense
|
5,147 | — | — | — | 5,147 | |||||||||||||||
|
Deferred income taxes
|
27,103 | — | — | — | 27,103 | |||||||||||||||
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
||||||||||||||||||||
|
Equity in earnings of subsidiaries
|
(102,722 | ) | (9,778 | ) | — | 112,500 | (a) | — | ||||||||||||
|
Intercompany
|
145,852 | (133,436 | ) | (12,416 | ) | — | — | |||||||||||||
|
Accounts receivable
|
7 | (24,608 | ) | (10,854 | ) | — | (35,455 | ) | ||||||||||||
|
Other current assets
|
(2,692 | ) | 5,846 | (4,271 | ) | — | (1,117 | ) | ||||||||||||
|
Other assets
|
10,220 | (4,683 | ) | 30 | — | 5,567 | ||||||||||||||
|
Accounts payable
|
(1,424 | ) | 1,404 | 983 | — | 963 | ||||||||||||||
|
Due to third-party payors
|
— | (9,641 | ) | 5,837 | — | (3,804 | ) | |||||||||||||
|
Accrued expenses
|
3,852 | (7,131 | ) | 5,222 | — | 1,943 | ||||||||||||||
|
Net cash provided by operating activities
|
171,372 | 18,735 | 8,371 | — | 198,478 | |||||||||||||||
|
Investing activities
|
||||||||||||||||||||
|
Purchases of property and equipment
|
(1,889 | ) | (41,686 | ) | (14,302 | ) | — | (57,877 | ) | |||||||||||
|
Proceeds from sale of property
|
— | 1,341 | — | — | 1,341 | |||||||||||||||
|
Acquisition of businesses, net of cash acquired
|
— | (21,381 | ) | — | — | (21,381 | ) | |||||||||||||
|
Net cash used in investing activities
|
(1,889 | ) | (61,726 | ) | (14,302 | ) | — | (77,917 | ) | |||||||||||
|
Financing activities
|
||||||||||||||||||||
|
Borrowings on revolving credit facility
|
193,000 | — | — | — | 193,000 | |||||||||||||||
|
Payments on revolving credit facility
|
(343,000 | ) | — | — | — | (343,000 | ) | |||||||||||||
|
Payments on credit facility term loan
|
(173,433 | ) | — | — | — | (173,433 | ) | |||||||||||||
|
Repurchase of
7
5
/
8
% senior
subordinated notes
|
(30,114 | ) | — | — | — | (30,114 | ) | |||||||||||||
|
Borrowings of other debt
|
6,396 | — | 793 | — | 7,189 | |||||||||||||||
|
Principal payments on seller and other debt
|
(6,336 | ) | (928 | ) | (11 | ) | — | (7,275 | ) | |||||||||||
|
Dividends paid to Holdings
|
(39,387 | ) | — | — | — | (39,387 | ) | |||||||||||||
|
Payment of initial public offering costs
|
(1,737 | ) | — | — | (1,737 | ) | ||||||||||||||
|
Equity investment by Holdings
|
316,012 | — | — | — | 316,012 | |||||||||||||||
|
Repayment of bank overdrafts
|
(21,130 | ) | — | — | — | (21,130 | ) | |||||||||||||
|
Intercompany debt reallocation
|
(47,146 | ) | 41,109 | 6,037 | — | — | ||||||||||||||
|
Equity contribution and loans from non-controlling interests
|
— | — | 1,500 | — | 1,500 | |||||||||||||||
|
Distributions to non-controlling interests
|
— | — | (2,766 | ) | — | (2,766 | ) | |||||||||||||
|
Net cash provided by (used in) financing activities
|
(146,875 | ) | 40,181 | 5,553 | — | (101,141 | ) | |||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
22,608 | (2,810 | ) | (378 | ) | — | 19,420 | |||||||||||||
|
Cash and cash equivalents at beginning of period
|
58,332 | 5,108 | 820 | — | 64,260 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 80,940 | $ | 2,298 | $ | 442 | $ | — | $ | 83,680 | ||||||||||
| (a) | Elimination of equity in earnings of subsidiaries. |
F-50
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Operations
For the
Year Ended December 31, 2008
|
Select Medical
|
||||||||||||||||||||
|
Corporation
|
||||||||||||||||||||
|
(Parent Company
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net operating revenues
|
$ | 190 | $ | 1,947,733 | $ | 205,439 | $ | — | $ | 2,153,362 | ||||||||||
|
Costs and expenses:
|
||||||||||||||||||||
|
Cost of services
|
140 | 1,616,137 | 175,564 | — | 1,791,841 | |||||||||||||||
|
General and administrative
|
45,283 | 240 | — | — | 45,523 | |||||||||||||||
|
Bad debt expense
|
— | 43,404 | 4,400 | — | 47,804 | |||||||||||||||
|
Depreciation and amortization
|
3,211 | 63,405 | 5,170 | — | 71,786 | |||||||||||||||
|
Total costs and expenses
|
48,634 | 1,723,186 | 185,134 | — | 1,956,954 | |||||||||||||||
|
Income (loss) from operations
|
(48,444 | ) | 224,547 | 20,305 | — | 196,408 | ||||||||||||||
|
Other income and expense:
|
||||||||||||||||||||
|
Intercompany interest and royalty fees
|
(38,973 | ) | 38,614 | 359 | — | — | ||||||||||||||
|
Intercompany management fees
|
186,692 | (179,369 | ) | (7,323 | ) | — | — | |||||||||||||
|
Gain on early retirement of debt
|
912 | — | — | — | 912 | |||||||||||||||
|
Other expense
|
(2,802 | ) | — | — | — | (2,802 | ) | |||||||||||||
|
Interest income
|
331 | 135 | 5 | — | 471 | |||||||||||||||
|
Interest expense
|
(77,382 | ) | (30,729 | ) | (2,778 | ) | — | (110,889 | ) | |||||||||||
|
Income before income taxes
|
20,334 | 53,198 | 10,568 | — | 84,100 | |||||||||||||||
|
Income tax expense
|
8,412 | 26,656 | 2,266 | — | 37,334 | |||||||||||||||
|
Equity in earnings of subsidiaries
|
31,451 | 5,575 | — | (37,026 | )(a) | — | ||||||||||||||
|
Net income
|
43,373 | 32,117 | 8,302 | (37,026 | ) | 46,766 | ||||||||||||||
|
Less: Net income attributable to non-controlling interests
|
— | — | 3,393 | — | 3,393 | |||||||||||||||
|
Net income attributable to Select Medical Corporation
|
$ | 43,373 | $ | 32,117 | $ | 4,909 | $ | (37,026 | ) | $ | 43,373 | |||||||||
| (a) | Elimination of equity in earnings of subsidiaries. |
F-51
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Cash Flows
For the
Year Ended December 31, 2008
|
Select Medical
|
||||||||||||||||||||
|
Corporation (Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating activities
|
||||||||||||||||||||
|
Net income
|
$ | 43,373 | $ | 32,117 | $ | 8,302 | $ | (37,026 | )(a) | $ | 46,766 | |||||||||
|
Adjustments to reconcile net income to net cash
|
||||||||||||||||||||
|
provided by (used in) operating activities:
|
||||||||||||||||||||
|
Depreciation and amortization
|
3,211 | 63,405 | 5,170 | — | 71,786 | |||||||||||||||
|
Provision for bad debts
|
— | 43,404 | 4,400 | — | 47,804 | |||||||||||||||
|
Gain on early retirement of debt
|
(912 | ) | — | — | — | (912 | ) | |||||||||||||
|
Loss (gain) from disposal of assets and sale of business units
|
21 | 596 | (71 | ) | — | 546 | ||||||||||||||
|
Non-cash loss from interest rate swaps
|
2,802 | — | — | — | 2,802 | |||||||||||||||
|
Non-cash stock compensation expense
|
2,093 | — | — | — | 2,093 | |||||||||||||||
|
Deferred income taxes
|
33,027 | — | — | — | 33,027 | |||||||||||||||
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
||||||||||||||||||||
|
Equity in earnings of subsidiaries
|
(31,451 | ) | (5,575 | ) | — | 37,026 | (a) | — | ||||||||||||
|
Intercompany
|
37,650 | (25,617 | ) | (12,033 | ) | — | — | |||||||||||||
|
Accounts receivable
|
236 | (81,477 | ) | (7,304 | ) | — | (88,545 | ) | ||||||||||||
|
Other current assets
|
1,154 | 5,851 | 1,225 | — | 8,230 | |||||||||||||||
|
Other assets
|
527 | 16,002 | (174 | ) | — | 16,355 | ||||||||||||||
|
Accounts payable
|
(32 | ) | (3,807 | ) | 2,488 | — | (1,351 | ) | ||||||||||||
|
Due to third-party payors
|
— | (1,942 | ) | (7,421 | ) | — | (9,363 | ) | ||||||||||||
|
Accrued expenses
|
16,979 | (5,977 | ) | 5 | — | 11,007 | ||||||||||||||
|
Net cash provided by (used in) operating activities
|
108,678 | 36,980 | (5,413 | ) | — | 140,245 | ||||||||||||||
|
Investing activities
|
||||||||||||||||||||
|
Purchases of property and equipment
|
(3,186 | ) | (48,869 | ) | (4,449 | ) | — | (56,504 | ) | |||||||||||
|
Proceeds from sale of business units
|
— | 2,666 | — | — | 2,666 | |||||||||||||||
|
Sale of real property
|
— | 743 | — | — | 743 | |||||||||||||||
|
Insurance proceeds
|
— | — | 281 | — | 281 | |||||||||||||||
|
Acquisition of businesses, net of cash acquired
|
— | (4,839 | ) | (2,785 | ) | — | (7,624 | ) | ||||||||||||
|
Net cash used in investing activities
|
(3,186 | ) | (50,299 | ) | (6,953 | ) | — | (60,438 | ) | |||||||||||
|
Financing activities
|
||||||||||||||||||||
|
Borrowings on revolving credit facility
|
407,000 | — | — | — | 407,000 | |||||||||||||||
|
Payments on revolving credit facility
|
(377,000 | ) | — | — | — | (377,000 | ) | |||||||||||||
|
Payments on credit facility term loan
|
(6,800 | ) | — | — | — | (6,800 | ) | |||||||||||||
|
Repurchase of
7
5
/
8
% senior
subordinated notes
|
(1,040 | ) | — | — | — | (1,040 | ) | |||||||||||||
|
Principal payments on seller and other debt
|
(5,191 | ) | (434 | ) | (5 | ) | — | (5,630 | ) | |||||||||||
|
Payment of initial public offering costs
|
(1,326 | ) | — | — | — | (1,326 | ) | |||||||||||||
|
Proceeds from bank overdrafts
|
6 | — | — | — | 6 | |||||||||||||||
|
Dividends to Holdings
|
(33,419 | ) | — | — | — | (33,419 | ) | |||||||||||||
|
Intercompany debt reallocation
|
(29,641 | ) | 15,759 | 13,882 | — | — | ||||||||||||||
|
Equity investment by Holdings
|
90 | — | — | — | 90 | |||||||||||||||
|
Distributions to non-controlling interests
|
— | — | (1,957 | ) | — | (1,957 | ) | |||||||||||||
|
Net cash provided by (used in) financing activities
|
(47,321 | ) | 15,325 | 11,920 | — | (20,076 | ) | |||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
58,171 | 2,006 | (446 | ) | — | 59,731 | ||||||||||||||
|
Cash and cash equivalents at beginning of period
|
161 | 3,102 | 1,266 | — | 4,529 | |||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 58,332 | $ | 5,108 | $ | 820 | $ | — | $ | 64,260 | ||||||||||
| (a) | Elimination of equity in earnings of subsidiaries. |
F-52
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 20. | Selected Quarterly Financial Data (Unaudited) |
The table below sets forth selected unaudited financial data for
each quarter of the last two years.
| Select Medical Holdings Corporation | ||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||
|
Net operating revenues
|
$ | 561,172 | $ | 559,535 | $ | 545,621 | $ | 573,543 | ||||||||
|
Income from operations
|
67,626 | 65,388 | 32,905 | 69,919 | ||||||||||||
|
Net income attributable to Select Medical Holdings Corporation
|
$ | 24,996 | $ | 19,792 | $ | 583 | $ | 29,911 | ||||||||
|
Income (loss) per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.27 | $ | 0.20 | $ | (0.09 | ) | $ | 0.19 | |||||||
|
Diluted
|
$ | 0.27 | $ | 0.19 | $ | (0.09 | ) | $ | 0.19 | |||||||
| Select Medical Corporation | ||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||
|
Net operating revenues
|
$ | 561,172 | $ | 559,535 | $ | 545,621 | $ | 573,543 | ||||||||
|
Income from operations
|
67,626 | 65,388 | 32,905 | 69,919 | ||||||||||||
|
Net income attributable to Select Medical Corporation
|
$ | 31,727 | $ | 25,495 | $ | 6,708 | $ | 34,514 | ||||||||
| Select Medical Holdings Corporation | ||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Year ended December 31, 2010
|
||||||||||||||||
|
Net operating revenues
|
$ | 584,813 | $ | 579,877 | $ | 588,250 | $ | 637,350 | ||||||||
|
Income from operations
|
72,649 | 72,576 | 41,954 | 48,958 | ||||||||||||
|
Net income attributable to Select Medical Holdings Corporation
|
$ | 24,226 | $ | 24,462 | $ | 8,009 | $ | 20,947 | ||||||||
|
Income per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.15 | $ | 0.15 | $ | 0.05 | $ | 0.13 | ||||||||
|
Diluted
|
$ | 0.15 | $ | 0.15 | $ | 0.05 | $ | 0.13 | ||||||||
| Select Medical Corporation | ||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Year ended December 31, 2010
|
||||||||||||||||
|
Net operating revenues
|
$ | 584,813 | $ | 579,877 | $ | 588,250 | $ | 637,350 | ||||||||
|
Income from operations
|
72,649 | 72,576 | 41,954 | 48,958 | ||||||||||||
|
Net income attributable to Select Medical Corporation
|
$ | 28,779 | $ | 28,982 | $ | 12,465 | $ | 25,531 | ||||||||
F-53
The following Financial Statement Schedule along with the report
thereon of PricewaterhouseCoopers LLP dated March 9, 2011,
should be read in conjunction with the consolidated financial
statements. Financial Statement Schedules not included in this
filing have been omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
Select
Medical Holdings Corporation
Select Medical Corporation
Select Medical Corporation
Schedule II —
Valuation and Qualifying Accounts
|
Balance at
|
Charged to
|
|||||||||||||||||||
|
Beginning of
|
Cost and
|
Acquisitions
|
Balance at End
|
|||||||||||||||||
|
Description
|
Year | Expenses | (A) | Deductions(B) | of Year | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Year ended December 31, 2010 allowance for doubtful accounts
|
$ | 43,357 | $ | 41,147 | $ | 7,448 | $ | (47,536 | ) | $ | 44,416 | |||||||||
|
Year ended December 31, 2009 allowance for doubtful accounts
|
$ | 57,052 | $ | 40,872 | $ | — | $ | (54,567 | ) | $ | 43,357 | |||||||||
|
Year ended December 31, 2008 allowance for doubtful accounts
|
$ | 55,856 | $ | 47,804 | $ | 183 | $ | (46,791 | ) | $ | 57,052 | |||||||||
|
Year ended December 31, 2010 income tax valuation allowance
|
$ | 22,372 | $ | (5,750 | ) | $ | — | $ | — | $ | 16,622 | |||||||||
|
Year ended December 31, 2009 income tax valuation allowance
|
$ | 23,008 | $ | (636 | ) | $ | — | $ | — | $ | 22,372 | |||||||||
|
Year ended December 31, 2008 income tax valuation allowance
|
$ | 16,761 | $ | 6,355 | $ | — | $ | (108 | ) | $ | 23,008 | |||||||||
| (A) | Represents opening balance sheet reserves resulting from purchase accounting entries. | |
| (B) | Allowance for doubtful accounts deductions represent write-offs against the reserve for 2008, 2009 and 2010. |
F-54
TABLE OF CONTENTS