UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file numbers:
001-34465
and
001-31441
SELECT MEDICAL HOLDINGS
CORPORATION
SELECT MEDICAL
CORPORATION
(Exact name of Registrants as
specified in their Charter)
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Delaware
Delaware
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20-1764048
23-2872718
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification
Number)
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4714 Gettysburg Road, P.O. Box 2034
Mechanicsburg, PA
(Address of Principal
Executive Offices)
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17055
(Zip Code)
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(717)
972-1100
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
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. þ
Indicate by check mark whether the registrants are large
accelerated filers, accelerated filers, non-accelerated filers,
or smaller reporting companies. See the definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large Accelerated
Filers o
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Accelerated
Filers o
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Non-Accelerated
Filers þ
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Smaller Reporting
Companies o
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(Do not check if a smaller reporting
companies)
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Indicate by check mark whether the registrants are shell
companies (as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2009 (the last business day of our most
recently completed second fiscal quarter), Holdings common
stock was not listed on any exchange or over-the counter market.
Holdings common stock began trading on the New York Stock
Exchange on September 25, 2009. As of December 31,
2009, the aggregate market value of Holdings voting stock
held by non-affiliates was approximately $555,569,667 based on
the number of shares held by non-affiliates as of
December 31, 2009, and based on the reported last sale
price of Holdings common stock on December 31, 2009.
The number of shares of Holdings Common Stock,
$0.001 par value, outstanding as of March 1, 2010 was
160,005,236.
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:
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1.
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The registrants definitive
proxy statement for use in connection with the 2010 Annual
Meeting of Stockholders to be held on or about May 11, 2010
to be filed within 120 days after the registrants
fiscal year ended December 31, 2009, 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.
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SELECT
MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
ANNUAL REPORT ON
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
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
managements 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:
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additional changes in government reimbursement for our services,
including changes that will result from the expiration of the
moratorium for long term acute care hospitals established by the
SCHIP Extension Act of 2007 and the American Recovery and
Reinvestment Act, may result in a reduction in net operating
revenues, an increase in costs and a reduction in profitability;
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the failure of our specialty hospitals to maintain their
Medicare certifications may cause our net operating revenues and
profitability to decline;
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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;
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a government investigation or assertion that we have violated
applicable regulations may result in sanctions or reputational
harm and increased costs;
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future acquisitions or joint ventures may prove difficult or
unsuccessful, use significant resources or expose us to
unforeseen liabilities;
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private third-party payors for our services may undertake future
cost containment initiatives that limit our future net operating
revenues and profitability;
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the failure to maintain established relationships with the
physicians in the areas we serve could reduce our net operating
revenues and profitability;
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shortages in qualified nurses or therapists could increase our
operating costs significantly;
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competition may limit our ability to grow and result in a
decrease in our net operating revenues and profitability;
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the loss of key members of our management team could
significantly disrupt our operations;
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the effect of claims asserted against us or lack of adequate
available insurance could subject us to substantial uninsured
liabilities;
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the ability to refinance our outstanding indebtedness before it
comes due;
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the ability to obtain any necessary or desired waiver or
amendment from our lenders may be difficult due to the current
uncertainty in the credit markets;
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the inability to draw funds under our senior secured credit
facility because of lender defaults; and
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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.
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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.
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, 2009, we operated 89 long term acute care
hospitals, or LTCHs and six inpatient rehabilitation
facilities, or IRFs in 25 states, and 961
outpatient rehabilitation clinics in 37 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 $2,239.9 million
for the year ended December 31, 2009. Of this total, we
earned approximately 70% of our net operating revenues from our
specialty hospital segment and approximately 30% 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 95 facilities throughout 25 states, as of
December 31, 2009. We operate 89 long term acute care
hospitals, 88 of which are currently certified by the federal
Medicare program as long term acute care hospitals and one which
is in its demonstration period. We also operate six acute
medical rehabilitation hospitals, all of which are currently
certified by the federal Medicare program as inpatient
rehabilitation facilities. For both the years ended
December 31, 2008 and December 31, 2009, approximately
63% of the net operating revenues of our specialty hospital
segment came from Medicare reimbursement. As of
December 31, 2009, we operated a total of 4,233 available
licensed beds and employed approximately 13,300 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 16 days in our
inpatient rehabilitation facilities, for the year ended
December 31, 2009.
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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, 2009:
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Distribution
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Medical Condition
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of Patients
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Respiratory disorders
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35
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Neuromuscular disorders
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31
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Cardiac disorders
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9
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Wound care
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7
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Other
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18
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Total
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100
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%
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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, 2009, The Joint Commission had fully
accredited 91 of the 95 specialty hospitals we operated. The
other four specialty hospitals are in the process of obtaining
full accreditation. Three of our six 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, a clinical liaison along with
a case manager from our company makes an assessment 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
patients 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
patients hospital stay and serves as a liaison with the
insurance carriers 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 composition of the medical staff of a specialty
hospital, we consider (1) the size of the specialty
hospital,
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(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 an 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 director of clinical
services and a director of provider relations. 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 spend more time on
patient care.
We operate the majority of our long term acute care hospitals as
hospitals within hospitals or as
satellites, which we collectively refer to as
HIHs. 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
89 long term acute care hospitals at December 31, 2009, of
which 88 are owned and one is managed. Of the 88 long term acute
care hospitals we owned, 65 were operated as HIHs and 23 were
operated as free-standing hospitals.
All Medicare payments to our long term acute care hospitals are
made in accordance with the prospective payment system
specifically applicable to long term acute care hospitals,
referred to as LTCH-PPS. Under LTCH-PPS, a long term
acute care hospital is paid a pre-determined fixed amount
depending upon the long term care diagnosis-related group, or
LTC-DRG, to which each patient is assigned. LTCH-PPS
includes special payment policies that adjust the payments for
some patients based on a variety of factors. Some of these
special payment policies have been the subject of recent
regulatory developments. See Government
Regulations and Managements Discussion and
Analysis of Financial Condition and Results of
Operations Regulatory Changes.
All Medicare payments to our acute medical rehabilitation
hospitals are made in accordance with the prospective payment
system specifically applicable to inpatient rehabilitation
facilities, 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. The IRF-PPS includes special payment policies that
adjust the payments for some patients based on the
patients length of stay, the facilitys costs,
whether the patient was discharged and readmitted and other
factors, some of which have been the subject of recent
regulatory developments. See Government
Regulations and Managements 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 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, 2009.
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
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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 regimens 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, payor and
physician satisfaction surveys, as well as clinical outcomes
analyses. Quality measures are collected monthly and reported
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 office, and directly to The Joint Commission. As
of December 31, 2009, The Joint Commission had fully
accredited 91 of the 95 specialty hospitals we operated. The
other four specialty hospitals are in the process of obtaining
full accreditation. Three of our six 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:
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centralizing administrative functions such as accounting,
finance, payroll, legal, operational support, compliance, human
resources and billing and collection;
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standardizing management information systems to aid in financial
reporting as well as billing and collecting; and
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participating in group purchasing arrangements to receive
discounted prices for pharmaceuticals and medical supplies.
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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. As a result of
the Medicare, Medicaid, and SCHIP Extension Act of 2007, or
SCHIP Extension Act, which prohibits the
establishment and classification of new LTCHs or satellites
during the three calendar years commencing on December 29,
2007, we have stopped all LTCH development. However, we expect
to continue evaluating opportunities to develop joint venture
relationships with significant health systems.
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 areas 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 the
recruitment of a full-time management team. After the facility
is opened, responsibility for its management is transitioned to
this new management team and our corporate operations group.
From time to time we may also develop new inpatient
rehabilitation facilities.
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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 have generally been able 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 961 facilities throughout 37 states and
the District of Columbia, as of December 31, 2009.
Typically, each of our clinics is located in a medical complex
or retail location. As of December 31, 2009, our outpatient
rehabilitation segment employed approximately 8,600 people.
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 310 contracted
locations in 22 states, while our contract operations in
New York provide pediatric contract care at approximately 150
locations.
In our outpatient rehabilitation segment, approximately 90% 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
continue to provide high quality care and strong customer
service. This allows us to realize economies of scale,
heightened brand loyalty, workforce continuity and increased
leverage when negotiating payor contracts.
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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 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. 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 clinics performance.
Pursue Opportunistic Acquisitions. We may grow
our network of outpatient rehabilitation facilities through
opportunistic acquisitions. We significantly expanded our
network with the 2007 acquisition of the outpatient
rehabilitation division of HealthSouth Corporation, consisting
of 569 clinics in 35 states and the District of Columbia,
including 18 states in which we did not previously have
outpatient rehabilitation facilities. 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,
2009) 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
89 long term acute care hospitals with 3,770 available licensed
beds in 25 states and six inpatient rehabilitation
facilities with 463 beds in four states and derived
approximately 70% of net operating revenues from these
operations, for the year ended December 31, 2009. In our
outpatient rehabilitation segment, we operated 961 outpatient
rehabilitation clinics in 37 states and the District of
Columbia and derived approximately 30% of net operating revenues
from these operations, for the year ended December 31,
2009. 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.
7
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 nations long term
acute care hospitals, inpatient rehabilitation facilities and
outpatient rehabilitation facilities being operated by
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
2009, we completed six significant acquisitions for
approximately $894.8 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 32 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
|
|
2007
|
|
2008
|
|
2009
|
|
Medicare
|
|
|
48.0
|
%
|
|
|
46.2
|
%
|
|
|
46.6
|
%
|
Commercial
insurance(1)
|
|
|
44.2
|
%
|
|
|
46.3
|
%
|
|
|
45.9
|
%
|
Private and
other(2)
|
|
|
5.5
|
%
|
|
|
5.4
|
%
|
|
|
5.1
|
%
|
Medicaid
|
|
|
2.3
|
%
|
|
|
2.1
|
%
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 95 specialty hospitals, all of
which are currently certified as Medicare providers. Our
outpatient rehabilitation
8
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
An increasing amount of our net operating revenues continue to
come from commercial and private payor sources. These sources
include insurance companies, workers compensation
programs, health maintenance organizations, preferred provider
organizations, other managed care companies and 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.
Initial
Public Offering of Common Stock
On September 30, 2009, Holdings completed an initial public
offering of 30,000,000 shares of common stock 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 the same price.
The total net proceeds to Holdings after deducting underwriting
discounts and commissions and offering expenses was
approximately $312.5 million. Holdings used the proceeds
from the offering to repay $258.4 million of revolving and
term loans outstanding under its senior secured credit facility
and to 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.
The
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
Transactions.
As a result of the Merger Transactions, the majority of
Selects 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 Selects tangible and
identifiable intangible assets was allocated to goodwill, which
is the subject of an annual impairment test. Additionally, a
portion of the equity related to our continuing stockholders was
recorded at the stockholders 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.
Acquisition
of HealthSouth Corporations Outpatient Rehabilitation
Division
On May 1, 2007, we acquired HealthSouth Corporations
outpatient rehabilitation division for approximately
$245.0 million, reduced by approximately $7.0 million
at closing for assumed indebtedness and other matters. We
significantly expanded our network of outpatient rehabilitation
clinics with the HealthSouth acquisition, consisting of 569
outpatient rehabilitation clinics in 35 states and the
District of Columbia, including 18 states in which we did
not previously have outpatient rehabilitation clinics.
9
Employees
As of December 31, 2009, we employed approximately
22,500 people throughout the United States. Approximately
15,600 of our employees are full time and the remaining
approximately 6,900 are part time employees. Outpatient,
contract therapy and physical rehabilitation and occupational
health employees totaled approximately 8,600 and specialty
hospital employees totaled approximately 13,300. The remaining
approximately 600 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. 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 hospitals 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.
Government
Regulations
General
The healthcare industry is required to comply with many 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.
Licensure
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
10
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
compliance with all applicable state and local laws and
regulations. Of the 95 specialty hospitals we operate, all are
currently certified as Medicare providers. 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,
2009, The Joint Commission had fully accredited 91 of the 95
specialty hospitals we operated. The other four specialty
hospitals are in the process of obtaining full accreditation.
Three of our six inpatient rehabilitation facilities have also
received accreditation from the Commission on Accreditation of
Rehabilitation Facilities, 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. 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 CMS. Net operating
revenues generated directly from the Medicare program
represented approximately 48% of our consolidated net operating
revenues for the year ended December 31, 2007, 46% for the
year ended December 31, 2008, and 47% for the year ended
December 31, 2009.
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 for 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. 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
diagnosis-related groups, or DRGs. The general acute
care hospital DRG payment rate is based upon the national
average cost of treating a Medicare patients condition in
that type of facility. Although the average length of stay
varies for each DRG, the average stay of all Medicare patients
in a general acute care hospital is approximately six days.
Thus, the prospective payment system for general acute care
hospitals creates an economic incentive for those hospitals to
discharge medically complex Medicare patients as soon as
clinically possible. Effective October 1, 2005, CMS
expanded its post-acute care transfer policy under which general
acute
11
care hospitals are paid on a per diem basis rather than the full
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 DRGs to, among other providers, an
LTCH, the general acute care hospital is reimbursed below the
full DRG payment if the patients length of stay is less
than the geometric mean length of stay for the DRG. This policy
originally applied to ten DRGs beginning in fiscal year 1999 and
was expanded to additional DRGs in FY 2004 and to a total of 182
DRGs effective October 1, 2005. The expansion of this
policy to patients in a greater number of DRGs could cause
general acute care hospitals to delay discharging those patients
to our long term acute care hospitals and inpatient
rehabilitation facilities.
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 LTCH. 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 their cost reporting periods beginning on or after
October 1, 2002. Under LTCH-PPS, each patient discharged
from a long term acute care hospital is assigned to a distinct
LTC-DRG and a long term acute care hospital will generally be
paid a pre-determined fixed amount applicable to the assigned
LTC-DRG (adjusted for area wage differences). The payment amount
for each LTC-DRG is intended to reflect the average cost of
treating a Medicare patient assigned to that LTC-DRG in a long
term acute care hospital. Cases with unusually high costs,
referred to as high cost outliers, receive a payment
adjustment to reflect the additional resources utilized.
Conversely, cases with a stay that is 5/6th or less than
the geometric mean length of stay for each specific LTC-DRG, a
short-stay outlier, receive a reduction in payment.
LTCH-PPS also includes special payment policies that adjust the
payments for some patients based on the patients length of
stay, the facilitys costs, whether the patient was
discharged and readmitted and other factors. 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
permit CMS to make a one-time adjustment between
December 29, 2010 and October 1, 2012 to correct any
significant error CMS made in estimating the federal rate in the
first year of LTCH-PPS.
The LTCH-PPS regulations also refined the criteria that must be
met in order for a hospital to be certified as a long term acute
care hospital. For cost reporting periods beginning on or after
October 1, 2002, a long term acute care hospital must have
an average inpatient length of stay for Medicare patients
(including both Medicare covered and non-covered days) of
greater than 25 days. Previously, average lengths of stay
were measured with respect to all patients. LTCHs that fail to
exceed an average length of stay of greater than 25 days
during any cost reporting period will be paid under the general
acute care hospital DRG-based reimbursement.
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 DRG-based reimbursement system. 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 Medicare length of stay of more
than 25 days.
August 2004 Final Rule. On August 11,
2004, CMS published final regulations applicable to LTCHs that
are operated as HIHs. Effective for hospital cost reporting
periods beginning on or after October 1, 2004, subject to
certain exceptions, the final regulations provide lower rates of
reimbursement to HIHs for those Medicare patients admitted from
their host hospitals that are in excess of a specified
percentage threshold. For HIHs opened after October 1,
2004, the Medicare admissions threshold has been established at
25% except for HIHs located in rural areas or co-located with an
MSA dominant hospital or single urban hospital where the
percentage is no more than 50%, nor less than 25%.
For HIHs that meet specified criteria and were in existence as
of October 1, 2004, including all but two of our then
existing HIHs, the Medicare admissions thresholds were phased in
over a four year period starting with hospital cost reporting
periods that began on or after October 1, 2004. For
discharges during the cost reporting period that began on or
after October 1, 2005 and before October 1, 2006, the
Medicare admissions threshold was the lesser of the Fiscal
2004 Percentage of Medicare discharges admitted from the
host hospital or 75%. For discharges during the cost reporting
period beginning on or after October 1, 2006 and before
October 1, 2007, the Medicare admissions threshold was the
lesser of the Fiscal 2004 Percentage of Medicare discharges
admitted from the host
12
hospital or 50%. For discharges during cost reporting periods
beginning on or after October 1, 2007, the Medicare
admissions threshold is 25%. However, the SCHIP Extension Act
(as amended by the American Recovery and Reinvestment Act, or
ARRA) has limited the application of the Medicare
admission threshold on HIHs in existence on October 1, 2004
and subject to the four year phase in described above. For these
HIHs, the admission threshold is no lower than 50% for a three
year period to commence on an LTCHs 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 (as
defined by current regulations), in which cases the percentage
threshold is no more than 75% during the same three cost
reporting years. As used above, Fiscal
2004 Percentage means, with respect to any HIH, the
percentage of all Medicare patients discharged by such HIH
during its cost reporting period beginning on or after
October 1, 2003 and before October 1, 2004 who were
admitted to such HIH from its host hospital, but in no event is
the Fiscal 2004 Percentage less than 25%. The HIH
regulations also established exceptions to the Medicare
admissions thresholds with respect to patients who reach
outlier status at the host hospital, HIHs located in
MSA dominant hospitals or HIHs located in rural areas.
In the 2008 rate year final rule, CMS applied the Medicare
admissions threshold to admissions to grandfathered HIHs and
grandfathered satellites from co-located hospitals. The SCHIP
Extension Act delays application of the admissions threshold on
grandfathered HIHs for a three year period commencing on the
first cost reporting period beginning on or after July 1,
2007. The ARRA limits application of the admission 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.
August 2005 Final Rule. On August 12,
2005, CMS published the final rules for the general acute care
hospital IPPS, for fiscal year 2006, which included an update of
the LTC-DRG relative weights. CMS estimated the changes to the
relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 4.2% in fiscal year 2006 (the period from
October 1, 2005 through September 30, 2006).
May 2006 Final Rule. On May 12, 2006,
CMS published its final annual payment rate updates for the 2007
LTCH-PPS rate year (affecting discharges and cost reporting
periods beginning on or after July 1, 2006 and before
July 1, 2007), or RY 2007. The May 2006 final
rule revised the payment adjustment formula for short stay
outlier, or SSO, patients. For discharges occurring
on or after July 1, 2006, the rule changed 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 each SSO case. Payment for these patients 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 patients length of stay; or (3) the full
LTC-DRG payment. The May 2006 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 final rule also
added a fourth limitation, capping payment for SSO cases at a
per diem rate derived from blending 120% of the LTC-DRG specific
per diem amount with a per diem rate based on the general acute
care hospital IPPS. Under this methodology, as a patients
length of stay increases, the percentage of the per diem amount
based upon the IPPS component will decrease and the percentage
based on the LTC-DRG component will increase.
In addition, for discharges occurring on or after July 1,
2006, the May 2006 final rule provided for (1) a
zero-percent update to the LTCH-PPS standard federal rate used
as a basis for LTCH-PPS payments for the 2007 LTCH-PPS rate
year; (2) the elimination of the surgical case exception to
the three day or less interruption of stay policy (under the
surgical exception, Medicare reimburses a general acute care
hospital directly for surgical services furnished to a long term
acute care hospital patient during a brief interruption of stay
from the long term acute care hospital, rather than requiring
the long term acute care hospital to bear responsibility for
such surgical services); and (3) increasing the costs that
a long term acute care hospital must bear before Medicare will
make additional payments for a case under its high-cost outlier
policy for RY 2007.
CMS estimated that the changes in the May 2006 final rule would
result in an approximately 3.7% decrease in LTCH Medicare
payments-per-discharge
compared to the 2006 rate year, largely attributable to the
revised SSO payment methodology. We estimated that the May 2006
final rule reduced Medicare revenues associated with SSO cases
and high-cost outlier cases to our long term acute care
hospitals by approximately $29.3 million for RY 2007.
Additionally, had CMS updated the LTCH-PPS standard federal rate
by the 2007 estimated market basket index of 3.4% rather than
applying the zero-percent update, we estimated that we would
have received
13
approximately $31.0 million in additional annual Medicare
revenues based on our historical Medicare patient volumes and
revenues (such revenues would have been paid to our hospitals
for discharges beginning on or after July 1, 2006).
August 2006 Final Rule. On August 18,
2006, CMS published the IPPS final rule for fiscal year 2007,
which is the period from October 1, 2006 through
September 30, 2007, that included an update of the LTC-DRG
relative weights for fiscal year 2007. CMS estimated the changes
to the relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 1.3% in fiscal year 2007. The August 2006 final
rule also included changes to the DRGs in IPPS that apply to
LTCHs, as the LTC-DRGs are based on the IPPS DRGs. CMS created
20 new DRGs and modified 32 others, including LTC-DRGs. Prior to
the August 2006 final rule, certain HIHs that were in existence
on or before September 30, 1995, and certain satellite
facilities that were in existence on or before
September 30, 1999, referred to as grandfathered HIHs or
satellites, were not subject to certain HIH separateness
and control requirements as long as the
grandfathered HIHs or satellites continued to
operate under the same terms and conditions, including the
number of beds and square footage, in effect on
September 30, 2003 (for grandfathered HIHs) or
September 30, 1999 (for grandfathered satellites). These
grandfathered HIHs were also not subject to the payment
adjustments for discharged Medicare patients admitted from their
host hospitals in excess of the specified percentage threshold,
as discussed in the August final 2004 rule above. The August
2006 final rule revised the regulations to provide grandfathered
HIHs more flexibility in adjusting square footage upward or
downward, or decreasing the number of beds without being subject
to the separateness and control requirements and
payment adjustment provisions. As of December 31, 2009, we
operated two grandfathered HIHs.
May 2007 Final Rule. On May 1, 2007, CMS
published its annual payment rate update for the 2008 LTCH-PPS
rate year, or RY 2008 (affecting discharges and cost
reporting periods beginning on or after July 1, 2007 and
before July 1, 2008). The May 2007 final rule made several
changes to LTCH-PPS payment methodologies and amounts during RY
2008 although, as described below, many of these changes have
been postponed for a three year period by the SCHIP Extension
Act.
For cost reporting periods beginning on or after July 1,
2007, the May 2007 final rule expanded the current Medicare
admissions threshold to apply to Medicare patients admitted from
any individual hospital. Previously, the admissions threshold
was applicable only to Medicare admissions from hospitals
co-located with an LTCH or satellite of an LTCH. Under the May
2007 final rule, free-standing LTCHs and grandfathered HIHs 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 LTCHs or LTCH satellite
facilitys 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. CMS estimated the impact of the
expansion of the Medicare admission thresholds would result in a
reduction of 2.2% of the aggregate payments to all LTCHs in RY
2008.
The applicable percentage threshold is generally 25% after the
completion of the phase-in period described below. The
percentage threshold for LTCH discharges from a referring
hospital that is an MSA dominant hospital or a single urban
hospital is the percentage of total Medicare discharges in the
MSA that are from the referring hospital, but no less than 25%
nor more than 50%. For Medicare discharges from LTCHs or LTCH
satellites located in rural areas, as defined by the Office of
Management and Budget, the percentage threshold is 50% from any
individual referring hospital. The expanded 25% rule was phased
in over a three year period. The three year transition period
started with cost reporting periods beginning on or after
July 1, 2007 and before July 1, 2008, when the
threshold was the lesser of 75% or the percentage of the
LTCHs or LTCH satellites admissions discharged from
the referring hospital during its cost reporting period
beginning on or after July 1, 2004 and before July 1,
2005, or RY 2005. For cost reporting periods
beginning on or after July 1, 2008 and before July 1,
2009, the threshold was the lesser of 50% or the percentage of
the LTCHs or LTCH satellites admissions from the
referring hospital, during its RY 2005 cost reporting period.
For cost reporting periods beginning on or after July 1,
2009, all LTCHs were subject to the 25% threshold (or applicable
threshold for rural, urban-single, or MSA dominant hospitals).
The SCHIP Extension Act, as amended by the ARRA, postponed the
application of the percentage threshold to all free-
14
standing and grandfathered HIHs for a three year period
commencing on an LTCHs first cost reporting period on or
after July 1, 2007. However, the SCHIP Extension Act did
not postpone the application of the percentage threshold, or the
transition period stated above, to those Medicare patients
discharged from an LTCH HIH or satellite that were admitted from
a non-co-located hospital.
The May 2007 final rule further revised the payment adjustment
formula for SSO cases. Beginning with discharges on or after
July 1, 2007, for cases with a length of stay that is less
than the average length of stay plus one standard deviation for
the same DRG under IPPS, referred to as the so-called IPPS
comparable threshold, the rule effectively lowers the LTCH
payment to a rate based on the general acute care hospital IPPS.
SSO cases with covered lengths of stay that exceed the IPPS
comparable threshold would continue to be paid under the SSO
payment policy described above under the May 2006 final rule.
Cases with a covered length of stay less than or equal to the
IPPS comparable threshold and less than five-sixths of the
geometric average length of stay for that LTC-DRG are paid at an
amount comparable to the IPPS per diem. The SCHIP Extension Act
also postpones, for the three year period beginning on
December 29, 2007, the SSO policy changes made in the May
2007 final rule.
The May 2007 final rule increased the standard federal rate by
0.71% for RY 2008. As a result, the federal rate for RY 2008
increased to $38,356.45 from $38,086.04 for RY 2007.
Subsequently, the SCHIP Extension Act eliminated the update to
the standard federal rate that occurred for RY 2008 effective
April 1, 2008. This adjustment to the standard federal rate
was applied prospectively on April 1, 2008 and reduced the
federal rate back to $38,086.04. In a technical correction to
the May 2007 final rule, CMS increased the fixed-loss amount for
high cost outlier in RY 2008 to $20,738 from $14,887 in RY 2007.
CMS projected an estimated 0.4% decrease in LTCH payments in RY
2008 due to this change in the fixed-loss amount and the overall
impact of the May 2007 final rule to be a 1.2% decrease in total
estimated LTCH-PPS payments for RY 2008.
The May 2007 final rule provided that beginning with the annual
payment rate updates to the LTC-DRG classifications and relative
weights for the fiscal year 2008, or FY 2008
(affecting discharges beginning on or after October 1, 2007
and before September 30, 2008), annual updates to the
LTC-DRG classification and relative weights are to have a budget
neutral impact. Under the May 2007 final rule, future LTC-DRG
reclassification and recalibrations, by themselves, should
neither increase nor decrease the estimated aggregated LTCH-PPS
payments.
August 2007 Final Rule. On August 22,
2007, CMS published the IPPS final rule for FY 2008, which
created a new patient classification system with categories
referred to as MS-DRGs and MS-LTC-DRGs, respectively, for
hospitals reimbursed under IPPS and LTCH-PPS. Beginning with
discharges on or after October 1, 2007, the new
classification categories take into account the severity of the
patients condition. CMS assigned proposed relative weights
to each MS-DRG and MS-LTC-DRG to reflect their relative use of
medical care resources.
The August 2007 final rule published a budget neutral update to
the MS-LTC-DRG classification and relative weights. In the
preamble to the IPPS final rule for FY 2008 CMS restated that it
intends to continue to update the LTC-DRG weights annually in
the IPPS rulemaking and those weights would be modified by a
budget neutrality adjustment factor to ensure that estimated
aggregate LTCH payments after reweighting are equal to estimated
aggregate LTCH payments before reweighting.
Medicare, Medicaid and SCHIP Extension Act of
2007. On December 29, 2007, President Bush
signed into law the SCHIP Extension Act. Among other changes in
the federal healthcare programs, the SCHIP Extension Act made
significant changes to Medicare policy for LTCHs including a new
statutory definition of an LTCH, a report to Congress on new
LTCH patient criteria, relief from certain LTCH-PPS payment
policies for three years, a three year moratorium on the
establishment and classification of new LTCHs and LTCH beds,
elimination of the payment update for the last quarter of RY
2008 and new medical necessity reviews by Medicare contractors
through at least October 1, 2010.
Previously, the statutory definition of an LTCH focused on the
facility having an average length of stay of greater than
25 days. The SCHIP Extension Act adds to the statutory
requirements by defining an LTCH as a hospital 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
patients subsequent admission, evaluates regularly their
patients for
15
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. We do not expect that
these changes will have any impact on the designation of our
hospitals as LTCHs.
The SCHIP Extension Act requires the Secretary of the Department
of Health and Human Services to conduct a study on the
establishment of national LTCH facility and patient criteria for
the purpose of determining medical necessity, appropriateness of
admissions and continued stay at, and discharge from, LTCHs. The
Secretary must submit a report on the results of this study to
Congress. Both the study and the report are required to consider
recommendations on LTCH-specific facility and patient criteria
contained in a June 2004 report to Congress by the Medicare
Payment Advisory Commission.
As described above, the SCHIP Extension Act precludes the
Secretary from implementing, during the three year moratorium
period, the provisions added by the May 2007 final rule that
extended the 25% rule to free-standing LTCHs and grandfathered
HIHs. The SCHIP Extension Act also modifies, during the
moratorium, the effect of the 25% threshold for admissions from
co-located hospitals that was established in the August 2004
final rule. For non-grandfathered HIHs and satellites opened on
or before October 1, 2004, the applicable percentage
threshold is set at 50%, except for those HIHs and satellites
located in rural areas and those which receive referrals from
MSA dominant hospitals or single urban hospitals, in which cases
the percentage threshold is set at no more than 75%. The ARRA,
as discussed below, further revised the SCHIP Extension Act to
modify the delay in the percentage limitations to the three cost
reporting periods beginning on or after July 1, 2007 for
freestanding LTCHs, grandfathered HIHs, and grandfathered
satellites and on or after October 1, 2007 for
non-grandfathered LTCH HIHs and non-grandfathered satellites.
The SCHIP Extension Act also precludes the Secretary from
implementing, for the three year period beginning on
December 29, 2007, a one-time adjustment to the LTCH
standard federal rate. This rule, established in the original
LTCH-PPS regulations, permits CMS to restate the standard
federal rate to reflect the effect of changes in coding since
the LTCH-PPS base year. In the preamble to the May 2007 final
rule, CMS discussed making a one-time prospective adjustment to
the LTCH-PPS rates for the 2009 rate year. In addition, the
SCHIP Extension Act reduced the Medicare payment update for the
portion of RY 2008 from April 1, 2008 to June 30, 2008
to the same base rate applied to LTCH discharges during RY 2007.
For the three calendar years following December 29, 2007,
the Secretary must impose a moratorium on the establishment and
classification of new LTCHs, LTCH satellite facilities, and LTCH
beds in existing LTCH or satellite facilities. 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. As a result of the
SCHIP Extension Acts three calendar year moratorium on the
development of new LTCHs, we have stopped all LTCH development.
Beginning with LTCH discharges on or after October 1, 2007
and through September 30, 2010 (unless extended by the
Secretary), the SCHIP Extension Act also requires the Secretary
to significantly expand medical necessity review for patients
admitted to LTCHs by instituting a review of the medical
necessity of continued stays of patients admitted to LTCHs. The
medical necessity reviews must include a representative sample
that results in a 95% confidence interval and guarantees that at
least 75% of overpayments received by LTCHs for medically
unnecessary admissions and continued stays are recovered and not
counted toward an LTCHs Medicare average length of stay.
The Secretary may use up to 40% of the recouped overpayments to
compensate the fiscal intermediaries and Medicare administrative
contractors for the costs of conducting medical necessity
reviews.
May 6, 2008 Interim Final Rule. On
May 6, 2008, CMS published an interim final rule with
comment period, which implemented portions of the SCHIP
Extension Act. The May 6, 2008 interim final rule
addressed: (1) the payment adjustment for very short-stay
outliers, (2) the standard federal rate for the last three
months of
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RY 2008, (3) adjustment of the high cost outlier
fixed-loss amount for the last three months of RY 2008, and
(4) made reference to the SCHIP Extension Act in the
discussion of the basis and scope of the LTCH-PPS rules.
As provided in the SCHIP Extension Act, for discharges beginning
on or after December 29, 2007 and before December 29,
2010, the RY 2008 short-stay outlier rule based on the IPPS
comparable threshold does not apply. The RY 2008 rule required
that cases with a covered length of stay less than or equal to
the IPPS comparable threshold and less than five-sixths of the
geometric average length of stay for that DRG were paid at an
amount comparable to the IPPS per diem. IPPS comparable
threshold is defined as cases with a length of stay that is less
than the average length of stay plus one standard deviation for
the same DRG under IPPS. For discharges occurring on or after
April 1, 2008 through June 30, 2008, the revised RY
2008 standard federal rate is $38,086.04, which is the same as
the RY 2007 federal rate. In the only interpretation of the
SCHIP Extension Act in the interim rule, CMS stated that it is
interpreting the term base rate to be the standard
federal rate because we believe Congress meant to
eliminate the 0.71% update from the RY 2008 standard federal
rate. Finally, the revised high cost outlier fixed-loss
amount for discharges occurring on or after April 1, 2008
through June 30, 2008 was $20,707, a decrease of $31 per
discharge from the $20,738 fixed-loss amount established by CMS
in its technical correction to the May 2007 final rule. CMS
indicated that the other issues addressed in the SCHIP Extension
Act will be discussed in a forthcoming regulation, including
instructions concerning (1) the moratorium on the
certification of new LTCHs and satellites and the expansion of
beds in existing facilities and (2) implementing changes to
the 25% admission threshold adjustment for LTCH patients
admitted from certain referring hospitals for a three year
period.
May 9, 2008 Final Rule. On May 9,
2008, CMS published its annual payment rate update for the 2009
LTCH-PPS rate year, or RY 2009 (affecting discharges
and cost reporting periods beginning on or after July 1,
2008). 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 rule
increased the fixed-loss amount for high cost outlier cases to
$22,960, which is $2,222 higher than the 2008 LTCH-PPS rate
year. The final rule provided that CMS may make a one-time
reduction in the LTCH-PPS rates to reflect a budget neutrality
adjustment no earlier than December 29, 2010 and no later
than October 1, 2012. CMS estimated this reduction will be
approximately 3.75%.
May 22, 2008 Interim Final Rule. On
May 22, 2008, CMS published an interim final rule with
comment period, which implemented portions of the SCHIP
Extension Act not addressed in the May 6, 2008 interim
final rule. Among other things, the May 22, 2008 interim
final rule established a definition for
free-standing LTCHs as a hospital that: (1) has
a Medicare provider agreement, (2) has an average length of
stay of greater than 25 days, (3) does not occupy
space in a building used by another hospital, (4) does not
occupy space in one or more separate or entire buildings located
on the same campus as buildings used by another hospital; and
(5) is not part of a hospital that provides inpatient
services in a building also used by another hospital. As
required by the SCHIP Extension Act, CMS made certain changes to
the payment adjustment policy in the May 22, 2008 interim
final rule. Effective for cost reporting periods beginning on or
after December 29, 2007 and before December 29, 2010,
CMS delayed the extension of the 25% threshold payment
adjustment to grandfathered HIHs and free-standing LTCHs.
Furthermore, CMS increased the patient percentage thresholds
from 25% to 50% for certain LTCH HIH and satellite discharges
admitted from a co-located hospital, and from 50% to 75% for
certain LTCH HIH and satellite discharges at rural HIHs or
admitted from a co-located MSA dominant or urban single
hospital. For purposes of LTCH HIH and satellite discharges
admitted from a co-located MSA dominant or urban single
hospital, the percentage threshold continued to be limited by
the percentage of total Medicare discharges in the MSA in which
the hospital is located that are from the co-located hospital.
The May 22, 2008 interim final rule, effective
December 29, 2007, continued to apply the percentage
threshold to grandfathered satellites for patients admitted from
any individual hospital with which they are not co-located. In
addition, LTCH HIHs and LTCH satellites that are not
grandfathered remained subject to the percentage threshold for
patients admitted from non-co-located hospitals. Neither the
SCHIP Extension Act nor the ARRA delayed or excluded these
facilities from the percentage threshold applicable for cost
reporting periods beginning on or after July 1, 2007. For
LTCHs subject to the expanded percentage threshold a three year
transition period starts with cost reporting periods beginning
on or after July 1, 2007 and before July 1, 2008, when
the threshold is the lesser of 75% or the percentage of the
LTCHs or LTCH satellites admissions discharged from
the referring hospital during its
17
cost reporting period beginning on or after July 1, 2004
and before July 1, 2005 (RY 2005). For cost
reporting periods beginning on or after July 1, 2008 and
before July 1, 2009, the threshold will be the lesser of
50% or the percentage of the LTCHs or LTCH
satellites admissions from the referring hospital, during
its RY 2005 cost reporting period. For cost reporting periods
beginning on or after July 1, 2009, LTCHs subject to the
expanded percentage threshold will be subject to the 25%
threshold (or applicable threshold for rural, urban-single, or
MSA dominant hospitals).
In accordance with the SCHIP Extension Act, the May 22,
2008 interim final rule provided an exception for new LTCHs
that, on or before December 29, 2007, (1) began the
qualifying period for payment under the LTCH-PPS, (2) have
a binding 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. The May 22, 2008 interim final rule implemented a
moratorium on any increase of LTCH beds in existing LTCHs or
LTCH satellites beginning on December 29, 2007 and
continuing through December 28, 2010. The May 22, 2008
interim final rule also implemented a narrow exception for new
beds. LTCHs located in a state with only two LTCHs may request
an increase in beds following the closure or decrease in the
number of beds at the other LTCH located within the state. CMS
noted that the exception for an increase in beds does not apply
to the limit on the number of beds in grandfathered LTCH HIHs or
grandfathered LTCH satellites. A grandfathered facility would
not be allowed to maintain its grandfathered status if it
increases its number of beds under the exception.
August 2008 Final Rule. On August 19,
2008, CMS published the IPPS final rule for FY 2009 (affecting
discharges and cost reports beginning on or after
October 1, 2008 and before October 1, 2009), which
made limited revisions to the classifications of cases in
MS-LTC-DRGs. The final rule also included a number of hospital
ownership and physician referral provisions, including expansion
of a hospitals disclosure obligations by requiring
physician-owned hospitals to disclose ownership or investment
interests held by immediate family members of a referring
physician. The final rule requires physician-owned hospitals to
furnish to patients, on request, a list of physicians or
immediate family members who own or invest in the hospital.
Moreover, a physician-owned hospital must require all physician
owners or investors who are also active members of the
hospitals 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.
The American Recovery and Reinvestment Act of
2009. On February 17, 2009, President Obama
signed into law the ARRA. The ARRA made several technical
corrections to the SCHIP Extension Act, including a
clarification that, during the moratorium period established by
the SCHIP Extension Act, the percentage threshold for
grandfathered satellites is set at 50% and not phased in to the
25% level for admissions from a co-located hospital. In
addition, the ARRA clarified that the application of the
percentage threshold is postponed for a LTCH HIH or satellite
that was co-located with a provider-based, off-campus location
of an IPPS hospital that did not deliver services payable under
IPPS. The ARRA also modified certain delays in the application
of the percentage thresholds as originally established in the
SCHIP Extension Act. The effective date of the delay in
application of the full 25% patient threshold payment adjustment
policy is changed from cost reporting periods beginning on or
after December 29, 2007 to cost reporting periods beginning
on or after July 1, 2007 for freestanding LTCHs and
grandfathered HIHs and satellites, and cost reporting periods
beginning on or after October 1, 2007 for non-grandfathered
LTCH HIHs and satellites.
June 3, 2009 Interim Final Rule. On
June 3, 2009, CMS published an interim final rule in which
CMS adopted a new table of MS-LTC-DRG relative weights that will
apply 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 CMSs misapplication
of its established methodology in the calculation of the budget
neutrality factor. CMS stated that the calculation of the budget
neutrality factor of 1.04186 was determined using the unadjusted
recalibrated relative weights rather than using the normalized
relative weights. The revised fiscal year 2009 budget neutrality
factor is 1.0030401. 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).
18
However, CMS is only applying the corrected weights to the
remainder of fiscal year 2009 (that is, from June 3, 2009
through September 30, 2009).
July 31, 2009 Final Rule. On
July 31, 2009, CMS released its annual payment rate update
for the 2010 LTCH-PPS rate year, or RY 2010
(affecting discharges and cost reporting periods beginning on or
after October 1, 2009 and before 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 RY
2010 is set at $39,896.65, an increase from $39,114.36 in RY
2009. The fixed loss amount for high cost outlier cases is set
at $18,425. This is a decrease from the fixed loss amount in the
2009 rate year of $22,960.
The July 31, 2009 annual payment rate update also included
an interim final rule with comment period implementing
provisions of the ARRA discussed above, including amendments to
provisions of the SCHIP Extension Act relating to payments to
LTCHs and LTCH satellite facilities and increases in beds in
existing LTCHs and LTCH satellite facilities under the LTCH-PPS.
On July 31, 2009, CMS finalized three interim final rules
with comment period that it previously published but had yet to
respond to public comment. First, CMS finalized the June 3,
2009 interim final rule that adopted a new table of MS-LTC-DRG
relative weights for the period between June 3, 2009 and
September 30, 2009. Second, CMS finalized the May 6,
2008 interim final rule that implemented changes to LTCH-PPS
mandated by the SCHIP Extension Act addressing: (1) payment
adjustments for certain short-stay outliers , (2) the
federal standard rate for the last three months of rate year
2008, and (3) adjustment of the high cost outlier
fixed-loss amount. Finally, CMS finalized the May 22, 2008
interim final rule that implemented changes to LTCH-PPS mandated
by the SCHIP Extension Act modifying the percentage threshold
policy for certain LTCHs and addressing the three-year
moratorium on the establishment of new LTCHs and bed increases
at existing LTCHs and LTCH satellites.
The SCHIP Extension Act, as amended by the ARRA, among other
things, limited the application of the Medicare admission
threshold on HIHs in existence on October 1, 2004 to no
lower than 50% (subject to exceptions for rural and MSA dominant
hospitals) for a three year period to commence on an LTCHs
first cost reporting period to begin on or after October 1,
2007, postponed for the three year period beginning on
December 29, 2007 the SSO policy changes made in the May
2007 final rule and postponed the application of the percentage
threshold to all free-standing and grandfathered HIHs for a
three year period commencing on an LTCHs first cost
reporting period on or after July 1, 2007. The ARRA further
limited application of the admissions 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. If the May 2004 final rules and May 2007 final rules
become effective as currently written after the expiration of
the applicable provisions of the SCHIP Extension Act and the
ARRA, these regulatory changes will collectively cause an
adverse effect on our operating revenues and profitability in
2011 and beyond, which adverse effect could be partially
mitigated if we are able to implement certain operational
changes. However, the effect of these changes in 2010 will not
be significant.
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
patients 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
patients length of stay, the facilitys 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. The IRF-PPS was phased in over a transition period
in 2002. For cost reporting periods beginning on or after
October 1, 2002, inpatient rehabilitation facilities are
paid solely on the basis of the IRF-PPS payment rate.
19
Although the initial IRF-PPS regulations did not change the
criteria that must be met in order for a hospital to be
certified as an inpatient rehabilitation facility, CMS adopted a
separate final rule on May 7, 2004 that made significant
changes to those criteria. The new inpatient rehabilitation
facility certification criteria became effective for cost
reporting periods beginning on or after July 1, 2004. Under
the historic IRF certification criteria that had been 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.
CMS adopted four major changes to the 75% rule in its
May 7, 2004 final rule. First, CMS temporarily lowered the
75% compliance threshold, as follows: (1) 50% for cost
reporting periods beginning on or after July 1, 2004 and
before July 1, 2005; (2) 60% for cost reporting
periods beginning on or after July 1, 2005 and before
July 1, 2006; (3) 65% for cost reporting periods
beginning on or after July 1, 2006 and before July 1,
2007; and (4) 75% for cost reporting periods beginning on
or after July 1, 2007. Second, CMS modified and expanded
from ten to 13 the medical conditions used to determine whether
a hospital qualifies as an inpatient rehabilitation facility.
Third, the agency finalized the conditions under which
comorbidities can be used to verify compliance with the 75%
rule. Fourth, CMS changed 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 facilitys certification 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 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.
August 2006 Final Rule. In the August 2006
final rule updating IRF-PPS for discharges occurring on or after
October 1, 2006 and on or before September 30, 2007,
CMS reduced the standard payment amount by 2.6% and increased
the outlier threshold for fiscal year 2007 to $5,534 from $5,129
for fiscal year 2006. CMS stated that the reduction in standard
payment was to account for coding changes that did not reflect
real changes in case mix.
August 2007 Final Rule. In the August 2007
final rule updating IRF-PPS for discharges occurring on or after
October 1, 2007 and on or before September 30, 2008,
CMS increased the standard payment amount by 3.2% and increased
the outlier threshold for fiscal year 2008 to $7,362 from $5,534
for fiscal year 2007.
Medicare Medicaid and SCHIP Extension Act of
2007. 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. In order to comply with
Medicare inpatient rehabilitation facility certification
criteria, it may be necessary for our IRFs to implement
restrictive admissions policies and not admit patients whose
diagnoses fall outside the 13 specified conditions. Such
policies may result in reduced patient volumes, which could have
a negative effect on financial performance.
In addition to meeting the compliance threshold, a hospital must
meet other facility criteria to be classified as an IRF,
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 patients medical record to note the patients
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, including the compliance threshold, may
cause a hospital to lose its exclusion from the prospective
payment system that applies to general acute care hospitals and,
as a result, no longer be eligible for payment at a higher rate.
20
The SCHIP Extension Act requires the Secretary, in consultation
with providers, trade organizations and the Medicare Payment
Advisory Commission, to prepare an analysis of the compliance
threshold for the Committee on Ways and Means of the House of
Representatives and the Committee on Finance of the Senate.
Among other things, the analysis must include the potential
effect of the 75% rule on access to care, alternatives to the
75% rule policy for certifying inpatient rehabilitation
hospitals, and the appropriate setting of care for conditions of
patients commonly admitted to IRFs that are not one of the 13
specified conditions. In requiring the Secretary to produce a
recommendation for classifying IRFs, Congress used the term
75% rule for the first time to describe the
compliance threshold requirement, while at the same time
freezing the threshold at 60%. The results of this analysis may
impact future policies, regulations and statutes governing
IRF-PPS.
August 2008 Final Rule. On August 8,
2008, CMS published the final rule for IRF-PPS for FY 2009. The
final rule includes changes to the IRF-PPS regulations designed
to implement portions of the SCHIP Extension Act. In particular,
the patient classification criteria compliance threshold is
established at 60% (with comorbidities counting toward this
threshold). In addition to updating the various values that
compose the IRF-PPS, the final rule increased the outlier
threshold amount to $10,250 from $7,362 for fiscal year 2007.
CMS also updated the CMG relative weights and average length of
stay values.
July 31, 2009 Final Rule. On
July 31, 2009, CMS released its final rule establishing the
annual payment rate update for the IRF-PPS for FY 2010
(affecting discharges and cost reporting periods beginning on
October 1, 2009 through September 30, 2010). The
standard federal rate is established at $13,661 for FY 2010, an
increase from $12,958 in FY 2009. The proposed outlier threshold
amount is set at $10,652, an increase from $10,250 in FY 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 rules specifications.
The interdisciplinary team must meet weekly to review the
patients 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.
While the final rules payment rate updates are effective
for IRF discharges on or after October 1, 2009, CMS has
adopted a January 1, 2010 effective date for the new
coverage requirements to provide facilities more time to comply
with the new framework. If we fail to implement the new coverage
criteria, claims for our services may be denied in whole or in
part.
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 and administered and funded
jointly by each individual state government and CMS. 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 3.3% of our specialty hospital net
operating revenues for the year ended December 31, 2009.
Medicare Reimbursement of Outpatient Rehabilitation
Services. Beginning on January 1, 1999, the
Balanced Budget Act of 1997 subjected certain outpatient therapy
providers reimbursed under the Medicare physician fee schedule
to annual limits for therapy expenses. Effective January 1,
2010, the annual limit on outpatient therapy services is $1,860
for combined physical and speech language pathology services and
$1,860 for occupational therapy services. The per beneficiary
caps were $1,840 for calendar year 2009. In the Deficit
Reduction Act of 2005, Congress implemented an exception 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
21
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 Temporary Extension Act of 2010 extended the
exception process through March 31, 2010. The exception
process will expire on April 1, 2010 unless further
extended by Congress. There can be no assurance that Congress
will extend it further. Failure to extend the exception process
may reduce our future net operating revenues and profitability.
The Medicare program reimburses outpatient rehabilitation
providers based on the Medicare physician fee schedule. The
Medicare physician fee schedule rates are automatically updated
annually based on a formula, called the sustainable growth rate
(SGR) formula, contained in legislation. The SGR
formula has resulted in automatic reductions in rates in every
year since 2002; however, for each year through 2009 CMS or
Congress has taken action to prevent the SGR formula reductions.
On December 19, 2009, President Obama signed the Department
of Defense Appropriations Act, 2010 into law, which delayed
until March 1, 2010 the payment reductions for 2010
required by the SGR formula. The Temporary Extension Act of 2010
further delayed the scheduled reduction in Medicare payment
until March 31, 2010. Congress is now considering several
proposals to delay the payment cut further or to replace the SGR
formula with another methodology for setting Medicare physician
payment rates. We cannot predict what actions, if any, Congress
or CMS may take with respect to the Medicare physician fee
schedule update. If no further legislation is passed by Congress
and signed by the President, the SGR formula will reduce our
Medicare outpatient rehabilitation payment rates by
approximately 21.2% beginning April 1, 2010. For the year
ended December 31, 2009, we received approximately 9.7% of
our outpatient rehabilitation net operating revenues from
Medicare.
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 group therapy. 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.
Workers Compensation. Net operating
revenues generated directly from Workers compensation
programs represented approximately 18.9% of our net operating
revenue from outpatient rehabilitation services for the year
ended December 31, 2009. 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.
Federal
Healthcare Reform Proposals
Healthcare is one of the largest industries in the United States
and continues to attract much legislative interest and public
attention. Comprehensive national healthcare reform is currently
a focus at the federal level. In the final months of 2009, both
houses of the U.S. Congress passed different versions of
comprehensive healthcare reform legislation. Both versions of
the legislation would require most individuals to have health
insurance coverage, and would aim to promote quality and cost
efficiency in healthcare delivery and budgetary savings in the
Medicare program. On March 3, 2010, President Obama
announced that he would seek passage of healthcare reform
legislation with certain changes. While no comprehensive
healthcare reform legislation has yet become law, we anticipate
that Congress will continue to consider legislative changes,
either as part of comprehensive healthcare reform or separately,
that could affect our business.
Legislative changes that have been discussed as part of
healthcare reform have included, among other things, calls for
bundled payments to hospitals that would cover not just the
hospitalization, but care from certain post-acute providers for
the 30 days after the hospitalization. A significant
portion of the services furnished by our specialty
22
hospitals and outpatient rehabilitation clinics are to patients
discharged from acute care hospitals. Therefore, the proposal to
bundle payments to hospitals could have a material impact on
volume of referrals to our facilities from acute care hospitals
and the payment rates that we receive for our services. Other
proposed legislative changes have included negative adjustments
to the annual market basket updates for the Medicare long term
care hospital and inpatient rehabilitation payment systems,
penalties for hospital readmissions, value-based purchasing and
enhanced efforts to curb fraud and abuse, including by
implementing additional prepayment reviews. There has also been
discussion of establishing an Independent Medicare Advisory
Board charged with presenting proposals to Congress to reduce
Medicare expenditures when such expenditures exceed specified
levels.
Healthcare reform legislation passed by the U.S. Senate in
2009 contained a temporary extension of policies adopted in the
SCHIP Extension Act, including extending relief from certain
LTCH-PPS payment policies and extending the moratorium on the
establishment and classification of new LTCHs and LTCH beds. The
healthcare reform legislation passed by the U.S. House of
Representatives in 2009 did not contain a similar extension. It
is uncertain whether both houses of Congress will enact
healthcare reform legislation or other legislation that includes
an extension of the policies adopted in the SCHIP Extension Act.
At this time we are unable to predict what action Congress or
the President might take with respect to comprehensive
healthcare reform or other legislation affecting healthcare, or
the impact of any such legislation on our revenues, operating
costs, results of operations or cash flows.
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
contractors, or 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 Generals 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
Generals 2005 Work Plan describes plans to study whether
patients in long term acute care hospitals are receiving
acute-level services or could be cared for in skilled nursing
facilities. The 2006 and 2007 Work Plans describe plans:
(1) to study the accuracy of Medicare payment for inpatient
rehabilitation stays when patient assessments are entered later
than the required deadlines, (2) to study both inpatient
rehabilitation facility and long term acute care hospital
payments in order to determine whether they were made in
accordance with applicable regulations, including
23
policies on outlier payments and interrupted stays, and
(3) to study physical and occupational therapy claims in
order to determine whether the services were medically
necessary, adequately documented and certified. The 2007 Work
Plan describes plans to study the extent to which long term
acute care hospitals admit patients from a sole general acute
care hospital and whether hospitals currently reimbursed under
LTCH-PPS are in compliance with the average length of stay
criteria. The 2008 Work Plan announced plans to review whether
payments to long term acute care hospitals were appropriate for:
(1) interrupted stays, (2) short stay outliers,
(3) cases involving the readmission of patients transferred
to a co-located general acute care hospital, and (4) cases
exceeding the applicable patient threshold payment adjustment
policy. In the 2009 Work Plan, the Office of Inspector General
indicated an interest in reviewing Medicare claims involving
cases transferred from inpatient rehabilitation facilities to
other inpatient rehabilitation facilities, long term acute care
hospitals, acute inpatient hospitals, or nursing homes that
accept payments under the Medicare or Medicaid programs. The
2009 Work Plan also 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 Work Plan identified as
an area of concern whether the patient assessments instruments
prepared by inpatient rehabilitation facilities were submitted
in accordance with Medicare regulations. 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.
Section 1877 of the Social Security Act, commonly known as
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 providers 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 12 specialty hospitals that are treated as
provider-based satellites of certain of our other facilities,
certain of our outpatient rehabilitation services 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
24
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 that most affect our operations.
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. We were required to comply with these standards by
April 14, 2003.
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. We were required to comply with these requirements by
October 16, 2003.
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 were required to
comply with these security standards by April 20, 2005.
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 HIPPA 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. The Federal Trade Commission issued so-called Red
Flag regulations aimed at preventing and detecting
identity theft, which are expected to become effective soon.
Lawsuits, including class actions and action by state attorneys
general, directed at companies that have experienced a privacy
or security breach are becoming more common. 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
codes policies.
25
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 HIPPA, including amendments made
by the Health Information Technology for Economic and Clinical
Health Act or HITECH, and provides reports to the 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 departments 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 employees 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 SECs Public Reference Room at
100 F Street, NE., Washington, DC 20549, or may be
obtained by calling the SEC at 1 800
26
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.selectmedicalcorp.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.
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, 2009:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Rocco A. Ortenzio
|
|
|
77
|
|
|
Executive Chairman
|
Robert A. Ortenzio
|
|
|
52
|
|
|
Chief Executive Officer
|
Patricia A. Rice
|
|
|
63
|
|
|
President and Chief Operating Officer
|
David W. Cross
|
|
|
63
|
|
|
Executive Vice President and Chief Development Officer
|
S. Frank Fritsch
|
|
|
58
|
|
|
Executive Vice President and Chief Human Resources Officer
|
Martin F. Jackson
|
|
|
55
|
|
|
Executive Vice President and Chief Financial Officer
|
James J. Talalai
|
|
|
48
|
|
|
Executive Vice President and Chief Information Officer
|
Michael E. Tarvin
|
|
|
49
|
|
|
Executive Vice President, General Counsel and Secretary
|
Scott A. Romberger
|
|
|
49
|
|
|
Senior Vice President, Controller and Chief Accounting Officer
|
Robert G. Breighner, Jr.
|
|
|
41
|
|
|
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 from February 1997 until
September 2001. Mr. Ortenzio has served as Executive
Chairman since September 2001. He became a director of Holdings
upon the consummation of the Merger Transactions. 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 upon the consummation of the Merger
Transactions. 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. He currently serves on the board of directors of
Odyssey Healthcare, Inc., a hospice healthcare company, and
U.S. Oncology, Inc. 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
27
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 W. Cross has served as our Executive Vice President
and Chief Development Officer since February 2007. He served as
our Senior Vice President and Chief Development Officer from
December 1998 to February 2007. Before joining us, he was
President and Chief Executive Officer of Intensiva Healthcare
Corporation from 1994 until we acquired it. Mr. Cross was a
founder, the President and Chief Executive Officer, and a
director of Advanced Rehabilitation Resources, Inc., and served
in each of these capacities from 1990 to 1993. From 1987 to
1990, he was Senior Vice President of Business Development for
RehabCare Group, Inc., a publicly traded rehabilitation care
company, and in 1993 and 1994 served as Executive Vice President
and Chief Development Officer of RehabCare Group, Inc.
Mr. Cross currently serves on the board of directors of
Odyssey Healthcare, Inc., a hospice healthcare company.
S. Frank Fritsch has served as our Executive Vice
President and Chief Human Resources Officer since February 2007.
He served as our Senior Vice President of Human Resources from
November 1999 to February 2007. He served as our Vice President
of Human Resources from June 1997 to November 1999. Prior to
June 1997, he was Senior Vice President Human
Resources for Integrated Health Services from May 1996 until
June 1997. Prior to that time, Mr. Fritsch was Senior Vice
President Human Resources for Continental Medical
Systems, Inc. from August 1992 to April 1996. From 1980 to 1992,
Mr. Fritsch held senior human resources positions with
Mercy Health Systems, Rorer Pharmaceuticals, ARA Mark and
American Hospital Supply Corporation.
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 LNard
Associates. Mr. Jackson also serves as a director of
several private companies.
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
28
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.
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 46% and 47% of our net operating revenues for the
year ended December 31, 2008 and the year ended
December 31, 2009, respectively, 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 proposed comprehensive
reforms to the healthcare system, including changes to the
methods for, and amounts of, Medicare reimbursement. 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.
We cannot predict what form healthcare reform will take, or if
significant healthcare reform in the near term will take place
at all. 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:
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facility and professional licensure, including certificates of
need;
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conduct of operations, including financial relationships among
healthcare providers, Medicare fraud and abuse and physician
self-referral;
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addition of facilities and services and enrollment of newly
developed facilities in the Medicare program;
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payment for services; and
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safeguarding protected health information.
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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,
29
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.
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 do not know whether the
subpoena has been issued in connection with a lawsuit under the
qui tam provisions of the federal False Claims Act or in
connection with possible civil, criminal or administrative
proceedings by the government. We have produced documents in
response to the subpoena and intend to fully cooperate with this
investigation. At this time, we are unable to predict the timing
and outcome of this matter. See Legal Proceedings
and Business Government Regulations.
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.
On August 11, 2004, CMS published final regulations
applicable to long term acute care hospitals that are operated
as hospitals within hospitals or as
satellites. We collectively refer to hospitals
within hospitals and satellites as HIHs, and we
refer to the CMS final regulations as the final
regulations. HIHs are separate hospitals located in space
leased from, and located in or on the same campus of, another
hospital. We refer to such other hospitals as host
hospitals.
Effective for hospital cost reporting periods beginning on or
after October 1, 2004, the final regulations, subject to
certain exceptions, provide lower rates of reimbursement to HIHs
for those Medicare patients admitted from their host hospitals
that are in excess of a specified percentage threshold. For HIHs
opened after October 1, 2004, the Medicare admissions
threshold has been established at 25% except for HIHs located in
rural areas or co-located with 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
August 11, 2004 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.
For HIHs that meet specified criteria and were in existence as
of October 1, 2004, including all but two of our then
existing grandfathered HIHs, the Medicare admissions thresholds
were phased in over a four year period starting with hospital
cost reporting periods beginning on or after October 1,
2004, as follows: (1) for discharges during the cost
reporting period beginning on or after October 1, 2004 and
before October 1, 2005, the Medicare admissions threshold
was the Fiscal 2004 Percentage (as defined below) of
Medicare discharges admitted from the host hospital;
(2) for discharges during the cost reporting period
beginning on or after October 1, 2005 and before
October 1, 2006, the Medicare admissions threshold was the
lesser of the Fiscal 2004 Percentage of Medicare discharges
admitted from the host hospital or 75%; (3) for discharges
during the cost reporting period beginning on or after
October 1, 2006 and before October 1, 2007, the
Medicare admissions threshold was the lesser of the Fiscal
2004 Percentage of Medicare discharges admitted from the
host hospital or 50%; and (4) for discharges during cost
reporting periods beginning on or after October 1, 2007,
the Medicare admissions threshold is 25%.
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) has limited
the application of the Medicare admission threshold on HIHs in
existence on October 1, 2004 and subject to the four year
phase in described above. For these HIHs, the admission
threshold is no lower than 50% for a three year period to
commence on a long term acute care hospitals, or
LTCHs, 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 three 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 three 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. In the 2008 rate year final rule,
CMS applied the
30
Medicare admissions threshold to admissions to grandfathered
HIHs and grandfathered satellites from co-located hospitals. The
SCHIP Extension Act delays application of the admissions
threshold on grandfathered HIHs for a three year period
commencing on the first cost reporting period beginning on or
after July 1, 2007. The ARRA limits application of the
admission 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. As of December 31,
2009, we owned 65 LTCH HIHs; four of these HIHs were subject to
a maximum 25% Medicare admission threshold, 19 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%, 38 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.
With respect to any HIH, Fiscal 2004 Percentage
means the percentage of all Medicare patients discharged by such
HIH during its cost reporting period beginning on or after
October 1, 2003 and before October 1, 2004 who were
admitted to such HIH from its host hospital. In no event,
however, is the Fiscal 2004 Percentage less than 25%.
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 three year moratorium provided by the SCHIP Extension
Act, we expect many of our HIHs will experience an adverse
financial impact beginning for their cost reporting periods on
or after October 1, 2010, when the Medicare admissions
thresholds decline to 25%.
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.
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. On May 1, 2007, CMS
published its annual payment rate update for the 2008 LTCH-PPS
rate year, or RY 2008. We refer to such rate update as the May
2007 final rule. The May 2007 final rule makes several changes
to LTCH-PPS payment methodologies and amounts during RY 2008. As
described below, however, many of these changes have been
postponed for a three year period by the SCHIP Extension Act.
For cost reporting periods beginning on or after July 1,
2007, the May 2007 final rule expanded the 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 May
2007 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 LTCHs or LTCH satellite
facilitys 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 three year period commencing on an
LTCHs 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 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.
Of the 88 long term acute care hospitals we owned as of
December 31, 2009, 23 were operated as free-standing
hospitals and two qualified as grandfathered LTCH HIHs. Because
these rules are complex and are based on the
31
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
May 2007 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, 2010 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, expand into new areas or increase services in existing
areas we serve.
The SCHIP Extension Act imposed a three 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,
expand into new areas or increase bed capacity in existing areas
we serve.
Government
implementation of recent changes to Medicares method of
reimbursing our long term acute care hospitals will reduce our
future net operating revenues and profitability.
The May 2007 final rule changed 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 each
long term care diagnosis-related group, or LTC-DRG
(also referred to as short-stay outlier or
SSO cases). Under this methodology, as a
patients length of stay increases, the percentage of the
per diem amount based upon the IPPS component decreases and the
percentage based on the LTC-DRG component increases. For the
three year period beginning on December 29, 2007, the SCHIP
Extension Act delays the SSO policy changes made in the May 2007
final rule. In an interim final rule dated May 6, 2008, CMS
revised the regulations to provide that the change in the SSO
policy adopted in the RY 2008 annual payment update does not
apply for a three year period beginning with discharges
occurring on or after December 29, 2007 and before
December 29, 2010. The implementation of the payment
methodology for short-stay outliers discharged after
December 29, 2010 will reduce our future net operating
revenues and profitability.
A long term acute care hospital is paid a pre-determined fixed
amount for Medicare patients under LTCH-PPS depending upon the
LTC-DRG to which each patient is assigned. LTCH-PPS includes
special payment policies that adjust the payments for some
patients based on a variety of factors. On May 12, 2006,
CMS published its final annual payment rate updates for the 2007
LTCH-PPS rate year. The May 2006 final rule made several changes
to LTCH-PPS payment methodologies and amounts. For discharges
occurring on or after July 1, 2006, the rule changed the
payment methodology for SSO cases. Payment for these patients
was previously 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 patients length of stay or
(3) the full LTC-DRG payment. The May 2006 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 final rule also added a fourth limitation, capping
payment for SSO cases at a per diem rate derived from blending
120% of the LTC-DRG specific per diem amount with a per diem
rate based on the general acute care hospital IPPS. Under this
methodology, as a patients length of stay increases, the
percentage of the per diem amount based upon the IPPS component
decreases and the percentage based on the LTC-DRG component
increases.
On May 1, 2007, CMS published its final annual payment rate
updates for the 2008 LTCH-PPS rate year. The May 2007 final rule
further revised the payment adjustment for SSO cases. Beginning
with discharges on or after July 1, 2007, for cases with a
length of stay that is less than the average length of stay plus
one standard deviation for
32
the same diagnosis-related group, or DRG, under
IPPS, referred to as the so-called IPPS comparable
threshold, the rule effectively lowered the LTCH payment
to a rate based on the general acute care hospital IPPS. SSO
cases with covered lengths of stay that exceed the IPPS
comparable threshold would continue to be paid under the SSO
payment policy described above under the May 2006 final rule.
Cases with a covered length of stay less than or equal to the
IPPS comparable threshold and less than five-sixths of the
geometric average length of stay for that LTC-DRG are paid at an
amount comparable to the IPPS per diem. As previously stated,
the SCHIP Extension Act delays the SSO policy changes made in
the May 2007 final rule for the three year period beginning on
December 29, 2007.
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 89 long term acute care hospitals, 88 of which are
currently certified by Medicare as long term acute care
hospitals and one which is in its demonstration period. 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 Commissions recommendation, CMS awarded a
contract to Research Triangle Institute International to examine
such recommendation. However, while acknowledging that Research
Triangle Institute Internationals findings are expected to
have a substantial impact on future Medicare policy for LTCHs,
CMS stated in the May 2006 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 RY 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 Commissions June 2004
report to Congress. Implementation of additional criteria that
may 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 revenues and
profitability. See Business Government
Regulations Overview of U.S. and State
Government Reimbursements Long Term Acute Care
Hospital Medicare Reimbursement.
33
Implementation
of modifications to the admissions policies of our inpatient
rehabilitation facilities as required in order to achieve
compliance with Medicare regulations may result in a reduction
of patient volume at these hospitals and, as a result, may
reduce our future net operating revenues and
profitability.
We operate six acute medical rehabilitation hospitals, all of
which are currently certified by Medicare as inpatient
rehabilitation facilities, or IRFs. In order for
these facilities to be eligible for payment under the IRF
prospective payment system (IRF-PPS) for services
provided to Medicare patients, each IRF must establish that,
during its most recent
12-month
cost reporting period, it served an inpatient population
requiring intensive rehabilitation services. In particular, for
cost reporting periods beginning on or after July 1, 2005,
at least 60% of an IRFs inpatient population must require
intensive rehabilitation services for treatment of one or more
of 13 specific conditions with specified comorbidities counting
toward this threshold.
In order to comply with Medicare inpatient rehabilitation
facility certification criteria, it may be necessary for us to
implement more restrictive admissions policies at our inpatient
rehabilitation facilities and not admit patients whose diagnoses
fall outside the specified conditions. Such policies may result
in a reduction of patient volume at these hospitals and, as a
result, may reduce our future net operating revenues and
profitability. See Business Government
Regulations.
Decreases
in Medicare reimbursement rates received by our outpatient
rehabilitation clinics or implementation of annual caps that
limit the amount that can be paid for outpatient therapy
services rendered to any Medicare beneficiary 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. If no further legislation is
passed by Congress and signed by the President, the SGR formula
will reduce our Medicare outpatient rehabilitation payment rates
by approximately 21.2% beginning April 1, 2010.
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 Temporary Extension Act of 2010 extended the
exception process through March 31, 2010. The exception
process will expire on April 1, 2010 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. For
the years ended December 31, 2008 and December 31,
2009, we received approximately 9.5% and 9.7%, respectively, 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 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
34
law in February of 2009, enhanced the privacy, security and
enforcement provisions of 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 the Health
Insurance Portability and Accountability Act of 1996 or the
Health Information Technology for Economic and Clinical Health
Act could result in civil or criminal penalties.
In addition to HIPPA, 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. The Federal Trade Commission issued so-called Red
Flag regulations aimed at preventing and detecting
identity theft, which are expected to become effective soon.
Lawsuits, including class actions and action by state attorneys
general, directed at companies that have experienced a privacy
or security breach are becoming more common.
We have developed a comprehensive set of policies and procedures
in our efforts to comply with the Health Insurance Portability
and Accountability Act of 1996 and other privacy laws. Our
compliance officers and information security officers 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 the Health
Insurance Portability and Accountability Act of 1996 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. 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. Acquisitions or
joint ventures involve numerous risks, including:
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difficulty and expense of integrating acquired personnel into
our business;
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35
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diversion of managements time from existing operations;
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potential loss of key employees or customers of acquired
companies; and
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assumption of the liabilities and exposure to unforeseen
liabilities of acquired companies, including liabilities for
failure to comply with healthcare regulations.
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We cannot assure you that we will succeed in obtaining financing
for acquisitions or joint ventures at a reasonable cost, or that
such financing will not contain restrictive covenants that limit
our operating flexibility. We also may be unable to operate
acquired hospitals and outpatient rehabilitation clinics
profitably or succeed in achieving improvements in their
financial performance.
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,
42 U.S.C. § 1395nn, 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 current law, physicians who have a
direct or indirect ownership interest in a hospital will not be
prohibited from referring to the hospital because of the
applicability of the whole hospital exception to the
Stark Law. Various bills recently introduced in Congress have
included provisions that further restrict physician ownership in
hospitals to which the physician refers patients. These
provisions would typically limit the Stark Laws
whole hospital exception to existing hospitals with
physician ownership. Physicians with ownership in
new hospitals would be prohibited from referring to
that hospital. Certain requirements and limitations would also
be placed on existing hospitals with physician ownership, such
as limiting the expansion of any such hospital and limiting the
amount and terms of physician investment. Furthermore,
initiatives are underway in some states to restrict physician
referrals to physician-owned hospitals. Currently, nine of our
hospitals have physicians as minority owners. The aggregate
revenue of these nine hospitals was $172.6 million for the
year ended December 31, 2009, or approximately 7.7% of our
revenues for the year ended December 31, 2009. The range of
physician minority ownership of these nine hospitals was 2.1% to
49.0%, with the average physician minority ownership of 10.7% as
of the year ended December 31, 2009. 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, or considered investing 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
36
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 four key employees, Rocco A. Ortenzio, our
Executive Chairman, Robert A. Ortenzio, our Chief Executive
Officer, Patricia A. Rice, our President and Chief Operating
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 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.
37
Significant
legal actions as well as the cost and possible lack of available
insurance could subject us to substantial uninsured
liabilities.
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.
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 are generally
subject to a self-insured retention of $2.0 million per
medical incident for professional liability claims and
$2.0 million per occurrence for general liability claims.
We review our insurance program annually and may make
adjustments to the amount of insurance coverage and self-insured
retentions in future years. In recent years, many insurance
underwriters have become more selective in the insurance limits
and types of coverage they will provide as a result of rising
settlement costs. Insurance underwriters, in some instances,
will no longer underwrite risk in certain states that have a
history of high medical malpractice awards. 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
42.4% and 8.0%, respectively, of our outstanding common stock as
of March 1, 2010. Our executives, directors and principal
stockholders, including Welsh Carson and Thoma Cressey,
beneficially own, in the aggregate, approximately 67.3% of our
outstanding common stock as of March 1, 2010. 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 subsidiarys creditors,
including lenders under our senior secured credit facility and
holders of Selects
75/8% senior
subordinated notes. Holdings total consolidated balance
sheet liabilities as of December 31, 2009 were
$1,832.7 million, of which $1,405.6 million
constituted indebtedness, including $483.1 million of
indebtedness (excluding $30.7 million of letters of credit)
under our senior secured credit facility, $611.5 million of
Selects
38
75/8% senior
subordinated notes, $137.3 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 $269.3 million 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 Selects
75/8% 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, 2009, we had approximately
$1,405.6 million of total indebtedness. For the years ended
December 31, 2008 and December 31, 2009, we paid cash
interest of $135.8 million and $126.7 million,
respectively on our indebtedness.
Our indebtedness could have important consequences to you. For
example, it:
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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;
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increases our vulnerability to adverse general economic or
industry conditions;
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limits our flexibility in planning for, or reacting to, changes
in our business or the industries in which we operate;
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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;
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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
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places us at a competitive disadvantage compared to our
competitors that have less indebtedness.
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See Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
39
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 December 31, 2009, 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, 2009, 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 5.00 to 1.00. For the four quarters ended December 31,
2009, Selects interest expense coverage ratio was 2.58 to
1.00 and Selects leverage ratio was 3.11 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 Selects
75/8% 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 Selects
75/8% 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, 2009, we had
$269.3 million of revolving loan availability under our
senior secured credit facility (after giving effect to
$30.7 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 terminates 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 February 24, 2011.
We anticipate refinancing at least a portion of the indebtedness
under our senior secured credit facility within the next twelve
months, which includes entering into a new revolving credit
facility on or before the termination of our current revolving
credit facility on February 24, 2011. There can be no
assurance that we will be successful in our effort to enter into
a new revolving credit facility
and/or
refinance indebtedness under our senior secured credit facility
in the future. Many lenders have been adversely impacted by
recent events in the United States and international financial
markets and, as a result, have ceased or reduced the amount of
lending they have made available to borrowers. While we expect
there to be alternatives available to us to enter into a new
revolving credit facility
and/or
refinance our indebtedness under our senior secured credit
facility, we cannot assure you that any of these alternatives
will be successfully implemented.
We depend on our revolving credit facility to meet our cash
requirements to operate our business. If we repay our revolving
credit facility upon its termination and are unable to enter
into a new revolving credit facility on terms acceptable to us,
or at all, we may be forced to reduce our operations and may not
be able to respond to changing business conditions or
competitive pressures. As a result, our business, operating
results and financial condition could be adversely affected.
40
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. We cannot assure you that we will be able to
refinance indebtedness under our senior secured credit facility
on terms acceptable to us, if at all. 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
Selects
75/8% 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, Selects
75/8% 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.
We are
exposed to the credit risk of our payors which in the future may
cause us to make larger allowances for doubtful accounts or
incur bad debt write-offs.
In the future, due to deteriorating economic conditions or other
factors commercial payors may default on their payments to us,
and individual patients may default on co-payments and
deductibles for which they are responsible under the terms of
either commercial insurance programs or Medicare. Although we
review the credit risk of our commercial payors regularly, such
risks will nevertheless arise from events or circumstances that
are difficult to anticipate or control, such as a general
economic downturn. As a result of the credit risk exposure of
our payors defaulting on their payments to us in the future, we
may have to make larger allowances for doubtful accounts or
incur bad debt write-offs, both of which may have an adverse
impact on our profitability.
Adverse
economic conditions could materially adversely affect our net
operating revenues in our outpatient rehabilitation segment from
commercial payors.
Our net operating revenues may be materially adversely affected
by adverse conditions in the general economy that could reduce
the frequency of visits by patients of our outpatient
rehabilitation clinics. While we believe that patient demand for
the services provided by our outpatient rehabilitation clinics
will not generally be impacted by the current state of the
general economy, adverse economic conditions may result in some
patients with commercial insurance electing to defer treatment
or decrease the frequency of visits to our outpatient
rehabilitation clinics in order to minimize their copay
obligations. This could have a material adverse effect on the
amount of our net operating revenues in our outpatient
rehabilitation segment from commercial payors.
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Item 1B.
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Unresolved
Staff Comments.
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None.
We currently lease most of our facilities, including clinics,
offices, specialty hospitals and our corporate headquarters. We
own three of our inpatient rehabilitation facilities and 12 of
our long term acute care hospitals.
We lease all but four of our outpatient rehabilitation clinics
and related offices, which, as of December 31, included 879
leased outpatient rehabilitation clinics throughout the United
States. The outpatient rehabilitation clinics generally have a
five year lease term and include options to renew. We also lease
the majority of our long term acute care hospital facilities
except for the facilities described above. As of
December 31, 2009, in our LTCHs we had 65 hospital within
hospital leases and 11 free-standing building leases.
We generally seek a five year lease for our long term acute care
hospitals operated as HIHs, with an additional five year renewal
at our option. 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, 2009, this was
comprised of 10 locations throughout the United States with
approximately 82,018 square feet in total.
41
The following is a list of our hospitals and the number of beds
at each hospital as of December 31, 2009.
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Hospital Name
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City
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State
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Beds
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Select Specialty Hospital Birmingham
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Birmingham
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AL
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38
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Select Specialty Hospital Fort Smith
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Fort Smith
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AR
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32
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Select Specialty Hospital Little Rock
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Little Rock
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AR
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43
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Select Specialty Hospital Arizona (Phoenix Downtown
Campus)
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Phoenix
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AZ
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33
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Select Specialty Hospital Phoenix
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Phoenix
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AZ
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48
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Select Specialty Hospital Arizona (Scottsdale Campus)
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Scottsdale
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AZ
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29
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Select Specialty Hospital Colorado Springs
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Colorado Springs
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CO
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30
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Select Specialty Hospital Denver
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Denver
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CO
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37
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Select Specialty Hospital Denver (South Campus)
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Denver
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CO
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28
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Select Specialty Hospital Wilmington
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Wilmington
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DE
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35
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Select Specialty Hospital Orlando (South Campus)
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Edgewood
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FL
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40
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Select Specialty Hospital Gainesville
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Gainesville
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FL
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44
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Select Specialty Hospital Palm Beach
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Lake Worth
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FL
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60
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Select Specialty Hospital Miami
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Miami
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FL
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47
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Select Specialty Hospital Orlando (North Campus)
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Orlando
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FL
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35
|
|
Select Specialty Hospital Panama City
|
|
Panama City
|
|
FL
|
|
|
30
|
|
Select Specialty Hospital Pensacola
|
|
Pensacola
|
|
FL
|
|
|
54
|
|
Select Specialty Hospital Tallahassee
|
|
Tallahassee
|
|
FL
|
|
|
29
|
|
Select Specialty Hospital Atlanta
|
|
Atlanta
|
|
GA
|
|
|
27
|
|
Select Specialty Hospital Augusta
|
|
Augusta
|
|
GA
|
|
|
80
|
|
Select Specialty Hospital Savannah
|
|
Savannah
|
|
GA
|
|
|
36
|
|
Select Specialty Hospital Quad Cities
|
|
Davenport
|
|
IA
|
|
|
50
|
|
Select Specialty Hospital Beech Grove
|
|
Beech Grove
|
|
IN
|
|
|
40
|
|
Select Specialty Hospital Evansville
|
|
Evansville
|
|
IN
|
|
|
60
|
|
Select Specialty Hospital Fort Wayne
|
|
Fort Wayne
|
|
IN
|
|
|
32
|
|
Select Specialty Hospital Northwest Indiana
|
|
Hammond
|
|
IN
|
|
|
70
|
|
Select Specialty Hospital Kansas City
|
|
Overland Park
|
|
KS
|
|
|
40
|
|
Select Specialty Hospital Topeka
|
|
Topeka
|
|
KS
|
|
|
34
|
|
Select Specialty Hospital Wichita
|
|
Wichita
|
|
KS
|
|
|
60
|
|
Select Specialty Hospital Lexington
|
|
Lexington
|
|
KY
|
|
|
41
|
|
Select Specialty Hospital Northwest Detroit
|
|
Detroit
|
|
MI
|
|
|
36
|
|
Select Specialty Hospital Flint
|
|
Flint
|
|
MI
|
|
|
26
|
|
Select Specialty Hospital Grosse Pointe
|
|
Grosse Pointe Farms
|
|
MI
|
|
|
30
|
|
Select Specialty Hospital Kalamazoo
|
|
Kalamazoo
|
|
MI
|
|
|
25
|
|
Select Specialty Hospital Macomb County
|
|
Mount Clemens
|
|
MI
|
|
|
36
|
|
Great Lakes Specialty Hospital Hackley, LLC
|
|
Muskegon
|
|
MI
|
|
|
31
|
|
Great Lakes Specialty Hospital Oak, LLC
|
|
Muskegon
|
|
MI
|
|
|
20
|
|
Select Specialty Hospital Pontiac
|
|
Pontiac
|
|
MI
|
|
|
30
|
|
Select Specialty Hospital Saginaw
|
|
Saginaw
|
|
MI
|
|
|
32
|
|
Select Specialty Hospital Downriver
|
|
Taylor
|
|
MI
|
|
|
40
|
|
Select Specialty Hospital Ann Arbor
|
|
Ypsilanti
|
|
MI
|
|
|
36
|
|
Select Specialty Hospital Western Missouri
|
|
Kansas
|
|
MO
|
|
|
34
|
|
Select Specialty Hospital Springfield
|
|
Springfield
|
|
MO
|
|
|
44
|
|
Select Specialty Hospital St. Louis
|
|
St. Louis
|
|
MO
|
|
|
33
|
|
SSM Select Rehab St. Louis, LLC
|
|
St. Louis
|
|
MO
|
|
|
60
|
|
Select Specialty Hospital Gulfport
|
|
Gulfport
|
|
MS
|
|
|
61
|
|
Select Specialty Hospital Jackson
|
|
Jackson
|
|
MS
|
|
|
53
|
|
Select Specialty Hospital Durham
|
|
Durham
|
|
NC
|
|
|
30
|
|
Select Specialty Hospital Greensboro
|
|
Greensboro
|
|
NC
|
|
|
30
|
|
Select Specialty Hospital Winston-Salem
|
|
Winston-Salem
|
|
NC
|
|
|
42
|
|
42
|
|
|
|
|
|
|
|
|
Hospital Name
|
|
City
|
|
State
|
|
Beds
|
|
Select Specialty Hospital Omaha (Central Campus)
|
|
Omaha
|
|
NE
|
|
|
52
|
|
Kessler Institute for Rehabilitation (Welkind Campus)
|
|
Chester
|
|
NJ
|
|
|
72
|
|
Select Specialty Hospital Northeast New Jersey
|
|
Rochelle Park
|
|
NJ
|
|
|
59
|
|
Kessler Institute for Rehabilitation (North Campus)
|
|
Saddle Brook
|
|
NJ
|
|
|
112
|
|
Kessler Institute for Rehabilitation (West Campus)
|
|
West Orange
|
|
NJ
|
|
|
143
|
|
Select Specialty Hospital Akron
|
|
Akron
|
|
OH
|
|
|
60
|
|
Select Specialty Hospital Northeast Ohio (Canton
Campus)
|
|
Canton
|
|
OH
|
|
|
30
|
|
Select Specialty Hospital Cincinnati
|
|
Cincinnati
|
|
OH
|
|
|
35
|
|
Select Specialty Hospital Columbus
|
|
Columbus
|
|
OH
|
|
|
152
|
|
Select Specialty Hospital Columbus (Mt. Carmel
Campus)
|
|
Columbus
|
|
OH
|
|
|
24
|
|
Select Specialty Hospital Youngstown
|
|
Youngstown
|
|
OH
|
|
|
31
|
|
Select Specialty Hospital Youngstown (Boardman
Campus)
|
|
Youngstown
|
|
OH
|
|
|
20
|
|
Select Specialty Hospital Zanesville
|
|
Zanesville
|
|
OH
|
|
|
35
|
|
Select Specialty Hospital Oklahoma City
|
|
Oklahoma City
|
|
OK
|
|
|
72
|
|
Select Specialty Hospital Tulsa/Midtown
|
|
Tulsa
|
|
OK
|
|
|
56
|
|
Select Specialty Hospital Central Pennsylvania (Camp
Hill Campus)
|
|
Camp Hill
|
|
PA
|
|
|
31
|
|
Select Specialty Hospital Danville
|
|
Danville
|
|
PA
|
|
|
30
|
|
Select Specialty Hospital Erie
|
|
Erie
|
|
PA
|
|
|
50
|
|
Penn State Hershey Rehabilitation
|
|
Harrisburg
|
|
PA
|
|
|
32
|
|
Select Specialty Hospital Central Pennsylvania
(Harrisburg Campus)
|
|
Harrisburg
|
|
PA
|
|
|
38
|
|
Select Specialty Hospital Johnstown
|
|
Johnstown
|
|
PA
|
|
|
39
|
|
Select Specialty Hospital Laurel Highlands
|
|
Latrobe
|
|
PA
|
|
|
40
|
|
Select Specialty Hospital McKeesport
|
|
McKeesport
|
|
PA
|
|
|
30
|
|
Select Specialty Hospital Pittsburgh
|
|
Pittsburgh
|
|
PA
|
|
|
32
|
|
Select Specialty Hospital Central Pennsylvania (York
Campus)
|
|
York
|
|
PA
|
|
|
23
|
|
Select Specialty Hospital Sioux Falls
|
|
Sioux Falls
|
|
SD
|
|
|
21
|
|
Select Specialty Hospital
Tri-Cities
|
|
Bristol
|
|
TN
|
|
|
33
|
|
Select Specialty Hospital Knoxville
|
|
Knoxville
|
|
TN
|
|
|
35
|
|
Select Specialty Hospital North Knoxville
|
|
Knoxville
|
|
TN
|
|
|
33
|
|
Select Specialty Hospital Memphis
|
|
Memphis
|
|
TN
|
|
|
38
|
|
Select Specialty Hospital Nashville
|
|
Nashville
|
|
TN
|
|
|
47
|
|
Select Specialty Hospital Dallas/Ft Worth
|
|
Carrolton
|
|
TX
|
|
|
60
|
|
Rehabilitation Institute of Denton, LLC
|
|
Denton
|
|
TX
|
|
|
44
|
|
Select Specialty Hospital South Dallas
|
|
DeSoto
|
|
TX
|
|
|
100
|
|
Select Specialty Hospital Houston (Houston Heights)
|
|
Houston
|
|
TX
|
|
|
135
|
|
Select Specialty Hospital Houston (Houston Medical
Center)
|
|
Houston
|
|
TX
|
|
|
86
|
|
Select Specialty Hospital Houston (Houston West)
|
|
Houston
|
|
TX
|
|
|
56
|
|
Select Specialty Hospital Longview
|
|
Longview
|
|
TX
|
|
|
30
|
|
Select Specialty Hospital Midland
|
|
Midland
|
|
TX
|
|
|
29
|
|
Select Specialty Hospital San Antonio
|
|
San Antonio
|
|
TX
|
|
|
44
|
|
Select Specialty Hospital Madison
|
|
Madison
|
|
WI
|
|
|
58
|
|
Select Specialty Hospital Milwaukee
|
|
Milwaukee
|
|
WI
|
|
|
34
|
|
Select Specialty Hospital Milwaukee (St Lukes
Campus)
|
|
Milwaukee
|
|
WI
|
|
|
29
|
|
Select Specialty Hospital Charleston
|
|
Charleston
|
|
WV
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total Beds:
|
|
|
|
|
|
|
4,233
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 3.
|
Legal
Proceedings.
|
To cover claims arising out of the operations of the
Companys 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 Companys 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.
43
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 Companys
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 Companys financial relationships with certain
physicians practicing at its hospitals in Columbus, Ohio. The
Company does not know whether the subpoena has been issued in
connection with a qui tam lawsuit or in connection with possible
civil, criminal or administrative proceedings by the government.
The Company has produced documents in response to the subpoena
and intends to fully cooperate with this investigation. At this
time, the Company is unable to predict the timing and outcome of
this matter.
PART II
|
|
Item 5.
|
Market
for Registrants 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
|
|
Holders
At the close of business on March 1, 2010, we had
160,005,236 shares of common stock issued and outstanding.
As of that date, there were 143 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.
44
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.
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 Companys initial
public offering was priced for initial sale, through and
including the market close on December 31, 2009, with the
cumulative total return of the same time period on the same
amount invested in the Standard & Poors 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/25/2009
|
|
|
9/30/2009
|
|
|
10/30/2009
|
|
|
11/30/2009
|
|
|
12/31/2009
|
Select Medical Holdings Corporation (SEM)
|
|
|
$
|
100.00
|
|
|
|
$
|
100.70
|
|
|
|
$
|
97.00
|
|
|
|
$
|
90.50
|
|
|
|
$
|
106.20
|
|
Morgan Stanley Healthcare Provider Index (RXH)
|
|
|
|
100.00
|
|
|
|
|
102.31
|
|
|
|
|
97.41
|
|
|
|
|
93.78
|
|
|
|
|
102.32
|
|
S&P 500
|
|
|
|
100.00
|
|
|
|
|
100.72
|
|
|
|
|
98.73
|
|
|
|
|
104.40
|
|
|
|
|
106.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Sales of Unregistered Securities
The following is a summary of our transactions during the year
ended December 31, 2009, involving sales of our securities
that were not registered under the Securities Act of 1933, as
amended:
On March 3, 2009, we granted to an employee options to
purchase an aggregate of 15,000 shares of our common stock
under the Select Medical Holdings Corporation 2005 Equity
Incentive Plan, as amended and restated (2005 Equity
Incentive Plan), at an exercise price of $10.00 per share.
The stock options described above were made under written
compensatory plans or agreements in reliance on the exemption
from registration pursuant to Rule 701 under the Securities
Act or pursuant to Section 4(2) of the Securities Act.
From March 16, 2009 through June 24, 2009, we sold and
issued to our employees an aggregate of 2,880 shares of our
common stock pursuant to option exercises under our 2005 Equity
Incentive Plan at a price of $8.33 per share for an aggregate
purchase price of $24,000. The issuance of common stock
described above was made under written compensatory plans or
agreements in reliance on the exemption from registration
pursuant to Rule 701 under the Securities Act or pursuant
to Section 4(2) of the Securities Act.
45
On August 12, 2009, we granted to our non-employee
directors options to purchase an aggregate of 12,000 shares
of our common stock under the Select Medical Holdings
Corporation 2005 Equity Incentive Plan for Non-Employee
Directors, as amended and restated, at an exercise price of
$10.00 per share. The stock options described above were made
under written compensatory plans or agreements in reliance on
the exemption from registration pursuant to Rule 701 under
the Securities Act or pursuant to Section 4(2) of the
Securities Act.
On August 12, 2009, we awarded to certain of our employees
an aggregate of 363,608 shares of our restricted common
stock under our 2005 Equity Incentive Plan. These shares vested
upon the consummation of our initial public offering. The awards
of restricted common stock described above were made under
written compensatory plans or agreements in reliance on the
exemption from registration pursuant to Rule 701 under the
Securities Act or pursuant to Section 4(2) of the
Securities Act.
Use of
Proceeds from Sales of Registered Securities
On September 24, 2009, our registration statement on
Form S-1
originally filed on July 24, 2008 (File
No. 333-152514)
was declared effective, pursuant to which Holdings issued and
sold (1) 30,000,000 shares of common stock for
aggregate gross offering proceeds of $300.0 million at a
price to the public of $10.00 per share, which closed on
September 30, 2009, and (2) an additional
3,602,700 shares of common stock to the underwriters
pursuant to their over-allotment option for aggregate gross
offering proceeds of approximately $36.0 million at a price
to the public of $10.00 per share, which closed on
October 28, 2009. The managing underwriters were Goldman,
Sachs & Co., Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and J.P. Morgan Securities Inc.
We paid to the underwriters underwriting discounts and
commissions totaling approximately $20.2 million in
connection with the offering. In addition, we incurred
additional costs of approximately $3.3 million in
connection with the offering which, when added to the
underwriting discounts and commissions paid by Holdings,
resulted in total expenses of approximately $23.5 million
related to the offering. Accordingly, the net proceeds to
Holdings from the offering, after deducting underwriting
discounts and commissions and offering expenses, were
approximately $312.5 million. Except for the payments to
executive officers under our Long Term Cash Incentive Plan
described below, no amounts, including offering expenses, were
paid directly or indirectly to any of our directors or officers
(or their associates) or persons owning ten percent or more of
any class of Holdings equity securities or to any other
affiliates from the proceeds of the offering.
Holdings used the net proceeds from the offering to repay
indebtedness, to make payments to its executive officers under
our Long Term Cash Incentive Plan and for general corporate
purposes. There was no material change in the planned use of
proceeds from our initial public offering from that described in
the Prospectus filed on September 25, 2009 with the SEC
pursuant to Rule 424(b) of the Securities Act of 1933, as
amended.
|
|
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
Managements Discussion and Analysis of Financial
Condition and Results of Operations, which is contained
elsewhere herein. The historical financial data as of
December 31, 2005, 2006, 2007, 2008 and 2009 and for the
period from January 1 through February 24, 2005
(Predecessor Period), for the period from February 25 through
December 31, 2005 and for the years ended December 31,
2006, 2007, 2008 and 2009 (Successor Period) 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, 2008 and 2009, and for the years
ended December 31, 2007, 2008 and 2009 have been derived
from our consolidated financial information included elsewhere
herein. The selected historical consolidated financial data as
of December 31, 2005, 2006 and 2007 and for the period from
January 1 through February 24, 2005 (Predecessor Period),
and for the period from February 25 through December 31,
2005 and for the year ended December 31, 2006 (Successor
Period) have been derived from our audited consolidated
financial information not included elsewhere herein.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical Holdings Corporation
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
Period
|
|
|
|
Successor Period
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2005(1)
|
|
|
|
2005(1)(2)
|
|
|
2006(1)(2)
|
|
|
2007(1)(2)
|
|
|
2008(1)(2)
|
|
|
2009
|
|
|
|
(In thousands,
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
except
|
|
|
|
|
|
|
|
|
|
|
per share data)
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
277,736
|
|
|
|
$
|
1,580,706
|
|
|
$
|
1,851,498
|
|
|
$
|
1,991,666
|
|
|
$
|
2,153,362
|
|
|
$
|
2,239,871
|
|
Operating
expenses(3)(4)
|
|
|
373,418
|
|
|
|
|
1,322,068
|
|
|
|
1,546,956
|
|
|
|
1,740,484
|
|
|
|
1,885,168
|
|
|
|
1,933,052
|
|
Depreciation and amortization
|
|
|
5,933
|
|
|
|
|
37,922
|
|
|
|
46,668
|
|
|
|
57,297
|
|
|
|
71,786
|
|
|
|
70,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(101,615
|
)
|
|
|
|
220,716
|
|
|
|
257,874
|
|
|
|
193,885
|
|
|
|
196,408
|
|
|
|
235,838
|
|
Gain (loss) on early retirement of
debt(5)
|
|
|
(42,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
912
|
|
|
|
13,575
|
|
Merger related
charges(6)
|
|
|
(12,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
267
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
|
|
|
|
(632
|
)
|
Interest expense,
net(7)
|
|
|
(4,128
|
)
|
|
|
|
(101,441
|
)
|
|
|
(130,538
|
)
|
|
|
(138,052
|
)
|
|
|
(145,423
|
)
|
|
|
(132,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(160,237
|
)
|
|
|
|
120,367
|
|
|
|
127,336
|
|
|
|
55,666
|
|
|
|
51,897
|
|
|
|
116,404
|
|
Income tax expense (benefit)
|
|
|
(59,794
|
)
|
|
|
|
49,336
|
|
|
|
43,521
|
|
|
|
18,699
|
|
|
|
26,063
|
|
|
|
37,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(100,443
|
)
|
|
|
|
71,031
|
|
|
|
83,815
|
|
|
|
36,967
|
|
|
|
25,834
|
|
|
|
78,888
|
|
Income from discontinued operations, net of tax
|
|
|
522
|
|
|
|
|
3,072
|
|
|
|
12,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(99,921
|
)
|
|
|
|
74,103
|
|
|
|
96,633
|
|
|
|
36,967
|
|
|
|
25,834
|
|
|
|
78,888
|
|
Less: Net income attributable to non-controlling
interests(8)
|
|
|
330
|
|
|
|
|
1,776
|
|
|
|
1,754
|
|
|
|
1,537
|
|
|
|
3,393
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Select Medical Holdings
Corporation
|
|
|
(100,251
|
)
|
|
|
|
72,327
|
|
|
|
94,879
|
|
|
|
35,430
|
|
|
|
22,441
|
|
|
|
75,282
|
|
Less: Preferred dividends
|
|
|
|
|
|
|
|
23,519
|
|
|
|
22,663
|
|
|
|
23,807
|
|
|
|
24,972
|
|
|
|
19,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders and
participating securities
|
|
$
|
(100,251
|
)
|
|
|
$
|
48,808
|
|
|
$
|
72,216
|
|
|
$
|
11,623
|
|
|
$
|
(2,531
|
)
|
|
$
|
55,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.70
|
|
|
$
|
0.88
|
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
Income from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
0.05
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.75
|
|
|
$
|
1.06
|
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.70
|
|
|
$
|
0.88
|
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
Income from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
0.05
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.75
|
|
|
$
|
1.06
|
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
102,026
|
|
|
|
|
51,399
|
|
|
|
54,055
|
|
|
|
57,086
|
|
|
|
59,566
|
|
|
|
85,587
|
|
Diluted
|
|
|
102,026
|
|
|
|
|
51,399
|
|
|
|
54,055
|
|
|
|
57,086
|
|
|
|
59,566
|
|
|
|
86,045
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
$
|
35,861
|
|
|
$
|
81,600
|
|
|
$
|
4,529
|
|
|
$
|
64,260
|
|
|
$
|
83,680
|
|
Working capital
|
|
|
|
|
|
|
|
77,556
|
|
|
|
59,468
|
|
|
|
14,730
|
|
|
|
118,370
|
|
|
|
170,772
|
|
Total assets
|
|
|
|
|
|
|
|
2,168,385
|
|
|
|
2,182,524
|
|
|
|
2,495,046
|
|
|
|
2,579,469
|
|
|
|
2,602,233
|
|
Total debt
|
|
|
|
|
|
|
|
1,628,889
|
|
|
|
1,538,503
|
|
|
|
1,755,635
|
|
|
|
1,779,925
|
|
|
|
1,405,571
|
|
Total Select Medical Holdings Corporation stockholders
equity
|
|
|
|
|
|
|
|
(244,658
|
)
|
|
|
(169,139
|
)
|
|
|
(165,889
|
)
|
|
|
(174,204
|
)
|
|
|
738,988
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical Corporation
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
Period
|
|
|
|
Successor Period
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2005(1)
|
|
|
|
2005(1)
|
|
|
2006(1)
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
|
(In thousands)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
277,736
|
|
|
|
$
|
1,580,706
|
|
|
$
|
1,851,498
|
|
|
$
|
1,991,666
|
|
|
$
|
2,153,362
|
|
|
$
|
2,239,871
|
|
Operating
expenses(3)(4)
|
|
|
373,418
|
|
|
|
|
1,322,068
|
|
|
|
1,546,956
|
|
|
|
1,740,484
|
|
|
|
1,885,168
|
|
|
|
1,933,052
|
|
Depreciation and amortization
|
|
|
5,933
|
|
|
|
|
37,922
|
|
|
|
46,668
|
|
|
|
57,297
|
|
|
|
71,786
|
|
|
|
70,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(101,615
|
)
|
|
|
|
220,716
|
|
|
|
257,874
|
|
|
|
193,885
|
|
|
|
196,408
|
|
|
|
235,838
|
|
Gain (loss) on early retirement of
debt(5)
|
|
|
(42,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
912
|
|
|
|
12,446
|
|
Merger related
charges(6)
|
|
|
(12,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
267
|
|
|
|
|
3,018
|
|
|
|
1,366
|
|
|
|
(4,494
|
)
|
|
|
(2,802
|
)
|
|
|
3,204
|
|
Interest expense,
net(7)
|
|
|
(4,128
|
)
|
|
|
|
(82,985
|
)
|
|
|
(95,995
|
)
|
|
|
(103,394
|
)
|
|
|
(110,418
|
)
|
|
|
(99,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(160,237
|
)
|
|
|
|
140,749
|
|
|
|
163,245
|
|
|
|
85,997
|
|
|
|
84,100
|
|
|
|
152,037
|
|
Income tax expense (benefit)
|
|
|
(59,794
|
)
|
|
|
|
56,470
|
|
|
|
56,089
|
|
|
|
29,315
|
|
|
|
37,334
|
|
|
|
49,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(100,443
|
)
|
|
|
|
84,279
|
|
|
|
107,156
|
|
|
|
56,682
|
|
|
|
46,766
|
|
|
|
102,050
|
|
Income from discontinued operations, net of tax
|
|
|
522
|
|
|
|
|
3,072
|
|
|
|
12,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(99,921
|
)
|
|
|
|
87,351
|
|
|
|
119,974
|
|
|
|
56,682
|
|
|
|
46,766
|
|
|
|
102,050
|
|
Less: Net income attributable to non-controlling
interests(8)
|
|
|
330
|
|
|
|
|
1,776
|
|
|
|
1,754
|
|
|
|
1,537
|
|
|
|
3,393
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Select Medical Holdings
Corporation
|
|
$
|
(100,251
|
)
|
|
|
$
|
85,575
|
|
|
$
|
118,220
|
|
|
$
|
55,145
|
|
|
$
|
43,373
|
|
|
$
|
98,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
$
|
35,861
|
|
|
$
|
81,600
|
|
|
$
|
4,529
|
|
|
$
|
64,260
|
|
|
$
|
83,680
|
|
Working capital
|
|
|
|
|
|
|
|
88,354
|
|
|
|
70,957
|
|
|
|
9,169
|
|
|
|
100,127
|
|
|
|
167,318
|
|
Total assets
|
|
|
|
|
|
|
|
2,163,369
|
|
|
|
2,177,642
|
|
|
|
2,490,777
|
|
|
|
2,562,425
|
|
|
|
2,599,179
|
|
Total debt
|
|
|
|
|
|
|
|
1,322,280
|
|
|
|
1,230,718
|
|
|
|
1,446,525
|
|
|
|
1,469,322
|
|
|
|
1,100,987
|
|
Total Select Medical Corporation stockholders equity
|
|
|
|
|
|
|
|
506,165
|
|
|
|
614,002
|
|
|
|
624,171
|
|
|
|
630,315
|
|
|
|
1,037,064
|
|
|
|
|
(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 the repurchase of outstanding stock options in the
Predecessor Period from January 1 through February 24,
2005, compensation expense related to restricted stock, stock
options and long term incentive compensation in the Successor
Periods from February 25 through December 31, 2005, and for
the years ended December 31, 2006, 2007, 2008 and 2009.
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(5)
|
|
The loss in the Predecessor Period
of January 1 through February 24, 2005 consists of the
tender premium cost of $34.8 million and the remaining
write-off of unamortized deferred financing costs of
$7.9 million related to the tender offers for all of
Selects 91/2% senior subordinated notes due 2009 and
all of Selects 71/2% senior subordinated notes due
2013 completed in connection with the Merger. In the year ended
December 31, 2008, we paid approximately $1.0 million
to repurchase and retire a portion of Selects
75/8% senior subordinated notes. These notes had a carrying
value of $2.0 million.
|
48
|
|
|
|
|
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 Selects
75/8% 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.
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(6)
|
|
As a result of the Merger, Select
incurred costs in the Predecessor Period of January 1 through
February 24, 2005 directly related to the Merger. This
included the cost of the investment advisor hired by the special
committee of Selects board of directors to evaluate the
Merger, legal and accounting fees, costs associated with the
Hart-Scott-Rodino
filing relating to the Merger, the cost associated with
purchasing a six year extended reporting period under our
directors and officers liability insurance policy and other
associated expenses.
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(7)
|
|
Interest expense, net equals
interest expense minus interest income.
|
(8)
|
|
Reflects interests held by other
parties in subsidiaries, limited liability companies and limited
partnerships owned and controlled by us.
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49
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|
Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
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You should read this discussion together with the
Selected Financial Data and our consolidated
financial statements and the 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, 2009, we operated 89 long term acute care
hospitals and six acute medical rehabilitation hospitals in
25 states, and 961 outpatient rehabilitation clinics in
37 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 $2,239.9 million
for the year ended December 31, 2009. Of this total, we
earned approximately 70% of our net operating revenues from our
specialty hospitals and approximately 30% from our outpatient
rehabilitation business for the year ended December 31,
2009. 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 long term acute care hospitals from general acute care
hospitals. These patients have specialized needs, and serious
and often complex medical conditions such as respiratory
failure, neuromuscular disorders, traumatic brain and spinal
cord injuries, strokes, non-healing wounds, cardiac disorders,
renal disorders and cancer. Our outpatient rehabilitation
segment consists of clinics and contract services that provide
physical, occupational and speech rehabilitation services. Our
outpatient rehabilitation patients are typically diagnosed with
musculoskeletal impairments that restrict their ability to
perform normal activities of daily living.
Recent
Trends and Events
Initial
Public Offering of Common Stock
On September 30, 2009, we 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 proceed to us after deducting underwriting
discounts and commissions and offering expenses was
approximately $312.5 million. We used the proceeds from the
offering to repay $258.4 million of revolving and term
loans outstanding under our 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.
Summary
Financial Results
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.
Selects 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.
50
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 primarily relates to interest
payments on Holdings senior subordinated notes and senior
floating rate notes.
Year
Ended December 31, 2008
For the year ended December 31, 2008, our net operating
revenues increased 8.1% to $2,153.4 million compared to
$1,991.7 million for the year ended December 31, 2007.
This increase in net operating revenues resulted from a 7.4%
increase in our specialty hospital net operating revenue and a
10.2% increase in our outpatient rehabilitation net operating
revenue. The increase in our specialty hospital revenue was due
to increases in our discharge payment rates for Medicare and an
increase in our non-Medicare patient volume. The increase in our
outpatient rehabilitation net operating revenue was primarily
attributable to the net operating revenues generated by clinics
acquired from HealthSouth Corporation on May 1, 2007. We
had income from operations for the year ended December 31,
2008 of $196.4 million compared to $193.9 million for
the year ended December 31, 2007. Holdings interest
expense for the year ended December 31, 2008 was
$145.9 million compared to $140.2 million for the year
ended December 31, 2007. Selects interest expense for
the year ended December 31, 2008 was $110.9 million
compared to $105.5 million for the year ended
December 31, 2007. The increase in interest expense for
both Holdings and Select resulted from higher average debt
levels existing for the year ended December 31, 2008
resulting primarily from borrowings to finance the HealthSouth
transaction, offset by the effect of declining interest rates in
2008.
Cash flow from operations provided $107.4 million of cash
for the year ended December 31, 2008 for Holdings and
$140.2 million of cash for the year ended December 31,
2008 for Select. The difference primarily related to interest
payments on Holdings senior subordinated notes and senior
floating rate notes.
Regulatory
Changes
Medicare
Reimbursement of Long Term Acute Care Hospital
Services
In the last few years, there have been significant regulatory
changes affecting LTCHs that have affected our net operating
revenues and, in some cases, caused us to change our operating
models and strategies. The effective date of certain regulatory
changes that would otherwise have an adverse effect on us has
been suspended under a moratorium set to expire for cost
reporting periods beginning over the next year. The following is
a summary of some of the more significant healthcare regulatory
changes that have affected our financial performance in the past
or are likely to affect our financial performance in the future.
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, or IPPS, that
are typically proposed in May, finalized in August and effective
on 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 moves the LTCH-PPS from a
July-June update cycle to an October-September cycle. Beginning
fiscal year 2010 the LTCH rate year will begin October 1,
coinciding with the start of the federal fiscal year.
August 2004 Final Rule. On August 11,
2004, CMS published final regulations applicable to LTCHs that
are operated as hospital within hospitals or as
satellites. We collectively refer to hospital within
hospitals and satellites as HIHs, and we refer to
the CMS final regulations as the final regulations.
HIHs are separate hospitals located in space leased from, and
located in or on the same campus of, another hospital. We refer
to such other hospitals as host hospitals. Effective
for hospital cost reporting periods beginning on or after
October 1, 2004, subject to certain exceptions, the final
regulations provide lower rates of reimbursement to HIHs for
those Medicare patients admitted from their host hospitals that
are in excess of a specified percentage threshold. For HIHs
opened after October 1, 2004, the Medicare admissions
threshold has been established at 25% except for HIHs located in
rural hospitals, metropolitan statistical areas, or MSA
dominant hospitals or single urban hospitals where the
51
percentage is no more than 50%, nor less than 25%. For HIHs that
met specified criteria and were in existence as of
October 1, 2004, including all but two of our then existing
HIHs, the Medicare admissions thresholds were to have been
phased in over a four year period starting with hospital cost
reporting periods that began on or after October 1, 2004.
However, as described below, many of these changes have been
postponed for a three year period by the Medicare, Medicaid, and
SCHIP Extension Act of 2007, or SCHIP Extension Act,
and further clarified in the American Recovery and Reinvestment
Act of 2009, or ARRA.
August 2005 Final Rule. On August 12,
2005, CMS published the final rule for general acute care
hospitals IPPS, for fiscal year 2006, which included an update
of the relative weights for the long term care diagnosis-related
group, or LTC-DRG. CMS estimated the changes to the
relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 4.2% in fiscal year 2006 (the period from
October 1, 2005 through September 30, 2006).
May 2006 Final Rule. On May 12, 2006, CMS
published its final annual payment rate updates for the 2007
LTCH-PPS rate year (affecting discharges and cost reporting
periods beginning on or after July 1, 2006 and before
July 1, 2007), or RY 2007. The May 2006 final
rule revised the payment adjustment formula for short stay
outlier, or SSO, patients. For discharges occurring
on or after July 1, 2006, the rule changed 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 each SSO case. In addition, for discharges occurring on
or after July 1, 2006, the May 2006 final rule provided for
(1) a zero-percent update to the LTCH-PPS standard federal
rate used as a basis for LTCH-PPS payments for RY 2007;
(2) the elimination of the surgical case exception to the
three day or less interruption of stay policy, under which
surgical exception Medicare reimburses a general acute care
hospital directly for surgical services furnished to a long term
acute care hospital patient during a brief interruption of stay
from the long term acute care hospital, rather than requiring
the long term acute care hospital to bear responsibility for
such surgical services; and (3) increasing the costs that a
long term acute care hospital must bear before Medicare will
make additional payments for a case under its high-cost outlier
policy for RY 2007. CMS estimated that the changes in the May
2006 final rule would result in an approximately 3.7% decrease
in LTCH Medicare
payments-per-discharge
compared to the 2006 rate year, largely attributable to the
revised SSO payment methodology.
August 2006 Final Rule. On August 18,
2006, CMS published the IPPS final rule for fiscal year 2007,
which is the period from October 1, 2006 through
September 30, 2007, that included an update of the LTC-DRG
relative weights for fiscal year 2007. CMS estimated the changes
to the relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 1.3% in fiscal year 2007. The August 2006 final
rule also included changes to the diagnosis-related groups, or
DRGs, in IPPS that apply to LTCHs, as the LTC-DRGs
were based on the IPPS DRGs.
May 2007 Final Rule. On May 1, 2007, CMS
published its annual payment rate update for the 2008 LTCH-PPS
rate year, or RY 2008 (affecting discharges and cost
reporting periods beginning on or after July 1, 2007 and
before July 1, 2008). The May 2007 final rule made several
changes to LTCH-PPS payment methodologies and amounts during RY
2008 although, as described below, many of these changes have
been postponed for a three year period by the SCHIP Extension
Act.
For cost reporting periods beginning on or after July 1,
2007, the May 2007 final rule expanded the Medicare HIH
admissions threshold to apply to Medicare patients admitted from
any individual hospital. Previously, the admissions threshold
was applicable only to Medicare HIH admissions from hospitals
co-located with an LTCH or satellite of an LTCH. Under the May
2007 final rule, free-standing LTCHs and grandfathered HIHs are
subject to the Medicare admission thresholds, as well as HIHs
and satellites that admit Medicare patients from non-co-located
hospitals. To the extent that any LTCHs or LTCH satellite
facilitys 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 are
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. CMS estimated the impact of the
expansion of the Medicare admission thresholds would result in a
reduction of 2.2% of the aggregate payments to all LTCHs in RY
2008.
52
The applicable percentage threshold is generally 25% after the
completion of the phase-in period described below. The
percentage threshold for LTCH discharges from a referring
hospital that is an MSA dominant hospital or a single urban
hospital is the percentage of total Medicare discharges in the
MSA that are from the referring hospital, but no less than 25%
nor more than 50%. For Medicare discharges from LTCHs or LTCH
satellites located in rural areas, as defined by the Office of
Management and Budget, the percentage threshold is 50% from any
individual referring hospital. The expanded 25% rule was phased
in over a three year period. The three year transition period
started with cost reporting periods beginning on or after
July 1, 2007 and before July 1, 2008, when the
threshold was the lesser of 75% or the percentage of the
LTCHs or LTCH satellites admissions discharged from
the referring hospital during its cost reporting period
beginning on or after July 1, 2004 and before July 1,
2005, or RY 2005. For cost reporting periods
beginning on or after July 1, 2008 and before July 1,
2009, the threshold was the lesser of 50% or the percentage of
the LTCHs or LTCH satellites admissions from the
referring hospital, during its RY 2005 cost reporting period.
For cost reporting periods beginning on or after July 1,
2009, all LTCHs were subject to the 25% threshold (or applicable
threshold for rural, urban-single, or MSA dominant hospitals).
The SCHIP Extension Act, as revised 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
LTCHs first cost reporting period on or after July 1,
2007. However, the SCHIP Extension Act did not postpone the
application of the percentage threshold, or the transition
period stated above, to those Medicare patients discharged from
an LTCH HIH or HIH satellite that were admitted from a
non-co-located hospital.
The May 2007 final rule further revised the payment adjustment
for SSO cases. Beginning with discharges on or after
July 1, 2007, for cases with a length of stay that is less
than the average length of stay plus one standard deviation for
the same DRG under IPPS, referred to as the so-called IPPS
comparable threshold, the rule effectively lowers the LTCH
payment to a rate based on the general acute care hospital IPPS.
SSO cases with covered lengths of stay that exceed the IPPS
comparable threshold would continue to be paid under the SSO
payment policy described above under the May 2006 final rule.
Cases with a covered length of stay less than or equal to the
IPPS comparable threshold and less than five-sixths of the
geometric average length of stay for that LTC-DRG are paid at an
amount comparable to the IPPS per diem. The SCHIP Extension Act
also postponed, for the three year period beginning on
December 29, 2007, the SSO policy changes made in the May
2007 final rule.
The May 2007 final rule updated the standard federal rate by
0.71% for RY 2008. As a result, the federal rate for RY 2008 is
equal to $38,356.45, compared to $38,086.04 for RY 2007.
Subsequently, the SCHIP Extension Act eliminated the update to
the standard federal rate that occurred for RY 2008 effective
April 1, 2008. This adjustment to the standard federal rate
was applied prospectively on April 1, 2008 and reduced the
federal rate back to $38,086.04. In a technical correction to
the May 2007 final rule, CMS increased the fixed-loss amount for
high cost outlier in RY 2008 to $20,738, compared to $14,887 in
RY 2007. CMS projected an estimated 0.4% decrease in LTCH
payments in RY 2008 due to this change in the fixed-loss amount
and the overall impact of the May 2007 final rule to be a 1.2%
decrease in total estimated LTCH-PPS payments for RY 2008.
The May 2007 final rule provided that beginning with the annual
payment rate updates to the LTC-DRG classifications and relative
weights for the fiscal year 2008, or FY 2008
(affecting discharges beginning on or after October 1, 2007
and before September 30, 2008), annual updates to the
LTC-DRG classification and relative weights are to have a budget
neutral impact. Under the May 2007 final rule, future LTC-DRG
reclassification and recalibrations, by themselves, should
neither increase nor decrease the estimated aggregated LTCH-PPS
payments.
August 2007 Final Rule. On August 1,
2007, CMS published the IPPS final rule for FY 2008, which
created a new patient classification system with categories
referred to as MS-DRGs and MS-LTC-DRGs, respectively, for
hospitals reimbursed under IPPS and LTCH-PPS. Beginning with
discharges on or after October 1, 2007, the new
classification categories take into account the severity of the
patients condition. CMS assigned relative weights to each
MS-DRG and MS-LTC-DRG to reflect their relative use of medical
care resources.
The August 2007 final rule published a budget neutral update to
the MS-LTC-DRG classification and relative weights. In the
preamble to the IPPS final rule for FY 2008 CMS restated that it
intends to continue to update the LTC-DRG weights annually in
the IPPS rulemaking and those weights would be modified by a
budget neutrality adjustment factor to ensure that estimated
aggregate LTCH payments after reweighting are equal to estimated
aggregate LTCH payments before reweighting.
53
Medicare, Medicaid, and SCHIP Extension Act of
2007. On December 29, 2007, President Bush
signed into law the SCHIP Extension Act. Among other changes in
the federal healthcare programs, the SCHIP Extension Act makes
significant changes to Medicare policy for LTCHs including a new
statutory definition of an LTCH, a report to Congress on new
LTCH patient criteria, relief from certain LTCH-PPS payment
policies for three years, a three year moratorium on the
development of new LTCHs and LTCH beds, elimination of the
payment update for the last quarter of RY 2008 and new medical
necessity reviews by Medicare contractors through at least
October 1, 2010.
The SCHIP Extension Act precludes the Secretary from
implementing, during the three year moratorium period, the
provisions added by the May 2007 final rule that extended the
25% rule to free-standing LTCHs and grandfathered HIHs. The
SCHIP Extension Act also modifies, during the moratorium, the
effect of the 25% threshold for admissions from co-located
hospitals that was established in the August 2004 final rule.
For non-grandfathered HIHs and satellites opened on or before
October 1, 2004, the applicable percentage threshold is set
at 50%, except for those HIHs and satellites located in rural
areas and those which receive referrals from MSA dominant
hospitals or single urban hospitals in which cases the
percentage threshold is set at no more than 75%. The ARRA, as
discussed below, further revised the SCHIP Extension Act to
modify the delay in the percentage limitations to the three cost
reporting periods beginning on or after July 1, 2007 for
freestanding LTCHs, grandfathered HIHs, and grandfathered
satellites and on or after October 1, 2007 for
non-grandfathered LTCH HIHs and non-grandfathered satellites.
The SCHIP Extension Act also precludes the Secretary from
implementing, for the three year period beginning on
December 29, 2007, a one-time adjustment to the LTCH
standard federal rate. This rule, established in the original
LTCH-PPS regulations, permits CMS to restate the standard
federal rate to correct any significant error CMS made in
estimating the standard federal rate in the first year of
LTCH-PPS. In the preamble to the May 2007 final rule, CMS
discussed making a one-time prospective adjustment to the
LTCH-PPS rates for the 2009 rate year. In addition, the SCHIP
Extension Act reduced the Medicare payment update for the
portion of RY 2008 from April 1, 2008 to June 30, 2008
to the same base rate applied to LTCH discharges during RY 2007.
For the three years following December 29, 2007, the
Secretary is required to impose a moratorium on the
establishment and classification of new LTCHs, LTCH satellite
facilities, and LTCH beds in existing LTCH or satellite
facilities. 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. As a result of the
SCHIP Extension Acts three year moratorium on the
development of new LTCHs, we have stopped all LTCH development.
May 6, 2008 Interim Final Rule. On
May 6, 2008, CMS published an interim final rule with
comment period, which implemented portions of the SCHIP
Extension Act. The May 6, 2008 interim final rule
addressed: (1) the payment adjustment for very short-stay
outliers, (2) the standard federal rate for the last three
months of RY 2008, (3) adjustment of the high cost outlier
fixed-loss amount for the last three months of RY 2008, and
(4) made references to the SCHIP Extension Act in the
discussion of the basis and scope of the LTCH-PPS rules.
May 9, 2008 Final Rule. On May 9,
2008, CMS published its annual payment rate update for the 2009
LTCH-PPS rate year, or RY 2009 (affecting discharges
and cost reporting periods beginning on or after July 1,
2008). 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 rule
increased the fixed-loss amount for high cost outlier cases to
$22,960, which was $2,222 higher than the 2008 LTCH-PPS rate
year. The final rule provided that CMS may make a one-time
reduction in the LTCH-PPS rates to reflect a budget neutrality
adjustment no earlier than December 29, 2010 and no later
than October 1, 2012. CMS estimated this reduction will be
approximately 3.75%.
May 22, 2008 Interim Final Rule. On
May 22, 2008, CMS published an interim final rule with
comment period, which implemented portions of the SCHIP
Extension Act not addressed in the May 6, 2008 interim
final rule. Among other things, the May 22, 2008 interim
final rule established a definition for
free-standing LTCHs as a hospital that: (1) has
a Medicare provider agreement, (2) has an average length of
stay of greater than 25 days, (3) does not occupy
space in a building used by another hospital, (4) does not
occupy space in one or more separate
54
or entire buildings located on the same campus as buildings used
by another hospital and (5) is not part of a hospital that
provides inpatient services in a building also used by another
hospital.
August 2008 Final Rule. On August 19,
2008, CMS published the IPPS final rule for FY 2009 (affecting
discharges and cost reports beginning on or after
October 1, 2008 and before October 1, 2009), which
made limited revisions to the classifications of cases in
MS-LTC-DRGs. The final rule also included a number of hospital
ownership and physician referral provisions, including expansion
of a hospitals disclosure obligations by requiring
physician-owned hospitals to disclose ownership or investment
interests held by immediate family members of a referring
physician. The final rule requires physician-owned hospitals to
furnish to patients, on request, a list of physicians or
immediate family members who own or invest in the hospital.
Moreover, a physician-owned hospital must require all physician
owners or investors who are also active members of the
hospitals medical staff to disclose in writing their
ownership or investment interests in the hospital to all
patients they refer to the hospital. CMS can terminate the
Medicare provider agreement of a physician-owned hospital if it
fails to comply with these disclosure provisions or with the
requirement that a hospital disclose in writing to all patients
whether there is a physician
on-site at
the hospital 24 hours per day, 7 days per week.
The American Recovery and Reinvestment Act of
2009. On February 17, 2009, the President
signed into law the ARRA. The ARRA makes several technical
corrections to the SCHIP Extension Act, including a
clarification that, during the moratorium period established by
the SCHIP Extension Act, the percentage threshold for
grandfathered satellites is set at 50% and not phased in to the
25% level for admissions from a co-located hospital. In
addition, the ARRA clarifies that the application of the
percentage threshold is postponed for LTCH HIHs and satellites
that are co-located with provider-based off-campus locations of
IPPS hospitals. The ARRA also modified certain delays in the
application of the percentage thresholds as originally
established in the SCHIP Extension Act. The effective date of
the delay in application of the full 25% patient threshold
payment adjustment policy is changed from cost reporting periods
beginning on or after December 29, 2007 to cost reporting
periods beginning on or after July 1, 2007 for freestanding
LTCHs and grandfathered HIHs and satellites, and cost reporting
periods beginning on or after October 1, 2007 for
non-grandfathered LTCH HIHs and satellites.
June 3, 2009 Interim Final Rule. On
June 3, 2009, CMS published an interim final rule in which
CMS adopted a new table of MS-LTC-DRG relative weights that
applied 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
FY 2009 due to CMSs misapplication of its established
methodology in the calculation of the budget neutrality factor.
This error resulted in relative weights that are higher, by
approximately 3.9% for all of FY 2009 (October 1, 2008
through September 30, 2009) which has the effect of
reducing reimbursement by approximately 3.9%. However, CMS only
applied the corrected weights to the remainder of fiscal year
2009 (that is, from June 3, 2009 through September 30,
2009).
July 31, 2009 Final Rule. On
July 31, 2009, CMS released its annual payment rate update
for the LTCH-PPS for FY 2010 (affecting discharges
and cost reporting periods beginning on or after October 1,
2009 and before September 30, 2010). For FY 2010 CMS
adopted a 2.5% increase in payments under the LTCH-PPS. As a
result, the standard federal rate for FY 2010 is set at
$39,896.65, an increase from $39,114.36 in FY 2009. 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. The
fixed loss amount for high cost outlier cases is set at $18,425.
This is a decrease from the fixed loss amount in the 2009 rate
year of $22,960.
The July 31, 2009 annual payment rate update also included
an interim final rule with comment period implementing
provisions of the ARRA discussed above, including amendments to
provisions of the SCHIP Extension Act relating to payments to
LTCHs and LTCH satellite facilities and increases in beds in
existing LTCHs and LTCH satellite facilities under the LTCH-PPS.
In the same federal register, CMS finalized three interim final
rules with comment period that it previously published but had
yet to respond to public comment. First, CMS finalized the
June 3, 2009 interim final rule that adopted a new table of
MS-LTC-DRG relative weights for the period between June 3,
2009 and September 30, 2009. Second, CMS finalized the
May 6, 2008 interim final rule that implemented changes to
LTCH-PPS mandated by the SCHIP Extension Act addressing:
(1) payment adjustments for certain short-stay outliers,
(2) the federal standard rate for the last three months of
rate year 2008, and (3) adjustment of the high cost outlier
fixed-loss amount. Finally,
55
CMS finalized the May 22, 2008 interim final rule that
implemented changes to LTCH-PPS mandated by the SCHIP Extension
Act modifying the percentage threshold policy for certain LTCHs
and addressing the three-year moratorium on the establishment of
new LTCHs and bed increases at existing LTCHs and LTCH
satellites.
The SCHIP Extension Act, as amended by the ARRA, among other
things, limited the application of the Medicare admission
threshold on HIHs in existence on October 1, 2004 to no
lower than 50% (subject to exceptions for rural and MSA dominant
hospitals) for a three year period to commence on an LTCHs
first cost reporting period to begin on or after October 1,
2007, postponed for the three year period beginning on
December 29, 2007 the SSO policy changes made in the May
2007 final rule and postponed the application of the percentage
threshold to all free-standing and grandfathered HIHs for a
three year period commencing on an LTCHs first cost
reporting period on or after July 1, 2007. The ARRA further
limited application of the admissions 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. If the May 2004 final rules and May 2007 final
rules become effective as currently written after the expiration
of the applicable provisions of the SCHIP Extension Act and
the ARRA, these regulatory changes will collectively cause an
adverse effect on our operating revenues and profitability in
2011 and beyond, which adverse effect could be partially
mitigated if we are able to implement certain operational
changes. However, the effect of these changes in 2010 will not
be significant.
Medicare
Reimbursement of Inpatient Rehabilitation Facility
Services
The following is a summary of significant changes to the
Medicare prospective payment system for inpatient rehabilitation
facilities or IRF-PPS during 2008 and 2009.
August 2008 Final Rule. On August 8,
2008, CMS published the final rule for the inpatient
rehabilitation facility prospective payment system
(IRF-PPS) for FY 2009. The final rule included
changes to the IRF-PPS regulations designed to implement
portions of the SCHIP Extension Act. In particular, the patient
classification criteria compliance threshold was established at
60% (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.
July 31, 2009 Final Rule. On
July 31, 2009, CMS released its final rule establishing the
annual payment rate update for the IRF-PPS for FY 2010
(affecting discharges and cost reporting periods beginning on
October 1, 2009 through September 30, 2010). The
standard federal rate is established at $13,661 for FY 2010, an
increase from $12,958 in FY 2009. The proposed outlier threshold
amount is set at $10,652, an increase from $10,250 in FY 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 rules specifications.
The interdisciplinary team must meet weekly to review the
patients 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.
While the final rules payment rate updates are effective
for IRF discharges on or after October 1, 2009, CMS has
adopted a January 1, 2010 effective date for the new
coverage requirements to provide facilities more time to comply
with the new framework. If we fail to implement the new coverage
criteria, claims for our services may be denied in whole or part.
56
Medicare
Reimbursement of Outpatient Rehabilitation
Services
CMS released the final rule for the 2010 Medicare physician fee
schedule on November 25, 2009. The final rule increased the
annual per beneficiary cap on outpatient therapy services for
2010 to $1,860 for combined physical therapy and speech language
pathology services and $1,860 for occupational therapy services.
On March 2, 2010, President Obama signed the Temporary
Extension Act of 2010, which extended the exception process
through March 31, 2010. The exception process will expire
on April 1, 2010 unless further extended by Congress. There
can be no assurance that Congress will extend it further.
Failure to extend the exception process may reduce our future
net operating revenues and profitability.
The Medicare program reimburses outpatient rehabilitation
providers based on the Medicare physician fee schedule. The
Medicare physician fee schedule rates are automatically updated
annually based on a formula, called the sustainable growth rate
(SGR) formula, contained in legislation. The SGR
formula has resulted in automatic reductions in rates in every
year since 2002; however, for each year through 2009 CMS or
Congress has taken action to prevent the SGR formula reductions.
On December 19, 2009, President Obama signed the Department
of Defense Appropriations Act, 2010 into law, which delayed
until March 1, 2010 the payment reductions for 2010
required by the SGR formula. The Temporary Extension Act of 2010
further delayed the scheduled reduction in Medicare payment
until March 31, 2010. Congress is now considering several
proposals to delay the payment cut further or to replace the SGR
formula with another methodology for setting Medicare physician
payment rates. We cannot predict what actions, if any, Congress
or CMS may take with respect to the Medicare physician fee
schedule update. If no further legislation is passed by Congress
and signed by the President, the SGR formula will reduce our
Medicare outpatient rehabilitation payment rates by
approximately 21.2% beginning April 1, 2010. For the year
ended December 31, 2009, we received approximately 9.7% of
our outpatient rehabilitation net operating revenues from
Medicare.
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, in those states where we furnish
our services through business corporations, future
interpretations of the corporate practice prohibition, enactment
of new legislation or adoption of new regulations could have a
material adverse effect on the business and operations of our
outpatient therapy clinics. If new legislation, regulations or
interpretations establish that our clinics do not comply with
state corporate practice prohibition, we could be subject to
civil, and perhaps criminal, penalties, and may be required to
restructure our business operations or close our clinics in any
such state.
Facility
Licensure, Certification and Accreditation
Our hospitals and outpatient rehabilitation clinics are subject
to extensive and changing federal, state and local regulations
and private accreditation standards. Hospitals are required to
comply with state hospital standards setting requirements
related to patient rights, composition and responsibilities of
the hospital governing body, medical staff, quality improvement,
infection control, nursing services, food and nutrition, medical
records, drug distribution, diagnostic and treatment services,
surgical services, emergency services and social work. Our
hospitals are also required to meet conditions of participation
under Medicare programs in order to qualify to receive
reimbursement under these programs. In addition, many of our
hospitals and outpatient rehabilitation clinics are accredited
by The Joint Commission by voluntarily complying with a specific
set of accreditation standards.
57
Our hospitals and outpatient rehabilitation clinics are subject
to inspections, surveys and other reviews by governmental and
private regulatory authorities, not only at scheduled intervals
but also in response to complaints from patients and others.
While our hospitals and outpatient rehabilitation clinics intend
to comply with existing licensing, Medicare certification
requirements and accreditation standards, there can be no
assurance that regulatory authorities will determine that all
applicable requirements are fully met at any given time. A
determination by an applicable regulatory authority that a
facility is not in compliance with these requirements could lead
to the imposition of requirements that the facility takes
corrective action, assessment of fines and penalties or loss of
licensure, Medicare certification or accreditation. These
consequences could have a material adverse effect on the Company.
Federal
Healthcare Reform Proposals
Healthcare is one of the largest industries in the United States
and continues to attract much legislative interest and public
attention. Comprehensive national healthcare reform is currently
a focus at the federal level. In the final months of 2009, both
houses of the U.S. Congress passed different versions of
comprehensive healthcare reform legislation. Both versions of
the legislation would require most individuals to have health
insurance coverage, and would aim to promote quality and cost
efficiency in healthcare delivery and budgetary savings in the
Medicare program. On March 3, 2010, President Obama
announced that he would seek passage of healthcare reform
legislation with certain changes. While no comprehensive
healthcare reform legislation has yet become law, we anticipate
that Congress will continue to consider legislative changes,
either as part of comprehensive healthcare reform or separately,
that could affect our business.
Legislative changes that have been discussed as part of
healthcare reform have included, among other things, calls for
bundled payments to hospitals that would cover not just the
hospitalization, but care from certain post-acute providers for
the 30 days after the hospitalization. A significant
portion of the services furnished by our specialty hospitals and
outpatient rehabilitation clinics are to patients discharged
from acute care hospitals. Therefore, the proposal to bundle
payments to hospitals could have a material impact on volume of
referrals to our facilities by acute care hospitals and the
payment rates that we receive for our services. Other proposed
legislative changes have included negative adjustments to the
annual market basket updates for the Medicare long term care
hospital and inpatient rehabilitation payment systems, penalties
for hospital readmissions, value-based purchasing and enhanced
efforts to curb fraud and abuse, including by implementing
additional prepayment reviews. There has also been discussion of
establishing an Independent Medicare Advisory Board charged with
presenting proposals to Congress to reduce Medicare expenditures
when such expenditures exceed specified levels.
Healthcare reform legislation passed by the U.S. Senate in
2009 contained a temporary extension of policies adopted in the
SCHIP Extension Act, including extending relief from certain
LTCH-PPS payment policies and extending the moratorium on the
establishment and classification of new LTCHs and LTCH beds. The
healthcare reform legislation passed by the U.S. House of
Representatives in 2009 did not contain a similar extension. It
is uncertain whether both houses of Congress will enact
healthcare reform legislation or other legislation that includes
an extension of the policies adopted in the SCHIP Extension Act.
At this time we are unable to predict what action Congress or
the President might take with respect to comprehensive
healthcare reform or other legislation affecting healthcare, or
the impact of any such legislation on our revenues, operating
costs, results of operations or cash flows.
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, 2009, we have
internally developed 62 specialty hospitals and 276 outpatient
rehabilitation facilities. As a result of the SCHIP Extension
Act however, which has a three year moratorium on the
development of new LTCHs, we have stopped all new LTCH
development. In addition, 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. The moratorium
will not, however, apply to LTCHs acquired by us in the future
so long as those LTCHs were in existence prior to
December 29, 2007.
58
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
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%, 46% and
48% of net operating revenues for the years ended
December 31, 2009, 2008 and 2007, respectively.
Approximately 63%, 63% and 65% of our specialty hospital
revenues for the years ended December 31, 2009, 2008 and
2007, 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 hospitals 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
hospitals 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
deducted from 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 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
59
portion of our net accounts receivable balance. At
December 31, 2009, deductibles, co-payments and
self-insured amounts owed by the patient accounted for
approximately 0.5% 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,
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
|
|
|
Over 90
|
|
|
|
|
|
|
Over 90
|
|
|
|
0-90 Days
|
|
|
Days
|
|
|
|
0-90 Days
|
|
|
Days
|
|
Medicare and Medicaid
|
|
$
|
101,687
|
|
|
$
|
12,780
|
|
|
|
$
|
117,991
|
|
|
$
|
8,307
|
|
Commercial insurance, and other
|
|
|
186,200
|
|
|
|
68,803
|
|
|
|
|
176,195
|
|
|
|
47,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net accounts receivable
|
|
$
|
287,887
|
|
|
$
|
81,583
|
|
|
|
$
|
294,186
|
|
|
$
|
56,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
2008
|
|
|
2009
|
0 to 90 days
|
|
|
77.9
|
%
|
|
|
|
83.9
|
%
|
91 to 180 days
|
|
|
8.8
|
%
|
|
|
|
6.6
|
%
|
181 to 365 days
|
|
|
6.7
|
%
|
|
|
|
4.7
|
%
|
Over 365 days
|
|
|
6.6
|
%
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
2008
|
|
|
2009
|
Government payors and insured receivables
|
|
|
99.7
|
%
|
|
|
|
99.5
|
%
|
Self-pay receivables (including deductible and co-payments)
|
|
|
0.3
|
%
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
60
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, 2009 and
December 31, 2008, we have recorded a liability of
$60.8 million and $62.9 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 $4.0 million
and $3.3 million for the years ended December 31, 2009
and 2008, 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, 2009 amount to $45.6 million through
2023. These transactions and commitments are described more
fully in the notes to our consolidated financial statements
included herein. The Companys 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
Companys 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
2009, 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.
61
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, 2009, we had deferred tax assets in excess
of deferred tax liabilities of approximately $18.2 million
for both Holdings and Select. This amount is net of
approximately $22.4 million of valuation reserves related
primarily to state and federal tax net operating losses that may
not be realized at December 31, 2009.
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
Determining the fair value of our stock requires making complex
and subjective judgments. Our approach to valuation is based on
a discounted future cash flow approach that uses our estimates
of revenue and estimated costs as well as discount rates
determined by analyzing comparable companies and industry
capital structures. These estimates are consistent with the
plans and estimates that we use to manage the business. The fair
value of the common stock has generally been determined
contemporaneously with the grants. There is inherent uncertainty
in making these estimates.
62
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Specialty hospital
data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals start of period
|
|
|
96
|
|
|
|
87
|
|
|
|
93
|
|
Number of hospital
start-ups
|
|
|
3
|
|
|
|
7
|
|
|
|
1
|
|
Number of hospitals acquired
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Number of hospitals closed/sold
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Number of hospitals consolidated
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals owned end of period
|
|
|
87
|
|
|
|
93
|
|
|
|
94
|
|
Number of hospitals managed end of period
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hospitals (all) end of period
|
|
|
87
|
|
|
|
93
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available licensed beds
|
|
|
3,819
|
|
|
|
4,222
|
|
|
|
4,233
|
|
Admissions
|
|
|
40,008
|
|
|
|
41,177
|
|
|
|
42,674
|
|
Patient days
|
|
|
987,624
|
|
|
|
1,005,719
|
|
|
|
1,015,500
|
|
Average length of stay (days)
|
|
|
25
|
|
|
|
24
|
|
|
|
24
|
|
Net revenue per patient
day(2)
|
|
$
|
1,378
|
|
|
$
|
1,453
|
|
|
$
|
1,507
|
|
Occupancy rate
|
|
|
69
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
Percent patient days Medicare
|
|
|
69
|
%
|
|
|
65
|
%
|
|
|
64
|
%
|
Outpatient rehabilitation data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of clinics owned start of period
|
|
|
477
|
|
|
|
918
|
|
|
|
880
|
|
Number of clinics acquired
|
|
|
570
|
|
|
|
4
|
|
|
|
24
|
|
Number of clinic
start-ups
|
|
|
15
|
|
|
|
17
|
|
|
|
13
|
|
Number of clinics
closed/sold(3)
|
|
|
(144
|
)
|
|
|
(59
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of clinics owned end of period
|
|
|
918
|
|
|
|
880
|
|
|
|
883
|
|
Number of clinics managed end of period
|
|
|
81
|
|
|
|
76
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of clinics (all) end of period
|
|
|
999
|
|
|
|
956
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of visits
|
|
|
4,032,197
|
|
|
|
4,533,727
|
|
|
|
4,502,049
|
|
Net revenue per
visit(4)
|
|
$
|
100
|
|
|
$
|
102
|
|
|
$
|
102
|
|
|
|
|
(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 patient service revenues by the total number of patient
days. |
(3) |
|
The number of clinics closed/sold for the year ended
December 31, 2007 relate primarily to clinics closed in
connection with the restructuring plan for integrating the
acquisition of HealthSouth Corporations outpatient
rehabilitation division. |
(4) |
|
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. |
63
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,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Net operating revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of
services(1)
|
|
|
83.3
|
|
|
|
83.2
|
|
|
|
81.3
|
|
General and administrative
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
3.2
|
|
Bad debt expense
|
|
|
1.9
|
|
|
|
2.2
|
|
|
|
1.8
|
|
Depreciation and amortization
|
|
|
2.9
|
|
|
|
3.3
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9.7
|
|
|
|
9.1
|
|
|
|
10.5
|
|
Gain on early retirement of debt
|
|
|
|
|
|
|
0.0
|
|
|
|
0.6
|
|
Other expense
|
|
|
0.0
|
|
|
|
|
|
|
|
(0.0
|
)
|
Interest expense, net
|
|
|
(6.9
|
)
|
|
|
(6.7
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
2.8
|
|
|
|
2.4
|
|
|
|
5.2
|
|
Income tax expense
|
|
|
0.9
|
|
|
|
1.2
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.9
|
|
|
|
1.2
|
|
|
|
3.5
|
|
Net income attributable to non-controlling interests
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Holdings
|
|
|
1.8
|
%
|
|
|
1.0
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical Corporation
|
|
|
Year
|
|
Year
|
|
Year
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Net operating revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of
services(1)
|
|
|
83.3
|
|
|
|
83.2
|
|
|
|
81.3
|
|
General and administrative
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
3.2
|
|
Bad debt expense
|
|
|
1.9
|
|
|
|
2.2
|
|
|
|
1.8
|
|
Depreciation and amortization
|
|
|
2.9
|
|
|
|
3.3
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9.7
|
|
|
|
9.1
|
|
|
|
10.5
|
|
Gain on early retirement of debt
|
|
|
|
|
|
|
0.0
|
|
|
|
0.6
|
|
Other income (expense)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
Interest expense, net
|
|
|
(5.2
|
)
|
|
|
(5.1
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
4.3
|
|
|
|
3.9
|
|
|
|
6.8
|
|
Income tax expense
|
|
|
1.4
|
|
|
|
1.7
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2.9
|
|
|
|
2.2
|
|
|
|
4.6
|
|
Net income attributable to non-controlling interests
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Select
|
|
|
2.8
|
%
|
|
|
2.0
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
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,
|
|
|
2007-
|
|
|
2008-
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
1,386,410
|
|
|
$
|
1,488,412
|
|
|
$
|
1,557,821
|
|
|
|
7.4
|
%
|
|
|
4.7
|
%
|
Outpatient rehabilitation
|
|
|
603,413
|
|
|
|
664,760
|
|
|
|
681,892
|
|
|
|
10.2
|
|
|
|
2.6
|
|
Other(3)
|
|
|
1,843
|
|
|
|
190
|
|
|
|
158
|
|
|
|
(89.7
|
)
|
|
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
1,991,666
|
|
|
$
|
2,153,362
|
|
|
$
|
2,239,871
|
|
|
|
8.1
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
180,090
|
|
|
$
|
192,450
|
|
|
$
|
247,891
|
|
|
|
6.9
|
%
|
|
|
28.8
|
%
|
Outpatient rehabilitation
|
|
|
57,979
|
|
|
|
52,964
|
|
|
|
64,109
|
|
|
|
(8.6
|
)
|
|
|
21.0
|
|
Other(3)
|
|
|
(44,184
|
)
|
|
|
(49,006
|
)
|
|
|
(76,162
|
)
|
|
|
(10.9
|
)
|
|
|
(55.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
193,885
|
|
|
$
|
196,408
|
|
|
$
|
235,838
|
|
|
|
1.3
|
%
|
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
217,175
|
|
|
$
|
236,388
|
|
|
$
|
290,370
|
|
|
|
8.8
|
%
|
|
|
22.8
|
%
|
Outpatient rehabilitation
|
|
|
75,437
|
|
|
|
77,279
|
|
|
|
89,072
|
|
|
|
2.4
|
|
|
|
15.3
|
|
Other(3)
|
|
|
(37,684
|
)
|
|
|
(43,380
|
)
|
|
|
(49,215
|
)
|
|
|
(15.1
|
)
|
|
|
(13.5
|
)
|
Adjusted EBITDA
margins:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
|
15.7
|
%
|
|
|
15.9
|
%
|
|
|
18.6
|
%
|
|
|
1.3
|
%
|
|
|
17.0
|
%
|
Outpatient rehabilitation
|
|
|
12.5
|
|
|
|
11.6
|
|
|
|
13.1
|
|
|
|
(7.2
|
)
|
|
|
12.9
|
|
Other(3):
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
1,882,476
|
|
|
$
|
1,910,402
|
|
|
$
|
1,944,677
|
|
|
|
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
513,397
|
|
|
|
504,869
|
|
|
|
499,603
|
|
|
|
|
|
|
|
|
|
Other(3)
|
|
|
99,173
|
|
|
|
164,198
|
|
|
|
157,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
2,495,046
|
|
|
$
|
2,579,469
|
|
|
$
|
2,602,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
146,901
|
|
|
$
|
40,069
|
|
|
$
|
46,452
|
|
|
|
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
14,737
|
|
|
|
13,271
|
|
|
|
9,940
|
|
|
|
|
|
|
|
|
|
Other(3)
|
|
|
4,436
|
|
|
|
3,164
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
166,074
|
|
|
$
|
56,504
|
|
|
$
|
57,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Change
|
|
|
Change
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
2007-
|
|
|
2008-
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
1,386,410
|
|
|
$
|
1,488,412
|
|
|
$
|
1,557,821
|
|
|
|
7.4
|
%
|
|
|
4.7
|
%
|
Outpatient rehabilitation
|
|
|
603,413
|
|
|
|
664,760
|
|
|
|
681,892
|
|
|
|
10.2
|
|
|
|
2.6
|
|
Other(3)
|
|
|
1,843
|
|
|
|
190
|
|
|
|
158
|
|
|
|
(89.7
|
)
|
|
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
1,991,666
|
|
|
$
|
2,153,362
|
|
|
$
|
2,239,871
|
|
|
|
8.1
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
180,090
|
|
|
$
|
192,450
|
|
|
$
|
247,891
|
|
|
|
6.9
|
%
|
|
|
28.8
|
%
|
Outpatient rehabilitation
|
|
|
57,979
|
|
|
|
52,964
|
|
|
|
64,109
|
|
|
|
(8.6
|
)
|
|
|
21.0
|
|
Other(3)
|
|
|
(44,184
|
)
|
|
|
(49,006
|
)
|
|
|
(76,162
|
)
|
|
|
(10.9
|
)
|
|
|
(55.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
193,885
|
|
|
$
|
196,408
|
|
|
$
|
235,838
|
|
|
|
1.3
|
%
|
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
217,175
|
|
|
$
|
236,388
|
|
|
$
|
290,370
|
|
|
|
8.8
|
%
|
|
|
22.8
|
%
|
Outpatient rehabilitation
|
|
|
75,437
|
|
|
|
77,279
|
|
|
|
89,072
|
|
|
|
2.4
|
|
|
|
15.3
|
|
Other(3)
|
|
|
(37,684
|
)
|
|
|
(43,380
|
)
|
|
|
(49,215
|
)
|
|
|
(15.1
|
)
|
|
|
(13.5
|
)
|
Adjusted EBITDA
margins:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
|
15.7
|
%
|
|
|
15.9
|
%
|
|
|
18.6
|
%
|
|
|
1.3
|
%
|
|
|
17.0
|
%
|
Outpatient rehabilitation
|
|
|
12.5
|
|
|
|
11.6
|
|
|
|
13.1
|
|
|
|
(7.2
|
)
|
|
|
12.9
|
|
Other(3):
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
1,882,476
|
|
|
$
|
1,910,402
|
|
|
$
|
1,944,677
|
|
|
|
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
513,397
|
|
|
|
504,869
|
|
|
|
499,603
|
|
|
|
|
|
|
|
|
|
Other(3)
|
|
|
94,904
|
|
|
|
147,154
|
|
|
|
154,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
2,490,777
|
|
|
$
|
2,562,425
|
|
|
$
|
2,599,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
146,901
|
|
|
$
|
40,069
|
|
|
$
|
46,452
|
|
|
|
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
14,737
|
|
|
|
13,271
|
|
|
|
9,940
|
|
|
|
|
|
|
|
|
|
Other(3)
|
|
|
4,436
|
|
|
|
3,164
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
166,074
|
|
|
$
|
56,504
|
|
|
$
|
57,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
The following tables reconcile same hospitals information:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net operating revenue
|
|
|
|
|
|
|
|
|
Specialty hospitals net operating revenue
|
|
$
|
1,386,410
|
|
|
$
|
1,488,412
|
|
Less: Specialty hospitals in development, opened or closed after
1/1/07
|
|
|
79,500
|
|
|
|
85,709
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store net operating revenue
|
|
$
|
1,306,910
|
|
|
$
|
1,402,703
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(2)
|
|
|
|
|
|
|
|
|
Specialty hospitals Adjusted
EBITDA(2)
|
|
$
|
217,175
|
|
|
$
|
236,388
|
|
Less: Specialty hospitals in development, opened or closed after
1/1/07
|
|
|
(10,928
|
)
|
|
|
(21,339
|
)
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store Adjusted
EBITDA(2)
|
|
$
|
228,103
|
|
|
$
|
257,727
|
|
|
|
|
|
|
|
|
|
|
All specialty hospitals Adjusted EBITDA
margin(2)
|
|
|
15.7
|
%
|
|
|
15.9
|
%
|
Specialty hospitals same store Adjusted EBITDA
margin(2)
|
|
|
17.5
|
%
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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, 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, opened or closed after
1/1/08
|
|
|
(24,305
|
)
|
|
|
(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
|
%
|
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 (loss) on early
retirement of debt, stock compensation expense, other income
(expense), long term incentive compensation and non-controlling
interest. 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 |
67
|
|
|
|
|
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, 2009 Compared to Year Ended
December 31, 2008
In the following discussion, we address the results of
operations of Select and Holdings. With the exception of
incremental interest expense, gain on early retirement of debt
and income taxes, the results of operations of Holdings are
identical to those of Select. Therefore, discussion related to
net operating revenue, operating expenses, Adjusted EBITDA,
income from operations and non-controlling interest is identical
for Holdings and Select.
Net
Operating Revenues
Our net operating revenues increased by 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 3.2% to
$1,506 for the year ended December 31, 2009 from $1,459 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.
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
68
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 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.
69
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
75/8% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized on the transactions
which was net of the write-off of unamortized deferred financing
costs related to the repurchased debt. 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
75/8% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized on the transactions
which was net of the write-off of unamortized deferred financing
costs related to the 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.
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.
70
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Net
Operating Revenues
Our net operating revenues increased by 8.1% to
$2,153.4 million for the year ended December 31, 2008
compared to $1,991.7 million for the year ended
December 31, 2007.
Specialty Hospitals. Our specialty hospital
net operating revenues increased 7.4% to $1,488.4 million
for the year ended December 31, 2008 compared to
$1,386.4 million for the year ended December 31, 2007.
Net operating revenues for the specialty hospitals opened as of
January 1, 2007 and operated by us throughout both periods
increased 7.3% to $1,402.7 million for the year ended
December 31, 2008 from $1,306.9 million for the year
ended December 31, 2007. This increase was partially offset
by the loss of revenues from closed hospitals, which accounted
for $52.2 million of the difference in net operating
revenues between 2007 and 2008. Hospitals opened in 2007 and
2008 increased net operating revenues by $58.4 million for
the year ended December 31, 2008. The increase in same
store hospitals net operating revenues resulted from
increases in our patient days and our average net revenue per
patient day. Our patient days for these same store hospitals
increased 2.1% and was attributable to an increase in our
non-Medicare patient days. Our average net revenue per patient
day in our same store hospitals increased 5.0% to $1,458 for the
year ended December 31, 2008 from $1,388 for the year ended
December 31, 2007. This increase in net revenue per patient
day resulted from increased Medicare revenues and was primarily
the result of an increase in the Medicare case mix index of our
patients which adjusts our Medicare base rate used to determine
our discharge payments to compensate us for differences in the
severity of the cases we treat.
Outpatient Rehabilitation. Our outpatient
rehabilitation net operating revenues increased 10.2% to
$664.8 million for the year ended December 31, 2008
compared to $603.4 million for the year ended
December 31, 2007. The increase in outpatient
rehabilitation net operating revenues was primarily attributable
to an increase in patient visits. The number of patient visits
in our outpatient rehabilitation clinics increased 12.4% for the
year ended December 31, 2008 to 4,533,727 visits compared
to 4,032,197 visits for the year ended December 31, 2007.
Substantially all of the increase in net operating revenues and
patient visits was related to the acquisition of the outpatient
rehabilitation division of HealthSouth Corporation in May 2007.
Net revenue per visit in our clinics was $102 for the year ended
December 31, 2008 compared to $100 for the year ended
December 31, 2007.
Other. Our other revenues were
$0.2 million for the year ended December 31, 2008
compared to $1.8 million for the year ended
December 31, 2007. These revenues relate to revenue from
other non-healthcare services.
Operating
Expenses
Our operating expenses increased by 8.3% to
$1,885.2 million for the year ended December 31, 2008
compared to $1,740.5 million for the year ended
December 31, 2007. Our operating expenses include our cost
of services, general and administrative expense and bad debt
expense. The increase in operating expenses occurred in both of
our operating segments. In our specialty hospital segment, the
cause of the increase in costs was equally divided between costs
related to the increase in patient volume and an increase in the
cost to treat patients. In our outpatient rehabilitation segment
the cause of the increase in costs was principally related to
the increased patient volumes resulting from the acquisition of
the outpatient division of HealthSouth Corporation. As a
percentage of our net operating revenues, our operating expenses
were 87.6% for the year ended December 31, 2008 compared to
87.4% for the year ended December 31, 2007. The increase in
the relative percentage of our operating expenses compared to
net operating revenue was principally related to our bad debt
costs. Cost of services as a percentage of operating revenues
was 83.2% for the year ended December 31, 2008 compared to
83.3% for the year ended December 31, 2007. These costs
primarily reflect our labor expenses. Another component of cost
of services was facility rent expense, which was
$110.2 million for the year ended December 31, 2008
compared to $98.5 million for the year ended
December 31, 2007. The increase in rent expense was
principally related to the acquisition of the outpatient
rehabilitation division of HealthSouth Corporation and recently
opened specialty hospitals that are leased. General and
administrative expenses were 2.2% of net operating revenues for
both the years ended December 31, 2008 and 2007. Our bad
debt expense as a percentage of net operating revenues was 2.2%
for the year ended December 31, 2008 compared to 1.9% for
the year ended December 31, 2007. The increase in our bad
debt expense occurred principally in our specialty hospitals. In
our specialty hospitals we experienced an aging of our accounts
receivable which caused us to increase our reserves for doubtful
accounts for the year ended December 31,
71
2008. Additionally, we experienced an increase in the write-off
of uncollectible Medicare co-payments and deductibles where
state Medicaid programs are the secondary payor which has the
effect of increasing our bad debt expense.
Adjusted
EBITDA
Specialty Hospitals. Adjusted EBITDA increased
by 8.8% to $236.4 million for the year ended
December 31, 2008 compared to $217.2 million for the
year ended December 31, 2007. Our Adjusted EBITDA margins
increased to 15.9% for the year ended December 31, 2008
from 15.7% for the year ended December 31, 2007. The
hospitals opened before January 1, 2007 and operated
throughout both years had Adjusted EBITDA of
$257.7 million, an increase of $29.6 million or 13.0%
over the Adjusted EBITDA of these hospitals for the year ended
December 31, 2007. Our Adjusted EBITDA margin in these same
store hospitals increased to 18.4% for the year ended
December 31, 2008 from 17.5% for the year ended
December 31, 2007. The principal reason for the growth in
our Adjusted EBITDA and Adjusted EBITDA margin for these same
store hospitals was the result of increased patient volume and
the increase in our net revenue per patient day. Our hospitals
opened during 2007 and 2008 incurred Adjusted EBITDA losses of
$22.4 million and $11.3 million for the year ended
December 31, 2008 and 2007, respectively.
Outpatient Rehabilitation. Adjusted EBITDA
increased by 2.4% to $77.3 million for the year ended
December 31, 2008 compared to $75.4 million for the
year ended December 31, 2007. Our Adjusted EBITDA margins
decreased to 11.6% for the year ended December 31, 2008
from 12.5% for the year ended December 31, 2007. Our
Adjusted EBITDA margins decreased for the year ended
December 31, 2008 compared to the year ended
December 31, 2007 due to lower margins generated by the
outpatient rehabilitation clinics acquired from HealthSouth
Corporation. The principal cause of the lower margins was a
reduction in patient volume at these clinics. Due to the small
size of these clinics, it was difficult for us to reduce our
cost structures to offset patient volume declines.
Other. The Adjusted EBITDA loss was
$43.4 million for the year ended December 31, 2008
compared to a loss of $37.7 million for the year ended
December 31, 2007 and was primarily related to our general
and administrative expenses.
Income
from Operations
For the year ended December 31, 2008, we had income from
operations of $196.4 million compared to income from
operations of $193.9 million for the year ended
December 31, 2007. The decrease in income from operations
resulted from an increase in depreciation and amortization
expense offset by the Adjusted EBITDA changes described above.
The increase in depreciation and amortization expense resulted
primarily from increased depreciation expense associated with
free-standing hospitals that were placed in service and an
increase in depreciation and amortization expense related to the
outpatient rehabilitation clinics acquired from HealthSouth
Corporation.
Interest
Expense
Select Medical Corporation. Interest expense
was $110.9 million for the year ended December 31,
2008 compared to $105.5 million for the year ended
December 31, 2007. The increase in interest expense was
related to higher average outstanding debt balances under our
senior secured credit facility existing during the year ended
December 31, 2008. The increase in outstanding debt was
principally related to the borrowings on our senior secured
credit facility used to fund the acquisition of the outpatient
rehabilitation division of HealthSouth Corporation, offset by
the effect of declining interest rates in 2008.
Select Medical Holdings Corporation. Interest
expense was $145.9 million for the year ended
December 31, 2008 compared to $140.2 million for the
year ended December 31, 2007. The increase in interest
expense was related to higher average outstanding debt balances
under our senior secured credit facility existing during the
year ended December 31, 2008. The increase in outstanding
debt was principally related to the borrowings on our senior
secured credit facility used to fund the acquisition of the
outpatient rehabilitation division of HealthSouth Corporation,
offset by the effect of declining interest rates in 2008.
72
Gain
on Early Retirement of Debt
In the year ended December 31, 2008, we paid approximately
$1.0 million to repurchase and retire a portion of our
75/8% 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 on the transaction
which included the write-off of the unamortized deferred
financing costs related to the debt.
Income
Taxes
Select Medical Corporation. We recorded income
tax expense of $37.3 million, representing an effective tax
rate of 44.4%, for the year ended December 31, 2008. For
the year ended December 31, 2007, we recorded income tax
expense of $29.3 million, representing an effective tax
rate of 34.1%. In the year ended December 31, 2008 we
experienced an effective tax rate that 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 arising in tax entities acquired from
HealthSouth Corporation and excess federal capital losses that
can only be offset by future capital gains. For the year ended
December 31, 2007 we recognized a lower effective tax rate
as a result of greater than expected tax benefits generated on
the sale of equipment and subsidiaries.
Select Medical Holdings Corporation. We
recorded income tax expense of $26.1 million for the year
ended December 31, 2008. This expense represented an
effective tax rate of 50.2%. For the year ended
December 31, 2007, we recorded income tax expense of
$18.7 million. This expense represented an effective tax
rate of 33.6%. In the year ended December 31, 2008 we
experienced an effective tax rate that 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 arising in the tax entities acquired from
HealthSouth Corporation and excess federal capital losses that
can only be offset by future capital gains. For the year ended
December 31, 2007 we recognized a lower effective tax rate
as a result of greater than expected tax benefits generated on
the sale of equipment and subsidiaries.
Non-Controlling
Interests
Non-Controlling interests in consolidated earnings were
$3.4 million for the year ended December 31, 2008
compared to $1.5 million for the year ended
December 31, 2007. This increase in non-controlling
interest was due to an increase in the non-controlling ownership
in three of our specialty hospitals.
Liquidity
and Capital Resources
Year
Ended December 31, 2009, Year Ended December 31, 2008
and the Year Ended December 31, 2007
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Select Medical Holdings Corporation
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Select Medical Corporation
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Year Ended December 31,
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Year Ended December 31,
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2007
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2008
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2009
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2007
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2008
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2009
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(In thousands)
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(In thousands)
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Cash flows provided by operating activities
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$
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86,013
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$
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107,438
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$
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165,639
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$
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118,786
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$
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140,245
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$
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198,478
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Cash flows used in investing activities
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(382,676
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(60,438
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(77,917
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(382,676
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(60,438
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(77,917
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)
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Cash flows provided by (used in) financing activities
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219,592
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12,731
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(68,302
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186,819
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(20,076
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(101,141
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Net increase (decrease) in cash and cash equivalents
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(77,071
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)
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59,731
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19,420
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(77,071
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)
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59,731
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19,420
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Cash and cash equivalents at beginning of period
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81,600
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4,529
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64,260
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81,600
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4,529
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64,260
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Cash and cash equivalents at end of period
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$
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4,529
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$
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64,260
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$
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83,680
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$
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4,529
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$
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64,260
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$
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83,680
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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
73
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 primarily related to the timing of the
periodic interim payments we received from Medicare for the
services provided at our specialty hospitals.
Operating activities for Select generated $118.8 million in
cash during the year ended December 31, 2007. Our days
sales outstanding were 48 days at December 31, 2007
compared to 41 days at December 31, 2006. In
comparison to our operating cash flow generated for the year
ended December 31, 2006, our operating cash flow was
negatively affected by a reduction in our operating earnings, an
increase in interest expense and an increase in our accounts
receivable.
The operating cash flow of Select exceeds the operating cash
flow of Holdings by $32.8 million for the years ended
December 31, 2009, 2008 and 2007. The difference relates to
interest payments on Holdings senior subordinated notes
and senior floating rate notes.
Investing activities used $77.9 million, $60.4 million
and $382.7 million of cash flow for the years ended
December 31, 2009, 2008, and 2007, respectively. Of this
amount, we incurred acquisition related payments of
$21.4 million, $7.6 million and $237.0 million,
respectively in 2009, 2008 and 2007. In 2007, the acquisition of
the outpatient division of HealthSouth Corporation accounted for
the $236.9 million in acquisition payments. The remaining
acquisition payments relate primarily to small acquisitions of
outpatient businesses and specialty hospitals. Investing
activities also used cash for the purchases of property and
equipment of $57.9 million, $56.5 million and
$166.1 million in 2009, 2008, and 2007, respectively. In
2009 and 2008 our purchases of property and equipment were
principally related to routine capital expenditures. In 2007 our
purchases of property and equipment were related principally to
construction of new hospitals and relocation of existing
hospitals. Additionally during 2007 we made major improvements
and expanded our rehabilitation hospital in West Orange, New
Jersey. We sold business units and real property which generated
$1.3 million, $3.4 million and $16.0 million in
cash during the years ended December 31, 2009, 2008 and
2007, respectively.
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 Selects
75/8% 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 Selects
75/8% senior
subordinated notes of $1.0 million, offset by borrowings on
our senior secured credit facility of $23.2 million.
Financing activities for Select provided $186.8 million of
cash for the year ended December 31, 2007. The cash
resulted primarily from borrowings, net of repayments on our
senior secured credit facility of $213.5 million and
proceeds from bank overdrafts of $8.9 million, offset by
dividends paid to Holdings to fund interest payments of
$32.8 million, distributions to non-controlling interests
of $1.7 million and payments on seller and other debt of
$1.3 million. Approximately $203.0 million of the
borrowings from our senior secured credit facility were used to
74
fund the acquisition of the outpatient division of HealthSouth
Corporation. The remaining borrowings were used to fund our
normal operations including our hospital construction activities.
The difference in cash flows provided by (used in) financing
activities of Holdings compared to Select of $32.8 million
for each of the years ended December 31, 2009, 2008 and
2007 relates to dividends paid by Select to Holdings to service
Holdings interest obligations related to its senior
subordinated notes and its senior floating rate notes and to
fund repurchases of common and preferred stock.
Capital
Resources
Select Medical Corporation. Select had net
working capital of $167.3 million at December 31, 2009
compared to net working capital of $100.1 million at
December 31, 2008. The increase in net working capital is
primarily due to our improved cash position that has resulted
from our recently completed initial public offering of common
stock and a reduction in our accrued liabilities.
Select Medical Holdings Corporation. Holdings
had net working capital of $170.8 million at
December 31, 2009 compared to net working capital of
$118.4 million at December 31, 2008. The increase in
net working capital is primarily due to our improved cash
position that has resulted from our recently completed initial
public offering of common stock and a reduction in our accrued
liabilities.
After giving effect to Amendment No. 3 to our senior
secured credit facility (as described below) on August 5,
2009, our senior secured credit facility provided for senior
secured financing consisting of:
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a $300.0 million revolving loan facility that will
terminate on February 24, 2011, including both a letter of
credit
sub-facility
and a swingline loan
sub-facility, and
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$268.6 million in term loans that mature on
February 24, 2012 (the Tranche B Term
Loans), and
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$384.5 million in term loans that mature on August 22,
2014 (the
Tranche B-1
Term Loans).
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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 Selects total
indebtedness to consolidated EBITDA (as defined in the credit
agreement). The applicable margin percentage for revolving loans
will decrease from (1) 1.00% to 0.75% for alternate base
rate loans and (2) 2.00% to 1.75% for adjusted LIBOR loans
upon the delivery of Selects Annual Report on
Form 10-K
to JPMorgan Chase Bank, N.A., as administrative agent to
Selects senior secured credit facility. The applicable
margin percentages for the Tranche B Term Loans are
(1) 1.00% for alternate base rate loans and (2) 2.00%
for adjusted LIBOR loans. The applicable margin percentages for
the
Tranche B-1
Term Loans are (1) 2.75% for alternate base rate loans and
(2) 3.75% for adjusted LIBOR loans.
Our senior secured credit facility requires Select to maintain
certain interest expense coverage ratios and leverage ratios
which become more restrictive over time. For the four
consecutive fiscal quarters ended December 31, 2009, 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.
Selects interest expense coverage ratio was 2.58 to 1.00
for such period. As of December 31, 2009, Select was
required to maintain its leverage ratio (its ratio of total
indebtedness to consolidated
75
EBITDA for the prior four consecutive fiscal quarters) at less
than 5.00 to 1.00. Selects leverage ratio was 3.11 to 1.00
as of December 31, 2009.
Also, as of December 31, 2009, we had $191.8 million
outstanding in Tranche B term loans and $291.3 million
outstanding in
Tranche B-1
term loans. We also had $269.3 million of availability
under our revolving loan facility (after giving effect to
$30.7 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
November 3, 2009 we repaid $16.9 million of debt under
our senior secured credit facility, of which $6.7 million
was applied to Tranche B term loans and $10.2 million
was applied to
Tranche B-1
term loans.
On June 13, 2005, Select entered into two five year
interest rate swap transactions with an effective date of
August 22, 2005. On March 8, 2007 and
November 23, 2007, Select entered into two additional
interest rate swap transactions for three years with effective
dates of May 22, 2007 and November 23, 2007,
respectively. The swaps are designated as a cash flow hedge of
forecasted LIBOR-based variable rate interest payments. The
underlying variable rate debt is $500.0 million.
On August 5, 2009 we entered into Amendment No. 3 to
our senior secured credit facility with a group of holders of
Tranche B term loans and JPMorgan Chase Bank, N.A., as
administrative agent. Amendment No. 3 extended the maturity
of $384.5 million principal amount of Tranche B term
loans from February 24, 2012 to August 22, 2014, and
made related technical changes to our senior secured credit
facility. Holders of Tranche B term loans that extended the
maturity of their Tranche B term loans now hold
Tranche B-1
term loans that mature on August 22, 2014, and holders of
Tranche B term loans that did not extend the maturity of
their Tranche B term loans continue to hold Tranche B
term loans that mature on February 24, 2012. The applicable
margin percentage for the
Tranche B-1
term loans under our senior secured credit facility is 3.75% for
adjusted LIBOR loans and 2.75% for alternate base rate loans.
Under the terms of Amendment No. 3, if, prior to
August 5, 2011, our senior secured credit facility is
amended to reduce the applicable margin percentage for the
Tranche B-1
term loans, then we will be required to pay a fee in an amount
equal to 1% of the outstanding
Tranche B-1
term loans held by those holders of
Tranche B-1
term loans that agree to amend our senior secured credit
facility to reduce the applicable margin percentage. In
addition, if, prior to August 5, 2011, we make any
prepayment of
Tranche B-1
term loans with proceeds of any term loan indebtedness, we will
be required to pay a fee to holders of
Tranche B-1
term loans in an amount equal to 1% of the outstanding
Tranche B-1
term loans that are being prepaid.
On February 24, 2005, EGL Acquisition Corp. issued and sold
$660.0 million in aggregate principal amount of
75/8% senior
subordinated notes due 2015, which Select assumed in connection
with the Merger. The net proceeds of the offering were used to
finance a portion of the funds needed to consummate the Merger
with EGL Acquisition Corp. The notes were issued under an
indenture between EGL Acquisition Corp. and U.S. Bank
Trust National Association, as trustee. 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
Selects wholly-owned subsidiaries, subject to certain
exceptions. On or after February 1, 2010, the notes may be
redeemed at Selects 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 holders notes
at a purchase price equal to 101% of the principal amount plus
accrued and unpaid interest to the date of purchase.
During 2009, we paid approximately $30.1 million to
repurchase and retire additional
75/8% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized, which was net of
the write-off of unamortized deferred financing costs related to
the debt.
On September 29, 2005, 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,
76
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.
We believe our internally generated cash flows and borrowing
capacity under our senior secured credit facility will be
sufficient to finance normal operations in the over the next
twelve months. Our lenders, including the lenders participating
in our senior secured credit facility, may have suffered losses
related to their lending and other financial relationships,
especially because of the general weakening of the national
economy, increased financial instability of many borrowers and
the declining value of their assets. As a result, lenders may
become insolvent or tighten their lending standards, which could
make it more difficult for us to borrow under our revolving
credit facility. Our access to funds under the senior secured
credit facility is dependent upon the ability of our lenders to
meet their funding commitments. Our financial condition and
results of operations would be adversely affected if we were
unable to draw funds under our senior secured credit facility
because of a lender default or to obtain other cost-effective
financing.
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 February 24, 2011. We anticipate
refinancing at least a portion of the indebtedness under our
senior secured credit facility within the next twelve months,
which includes entering into a new revolving credit facility on
or before the termination of our current revolving credit
facility on February 24, 2011. There can be no assurance
that we will be successful in our effort to enter into a new
revolving credit facility
and/or
refinance indebtedness under our senior secured credit facility
in the future. While we expect there to be alternatives
available to us to enter into a new revolving credit facility
and/or
refinance our indebtedness under our senior secured credit
facility, we cannot assure you that any of these alternatives
will be successfully implemented. We depend on our revolving
credit facility to meet our cash requirements to operate our
business. If we repay our revolving credit facility upon its
termination and are unable to enter into a new revolving credit
facility on terms acceptable to us, or at all, we may be forced
to reduce our operations and may not be able to respond to
changing business conditions or competitive pressures. As a
result, our business, operating results and financial condition
could be adversely affected.
Longer term disruptions in the capital and credit markets as a
result of uncertainty, changing or increased regulation, reduced
alternatives or failures of significant financial institutions
could adversely affect our access to liquidity needed for our
business. Any disruption could require us to take measures to
conserve cash until the markets stabilize or until alternative
credit arrangements or other funding for our business can be
arranged. Such measures could include deferring capital
expenditures and reducing or eliminating other discretionary
uses of cash.
As a result of the SCHIP Extension Act, which prohibits the
establishment and classification of new LTCHs or satellites
during the three calendar years commencing on December 29,
2007, we have stopped all new LTCH development. However, we
continue to evaluate opportunities to develop new joint venture
relationships with significant health systems, and from time to
time we may also develop new inpatient rehabilitation hospitals.
We also intend to open new outpatient rehabilitation clinics in
local areas that we currently serve where we can benefit from
existing referral relationships and brand awareness to produce
incremental growth.
77
Commitments
and Contingencies
The following tables summarize contractual obligations at
December 31, 2009, and the effect such obligations are
expected to have on liquidity and cash flow in future periods.
Reserves for uncertain tax positions of $25.0 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
Contractual
Obligations
|
|
Total
|
|
|
2010
|
|
|
2011-2013
|
|
|
2014-2015
|
|
|
After 2015
|
|
|
|
(In thousands)
|
|
|
75/8% senior
subordinated notes
|
|
$
|
611,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
611,500
|
|
|
$
|
|
|
Senior secured credit facility
|
|
|
483,067
|
|
|
|
1,223
|
|
|
|
200,119
|
|
|
|
281,725
|
|
|
|
|
|
10% senior subordinated
notes(1)
|
|
|
137,284
|
|
|
|
|
|
|
|
|
|
|
|
137,284
|
|
|
|
|
|
Senior floating rate notes
|
|
|
167,300
|
|
|
|
|
|
|
|
|
|
|
|
167,300
|
|
|
|
|
|
Seller notes
|
|
|
971
|
|
|
|
487
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
1,347
|
|
|
|
304
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
Other debt obligations
|
|
|
4,102
|
|
|
|
2,131
|
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,405,571
|
|
|
|
4,145
|
|
|
|
203,617
|
|
|
|
1,197,809
|
|
|
|
|
|
Interest(2)
|
|
|
461,784
|
|
|
|
100,475
|
|
|
|
254,750
|
|
|
|
106,559
|
|
|
|
|
|
Letters of credit outstanding
|
|
|
30,654
|
|
|
|
|
|
|
|
30,654
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
3,376
|
|
|
|
1,699
|
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
Construction contracts
|
|
|
11,148
|
|
|
|
11,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Naming, promotional and sponsorship agreement
|
|
|
51,202
|
|
|
|
2,679
|
|
|
|
8,417
|
|
|
|
5,942
|
|
|
|
34,164
|
|
Operating leases
|
|
|
626,738
|
|
|
|
115,352
|
|
|
|
200,759
|
|
|
|
63,677
|
|
|
|
246,950
|
|
Related party operating leases
|
|
|
45,556
|
|
|
|
3,068
|
|
|
|
9,525
|
|
|
|
6,580
|
|
|
|
26,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
2,636,029
|
|
|
$
|
238,566
|
|
|
$
|
709,399
|
|
|
$
|
1,380,567
|
|
|
$
|
307,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select
Medical Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
Contractual
Obligations
|
|
Total
|
|
|
2010
|
|
|
2011-2013
|
|
|
2014-2015
|
|
|
After 2015
|
|
|
|
(In thousands)
|
|
|
75/8% senior
subordinated notes
|
|
$
|
611,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
611,500
|
|
|
$
|
|
|
Senior secured credit facility
|
|
|
483,067
|
|
|
|
1,223
|
|
|
|
200,119
|
|
|
|
281,725
|
|
|
|
|
|
Seller notes
|
|
|
971
|
|
|
|
487
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
1,347
|
|
|
|
304
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
Other debt obligations
|
|
|
4,102
|
|
|
|
2,131
|
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,100,987
|
|
|
|
4,145
|
|
|
|
203,617
|
|
|
|
893,225
|
|
|
|
|
|
Interest(2)
|
|
|
310,310
|
|
|
|
74,722
|
|
|
|
177,491
|
|
|
|
58,097
|
|
|
|
|
|
Letters of credit outstanding
|
|
|
30,654
|
|
|
|
|
|
|
|
30,654
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
3,376
|
|
|
|
1,699
|
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
Construction contracts
|
|
|
11,148
|
|
|
|
11,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Naming, promotional and sponsorship agreement
|
|
|
51,202
|
|
|
|
2,679
|
|
|
|
8,417
|
|
|
|
5,942
|
|
|
|
34,164
|
|
Operating leases
|
|
|
626,738
|
|
|
|
115,352
|
|
|
|
200,759
|
|
|
|
63,677
|
|
|
|
246,950
|
|
Related party operating leases
|
|
|
45,556
|
|
|
|
3,068
|
|
|
|
9,525
|
|
|
|
6,580
|
|
|
|
26,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
2,179,971
|
|
|
$
|
212,813
|
|
|
$
|
632,140
|
|
|
$
|
1,027,521
|
|
|
$
|
307,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
(1) |
|
Reflects the balance sheet liability of Holdings 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 $12.7 million at
December 31, 2009. Interest on the 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 any 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. We
anticipate making a payment of approximately $3.0 million
in February 2014. 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, 2009 of 2.3%, and 4.0% for the Term B and Term
B-1 loans, respectively. This interest rate was increased by
2.4% during 2010 to take into consideration the effect that the
Companys swaps have on its interest obligation. All swaps
mature in 2010. The interest obligation was calculated using the
stated interest rate for the
75/8% senior
subordinated notes and the 10% senior subordinated notes,
6.4% 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, 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. Updated
2010-06 is
effective for the first reporting period beginning after
December 15, 2009, 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 is
not anticipated to have a material impact on our consolidated
financial statements.
In August 2009, the FASB issued ASU
2009-05,
Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value
(Update
2009-05).
Update
2009-05
provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value
of such liability using one or more of the techniques prescribed
by the update. Update
2009-05 is
effective for the first annual or interim period beginning after
the issuance of this update. The adoption of Update
2009-05 did
not have a material impact on our consolidated financial
statements.
In June 2009, the FASB issued an amendment to Accounting
Standards Codification (ASC) topic 105,
Generally Accepted Accounting Principles. The
amendment stipulates the FASB Accounting Standards Codification
is the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. The amendment
was effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The
adoption of this amendment did not have a material impact on our
consolidated financial statements.
79
In June 2009, FASB issued an amendment to ASC topic 810,
Consolidation. The amendment changes how a reporting
entity determines when an entity that is insufficiently
capitalized or is not controlled through voting or similar
rights should be consolidated. The amendment will require a
reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant
changes in risk exposure related to that involvement. The
amendment is effective for annual and interim reporting periods
beginning after November 15, 2009. The adoption of the
amendment is not expected to have a material impact on our
consolidated financial statements.
In June 2009, the FASB issued an amendment to ASC topic 860,
Transfers and Servicing. The amendment will require
additional disclosure about the transfers of financial assets,
including securitization transactions, and additional disclosure
in cases where entities have continuing exposure to the risks
related to transferred financial assets. The amendment
eliminates the concept of qualifying special-purpose
entity and changes the requirements for derecognizing
financial assets. The amendment is effective for annual and
interim reporting periods beginning after November 15,
2009. The adoption of this amendment is not expected to have a
material impact on our consolidated financial statements.
In May 2009, the FASB issued an amendment to ASC topic 855,
Subsequent Events. The amendment provides general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. The amendment sets forth
the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the
financial statements. The amendment also sets forth the
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its
financial statements. Furthermore, this amendment identifies the
disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. We
adopted this amendment during the second quarter of 2009.
In April 2009, FASB issued an amendment to ASC topic 805,
Business Combinations. This amendment changes the
provisions for the initial recognition and measurement,
subsequent measurement and accounting and disclosures for assets
and liabilities arising from contingencies in business
combinations. The amendment eliminates the distinction between
contractual and non-contractual contingencies, including the
initial recognition and measurement criteria. The amendment is
effective for contingent assets and contingent liabilities
acquired in business combinations for which the acquisition date
is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The
adoption of this amendment did not have a material impact on our
consolidated financial statements.
In April 2009, the FASB issued an amendment to ASC topic 820,
Fair Value Measurements and Disclosures. This
amendment provides additional guidance for estimating fair value
when the volume and level of activity for the asset or liability
have decreased significantly. The amendment also provides
guidance on identifying circumstances that indicate a
transaction is not orderly. The amendment was effective for our
interim period ending on June 30, 2009. The adoption of
this amendment did not have a material impact on our
consolidated financial statements.
On January 1, 2009, we adopted an amendment issued by the
FASB in December 2007 to ASC topic 810,
Consolidation. Upon adoption of this amendment,
minority interest is now referred to as non-controlling interest
and has been reclassified from the mezzanine section of the
balance sheet to the equity section. The balance sheet as of
December 31, 2008 has been revised to show this change in
presentation. In addition, non-controlling interest is now
deducted from net income to obtain net income attributable to
each of Holdings and Select.
|
|
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 Selects senior
secured credit facility and Holdings senior floating rate
notes. As of December 31, 2009, Select had
$483.1 million in term and revolving loans outstanding
under its senior secured credit facility and $167.3 in senior
floating rate notes outstanding, which bear interest at variable
rates. On June 13, 2005, Select entered into two five year
interest rate swap transactions with an effective date of
August 22, 2005. On March 8, 2007 and
November 16, 2007, Select entered into two additional
interest rate swap transactions for three years with effective
dates of May 22, 2007 and November 23, 2007,
respectively. Select
80
entered into the swap transactions to mitigate the risks of
future variable rate interest payments. The notional amount of
the interest rate swaps are $500.0 million and the
underlying variable rate debt is associated with the senior
secured credit facility. Each eighth point change in interest
rates on the variable rate portion of our long-term indebtedness
would result in a $0.2 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(T).
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined
in
Rule 13a-15(e)
of the Securities Exchange Act of 1934) as of the end of
the period covered in this report. Based on this evaluation, our
principal executive officer and principal financial officer
concluded that our disclosure controls and procedures, including
the accumulation and communication of disclosure to our
principal executive officer and principal financial officer as
appropriate to allow timely decisions regarding disclosure, are
effective to provide reasonable assurance that material
information required to be included in our periodic SEC reports
is recorded, processed, summarized and reported within the time
periods specified in the relevant SEC rules and forms.
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, 2009 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys registered public accounting firm due to a
transition period established by rules of the SEC for newly
public companies.
|
|
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, is presented under the
headings Corporate Governance Committees of
the Board of Directors, and Election of
Directors Directors and Nominees in the
Companys definitive proxy statement for use in connection
with the 2010 Annual Meeting of Stockholders (the Proxy
Statement) to be filed within 120 days after the end
of the Companys fiscal year ended December 31, 2009.
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,
81
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.selectmedicalcorp.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.
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|
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.
|
|
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,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2,796,260
|
|
|
$
|
8.01
|
|
|
|
5,439,157
|
|
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.
82
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-55
of this report.
|
3) The following exhibits are filed as part of, or
incorporated by reference into, this report:
83
|
|
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Stock Purchase Agreement, dated as of January 27, 2007,
between HealthSouth Corporation and Select Medical Corporation,
incorporated by reference to Exhibit 2.1 of Select Medical
Corporations Current Report on
Form 8-K
filed January 30, 2007 (Reg.
No. 001-31441).
|
|
2
|
.2
|
|
Letter Agreement, dated as of May 1, 2007, between
HealthSouth Corporation and Select Medical Corporation,
incorporated by reference to Exhibit 2.2 of Select Medical
Corporations Current Report on
Form 8-K
filed May 7, 2007 (Reg.
No. 001-31441).
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Select
Medical Corporation, incorporated by reference to
Exhibit 3.1 of Select Medical Corporations
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 Corporations
Form S-1/A
filed September 21, 2009 (Reg
No. 333-152514).
|
|
3
|
.3
|
|
Amended and Restated Bylaws of Select Medical Corporation,
incorporated by reference to Exhibit 3.2 of Select Medical
Corporations
Form S-4
filed June 15, 2005 (Reg.
No. 011-21441).
|
|
3
|
.4
|
|
Form of Amended and Restated Bylaws of Select Medical Holdings
Corporation, incorporated by reference to Exhibit 3.4 of
Select Medical Holdings Corporations
Form S-1/A
filed September 21, 2009 (Reg.
No. 333-152514).
|
|
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 Corporations
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 Corporations
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 Corporations
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 Corporations
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 Corporations 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
Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
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 Corporations
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 Corporations
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 Corporations
Registration Statement on
Form S-4
filed June 26, 2001 (Reg.
No. 333-63828).
|
84
|
|
|
|
|
Number
|
|
Description
|
|
|
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 Corporations 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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.11
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Holdings Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.11 of
Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.12
|
|
Restricted Stock Award Agreement, dated as of November 8,
2005, between Select Medical Holdings Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.12 of
Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.13
|
|
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
Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.14
|
|
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 Corporations
Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.15
|
|
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 Corporations
Registration Statement on
Form S-1
filed March 30, 2001 (Reg.
No. 333-48856).
|
|
10
|
.16
|
|
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 Corporations Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
|
|
10
|
.17
|
|
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 Corporations Current
Report on
Form 8-K
filed December 16, 2004 (Reg.
No. 001-31441).
|
|
10
|
.18
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.19
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Holdings Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.19 of
Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.20
|
|
Restricted Stock Award Agreement, dated as of November 8,
2005, between Select Medical Holdings Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.20 of
Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.21
|
|
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
Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.22
|
|
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 Corporations
Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.23
|
|
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 Corporations
Registration Statement on
Form S-1
filed March 30, 2001 (Reg.
No. 333-48856).
|
|
10
|
.24
|
|
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 Corporations Current Report on
Form 8-K
filed December 16, 2004 (Reg.
No. 001-31441).
|
85
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.25
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.26
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.27
|
|
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 Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.28
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Holdings Corporation and Patricia
A. Rice, incorporated by reference to Exhibit 10.28 of
Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.29
|
|
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 Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.30
|
|
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 Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.31
|
|
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 Corporations
Registration Statement on
Form S-1
filed March 30, 2001 (Reg.
No. 333-48856).
|
|
10
|
.32
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.33
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Holdings Corporation and Martin F.
Jackson, incorporated by reference to Exhibit 10.33 of
Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.34
|
|
Employment Agreement, dated as of December 16, 1998,
between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.8 of Select Medical
Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.35
|
|
First Amendment to Employment Agreement, dated as of
October 15, 2000 between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.33
of Select Medical Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.36
|
|
Change of Control Agreement, dated as of November 21, 2001,
between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.61 of Select
Medical Corporations Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
|
|
10
|
.37
|
|
Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.28
of Select Medical Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.38
|
|
Other Senior Management Agreement, dated as of June 2,
1997, between Select Medical Corporation and S. Frank Fritsch,
incorporated by reference to Exhibit 10.9 of Select Medical
Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.39
|
|
Change of Control Agreement, dated as of March 1, 2000,
between Select Medical Corporation and S. Frank Fritsch,
incorporated by reference to Exhibit 10.10 of Select
Medical Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.40
|
|
Amendment to Change of Control Agreement, dated as of
February 23, 2001, between Select Medical Corporation and
S. Frank Fritsch, incorporated by reference to
Exhibit 10.53 of Select Medical Corporations
Registration Statement on
Form S-1
filed March 30, 2001 (Reg.
No. 333-48856).
|
|
10
|
.41
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and
S. Frank Fritsch, incorporated by reference to
Exhibit 10.32 of Select Medical Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
86
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.42
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Holdings Corporation and S. Frank
Fritsch, incorporated by reference to Exhibit 10.42 of
Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.43
|
|
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 Corporations Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
|
|
10
|
.44
|
|
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 Corporations Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
|
|
10
|
.45
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.46
|
|
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 Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.47
|
|
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 Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.48
|
|
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 Corporations
Registration Statement on
Form S-1
filed March 30, 2001 (Reg.
No. 333-48856).
|
|
10
|
.49
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.50
|
|
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 Corporations Annual Report on
Form 10-K
for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
|
|
10
|
.51
|
|
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 Corporations Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
|
|
10
|
.52
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.53
|
|
Fifth Amendment to Employment Agreement, dated as of
April 18, 2005, between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.43
of Select Medical Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.54
|
|
Form of Unit Award Agreement, incorporated by reference to
Exhibit 10.54 of Select Medical Holdings Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.55
|
|
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 Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.56
|
|
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 Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.57
|
|
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 Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
87
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.58
|
|
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 Corporations Registration Statement on
Form S-4
filed June 26, 2001 (Reg.
No. 333-63828).
|
|
10
|
.59
|
|
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 Corporations Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2001 (Reg.
No. 000-32499).
|
|
10
|
.60
|
|
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 Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.61
|
|
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 Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.62
|
|
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 Corporations Registration Statement on
Form S-1
filed October 27, 2000 (Reg.
No. 333-48856).
|
|
10
|
.63
|
|
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 Corporations
Form S-1
filed July 24, 2008 (Reg.
No. 333-152514).
|
|
10
|
.64
|
|
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 Corporations Registration Statement on
Form S-4
filed June 26, 2001 (Reg.
No. 333-63828).
|
|
10
|
.65
|
|
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 Corporations Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2002 (Reg.
No. 000-32499).
|
|
10
|
.66
|
|
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
Corporations Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2002 (Reg.
No. 000-32499).
|
|
10
|
.67
|
|
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 Corporations Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2002 (Reg.
No. 000-32499).
|
|
10
|
.68
|
|
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 Corporations
Form S-1/A
filed November 25, 2008 (Reg.
No. 333-152514).
|
|
10
|
.69
|
|
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 Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.70
|
|
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 Corporations Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 (Reg.
No. 001-31441).
|
|
10
|
.71
|
|
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 Corporations
Form S-1/A
filed November 25, 2008 (Reg.
No. 333-152514).
|
|
10
|
.72
|
|
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 Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
88
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.73
|
|
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 Corporations Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 (Reg.
No. 001-31441).
|
|
10
|
.74
|
|
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 Corporations
Form S-1/A
filed November 25, 2008 (Reg.
No. 333-152514).
|
|
10
|
.75
|
|
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 Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.76
|
|
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 Corporations Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2004 (Reg.
No. 001-31441).
|
|
10
|
.77
|
|
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 Corporations Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2004 (Reg.
No. 001-31441).
|
|
10
|
.78
|
|
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 Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.79
|
|
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 Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.80
|
|
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
Corporations Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 (Reg.
No. 001-31441).
|
|
10
|
.81
|
|
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
Corporations Current Report on
Form 8-K
filed August 16, 2005 (Reg.
No. 001-31441).
|
|
10
|
.82
|
|
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 Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.83
|
|
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 Corporations
Form S-1
filed July 25, 2008 (Reg.
No. 333-152514).
|
|
10
|
.84
|
|
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 Corporations Registration Statement on
Form S-1
filed December 7, 2000 (Reg.
No. 333-48856).
|
|
10
|
.85
|
|
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
Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.86
|
|
Select Medical Holdings Corporation 2005 Equity Incentive Plan,
as amended and restated, incorporated by reference to
Exhibit 10.88 of Select Medical Holdings Corporations
Form S-1/A
filed September 9, 2009 (Reg.
No. 333-152514).
|
|
10
|
.87
|
|
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 Corporations
Form S-1/A
filed September 9, 2009 (Reg.
No. 333-152514).
|
|
10
|
.88
|
|
Second Amendment to Employment Agreement, dated as of
October 26, 2001 between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.83
of Select Medical Holdings Corporations
Form S-1/A
filed August 29, 2008 (Reg.
No. 333-152514).
|
89
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.89
|
|
Third Amendment to Employment Agreement, dated as of
November 1, 2002 between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.84
of Select Medical Holdings Corporations
Form S-1/A
filed August 29, 2008 (Reg.
No. 333-152514).
|
|
10
|
.90
|
|
Fourth Amendment to Employment Agreement, dated as of
December 31, 2003 between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.85
of Select Medical Holdings Corporations
Form S-1/A
filed August 29, 2008 (Reg.
No. 333-152514).
|
|
10
|
.91
|
|
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
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.92
|
|
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
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.93
|
|
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
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.94
|
|
Sixth Amendment to Employment Agreement between Select Medical
Corporation and David W. Cross, incorporated by reference to
Exhibit 10.98 of Select Medical Holdings Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.95
|
|
Second Amendment to Change of Control Agreement between Select
Medical Corporation and David W. Cross, incorporated by
reference to Exhibit 10.99 of Select Medical Holdings
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.96
|
|
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
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.97
|
|
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
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.98
|
|
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
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.99
|
|
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
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.100
|
|
Third Amendment to Change of Control Agreement between Select
Medical Corporation and S. Frank Fritsch, incorporated by
reference to Exhibit 10.104 of Select Medical Holdings
Corporations
Form S-1/A
filed June 18, 2009 (Reg.
No. 333-152514).
|
|
10
|
.101
|
|
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 Corporations Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2005 (Reg.
No. 001-31441).
|
|
10
|
.102
|
|
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 Corporations
Current Report on
Form 8-K
filed March 23, 2007 (Reg.
No. 001-31441).
|
90
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.103
|
|
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 Corporations Current
Report on
Form 8-K
filed March 30, 2007 (Reg.
No. 001-31441).
|
|
10
|
.104
|
|
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
Corporations
Form S-1/A
filed August 25, 2009 (Reg.
No. 333-152514).
|
|
10
|
.105
|
|
Indenture governing
75/8% 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
Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.106
|
|
Form of
75/8% Senior
Subordinated Notes due 2015 (included in Exhibit 4.4),
incorporated by reference to Select Medical Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.107
|
|
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
Corporations
Form S-4
filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.108
|
|
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
Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.109
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.110
|
|
Form of Senior Floating Rate Notes due 2015 (included in
Exhibit 4.7), incorporated by reference to Select Medical
Holdings Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.111
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.112
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.113
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.114
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.115
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
91
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.116
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.117
|
|
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
Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.118
|
|
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 Corporations
Form S-4
filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.119
|
|
Form of Restricted Stock Agreement under the 2005 Equity
Incentive Plan.
|
|
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
|
92
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
|
|
|
|
By:
|
/s/ Michael
E. Tarvin
|
Michael E. Tarvin
(Executive Vice President, General Counsel and
Secretary)
Date: March 17, 2010
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 17, 2010.
|
|
|
|
|
|
|
|
|
|
/s/ Rocco
A. Ortenzio
Rocco
A. Ortenzio
Director and Executive Chairman
|
|
|
|
/s/ Rocco
A. Ortenzio
Rocco
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
Scott
A. Romberger
Senior Vice President, Controller and Chief
Accounting Officer (principal accounting officer)
|
|
|
|
|
|
/s/ Russell
L. Carson
Russell
L. Carson
Director
|
|
|
|
/s/ David
S. Chernow
David
S. Chernow
Director
|
|
|
|
|
|
/s/ Bryan
C. Cressey
Bryan
C. Cressey
Director
|
|
|
|
/s/ James
E. Dalton, Jr.
James
E. Dalton, Jr.
Director
|
|
|
|
|
|
/s/ James
S. Ely III
James
S. Ely III
Director
|
|
|
|
/s/ Thomas
A. Scully
Thomas
A. Scully
Director
|
|
|
|
|
|
/s/ Leopold
Swergold
Leopold
Swergold
Director
|
|
|
|
/s/ Sean
M. Traynor
Sean
M. Traynor
Director
|
93
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
F-2
|
|
|
F-4
|
|
|
F-5
|
|
|
F-7
|
|
|
F-9
|
|
|
F-11
|
|
|
F-55
|
F-1
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, 2009 and 2008, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009 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. These financial statements
and the financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits
of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes 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. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in the notes to the consolidated financial
statements, the Company changed the manner in which it accounts
for non-controlling interests (Note 1) and for
unvested restricted stock in the calculation of earnings per
share (Note 14) as of January 1, 2009.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 17, 2010
F-2
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, 2009 and 2008, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2009 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. These financial statements and the
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits
of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes 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. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in the notes to the consolidated financial
statements, the Company changed the manner in which it accounts
for non-controlling interests (Note 1) and for
unvested restricted stock in the calculation of earnings per
share (Note 14) as of January 1, 2009.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 17, 2010
F-3
SELECT
MEDICAL HOLDINGS
CORPORATION AND SELECT MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical
|
|
|
|
|
|
|
Holdings Corporation
|
|
|
Select Medical Corporation
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008(1)
|
|
|
2009
|
|
|
2008(1)
|
|
|
2009
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
64,260
|
|
|
$
|
83,680
|
|
|
$
|
64,260
|
|
|
$
|
83,680
|
|
Accounts receivable, net of allowance for doubtful accounts of
$57,052 and $43,357 in 2008 and 2009, respectively
|
|
|
312,418
|
|
|
|
307,079
|
|
|
|
312,418
|
|
|
|
307,079
|
|
Current deferred tax asset
|
|
|
61,925
|
|
|
|
48,535
|
|
|
|
48,594
|
|
|
|
48,535
|
|
Prepaid income taxes
|
|
|
7,362
|
|
|
|
11,179
|
|
|
|
7,362
|
|
|
|
11,179
|
|
Other current assets
|
|
|
20,897
|
|
|
|
24,240
|
|
|
|
20,897
|
|
|
|
24,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
466,862
|
|
|
|
474,713
|
|
|
|
453,531
|
|
|
|
474,713
|
|
Property and equipment, net
|
|
|
471,065
|
|
|
|
466,131
|
|
|
|
471,065
|
|
|
|
466,131
|
|
Goodwill
|
|
|
1,506,661
|
|
|
|
1,548,269
|
|
|
|
1,506,661
|
|
|
|
1,548,269
|
|
Other identifiable intangibles
|
|
|
74,078
|
|
|
|
65,297
|
|
|
|
74,078
|
|
|
|
65,297
|
|
Assets held for sale
|
|
|
12,542
|
|
|
|
11,342
|
|
|
|
12,542
|
|
|
|
11,342
|
|
Other assets
|
|
|
48,261
|
|
|
|
36,481
|
|
|
|
44,548
|
|
|
|
33,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,579,469
|
|
|
$
|
2,602,233
|
|
|
$
|
2,562,425
|
|
|
$
|
2,599,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
$
|
21,130
|
|
|
$
|
|
|
|
$
|
21,130
|
|
|
$
|
|
|
Current portion of long-term debt and notes payable
|
|
|
9,046
|
|
|
|
4,145
|
|
|
|
9,046
|
|
|
|
4,145
|
|
Accounts payable
|
|
|
72,496
|
|
|
|
73,434
|
|
|
|
72,496
|
|
|
|
73,434
|
|
Accrued payroll
|
|
|
66,380
|
|
|
|
62,035
|
|
|
|
66,380
|
|
|
|
62,035
|
|
Accrued vacation
|
|
|
37,109
|
|
|
|
41,013
|
|
|
|
37,109
|
|
|
|
41,013
|
|
Accrued interest
|
|
|
37,032
|
|
|
|
32,919
|
|
|
|
25,444
|
|
|
|
23,473
|
|
Accrued restructuring
|
|
|
8,108
|
|
|
|
4,256
|
|
|
|
8,108
|
|
|
|
4,256
|
|
Accrued other
|
|
|
91,482
|
|
|
|
84,234
|
|
|
|
107,982
|
|
|
|
97,134
|
|
Due to third party payors
|
|
|
5,709
|
|
|
|
1,905
|
|
|
|
5,709
|
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
348,492
|
|
|
|
303,941
|
|
|
|
353,404
|
|
|
|
307,395
|
|
Long-term debt, net of current portion
|
|
|
1,770,879
|
|
|
|
1,401,426
|
|
|
|
1,460,276
|
|
|
|
1,096,842
|
|
Non-current deferred tax liability
|
|
|
42,918
|
|
|
|
66,768
|
|
|
|
42,918
|
|
|
|
66,768
|
|
Other non-current liabilities
|
|
|
67,709
|
|
|
|
60,543
|
|
|
|
67,709
|
|
|
|
60,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,229,998
|
|
|
|
1,832,678
|
|
|
|
1,924,307
|
|
|
|
1,531,548
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock Authorized shares (liquidation
preference is $515,872 in 2008)
|
|
|
515,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock of Holdings, $0.001 par value,
700,000,000 shares authorized, 61,466,000 shares and
159,981,000 shares issued and outstanding in 2008 and 2009,
respectively
|
|
|
61
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
Common stock of Select, $0.01 par value, 100 shares issued
and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in excess of par
|
|
|
(289,238
|
)
|
|
|
578,648
|
|
|
|
481,094
|
|
|
|
822,664
|
|
Retained earnings
|
|
|
128,185
|
|
|
|
169,094
|
|
|
|
160,657
|
|
|
|
223,314
|
|
Accumulated other comprehensive loss
|
|
|
(13,212
|
)
|
|
|
(8,914
|
)
|
|
|
(11,436
|
)
|
|
|
(8,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Select Medical Holdings Corporation and Select Medical
Corporation Stockholders Equity
|
|
|
(174,204
|
)
|
|
|
738,988
|
|
|
|
630,315
|
|
|
|
1,037,064
|
|
Non-controlling interests
|
|
|
7,803
|
|
|
|
30,567
|
|
|
|
7,803
|
|
|
|
30,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity (Deficit)
|
|
|
(166,401
|
)
|
|
|
769,555
|
|
|
|
638,118
|
|
|
|
1,067,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
2,579,469
|
|
|
$
|
2,602,233
|
|
|
$
|
2,562,425
|
|
|
$
|
2,599,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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-Non-Controlling Interests, for additional information.
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SELECT
MEDICAL HOLDINGS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2009
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net operating revenues
|
|
$
|
1,991,666
|
|
|
$
|
2,153,362
|
|
|
$
|
2,239,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
1,660,049
|
|
|
|
1,791,841
|
|
|
|
1,819,771
|
|
General and administrative
|
|
|
42,863
|
|
|
|
45,523
|
|
|
|
72,409
|
|
Bad debt expense
|
|
|
37,572
|
|
|
|
47,804
|
|
|
|
40,872
|
|
Depreciation and amortization
|
|
|
57,297
|
|
|
|
71,786
|
|
|
|
70,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,797,781
|
|
|
|
1,956,954
|
|
|
|
2,004,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
193,885
|
|
|
|
196,408
|
|
|
|
235,838
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early retirement of debt
|
|
|
|
|
|
|
912
|
|
|
|
13,575
|
|
Other expense
|
|
|
(167
|
)
|
|
|
|
|
|
|
(632
|
)
|
Interest income
|
|
|
2,103
|
|
|
|
471
|
|
|
|
92
|
|
Interest expense
|
|
|
(140,155
|
)
|
|
|
(145,894
|
)
|
|
|
(132,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
55,666
|
|
|
|
51,897
|
|
|
|
116,404
|
|
Income tax expense
|
|
|
18,699
|
|
|
|
26,063
|
|
|
|
37,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
36,967
|
|
|
|
25,834
|
|
|
|
78,888
|
|
Less: Net income attributable to non-controlling interests
|
|
|
1,537
|
|
|
|
3,393
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
|
35,430
|
|
|
|
22,441
|
|
|
|
75,282
|
|
Less: Preferred dividends
|
|
|
23,807
|
|
|
|
24,972
|
|
|
|
19,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders and
participating securities
|
|
$
|
11,623
|
|
|
$
|
(2,531
|
)
|
|
$
|
55,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common
share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
|
|
|
(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-Non-Controlling Interests, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net operating revenues
|
|
$
|
1,991,666
|
|
|
$
|
2,153,362
|
|
|
$
|
2,239,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
1,660,049
|
|
|
|
1,791,841
|
|
|
|
1,819,771
|
|
General and administrative
|
|
|
42,863
|
|
|
|
45,523
|
|
|
|
72,409
|
|
Bad debt expense
|
|
|
37,572
|
|
|
|
47,804
|
|
|
|
40,872
|
|
Depreciation and amortization
|
|
|
57,297
|
|
|
|
71,786
|
|
|
|
70,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,797,781
|
|
|
|
1,956,954
|
|
|
|
2,004,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
193,885
|
|
|
|
196,408
|
|
|
|
235,838
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on early retirement of debt
|
|
|
|
|
|
|
912
|
|
|
|
12,446
|
|
Other income (expense)
|
|
|
(4,494
|
)
|
|
|
(2,802
|
)
|
|
|
3,204
|
|
Interest income
|
|
|
2,103
|
|
|
|
471
|
|
|
|
92
|
|
Interest expense
|
|
|
(105,497
|
)
|
|
|
(110,889
|
)
|
|
|
(99,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
85,997
|
|
|
|
84,100
|
|
|
|
152,037
|
|
Income tax expense
|
|
|
29,315
|
|
|
|
37,334
|
|
|
|
49,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
56,682
|
|
|
|
46,766
|
|
|
|
102,050
|
|
Less: Net income attributable to non-controlling interests
|
|
|
1,537
|
|
|
|
3,393
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Select Medical Corporation
|
|
$
|
55,145
|
|
|
$
|
43,373
|
|
|
$
|
98,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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-Non-Controlling Interests, for additional information.
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
SELECT
MEDICAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AND INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2006(1)
|
|
$
|
(166,573
|
)
|
|
|
|
|
|
|
61,471
|
|
|
$
|
61
|
|
|
$
|
(295,112
|
)
|
|
$
|
121,024
|
|
|
$
|
4,888
|
|
|
$
|
2,566
|
|
Net income
|
|
|
36,967
|
|
|
$
|
36,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,430
|
|
|
|
|
|
|
|
1,537
|
|
Unrealized loss on interest rate swap, net of tax
|
|
|
(10,451
|
)
|
|
|
(10,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
26,516
|
|
|
$
|
26,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative impact of change in accounting for uncertainties in
income taxes (Note 11)
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
Issuance and vesting of restricted stock
|
|
|
3,923
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
3,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
66
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(3
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of subsidiary shares to non-controlling interest
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,271
|
|
Distributions to non-controlling interests
|
|
|
(1,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,698
|
)
|
Other
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
Accretion of dividends on preferred stock
|
|
|
(23,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
535,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(81
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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-Non-Controlling Interests, 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2006(1)
|
|
$
|
616,568
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
464,283
|
|
|
$
|
146,774
|
|
|
$
|
2,945
|
|
|
$
|
2,566
|
|
Net income
|
|
|
56,682
|
|
|
$
|
56,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,145
|
|
|
|
|
|
|
|
1,537
|
|
Unrealized loss on interest rate swap, net of tax
|
|
|
(7,888
|
)
|
|
|
(7,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
48,794
|
|
|
$
|
48,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative impact of change in accounting for uncertainties in
income taxes (Note 11)
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
Federal tax benefit of losses contributed by Holdings
|
|
|
10,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional investment by Holdings
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared to Holdings
|
|
|
(17,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,000
|
)
|
|
|
|
|
|
|
|
|
Dividends paid to Holdings
|
|
|
(32,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,785
|
)
|
|
|
|
|
|
|
|
|
Contribution related to restricted stock awards and stock option
issuances by Holdings
|
|
|
3,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of subsidiary shares to non-controlling interest
|
|
|
3,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,271
|
|
Distributions to non-controlling interests
|
|
|
(1,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,698
|
)
|
Other
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of subsidiary shares to non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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-Non-Controlling Interests, for additional information
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
SELECT
MEDICAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
36,967
|
|
|
$
|
25,834
|
|
|
$
|
78,888
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
57,297
|
|
|
|
71,786
|
|
|
|
70,981
|
|
Provision for bad debts
|
|
|
37,572
|
|
|
|
47,804
|
|
|
|
40,872
|
|
Gain on early retirement of debt
|
|
|
|
|
|
|
(912
|
)
|
|
|
(13,575
|
)
|
Loss (gain) from disposal of assets
|
|
|
2,424
|
|
|
|
546
|
|
|
|
(122
|
)
|
Non-cash loss from interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
632
|
|
Non-cash stock compensation expense
|
|
|
3,746
|
|
|
|
2,093
|
|
|
|
5,147
|
|
Amortization of debt discount
|
|
|
1,325
|
|
|
|
1,492
|
|
|
|
1,681
|
|
Deferred income taxes
|
|
|
2,460
|
|
|
|
21,756
|
|
|
|
27,103
|
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(75,540
|
)
|
|
|
(88,545
|
)
|
|
|
(35,455
|
)
|
Other current assets
|
|
|
1,406
|
|
|
|
8,230
|
|
|
|
(1,117
|
)
|
Other assets
|
|
|
6,251
|
|
|
|
16,913
|
|
|
|
6,114
|
|
Accounts payable
|
|
|
(112
|
)
|
|
|
(1,351
|
)
|
|
|
963
|
|
Due to third-party payors
|
|
|
2,186
|
|
|
|
(9,363
|
)
|
|
|
(3,804
|
)
|
Accrued expenses
|
|
|
10,031
|
|
|
|
11,155
|
|
|
|
(12,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
86,013
|
|
|
|
107,438
|
|
|
|
165,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(166,074
|
)
|
|
|
(56,504
|
)
|
|
|
(57,877
|
)
|
Proceeds from sale of business units
|
|
|
9,605
|
|
|
|
2,666
|
|
|
|
|
|
Proceeds from sale of property
|
|
|
6,438
|
|
|
|
743
|
|
|
|
1,341
|
|
Insurance proceeds
|
|
|
|
|
|
|
281
|
|
|
|
|
|
Changes in restricted cash
|
|
|
4,335
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(236,980
|
)
|
|
|
(7,624
|
)
|
|
|
(21,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(382,676
|
)
|
|
|
(60,438
|
)
|
|
|
(77,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
449,000
|
|
|
|
407,000
|
|
|
|
193,000
|
|
Payments on revolving credit facility
|
|
|
(329,000
|
)
|
|
|
(377,000
|
)
|
|
|
(343,000
|
)
|
Credit facility term loan borrowing
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Payment on credit facility term loan
|
|
|
(6,550
|
)
|
|
|
(6,800
|
)
|
|
|
(173,433
|
)
|
Repurchase of
75/8% senior
subordinated notes
|
|
|
|
|
|
|
(1,040
|
)
|
|
|
(30,114
|
)
|
Repurchase of senior floating rate notes
|
|
|
|
|
|
|
|
|
|
|
(6,468
|
)
|
Borrowings of other debt
|
|
|
|
|
|
|
|
|
|
|
7,189
|
|
Principal payments on seller and other debt
|
|
|
(1,323
|
)
|
|
|
(5,630
|
)
|
|
|
(7,275
|
)
|
Repurchase of common and preferred stock
|
|
|
(14
|
)
|
|
|
(612
|
)
|
|
|
(80
|
)
|
Proceeds from issuance of restricted stock
|
|
|
200
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
66
|
|
|
|
90
|
|
|
|
146
|
|
Proceeds from (repayment of) bank overdrafts
|
|
|
8,911
|
|
|
|
6
|
|
|
|
(21,130
|
)
|
Equity contribution and loans from non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
Distributions to non-controlling interests
|
|
|
(1,698
|
)
|
|
|
(1,957
|
)
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
219,592
|
|
|
|
12,731
|
|
|
|
(68,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(77,071
|
)
|
|
|
59,731
|
|
|
|
19,420
|
|
Cash and cash equivalents at beginning of period
|
|
|
81,600
|
|
|
|
4,529
|
|
|
|
64,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,529
|
|
|
$
|
64,260
|
|
|
$
|
83,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
134,527
|
|
|
$
|
135,838
|
|
|
$
|
126,695
|
|
Cash paid for taxes
|
|
$
|
9,009
|
|
|
$
|
5,313
|
|
|
$
|
18,084
|
|
|
|
|
(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-Non-Controlling Interests, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007(1)
|
|
|
2008(1)
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
56,682
|
|
|
$
|
46,766
|
|
|
$
|
102,050
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
57,297
|
|
|
|
71,786
|
|
|
|
70,981
|
|
Provision for bad debts
|
|
|
37,572
|
|
|
|
47,804
|
|
|
|
40,872
|
|
Gain on early retirement of debt
|
|
|
|
|
|
|
(912
|
)
|
|
|
(12,446
|
)
|
Loss (gain) from disposal of assets
|
|
|
2,424
|
|
|
|
546
|
|
|
|
(122
|
)
|
Non-cash loss (gain) from interest rate swaps
|
|
|
4,327
|
|
|
|
2,802
|
|
|
|
(3,204
|
)
|
Non-cash stock compensation expense
|
|
|
3,746
|
|
|
|
2,093
|
|
|
|
5,147
|
|
Deferred income taxes
|
|
|
2,460
|
|
|
|
33,027
|
|
|
|
27,103
|
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(75,540
|
)
|
|
|
(88,545
|
)
|
|
|
(35,455
|
)
|
Other current assets
|
|
|
1,406
|
|
|
|
8,230
|
|
|
|
(1,117
|
)
|
Other assets
|
|
|
5,640
|
|
|
|
16,355
|
|
|
|
5,567
|
|
Accounts payable
|
|
|
(112
|
)
|
|
|
(1,351
|
)
|
|
|
963
|
|
Due to third-party payors
|
|
|
2,186
|
|
|
|
(9,363
|
)
|
|
|
(3,804
|
)
|
Accrued expenses
|
|
|
20,698
|
|
|
|
11,007
|
|
|
|
1,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
118,786
|
|
|
|
140,245
|
|
|
|
198,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(166,074
|
)
|
|
|
(56,504
|
)
|
|
|
(57,877
|
)
|
Proceeds from sale of business units
|
|
|
9,605
|
|
|
|
2,666
|
|
|
|
|
|
Proceeds from sale of property
|
|
|
6,438
|
|
|
|
743
|
|
|
|
1,341
|
|
Insurance proceeds
|
|
|
|
|
|
|
281
|
|
|
|
|
|
Changes in restricted cash
|
|
|
4,335
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(236,980
|
)
|
|
|
(7,624
|
)
|
|
|
(21,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(382,676
|
)
|
|
|
(60,438
|
)
|
|
|
(77,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment by Holdings
|
|
|
266
|
|
|
|
90
|
|
|
|
316,012
|
|
Payment of initial public offering costs
|
|
|
|
|
|
|
(1,326
|
)
|
|
|
(1,737
|
)
|
Borrowings on revolving credit facility
|
|
|
449,000
|
|
|
|
407,000
|
|
|
|
193,000
|
|
Payments on revolving credit facility
|
|
|
(329,000
|
)
|
|
|
(377,000
|
)
|
|
|
(343,000
|
)
|
Credit facility term loan borrowing
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Payment on credit facility term loan
|
|
|
(6,550
|
)
|
|
|
(6,800
|
)
|
|
|
(173,433
|
)
|
Repurchase of
75/8% senior
subordinated notes
|
|
|
|
|
|
|
(1,040
|
)
|
|
|
(30,114
|
)
|
Borrowings of other debt
|
|
|
|
|
|
|
|
|
|
|
7,189
|
|
Principal payments on seller and other debt
|
|
|
(1,323
|
)
|
|
|
(5,630
|
)
|
|
|
(7,275
|
)
|
Dividends paid to Holdings
|
|
|
(32,787
|
)
|
|
|
(33,419
|
)
|
|
|
(39,387
|
)
|
Proceeds from (repayment of) bank overdrafts
|
|
|
8,911
|
|
|
|
6
|
|
|
|
(21,130
|
)
|
Equity contribution and loans from non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
Distributions to non-controlling interests
|
|
|
(1,698
|
)
|
|
|
(1,957
|
)
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
186,819
|
|
|
|
(20,076
|
)
|
|
|
(101,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(77,071
|
)
|
|
|
59,731
|
|
|
|
19,420
|
|
Cash and cash equivalents at beginning of period
|
|
|
81,600
|
|
|
|
4,529
|
|
|
|
64,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,529
|
|
|
$
|
64,260
|
|
|
$
|
83,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
101,766
|
|
|
$
|
102,957
|
|
|
$
|
93,876
|
|
Cash paid for taxes
|
|
$
|
9,009
|
|
|
$
|
5,313
|
|
|
$
|
18,084
|
|
|
|
|
(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-Non-Controlling Interests, 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
NOTES TO
CONSOLIDATED FINANCIAL STATEMENT
|
|
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 effecting 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 Companys
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 Selects
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 Companys 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 Companys long term
acute care hospitals from general acute care hospitals. These
patients have specialized needs, and serious and often complex
medical conditions such as respiratory failure, neuromuscular
disorders, traumatic brain and spinal cord injuries, strokes,
non-healing wounds, cardiac disorders, renal disorders and
cancer. The Companys outpatient rehabilitation segment
consists of clinics and contract services that provide physical,
occupational and speech rehabilitation services. The
Companys outpatient rehabilitation patients are typically
diagnosed with musculoskeletal impairments that restrict their
ability to perform normal activities of daily living. The
Company operated 87, 93 and 95 specialty hospitals at
December 31, 2007, 2008 and 2009, respectively. At
December 31, 2007, 2008 and 2009, the Company operated 999,
956 and 961 outpatient clinics, respectively. At
December 31, 2007, 2008 and 2009, the Company had
operations in the District of Columbia and 42 states.
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
STATEMENT (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 Companys accounts receivable are related to providing
healthcare services to patients. Collection of these accounts
receivable is the Companys primary source of cash and is
critical to its operating performance. The Companys
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 Companys net accounts receivable balance and
accounted for approximately 0.3% and 0.5% of the net accounts
receivable balance before doubtful accounts at December 31,
2008 and December 31, 2009, respectively. The
Companys general policy is to verify insurance coverage
prior to the date of admission for a patient admitted to the
Companys hospitals or in the case of the Companys
outpatient rehabilitation clinics, the Company verifies
insurance coverage prior to their first therapy visit. The
Companys 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
Companys collection efforts with non-governmental payors
and regulatory or administrative disruptions with the fiscal
intermediaries that pay the Companys 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
|
|
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 whom reside in the service area
of the Companys facilities and are insured under
third-party payor agreements. Because of the geographic
diversity of the Companys facilities and non-governmental
third-party payors, Medicare represents the Companys only
significant concentration of credit risk.
F-12
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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 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, 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 the
Companys 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
STATEMENT (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 Companys insurance programs, which
include the Companys employee health insurance program,
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 may 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, 2008 and 2009,
respectively, the Company had recorded a liability of
$62.9 million and $60.8 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 $63.7 million at December 31,
2009 and 2008, respectively.
Fair
Value Measurements
The Company measures its interest rate swaps at fair value on a
recurring basis. The Company determines the fair value of its
interest rate swaps based on financial models that consider
current and future market interest rates and adjustments for
non-performance risk. The Company considers those inputs
utilized in the valuation process to be Level 2 in the fair
value hierarchy. Level 2 in the fair value hierarchy is
defined as inputs other than quoted prices that are observable
for the asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar assets
or liabilities in markets that are not active.
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. The balance sheet as of
December 31, 2008 has been revised to show this change in
presentation. In addition, non-controlling interest is now
deducted from net income to obtain net income attributable to
each of Holdings and Select. The Companys Statements of
operations and statements of cash flows for the years ended
December 31, 2007 and 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 Companys consolidated
results of operations.
Revenue
Recognition
Net operating revenues consists primarily of patient and
contract therapy revenues and are recognized as services are
rendered.
F-14
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
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.
A significant portion of the Companys net operating
revenues are generated directly from the Medicare program. Net
operating revenues generated directly from the Medicare program
represented approximately 48%, 46% and 47% of the Companys
net operating revenues for the years ended December 31,
2007, 2008 and 2009, respectively. Approximately 26% and 31% of
the Companys accounts receivable (after allowances for
contractual adjustments but before doubtful accounts) at
December 31, 2008 and 2009, 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 Companys specialty hospitals or clinics to
comply with regulations can result in changes in that specialty
hospitals or clinics 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, 2007, 2008 and 2009 was cumulative losses of
$5.6 million (net of tax), $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, 2007, 2008 and 2009 was cumulative losses of
$4.9 million (net of tax), $11.4 million (net of tax)
and $8.9 million (net of tax), respectively, on interest
rate swaps accounted for as cash flow hedges.
Financial
Instruments and Hedging
The Company has in the past entered into derivatives to manage
interest rate risk. Derivatives are 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 are
recognized at fair value on the balance sheet. The effective
portion of gains or losses on interest rate swaps designated as
hedges are reported in stockholders equity as a component
of other comprehensive income. The ineffective portion of
changes in fair value of the interest rate swaps are immediately
recognized in the other income and expense section of the
consolidated statement of operations.
Refer to Note 15 for information regarding interest rate
swaps the Company entered into during 2005 and 2007.
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
F-15
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
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. Updated
2010-06 is
effective for the first reporting period beginning after
December 15, 2009, 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 is
not anticipated to have an impact on the Companys
consolidated financial statements.
In August 2009, the FASB issued ASU
2009-05,
Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value
(Update
2009-05).
Update
2009-05
provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value
of such liability using one or more of the techniques prescribed
by the update. Update
2009-05 is
effective for the first annual or interim period beginning after
the issuance of this update. The adoption of Update
2009-05 did
not have an impact on the Companys consolidated financial
statements.
In June 2009, the FASB issued an amendment to Accounting
Standards Codification (ASC) topic 105,
Generally Accepted Accounting Principles. The
amendment stipulates the FASB Accounting Standards Codification
is the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. The amendment
was effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The
adoption of this amendment required the Company to update any
references made to the former accounting literature to
references in the ASC.
In June 2009, FASB issued an amendment to ASC topic 810,
Consolidation. The amendment changes how a reporting
entity determines when an entity that is insufficiently
capitalized or is not controlled through voting or similar
rights should be consolidated. The amendment will require a
reporting entity to provide additional disclosures about its
involvement with variable interest entities and any significant
changes in risk exposure related to that involvement. The
amendment is effective for annual and interim reporting periods
beginning after November 15, 2009. The adoption of the
amendment is not expected to have an impact on the
Companys consolidated financial statements.
In June 2009, the FASB issued an amendment to ASC topic 860,
Transfers and Servicing. The amendment will require
additional disclosure about the transfers of financial assets,
including securitization transactions, and additional disclosure
in cases where entities have continuing exposure to the risks
related to transferred financial assets. The amendment
eliminates the concept of qualifying special-purpose
entity and changes the requirements for derecognizing
financial assets. The amendment is effective for annual and
interim reporting periods beginning after November 15,
2009. The adoption of this amendment is not expected to have an
impact on the Companys consolidated financial statements.
In May 2009, the FASB issued an amendment to ASC topic 855,
Subsequent Events. The amendment provides general
standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued or are available to be issued. The amendment sets forth
the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the
financial statements. The amendment also sets forth the
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its
financial statements.
In April 2009, FASB issued an amendment to ASC topic 805,
Business Combinations. This amendment changes the
provisions for the initial recognition and measurement,
subsequent measurement and accounting and disclosures for assets
and liabilities arising from contingencies in business
combinations. The amendment eliminates the distinction between
contractual and non-contractual contingencies, including the
initial recognition and measurement criteria. The amendment is
effective for contingent assets and contingent liabilities
acquired in business combinations for which the acquisition date
is on or after the beginning of the first annual reporting
period
F-16
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
beginning on or after December 15, 2008. The adoption of
this amendment did not have an impact on the Companys
consolidated financial statements.
In April 2009, the FASB issued an amendment to ASC topic 820,
Fair Value Measurements and Disclosures. This
amendment provides additional guidance for estimating fair value
when the volume and level of activity for the asset or liability
have decreased significantly. The amendment also provides
guidance on identifying circumstances that indicate a
transaction is not orderly. The amendment was effective for the
Companys interim period ending on June 30, 2009. The
adoption of this amendment did not have an impact on the
Companys consolidated financial statements.
For
the Year Ended December 31, 2007
On May 1, 2007, Select completed the acquisition of
substantially all of the outpatient rehabilitation division (the
Division) of HealthSouth Corporation. At the
closing, Select acquired 539 outpatient rehabilitation clinics.
On June 30, 2007, one additional facility located in
Washington, D.C. was acquired upon the receipt of
regulatory approval. The closing of the purchase of 29
additional outpatient rehabilitation clinics that was deferred
pending certain state regulatory approvals was completed as of
October 31, 2007 and resulted in the release of an
additional $23.4 million of the purchase price. The
aggregate purchase price of $245.0 million was reduced by
approximately $7.0 million at closing for assumed
indebtedness and other matters. The amount of the consideration
was derived through arms length negotiations. Select
funded the acquisition through borrowings under its senior
secured credit facility and cash on hand. The factors that were
considered when deciding to acquire the Division and determining
the purchase price that resulted in goodwill included the
historical earnings of the acquired outpatient rehabilitation
clinics, general and administrative cost saving opportunities
that could be achieved by utilizing the Companys
infrastructure and the benefits that could be achieved with
patients and commercial payors by having a larger network of
outpatient rehabilitation clinics.
The results of operations of the Division have been included in
the Companys consolidated financial statements since
May 1, 2007. The Company has included the operations of the
Division in its outpatient rehabilitation segment.
The purchase price was allocated to tangible and identifiable
intangible assets and liabilities based upon estimates of fair
value, with the remainder allocated to goodwill. No amortization
of goodwill has been recorded.
The purchase price allocation is as follows (in thousands):
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
236,899
|
|
|
|
|
|
|
Fair value of net tangible assets acquired:
|
|
|
|
|
Accounts receivable
|
|
|
35,743
|
|
Other current assets
|
|
|
12,596
|
|
Property and equipment
|
|
|
39,347
|
|
Other assets
|
|
|
808
|
|
Current liabilities
|
|
|
(14,104
|
)
|
Long-term debt
|
|
|
(2,381
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
72,009
|
|
Non-compete,
5-year
|
|
|
5,100
|
|
Restructuring reserve
|
|
|
(18,700
|
)
|
Goodwill
|
|
|
178,490
|
|
|
|
|
|
|
|
|
$
|
236,899
|
|
|
|
|
|
|
F-17
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
The Company also acquired an interest in a rehabilitation
hospital and purchased the assets of two outpatient
rehabilitation clinics. Consideration for these transactions
totaled approximately $0.1 million in cash.
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 Division.
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.
Information with respect to all businesses acquired in purchase
transactions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cash paid (net of cash acquired)
|
|
$
|
236,980
|
|
|
$
|
7,624
|
|
|
$
|
21,381
|
|
Notes issued
|
|
|
|
|
|
|
1,001
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,980
|
|
|
|
8,625
|
|
|
|
21,665
|
|
Liabilities assumed
|
|
|
36,458
|
|
|
|
253
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273,438
|
|
|
|
8,878
|
|
|
|
21,802
|
|
Fair value of assets acquired, principally accounts receivable
and property and equipment
|
|
|
88,625
|
|
|
|
1,120
|
|
|
|
2,034
|
|
Non-compete agreement
|
|
|
5,100
|
|
|
|
|
|
|
|
|
|
Trademark
|
|
|
800
|
|
|
|
|
|
|
|
|
|
Non-controlling interest relieved
|
|
|
|
|
|
|
461
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(21,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost in excess of fair value of net assets acquired (goodwill)
|
|
$
|
178,913
|
|
|
$
|
7,297
|
|
|
$
|
41,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following pro forma unaudited results of operations have
been prepared assuming the acquisition of the Division occurred
on January 1, 2007. 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.
F-18
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Unaudited pro forma net revenue, net income and earnings per
share for the year ended December 31, 2007 as if the
acquisition occurred as of January 1, 2007 are as follows:
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2007
|
|
|
(Unaudited)
|
|
|
(In thousands, except per share data)
|
|
Net revenue
|
|
$
|
2,092,114
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
|
36,046
|
|
Net income attributable to Select Medical Corporation
|
|
|
55,757
|
|
Earnings per share
|
|
|
|
|
Basic income per common share
|
|
$
|
0.18
|
|
Diluted income per common share
|
|
$
|
0.18
|
|
|
|
3.
|
Assets
Held For Sale and Sale of Business Units
|
Assets
held for Sale
A building that the Company acquired in connection with its
acquisition of Kessler Rehabilitation Corporation in 2003 was
sold in June 2007 for approximately $4.5 million and a loss
on the sale of $0.5 million was recognized. Previously this
building was classified as an asset held for sale. Also during
the year ended December 31, 2007, the Company sold land for
approximately $1.9 million. No gain or loss was recognized
on this sale.
At December 31, 2007, the assets held for sale totaling
$14.6 million related to three properties the Company
expected to sell within the next year. The Company adjusted the
carrying values of these properties to fair market value by
recording an impairment loss of $2.7 million during the
year ended December 31, 2007. During the year ended
December 31, 2008 the Company sold two of these properties
for approximately $3.8 million and recognized an additional
loss on these sales of $0.4 million.
At December 31, 2008, the Company had $12.5 million in
assets held for sale. These assets consisted of three properties
that the Company intended to sell within the year. During the
year ended December 31, 2009, the Company sold one of these
properties for approximately $1.2 million and recognized a
gain on the sale of $0.1 million. At December 31,
2009, the Company had $11.3 million recorded as assets held
for sale, which consists of two properties the Company intends
to sell within the next year.
Sale
of Business Units
During the year ended December 31, 2007, the Company sold
its interest in four business units for aggregate consideration
of $12.2 million. The Company received cash of
$9.6 million and recorded notes receivable of
$2.6 million related to these transactions. 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.
F-19
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
|
|
4.
|
Property
and Equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
48,606
|
|
|
$
|
49,340
|
|
Leasehold improvements
|
|
|
82,228
|
|
|
|
85,541
|
|
Buildings
|
|
|
252,475
|
|
|
|
257,480
|
|
Furniture and equipment
|
|
|
206,316
|
|
|
|
208,216
|
|
Construction-in-progress
|
|
|
6,710
|
|
|
|
38,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596,335
|
|
|
|
639,378
|
|
Less: accumulated depreciation and amortization
|
|
|
125,270
|
|
|
|
173,247
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
471,065
|
|
|
$
|
466,131
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $48.6 million, $62.6 million
and $61.8 million for the years ended December 31,
2007, 2008 and 2009, respectively.
Goodwill and certain other indefinite-lived intangible assets
are no longer amortized, but instead are subject to periodic
impairment evaluations. The Companys most recent
impairment assessment was completed during the fourth quarter of
2009 utilizing financial information as of October 1, 2009,
which indicated that there was no impairment with respect to
goodwill or other recorded intangible assets. The majority of
the Companys 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, internal
development of specialty hospitals and outpatient rehabilitation
clinics, future EBITDA margin estimates, future selling, general
and administrative expense rates and the industrys
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 assumptions changes
or fails to materialize, the resulting decline in the
Companys estimated fair value could result in a material
impairment charge to the goodwill associated with any one of the
reporting units.
F-20
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
Contract therapy relationships
|
|
$
|
20,456
|
|
|
$
|
(15,683
|
)
|
Non-compete agreements
|
|
|
25,909
|
|
|
|
(15,958
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,365
|
|
|
$
|
(31,641
|
)
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,506,661
|
|
|
|
|
|
Trademarks
|
|
|
47,858
|
|
|
|
|
|
Certificates of need
|
|
|
10,157
|
|
|
|
|
|
Accreditations
|
|
|
1,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,566,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys accreditations and trademarks have renewal
terms. The costs to renew these intangibles are expensed as
incurred. At December 31, 2009, the accreditations and
trademarks have a weighted average time until next renewal of
1.3 years and 4.5 years, respectively.
Amortization expense for intangible assets with finite lives
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Amortization expense
|
|
$
|
8,491
|
|
|
$
|
8,830
|
|
|
$
|
8,831
|
|
F-21
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Amortization expense for the Companys 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 Division, Kessler Rehabilitation
Corporation and SemperCare Inc. and the value assigned to the
Companys contract therapy relationships. The useful lives
of the Divisions non-compete, the Kessler non-compete, the
SemperCare non-compete and the Companys contract therapy
relationships are approximately five, six, seven and five years,
respectively. Amortization expense related to these intangible
assets for each of the next five years commencing
January 1, 2010 is approximately as follows (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
2010
|
|
$
|
4,247
|
|
2011
|
|
|
1,306
|
|
2012
|
|
|
340
|
|
2013
|
|
|
0
|
|
2014
|
|
|
0
|
|
The changes in the carrying amount of goodwill for the
Companys reportable segments for the years ended
December 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance as of January 1, 2008
|
|
$
|
1,227,956
|
|
|
$
|
271,529
|
|
|
$
|
1,499,485
|
|
Goodwill acquired during year
|
|
|
|
|
|
|
7,297
|
|
|
|
7,297
|
|
Other
|
|
|
(108
|
)
|
|
|
(13
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Restructuring
Reserves
|
In connection with the acquisition of the Division
(Note 2), 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
Companys restructuring plan.
F-22
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
The following summarizes the Companys restructuring
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
January 1, 2007
|
|
$
|
225
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
225
|
|
2007 acquisition restructuring reserve
|
|
|
12,063
|
|
|
|
5,775
|
|
|
|
862
|
|
|
|
18,700
|
|
Amounts paid in 2007
|
|
|
(1,611
|
)
|
|
|
(1,830
|
)
|
|
|
|
|
|
|
(3,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to pay out the remaining lease termination
costs through 2014.
|
|
7.
|
Long-Term
Debt and Notes Payable
|
The components of long-term debt and notes payable are shown in
the following tables:
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
75/8% senior
subordinated notes
|
|
$
|
658,000
|
|
|
$
|
611,500
|
|
Senior secured credit facility:
|
|
|
|
|
|
|
|
|
Revolving loan
|
|
|
150,000
|
|
|
|
|
|
Tranche B Term loan
|
|
|
656,500
|
|
|
|
191,753
|
|
Tranche B-1
Term loan
|
|
|
|
|
|
|
291,314
|
|
10% senior subordinated notes
|
|
|
135,603
|
|
|
|
137,284
|
|
Senior floating rate notes
|
|
|
175,000
|
|
|
|
167,300
|
|
Seller notes
|
|
|
1,282
|
|
|
|
971
|
|
Other
|
|
|
3,540
|
|
|
|
5,449
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,779,925
|
|
|
|
1,405,571
|
|
Less: current maturities
|
|
|
9,046
|
|
|
|
4,145
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,770,879
|
|
|
$
|
1,401,426
|
|
|
|
|
|
|
|
|
|
|
F-23
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
|
|
|
|
|
|
|
|
|
|
|
Select
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
75/8% senior
subordinated notes
|
|
$
|
658,000
|
|
|
$
|
611,500
|
|
Senior secured credit facility:
|
|
|
|
|
|
|
|
|
Revolving loan
|
|
|
150,000
|
|
|
|
|
|
Tranche B Term loan
|
|
|
656,500
|
|
|
|
191,753
|
|
Tranche B-1
Term loan
|
|
|
|
|
|
|
291,314
|
|
Seller notes
|
|
|
1,282
|
|
|
|
971
|
|
Other
|
|
|
3,540
|
|
|
|
5,449
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,469,322
|
|
|
|
1,100,987
|
|
Less: current maturities
|
|
|
9,046
|
|
|
|
4,145
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,460,276
|
|
|
$
|
1,096,842
|
|
|
|
|
|
|
|
|
|
|
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 Selects senior
secured credit facility from $100.0 million to
$200.0 million, relaxed certain financial covenants
starting March 31, 2007 and waived Selects
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 HealthSouth 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 Tranche 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 Selects 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, Selects 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.
After giving effect to the Incremental Facility Amendment on
March 28, 2007 and Amendment No. 3 on August 5,
2009, Selects senior secured credit facility provided for
senior secured financing consisting of:
|
|
|
|
|
a $300.0 million revolving loan facility that will
terminate on February 24, 2011, including both a letter of
credit
sub-facility
and a swingline loan
sub-facility,
|
F-24
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
|
|
|
|
|
$268.6 million in Tranche B term loans that mature on
February 24, 2012, and
|
|
|
|
$384.5 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 Selects senior secured credit facility
are, at Selects 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 Selects senior credit facility are, at
Selects 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 Selects lenders are subject. The
applicable margin percentage for borrowings under Selects
revolving loans is subject to change based upon the ratio of
Selects total indebtedness to consolidated EBITDA (as
defined in the credit agreement). The applicable margin
percentage for revolving loans will decrease from (1) 1.00%
to 0.75% for alternate base rate loans and (2) 2.00% to
1.75% for adjusted LIBOR loans upon the delivery of
Selects Annual Report on
Form 10-K
to JPMorgan Chase Bank, N.A., as administrative agent to
Selects senior secured credit facility. 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, 2008 and
2009 was 6.1% and 5.9%, respectively.
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 0.375% and is subject to adjustment
based upon the ratio of Selects total indebtedness to its
consolidated EBITDA (as defined in the credit agreement).
Availability under the revolving credit facility at
December 31, 2009 was approximately $269.3 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
$30.7 million in letters of credit were outstanding at
December 31, 2009.
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,
which financial covenants will become more restrictive over
time. 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 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, 2009,
Select was in compliance with all debt covenants related to the
senior secured credit facility.
Selects senior secured credit facility is guaranteed by
Holdings and substantially all of Selects current
subsidiaries and will be guaranteed by substantially all of
Selects 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.
F-25
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
During the year ended December 31, 2009, the Company made
$168.4 million in prepayments on the term loan portion of
the credit facility from the proceeds from the Companys
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 Companys
initial public offering and $12.1 million were voluntary
repayments. 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 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
75/8%
Senior Subordinated Notes (the 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 Selects existing indebtedness, and
pay related fees and expenses. The Notes are unconditionally
guaranteed on a senior subordinated basis by all of
Selects wholly-owned subsidiaries (the Subsidiary
Guarantors). Certain of Selects subsidiaries that
were not wholly-owned by Select did not guarantee the Notes (the
Non-Guarantor Subsidiaries). The guarantees of the
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 Notes rank equally
in right of payment with all of Selects existing and
future senior subordinated indebtedness and senior to all of
Selects existing and future subordinated indebtedness. The
Notes were not guaranteed by Holdings.
Select will be entitled at its option to redeem all or a portion
of the 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
12-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 Notes. However, upon
the occurrence of any change of control of Select, each holder
of the Notes shall have the right to require Select to
repurchase such holders 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 Notes contains customary events of
default and affirmative and negative covenants that, among other
things, limit Selects 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, 2009, 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 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 its 7
5/8% senior
subordinated notes. These notes had a carrying value of
$46.5 million. A gain on early retirement of debt in the
amount of $15.3 million was recognized, which was net of
the write-off of $1.0 million in unamortized deferred
financing costs related to the debt.
F-26
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
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 Holdings Notes).
The Holdings 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
Holdings Notes are not guaranteed by Select or any of its
subsidiaries.
Payment of interest expense on the Holdings Notes is expected to
be funded through periodic dividends from Select. The terms of
Selects senior secured credit facility, as well as the
indenture governing Selects
75/8% 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 Holdings 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 Holdings 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
|
|
2009
|
|
|
102.00
|
%
|
2010
|
|
|
101.00
|
%
|
2011
|
|
|
100.00
|
%
|
Holdings is not required to make any mandatory redemption or
sinking fund payments with respect to the Holdings Notes.
However, upon the occurrence of any change of control of
Holdings, each holder of the Holdings 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 Holdings 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 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,
2009, 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 Holdings senior floating rate notes with a carrying
value of $7.7 million. A gain on the early retirement of
debt in the amount of $1.1 million was recognized in 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
F-27
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
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 Companys long-term debt for the years
after 2009 are approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
Select
|
|
|
(In thousands)
|
|
2010
|
|
$
|
4,145
|
|
|
$
|
4,145
|
|
2011
|
|
|
149,858
|
|
|
|
149,858
|
|
2012
|
|
|
50,809
|
|
|
|
50,809
|
|
2013
|
|
|
2,950
|
|
|
|
2,950
|
|
2014
|
|
|
281,725
|
|
|
|
281,725
|
|
2015 and beyond
|
|
|
916,084
|
|
|
|
611,500
|
|
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 Selects 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 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.
|
F-28
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
On September 30, 2009 the Companys 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 authorize 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 Companys 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.
|
|
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. 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.
|
|
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.
F-29
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
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 34%, no dividend yield,
an expected life of five years and a risk free rate of 4.5% in
2007 and 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. The
following is a summary of stock option grants under the Plan and
Director Plan from January 1, 2007 through
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
|
|
Fair Value of
|
|
|
Granted
|
|
Exercise Price
|
|
Common Stock
|
|
|
(In thousands, except per share amounts)
|
|
February 13, 2007
|
|
|
17
|
|
|
$
|
8.33
|
|
|
$
|
0.27
|
|
May 9, 2007
|
|
|
98
|
|
|
|
8.33
|
|
|
|
0.27
|
|
August 15, 2007
|
|
|
228
|
|
|
|
8.33
|
|
|
|
3.27
|
|
November 14, 2007
|
|
|
32
|
|
|
|
8.33
|
|
|
|
3.27
|
|
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
|
|
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, 2008
|
|
$
|
3.33-8.33
|
|
|
|
1,361
|
|
|
$
|
6.35
|
|
Granted
|
|
|
8.33-10.00
|
|
|
|
180
|
|
|
|
9.37
|
|
Exercised
|
|
|
3.33-8.33
|
|
|
|
(24
|
)
|
|
|
3.67
|
|
Canceled
|
|
|
3.33-10.00
|
|
|
|
(86
|
)
|
|
|
7.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
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
|
|
|
|
(42
|
)
|
|
|
7.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
3.33-10.00
|
|
|
|
2,796
|
|
|
$
|
8.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information with respect to the outstanding options
as of December 31, 2009 for the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
|
|
Remaining
|
|
Number
|
Exercise Price
|
|
Outstanding
|
|
Contractual Life
|
|
Exercisable
|
|
|
(In thousands, except per share amounts)
|
|
$ 3.33
|
|
|
465
|
|
|
|
5.01
|
|
|
|
363
|
|
8.33
|
|
|
777
|
|
|
|
7.08
|
|
|
|
403
|
|
9.18
|
|
|
1,430
|
|
|
|
9.89
|
|
|
|
|
|
10.00
|
|
|
124
|
|
|
|
8.70
|
|
|
|
22
|
|
F-30
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
The weighted average remaining contractual term for all
outstanding options is 8.23 years and the weighted average
remaining contractual term of exercisable options is
6.02 years.
The total intrinsic value of options exercised for the years
ended December 31, 2009 and 2008 was $0.2 million and
$0.1 million, respectively. The aggregate intrinsic value
of options outstanding and options exercisable at
December 31, 2009 was $7.3 million and
$3.6 million, respectively.
Transactions and other information related to the
Directors Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Price Per Share
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Balance, January 1, 2008
|
|
$
|
3.33-8.33
|
|
|
|
36
|
|
|
$
|
5.83
|
|
Granted
|
|
|
10.00
|
|
|
|
15
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
3.33-10.00
|
|
|
|
51
|
|
|
$
|
7.06
|
|
Granted
|
|
|
10.00
|
|
|
|
12
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
3.33-10.00
|
|
|
|
63
|
|
|
$
|
7.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information with respect to the outstanding options
as of December 31, 2009 for the Directors Plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
|
|
Remaining
|
|
Number
|
Exercise Price
|
|
Outstanding
|
|
Contractual Life
|
|
Exercisable
|
|
|
(In thousands, except per share amounts)
|
|
$ 3.33
|
|
|
18
|
|
|
|
5.61
|
|
|
|
14
|
|
8.33
|
|
|
18
|
|
|
|
7.24
|
|
|
|
9
|
|
10.00
|
|
|
27
|
|
|
|
9.12
|
|
|
|
3
|
|
The weighted average remaining contractual term for all
outstanding options is 7.58 years and the weighted average
remaining contractual term of exercisable options is
6.49 years.
The aggregate intrinsic value of options outstanding and options
exercisable at December 31, 2009 was $0.2 million and
$0.1 million, respectively.
Prior to the Companys 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 Companys initial public offering of common stock,
the fair-value of the Companys restricted stock is based
on the closing stock price on the date of grant.
The following is a summary of restricted stock issuances from
January 1, 2007 through December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
Issued
|
|
Fair Value of Common
Stock
|
|
|
(In thousands, except per share amounts)
|
|
February 13, 2007
|
|
|
60
|
|
|
$
|
0.27
|
|
August 12, 2009
|
|
|
364
|
|
|
|
10.00
|
|
November 23, 2009
|
|
|
250
|
|
|
|
9.18
|
|
F-31
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Stock compensation expense for each of the next five years,
based on restricted stock awards granted as of December 31,
2009, is estimated to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
|
(In thousands)
|
|
Stock compensation expense
|
|
$
|
663
|
|
|
$
|
574
|
|
|
$
|
575
|
|
|
$
|
513
|
|
|
$
|
0
|
|
The Company recognized the following stock compensation expense
related to restricted stock and stock option awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Stock compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in general and administrative
|
|
$
|
3,555
|
|
|
$
|
1,953
|
|
|
$
|
4,775
|
|
Included in cost of services
|
|
|
191
|
|
|
|
140
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,746
|
|
|
$
|
2,093
|
|
|
$
|
5,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys tax provision from
operations for the years ended December 31, 2007, 2008, and
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,004
|
|
|
$
|
(262
|
)
|
|
$
|
3,200
|
|
State and local
|
|
|
5,235
|
|
|
|
4,569
|
|
|
|
7,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
16,239
|
|
|
|
4,307
|
|
|
|
10,413
|
|
Deferred
|
|
|
2,460
|
|
|
|
21,756
|
|
|
|
27,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
18,699
|
|
|
$
|
26,063
|
|
|
$
|
37,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
21,620
|
|
|
$
|
(262
|
)
|
|
$
|
15,671
|
|
State and local
|
|
|
5,235
|
|
|
|
4,569
|
|
|
|
7,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
26,855
|
|
|
|
4,307
|
|
|
|
22,884
|
|
Deferred
|
|
|
2,460
|
|
|
|
33,027
|
|
|
|
27,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
29,315
|
|
|
$
|
37,334
|
|
|
$
|
49,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
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,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Expected federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of federal benefit
|
|
|
2.5
|
|
|
|
6.0
|
|
|
|
5.4
|
|
Other permanent differences
|
|
|
2.0
|
|
|
|
2.2
|
|
|
|
1.1
|
|
Valuation allowance
|
|
|
(0.7
|
)
|
|
|
8.6
|
|
|
|
(0.6
|
)
|
Tax loss on sale of subsidiaries
|
|
|
(5.7
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
Uncertain tax positions
|
|
|
2.1
|
|
|
|
3.2
|
|
|
|
0.5
|
|
IRS audit settlements
|
|
|
|
|
|
|
|
|
|
|
(7.7
|
)
|
Other
|
|
|
(1.6
|
)
|
|
|
(4.1
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33.6
|
%
|
|
|
50.2
|
%
|
|
|
32.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select
|
|
|
For the Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Expected federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of federal benefit
|
|
|
1.6
|
|
|
|
3.5
|
|
|
|
4.0
|
|
Other permanent differences
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
0.9
|
|
Valuation allowance
|
|
|
(0.5
|
)
|
|
|
5.1
|
|
|
|
(0.4
|
)
|
Tax loss on sale of subsidiaries
|
|
|
(3.7
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
Uncertain tax positions
|
|
|
1.3
|
|
|
|
1.9
|
|
|
|
0.4
|
|
IRS audit settlements
|
|
|
|
|
|
|
|
|
|
|
(5.9
|
)
|
Other
|
|
|
(0.9
|
)
|
|
|
(2.0
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
34.1
|
%
|
|
|
44.4
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the above tables, certain reclassifications have been made to
2007 components of the effective tax rate reconciliation to
conform to the 2008 and 2009 presentation.
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 Companys policy to include interest
related to income taxes as part of the income tax classification.
F-33
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
A summary of deferred tax assets and liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
8,535
|
|
|
$
|
4,461
|
|
Compensation and benefit related accruals
|
|
|
20,371
|
|
|
|
30,077
|
|
Malpractice insurance
|
|
|
11,856
|
|
|
|
12,349
|
|
Restructuring reserve
|
|
|
3,239
|
|
|
|
1,700
|
|
Net operating loss carry forwards
|
|
|
12,833
|
|
|
|
559
|
|
Interest rate swap
|
|
|
10,155
|
|
|
|
4,598
|
|
Other accruals, net
|
|
|
135
|
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset current
|
|
|
67,124
|
|
|
|
54,211
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) non-current
|
|
|
|
|
|
|
|
|
Expenses not currently deductible for tax
|
|
|
101
|
|
|
|
190
|
|
Excess capital loss carry forwards
|
|
|
6,424
|
|
|
|
6,418
|
|
Net operating loss carry forwards
|
|
|
27,464
|
|
|
|
26,133
|
|
Restricted stock
|
|
|
(567
|
)
|
|
|
(145
|
)
|
Interest rate swaps
|
|
|
5,169
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(67,179
|
)
|
|
|
(79,776
|
)
|
Other
|
|
|
3,480
|
|
|
|
(2,892
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability non-current
|
|
|
(25,108
|
)
|
|
|
(50,072
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
42,016
|
|
|
|
4,139
|
|
Valuation allowance
|
|
|
(23,009
|
)
|
|
|
(22,372
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
19,007
|
|
|
$
|
(18,233
|
)
|
|
|
|
|
|
|
|
|
|
F-34
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
|
|
|
|
|
|
|
|
|
|
|
Select
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
8,535
|
|
|
$
|
4,461
|
|
Compensation and benefit related accruals
|
|
|
20,371
|
|
|
|
30,077
|
|
Malpractice insurance
|
|
|
11,856
|
|
|
|
12,349
|
|
Restructuring reserve
|
|
|
3,239
|
|
|
|
1,700
|
|
Interest rate swap
|
|
|
8,095
|
|
|
|
4,598
|
|
Other accruals, net
|
|
|
1,697
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset current
|
|
|
53,793
|
|
|
|
54,211
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) non-current
|
|
|
|
|
|
|
|
|
Expenses not currently deductible for tax
|
|
|
101
|
|
|
|
190
|
|
Excess capital loss carry forwards
|
|
|
6,424
|
|
|
|
6,418
|
|
Net operating loss carry forwards
|
|
|
27,464
|
|
|
|
26,133
|
|
Restricted stock
|
|
|
(567
|
)
|
|
|
(145
|
)
|
Interest rate swaps
|
|
|
5,169
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(67,179
|
)
|
|
|
(79,776
|
)
|
Other
|
|
|
3,480
|
|
|
|
(2,892
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability non-current
|
|
|
(25,108
|
)
|
|
|
(50,072
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
28,685
|
|
|
|
4,139
|
|
Valuation allowance
|
|
|
(23,009
|
)
|
|
|
(22,372
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,676
|
|
|
$
|
(18,233
|
)
|
|
|
|
|
|
|
|
|
|
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 of approximately $18.2 million 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 net 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 Companys assessment, it has concluded that it is
more likely than not that such assets, net of the existing
valuation allowance, will be realized.
F-35
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
The total state net operating losses are approximately
$532.0 million. State net operating loss carry forwards
expire and have a respective valuation allowance as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
State Net
|
|
|
|
|
Operating
|
|
Valuation
|
|
|
Losses
|
|
Allowance
|
|
2010
|
|
$
|
7,624
|
|
|
$
|
7,624
|
|
2011
|
|
|
6,502
|
|
|
|
6,502
|
|
2012
|
|
|
10,742
|
|
|
|
10,735
|
|
2013
|
|
|
38,683
|
|
|
|
38,538
|
|
Thereafter through 2029
|
|
|
468,697
|
|
|
|
337,422
|
|
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 Companys 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
Companys 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 Companys unrecognized tax
benefits is as follows (in thousands):
|
|
|
|
|
Gross tax contingencies January 1, 2007
|
|
$
|
21,305
|
|
Reductions for tax positions taken in prior periods due
primarily to statute expirations
|
|
|
(2,249
|
)
|
Additions for current period tax positions taken
|
|
|
2,357
|
|
|
|
|
|
|
Gross tax contingencies January 1, 2008
|
|
|
21,413
|
|
Reductions for tax positions taken in prior periods due
primarily to statute expirations
|
|
|
(839
|
)
|
Additions for current period 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 expirations
|
|
|
(1,774
|
)
|
Additions for current period tax positions taken
|
|
|
2,017
|
|
|
|
|
|
|
Gross tax contingencies December 31, 2009
|
|
$
|
22,735
|
|
|
|
|
|
|
As of December 31, 2008 and 2009, the Company had
$22.5 million and $22.7 million of unrecognized tax
benefits, respectively, all of which, if fully recognized, would
affect the Companys effective income tax rate.
As of December 31, 2009, changes to the Companys
gross unrecognized tax benefits that are reasonably possible in
the next twelve months are not material. The Companys
policy is to include interest related to income taxes in income
tax expense. As of December 31, 2009, the Company had
accrued interest related to income taxes of $1.0 million,
net of federal income tax benefits, on the balance sheet.
Interest recognized for the year ended December 31, 2009
was $0.4 million 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 for years through 2001.
F-36
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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 HCEs (highly compensated employees) may
contribute up to 30% of their salary; HCEs 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
employees hire date. The expense incurred by the Company
related to this plan was $5.7 million, $11.7 million
and $8.4 million during the years ended December 31,
2007, 2008 and 2009, respectively.
The Companys reportable segments consist of
(i) specialty hospitals and (ii) outpatient
rehabilitation. All other represents amounts associated with
corporate activities and non-healthcare related services. The
outpatient rehabilitation reportable segment has two operating
segments: outpatient rehabilitation clinics and contract
therapy. These operating segments are aggregated for reporting
purposes as they have common economic characteristics and
provide a similar service to a similar patient base. The
accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The
Company evaluates performance of the segments based on Adjusted
EBITDA. Adjusted EBITDA is defined as net income before
interest, income taxes, depreciation and amortization, gain
(loss) on early retirement of debt, stock compensation expense,
other income (expense), long term incentive compensation and
non-controlling interest.
The following table summarizes selected financial data for the
Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
Specialty
|
|
Outpatient
|
|
|
|
|
|
|
Hospitals
|
|
Rehabilitation
|
|
All Other
|
|
Total
|
|
|
(In thousands)
|
|
Net revenue
|
|
$
|
1,386,410
|
|
|
$
|
603,413
|
|
|
$
|
1,843
|
|
|
$
|
1,991,666
|
|
Adjusted EBITDA
|
|
|
217,175
|
|
|
|
75,437
|
|
|
|
(37,684
|
)
|
|
|
254,928
|
|
Total
assets(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical Corporation
|
|
|
1,882,476
|
|
|
|
513,397
|
|
|
|
94,904
|
|
|
|
2,490,777
|
|
Select Medical Holdings Corporation
|
|
|
1,882,476
|
|
|
|
513,397
|
|
|
|
99,173
|
|
|
|
2,495,046
|
|
Capital expenditures
|
|
|
146,901
|
|
|
|
14,737
|
|
|
|
4,436
|
|
|
|
166,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
F-37
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,944,677
|
|
|
|
499,603
|
|
|
|
154,899
|
|
|
|
2,599,179
|
|
Select Medical Holdings Corporation
|
|
|
1,944,677
|
|
|
|
499,603
|
|
|
|
157,953
|
|
|
|
2,602,233
|
|
Capital expenditures
|
|
|
46,452
|
|
|
|
9,940
|
|
|
|
1,485
|
|
|
|
57,877
|
|
|
|
|
(1) |
|
The specialty hospital segment
includes $14.6 million, $12.5 million and
$11.3 million in real estate assets held for sale on
December 31, 2007, 2008 and 2009, respectively.
|
A reconciliation of Adjusted EBITDA to income from operations
before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Adjusted EBITDA
|
|
$
|
217,175
|
|
|
$
|
75,437
|
|
|
$
|
( 37,684
|
)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(37,085
|
)
|
|
|
(17,458
|
)
|
|
|
(2,754
|
)
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
(3,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
Select
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
Corporation
|
|
|
Income (loss) from operations
|
|
$
|
180,090
|
|
|
$
|
57,979
|
|
|
$
|
(44,184
|
)
|
|
$
|
193,885
|
|
|
$
|
193,885
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
(4,494
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(138,052
|
)
|
|
|
(103,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,666
|
|
|
$
|
85,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,897
|
|
|
$
|
84,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,404
|
|
|
$
|
152,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (FASB) clarified that share based
payment awards that have not yet vested meet the
F-39
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
definition of a participating security provided the right to
receive the dividend is non-forfeitable and non-contingent.
Participating securities are defined as securities that
participate in dividends with common stock according to a
predetermined formula. These participating securities should be
included in the computation of basic earnings per share under
the two class method. Based upon the clarification made by FASB,
the Company concluded that its non-vested restricted stock
awards meet the definition of a participating security and
should be included in the Companys computation of basic
earnings per share. The earnings per share calculations for the
years ended December 31, 2007 and 2008 have been revised to
reflect this clarification; however, the clarification had no
impact on earnings per share for the years ended
December 31, 2007 and 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 Companys
Consolidated Statement of Operations and the differences between
basic weighted average shares
F-40
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
outstanding and diluted weighted average shares outstanding used
to compute basic and diluted earnings per share, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Select Medical Holdings Corporation
|
|
$
|
35,430
|
|
|
$
|
22,441
|
|
|
$
|
75,282
|
|
Less: Preferred dividends
|
|
|
23,807
|
|
|
|
24,972
|
|
|
|
19,537
|
|
Less: Earnings allocated to unvested restricted stockholders
|
|
|
758
|
|
|
|
|
|
|
|
429
|
|
Less: Earnings (losses) allocated to preferred stockholders
|
|
|
1,133
|
|
|
|
(254
|
)
|
|
|
3,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders
|
|
$
|
9,732
|
|
|
$
|
(2,277
|
)
|
|
$
|
52,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
57,086
|
|
|
|
59,566
|
|
|
|
85,587
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
57,086
|
|
|
|
59,566
|
|
|
|
86,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
Diluted income (loss) per common share:
|
|
$
|
0.17
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.61
|
|
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,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Stock options
|
|
|
1,202
|
|
|
|
1,140
|
|
|
|
142
|
|
|
|
15.
|
Fair
Value of Financial Instruments
|
Financial instruments include cash and cash equivalents, notes
payable and long-term debt. The carrying amount of cash and cash
equivalents approximates fair value because of the short-term
maturity of these instruments.
The Company is exposed to the impact of interest rate changes.
The Companys objective is to manage the impact of the
interest rate changes on earnings and cash flows. On
June 13, 2005, Select entered into two interest rate swap
agreements to hedge Selects interest rate risk for a
portion of its term loans under its senior secured credit
facility. The effective date of the swap transactions was
August 22, 2005. The swaps are designated as a cash flow
hedge of forecasted LIBOR based variable rate interest payments.
The notional amount of the interest rate swaps is
$200.0 million, and the underlying variable rate debt is
associated with Selects senior secured credit facility.
The variable interest rate of the debt was 3.32% and the fixed
rate of the swaps was 7.56% at December 31, 2009. The swaps
are for a period of five years and mature on November 22,
2010.
On March 8, 2007, Select entered into an additional
interest rate swap agreement to hedge Selects interest
rate risk for a portion of its term loans under its senior
secured credit facility. The effective date of the swap
transaction
F-41
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
was May 22, 2007. The swap is designated as a cash flow
hedge of forecasted LIBOR based variable rate interest payments.
The notional amount of the interest rate swap is
$200.0 million, and the underlying variable rate debt is
associated with Selects senior secured credit facility.
The variable interest rate of the debt was 3.32% and the fixed
rate of the swap was 7.56% at December 31, 2009. The swap
is for a period of three years, and matures on May 22, 2010.
On November 16, 2007, Select entered into an additional
interest rate swap agreement to hedge Selects interest
rate risk for a portion of its term loans under its senior
secured credit facility. The effective date of the swap
transaction was November 23, 2007. A portion of the swap is
designated as a cash flow hedge of forecasted LIBOR based
variable rate interest payments. The notional amount of the
interest rate swap is $100.0 million, of which
$83.1 million qualifies as a hedge. The underlying variable
rate debt is associated with Selects senior secured credit
facility. The variable interest rate of the debt was 3.32% and
the fixed rate of the swap was 7.56% at December 31, 2009.
The swap is for a period of three years, and matures on
November 22, 2010.
For the portion of the swaps that qualify as a hedge, the
interest rate swaps are reflected at fair value in the
consolidated balance sheet and the related loss of
$10.5 million, net of tax, a loss of $7.6 million, net
of tax and a gain of $4.3 million, net of tax, was recorded
in Holdings stockholders equity as a component of
other comprehensive income (loss) for the years ended
December 31, 2007, 2008 and 2009, respectively. Select
recorded a loss of $7.9 million, net of tax, a loss of
$6.5 million, net of tax, and a gain of $2.5 million,
net of tax, for the years ended December 31, 2007, 2008 and
2009, respectively, related to the swaps in stockholders
equity as a component of other comprehensive income (loss). The
fair value of the Companys interest rate swaps was a
liability of $14.1 million at December 31, 2009 which
was reported as a current liability in accrued other. The
Company tests for ineffectiveness whenever financial statements
are issued or at least every three months using the Hypothetical
Derivative Method.
The carrying amount of this debt was $806.5 million and
$483.1 million at December 31, 2008 and 2009,
respectively. The fair value of Selects senior secured
credit facility was $523.3 million and $471.0 million
at December 31, 2008 and 2009, respectively. The fair value
of Selects senior secured credit facility was based on
quoted market prices for this debt in the syndicated loan market.
At December 31, 2008 the carrying value of the
75/8% Senior
Subordinated Notes was $658.0 million and the estimated
fair value was $335.6 million and at December 31, 2009
the carrying value was $611.5 million and the estimated
fair value was $593.2 million. The fair value of this
registered debt was based on quoted market prices.
At December 31, 2008 the carrying value of the senior
floating rate notes was $175.0 million and the estimated
fair value was $89.3 million and at December 31, 2009
the carrying value was $167.3 million and the estimated
fair value was $155.6 million. The fair value of this
registered debt was based on quoted market prices.
|
|
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 $2.3 million during the year ended
December 31, 2007, $3.3 million during the year ended
December 31, 2008 and $4.0 million during the year
ended December 31, 2009 to the affiliated companies.
F-42
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
As of December 31, 2009, future rental commitments under
outstanding agreements with the affiliated companies are
approximately as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
3,068
|
|
2011
|
|
|
3,082
|
|
2012
|
|
|
3,166
|
|
2013
|
|
|
3,277
|
|
2014
|
|
|
3,398
|
|
Thereafter
|
|
|
29,565
|
|
|
|
|
|
|
|
|
$
|
45,556
|
|
|
|
|
|
|
|
|
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, 2009 are approximately as follows (in
thousands):
|
|
|
|
|
2010
|
|
$
|
115,352
|
|
2011
|
|
|
90,045
|
|
2012
|
|
|
64,777
|
|
2013
|
|
|
45,937
|
|
2014
|
|
|
36,084
|
|
Thereafter
|
|
|
274,543
|
|
|
|
|
|
|
|
|
$
|
626,738
|
|
|
|
|
|
|
Total rent expense for operating leases, including cancelable
leases, for the years ended December 31, 2007, 2008 and
2009 was $131.9 million, $139.3 million and
$145.3 million, respectively.
Facility rent expense for the years ended December 31,
2007, 2008 and 2009 was $98.5 million, $110.2 million
and $117.1 million, respectively.
Construction
Commitments
At December 31, 2009, the Company has outstanding
commitments under construction contracts related to new
construction, improvements and renovations at the Companys
long term acute care properties and inpatient rehabilitation
facilities totaling approximately $11.1 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 Companys 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.
The Company has entered into change in control agreements with
six other members of senior management.
F-43
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
A subsidiary of the Company has entered into a naming,
promotional and sponsorship agreement with an NFL team for the
teams headquarters complex that requires a payment of
$2.7 million in 2010. 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
Companys 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 Companys 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 Companys
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 Companys financial relationships with certain
physicians practicing at its hospitals in Columbus, Ohio. The
Company does not know whether the subpoena has been issued in
connection with a qui tam lawsuit or in connection with possible
civil, criminal or administrative proceedings by the government.
The Company has produced documents in response to the subpoena
and intends to fully cooperate with this investigation. At this
time, the Company is unable to predict the timing and outcome of
this matter.
|
|
18.
|
Supplemental
Disclosures of Cash Flow Information
|
Non-cash investing and financing activities are comprised of the
following for the years ended December 31, 2007, 2008 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Dividends declared to Holdings (Select Medical
Corporation)(1)
|
|
$
|
17,000
|
|
|
$
|
16,500
|
|
|
$
|
12,900
|
|
Notes issued with acquisitions (Note 2)
|
|
|
|
|
|
|
1,001
|
|
|
|
284
|
|
Liabilities assumed with acquisitions (Note 2)
|
|
|
36,458
|
|
|
|
253
|
|
|
|
137
|
|
Notes recorded related to sale of business (Note 3)
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Recorded in accrued other
liabilities on the consolidated balance sheet of Select Medical
Corporation.
|
F-44
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
|
|
19.
|
Financial
Information for Subsidiary Guarantors and Non-Guarantor
Subsidiaries under Selects
75/8% Senior
Subordinated Notes
|
Selects
75/8% Senior
Subordinated Notes are fully and unconditionally guaranteed on a
senior subordinated basis by all of Selects wholly-owned
subsidiaries (the Subsidiary Guarantors). Certain of
Selects subsidiaries did not guarantee the
75/8% Senior
Subordinated Notes (the Non-Guarantor Subsidiaries).
Select conducts a significant portion of its business through
its subsidiaries. Presented below is condensed consolidating
financial information for Select, the Subsidiary Guarantors and
the Non-Guarantor Subsidiaries at December 31, 2008, and
2009, the years ended December 31, 2007, 2008 and 2009.
The equity method has been used by Select with respect to
investments in subsidiaries. The equity method has been used by
Subsidiary Guarantors with respect to investments in
Non-Guarantor Subsidiaries. Separate financial statements for
Subsidiary Guarantors are not presented.
The following table sets forth the Non-Guarantor Subsidiaries at
December 31, 2009:
Caritas Rehab Services, LLC
Elizabethtown Physical Therapy, P.S.C.
Great Lakes Specialty Hospital Hackley, LLC
Great Lakes Specialty Hospital Oak, LLC
Jeff Ayres, PT Therapy Center, Inc.
Jeffersontown Physical Therapy, LLC
Kentucky Orthopedic Rehabilitation, LLC
Kessler Core PT, OT and Speech Therapy at New York, LLC
Louisville Physical Therapy, P.S.C.
Metropolitan West Physical Therapy and Sports Medicine Services,
Inc.
MKJ Physical Therapy, Inc.
New York Physician Services, P.C.
North Andover Physical Therapy, P.C
Partners in Physical Therapy, PLLC
Penn State Hershey Rehabilitation, LLC
Philadelphia Occupational Health, P.C.
Rehabilitation Physician Services, P.C.
Select LifeCare Western Michigan, LLC
Select Physical Therapy/Baptist Rehabilitation Center, LLC
Select Physical Therapy of Las Vegas Limited Partnership
Select Specialty Downriver, LLC
Select Specialty Hospital Akron, LLC
Select Specialty Hospital Evansville, LLC
Select Specialty Hospital Central Pennsylvania, L.P.
Select Specialty Hospital Houston, L.P.
Select Specialty Hospital Gulf Coast, Inc.
SSM Select Rehab St. Louis, LLC
Therex, P.C.
TJ Corporation I, LLC
U.S. Regional Occupational Health II, P.C.
U.S. Regional Occupational Health II of New
Jersey, P.C.
F-45
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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
|
|
|
13,677
|
|
|
|
29,854
|
|
|
|
5,004
|
|
|
|
|
|
|
|
48,535
|
|
Prepaid income taxes
|
|
|
11,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,179
|
|
Other current assets
|
|
|
5,386
|
|
|
|
13,588
|
|
|
|
5,266
|
|
|
|
|
|
|
|
24,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
111,182
|
|
|
|
328,410
|
|
|
|
35,121
|
|
|
|
|
|
|
|
474,713
|
|
Property and equipment, net
|
|
|
6,649
|
|
|
|
409,258
|
|
|
|
50,224
|
|
|
|
|
|
|
|
466,131
|
|
Investment in affiliates
|
|
|
2,142,189
|
|
|
|
72,628
|
|
|
|
|
|
|
|
(2,214,817
|
)(a)(b)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
1,548,269
|
|
|
|
|
|
|
|
|
|
|
|
1,548,269
|
|
Other identifiable intangibles
|
|
|
|
|
|
|
65,297
|
|
|
|
|
|
|
|
|
|
|
|
65,297
|
|
Assets held for sale
|
|
|
11,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,342
|
|
Other assets
|
|
|
22,400
|
|
|
|
8,716
|
|
|
|
2,311
|
|
|
|
|
|
|
|
33,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,293,762
|
|
|
$
|
2,432,578
|
|
|
$
|
87,656
|
|
|
$
|
(2,214,817
|
)
|
|
$
|
2,599,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt and notes payable
|
|
$
|
2,545
|
|
|
$
|
803
|
|
|
$
|
797
|
|
|
$
|
|
|
|
$
|
4,145
|
|
Accounts payable
|
|
|
3,229
|
|
|
|
61,215
|
|
|
|
8,990
|
|
|
|
|
|
|
|
73,434
|
|
Intercompany accounts
|
|
|
495,981
|
|
|
|
(416,944
|
)
|
|
|
(79,037
|
)
|
|
|
|
|
|
|
|
|
Accrued payroll
|
|
|
81
|
|
|
|
61,860
|
|
|
|
94
|
|
|
|
|
|
|
|
62,035
|
|
Accrued vacation
|
|
|
2,942
|
|
|
|
33,024
|
|
|
|
5,047
|
|
|
|
|
|
|
|
41,013
|
|
Accrued interest
|
|
|
23,354
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
23,473
|
|
Accrued restructuring
|
|
|
|
|
|
|
4,256
|
|
|
|
|
|
|
|
|
|
|
|
4,256
|
|
Accrued other
|
|
|
50,122
|
|
|
|
41,661
|
|
|
|
5,351
|
|
|
|
|
|
|
|
97,134
|
|
Due to third party payors
|
|
|
|
|
|
|
11,319
|
|
|
|
(9,414
|
)
|
|
|
|
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
578,254
|
|
|
|
(202,687
|
)
|
|
|
(68,172
|
)
|
|
|
|
|
|
|
307,395
|
|
Long-term debt, net of current portion
|
|
|
616,906
|
|
|
|
434,384
|
|
|
|
45,552
|
|
|
|
|
|
|
|
1,096,842
|
|
Non-current deferred tax liability
|
|
|
995
|
|
|
|
58,346
|
|
|
|
7,427
|
|
|
|
|
|
|
|
66,768
|
|
Other non-current liabilities
|
|
|
60,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,256,698
|
|
|
|
290,043
|
|
|
|
(15,193
|
)
|
|
|
|
|
|
|
1,531,548
|
|
Stockholders 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 Stockholders 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
|
|
$
|
2,293,762
|
|
|
$
|
2,432,578
|
|
|
$
|
87,656
|
|
|
$
|
(2,214,817
|
)
|
|
$
|
2,599,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Elimination of investments in
subsidiaries.
|
|
(b)
|
|
Elimination of investments in
subsidiaries earnings.
|
F-46
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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) from operations 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 net income from consolidated
subsidiaries. |
F-47
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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
75/8% 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-48
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Select
Medical Corporation
Condensed
Consolidating Balance Sheet
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
(Parent
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Company Only)
|
|
|
Guarantors
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58,332
|
|
|
$
|
5,108
|
|
|
$
|
820
|
|
|
$
|
|
|
|
$
|
64,260
|
|
Accounts receivable, net
|
|
|
7
|
|
|
|
293,097
|
|
|
|
19,314
|
|
|
|
|
|
|
|
312,418
|
|
Current deferred tax asset
|
|
|
18,653
|
|
|
|
27,930
|
|
|
|
2,011
|
|
|
|
|
|
|
|
48,594
|
|
Prepaid income taxes
|
|
|
7,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,362
|
|
Other current assets
|
|
|
2,694
|
|
|
|
17,208
|
|
|
|
995
|
|
|
|
|
|
|
|
20,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
87,048
|
|
|
|
343,343
|
|
|
|
23,140
|
|
|
|
|
|
|
|
453,531
|
|
Property and equipment, net
|
|
|
8,431
|
|
|
|
422,067
|
|
|
|
40,567
|
|
|
|
|
|
|
|
471,065
|
|
Investment in affiliates
|
|
|
2,035,591
|
|
|
|
47,911
|
|
|
|
|
|
|
|
(2,083,502
|
)(a)(b)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
1,506,661
|
|
|
|
|
|
|
|
|
|
|
|
1,506,661
|
|
Other identifiable intangibles
|
|
|
|
|
|
|
74,078
|
|
|
|
|
|
|
|
|
|
|
|
74,078
|
|
Assets held for sale
|
|
|
12,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,542
|
|
Other assets
|
|
|
32,620
|
|
|
|
9,587
|
|
|
|
2,341
|
|
|
|
|
|
|
|
44,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,176,232
|
|
|
$
|
2,403,647
|
|
|
$
|
66,048
|
|
|
$
|
(2,083,502
|
)
|
|
$
|
2,562,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
$
|
21,130
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,130
|
|
Current portion of long-term debt and notes payable
|
|
|
8,063
|
|
|
|
971
|
|
|
|
12
|
|
|
|
|
|
|
|
9,046
|
|
Accounts payable
|
|
|
4,653
|
|
|
|
59,836
|
|
|
|
8,007
|
|
|
|
|
|
|
|
72,496
|
|
Intercompany accounts
|
|
|
335,903
|
|
|
|
(301,905
|
)
|
|
|
(33,998
|
)
|
|
|
|
|
|
|
|
|
Accrued payroll
|
|
|
1,193
|
|
|
|
65,118
|
|
|
|
69
|
|
|
|
|
|
|
|
66,380
|
|
Accrued vacation
|
|
|
2,781
|
|
|
|
31,134
|
|
|
|
3,194
|
|
|
|
|
|
|
|
37,109
|
|
Accrued interest
|
|
|
25,410
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
25,444
|
|
Accrued restructuring
|
|
|
|
|
|
|
8,108
|
|
|
|
|
|
|
|
|
|
|
|
8,108
|
|
Accrued other
|
|
|
52,022
|
|
|
|
53,953
|
|
|
|
2,007
|
|
|
|
|
|
|
|
107,982
|
|
Due to third party payors
|
|
|
|
|
|
|
20,960
|
|
|
|
(15,251
|
)
|
|
|
|
|
|
|
5,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
451,155
|
|
|
|
(61,791
|
)
|
|
|
(35,960
|
)
|
|
|
|
|
|
|
353,404
|
|
Long-term debt, net of current portion
|
|
|
1,035,208
|
|
|
|
385,549
|
|
|
|
39,519
|
|
|
|
|
|
|
|
1,460,276
|
|
Non-current deferred tax liability
|
|
|
(8,155
|
)
|
|
|
45,769
|
|
|
|
5,304
|
|
|
|
|
|
|
|
42,918
|
|
Other non-current liabilities
|
|
|
67,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,545,917
|
|
|
|
369,527
|
|
|
|
8,863
|
|
|
|
|
|
|
|
1,924,307
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in excess of par
|
|
|
481,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
481,094
|
|
Retained earnings
|
|
|
160,657
|
|
|
|
304,364
|
|
|
|
21,269
|
|
|
|
(325,633
|
)(b)
|
|
|
160,657
|
|
Subsidiary investment
|
|
|
|
|
|
|
1,729,756
|
|
|
|
28,113
|
|
|
|
(1,757,869
|
)(a)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(11,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Select Medical Corporation Stockholders Equity
|
|
|
630,315
|
|
|
|
2,034,120
|
|
|
|
49,382
|
|
|
|
(2,083,502
|
)
|
|
|
630,315
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
7,803
|
|
|
|
|
|
|
|
7,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity
|
|
|
630,315
|
|
|
|
2,034,120
|
|
|
|
57,185
|
|
|
|
(2,083,502
|
)
|
|
|
638,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
2,176,232
|
|
|
$
|
2,403,647
|
|
|
$
|
66,048
|
|
|
$
|
(2,083,502
|
)
|
|
$
|
2,562,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Elimination of investments in
subsidiaries.
|
|
(b)
|
|
Elimination of investments in
subsidiaries earnings.
|
F-49
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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 from operations 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 net income from consolidated
subsidiaries. |
F-50
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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
75/8% 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-51
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Operations
For the
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
(Parent Company
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
Only)
|
|
|
Guarantors
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
|
Net operating revenues
|
|
$
|
1,663
|
|
|
$
|
1,814,211
|
|
|
$
|
175,792
|
|
|
$
|
|
|
|
$
|
1,991,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
191
|
|
|
|
1,511,020
|
|
|
|
148,838
|
|
|
|
|
|
|
|
1,660,049
|
|
General and administrative
|
|
|
42,319
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
42,863
|
|
Bad debt expense
|
|
|
|
|
|
|
35,020
|
|
|
|
2,552
|
|
|
|
|
|
|
|
37,572
|
|
Depreciation and amortization
|
|
|
2,321
|
|
|
|
50,554
|
|
|
|
4,422
|
|
|
|
|
|
|
|
57,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
44,831
|
|
|
|
1,597,138
|
|
|
|
155,812
|
|
|
|
|
|
|
|
1,797,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(43,168
|
)
|
|
|
217,073
|
|
|
|
19,980
|
|
|
|
|
|
|
|
193,885
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany interest and royalty fees
|
|
|
(60,969
|
)
|
|
|
60,485
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
Intercompany management fees
|
|
|
189,796
|
|
|
|
(183,952
|
)
|
|
|
(5,844
|
)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(5,874
|
)
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
(4,494
|
)
|
Interest income
|
|
|
1,445
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
2,103
|
|
Interest expense
|
|
|
(79,900
|
)
|
|
|
(23,487
|
)
|
|
|
(2,110
|
)
|
|
|
|
|
|
|
(105,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
1,330
|
|
|
|
72,157
|
|
|
|
12,510
|
|
|
|
|
|
|
|
85,997
|
|
Income tax expense (benefit)
|
|
|
(1,756
|
)
|
|
|
30,521
|
|
|
|
550
|
|
|
|
|
|
|
|
29,315
|
|
Equity in earnings of subsidiaries
|
|
|
52,059
|
|
|
|
9,330
|
|
|
|
|
|
|
|
(61,389
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
55,145
|
|
|
|
50,966
|
|
|
|
11,960
|
|
|
|
(61,389
|
)
|
|
|
56,682
|
|
Less: Net income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
1,537
|
|
|
|
|
|
|
|
1,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Select Medical Corporation
|
|
$
|
55,145
|
|
|
$
|
50,966
|
|
|
$
|
10,423
|
|
|
$
|
(61,389
|
)
|
|
$
|
55,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Elimination of equity in net income from consolidated
subsidiaries. |
F-52
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (Continued)
Select
Medical Corporation
Condensed
Consolidating Statement of Cash Flows
For the
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation (Parent
|
|
|
Subsidiary
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Company Only)
|
|
|
Guarantors
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
55,145
|
|
|
$
|
50,966
|
|
|
$
|
11,960
|
|
|
$
|
(61,389
|
)(a)
|
|
$
|
56,682
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,321
|
|
|
|
50,554
|
|
|
|
4,422
|
|
|
|
|
|
|
|
57,297
|
|
Provision for bad debts
|
|
|
|
|
|
|
35,020
|
|
|
|
2,552
|
|
|
|
|
|
|
|
37,572
|
|
Gain from disposal of assets and sale of business units
|
|
|
287
|
|
|
|
2,468
|
|
|
|
(331
|
)
|
|
|
|
|
|
|
2,424
|
|
Non-cash income from interest rate swaps
|
|
|
4,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,327
|
|
Non-cash stock compensation expense
|
|
|
3,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,746
|
|
Deferred income taxes
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,460
|
|
Changes in operating assets and liabilities, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effects from acquisition of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
(52,059
|
)
|
|
|
(9,330
|
)
|
|
|
|
|
|
|
61,389
|
(a)
|
|
|
|
|
Intercompany
|
|
|
(218,197
|
)
|
|
|
224,902
|
|
|
|
(6,705
|
)
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(266
|
)
|
|
|
(75,590
|
)
|
|
|
316
|
|
|
|
|
|
|
|
(75,540
|
)
|
Other current assets
|
|
|
(2,251
|
)
|
|
|
4,409
|
|
|
|
(752
|
)
|
|
|
|
|
|
|
1,406
|
|
Other assets
|
|
|
23,211
|
|
|
|
(15,946
|
)
|
|
|
(1,625
|
)
|
|
|
|
|
|
|
5,640
|
|
Accounts payable
|
|
|
802
|
|
|
|
(1,158
|
)
|
|
|
244
|
|
|
|
|
|
|
|
(112
|
)
|
Due to third-party payors
|
|
|
|
|
|
|
10,016
|
|
|
|
(7,830
|
)
|
|
|
|
|
|
|
2,186
|
|
Accrued expenses
|
|
|
13,557
|
|
|
|
6,101
|
|
|
|
1,040
|
|
|
|
|
|
|
|
20,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(166,917
|
)
|
|
|
282,412
|
|
|
|
3,291
|
|
|
|
|
|
|
|
118,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,395
|
)
|
|
|
(158,610
|
)
|
|
|
(3,069
|
)
|
|
|
|
|
|
|
(166,074
|
)
|
Proceeds from sale of business units
|
|
|
2,332
|
|
|
|
7,273
|
|
|
|
|
|
|
|
|
|
|
|
9,605
|
|
Proceeds from sale of property
|
|
|
|
|
|
|
6,438
|
|
|
|
|
|
|
|
|
|
|
|
6,438
|
|
Changes in restricted cash
|
|
|
4,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,335
|
|
Acquisition of businesses, net of cash acquired
|
|
|
|
|
|
|
(236,980
|
)
|
|
|
|
|
|
|
|
|
|
|
(236,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,272
|
|
|
|
(381,879
|
)
|
|
|
(3,069
|
)
|
|
|
|
|
|
|
(382,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
449,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449,000
|
|
Payments on revolving credit facility
|
|
|
(329,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(329,000
|
)
|
Credit facility term loan borrowing
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Payments on credit facility term loan
|
|
|
(6,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,550
|
)
|
Principal payments on seller and other debt
|
|
|
|
|
|
|
(1,323
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,323
|
)
|
Intercompany debt reallocation
|
|
|
(92,279
|
)
|
|
|
91,026
|
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
Proceeds from bank overdrafts
|
|
|
8,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,911
|
|
Dividends paid to Holdings
|
|
|
(32,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,787
|
)
|
Equity investment by Holdings
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
Distributions to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
(1,698
|
)
|
|
|
|
|
|
|
(1,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
97,561
|
|
|
|
89,703
|
|
|
|
(445
|
)
|
|
|
|
|
|
|
186,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(67,084
|
)
|
|
|
(9,764
|
)
|
|
|
(223
|
)
|
|
|
|
|
|
|
(77,701
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
67,245
|
|
|
|
12,866
|
|
|
|
1,489
|
|
|
|
|
|
|
|
81,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
161
|
|
|
$
|
3,102
|
|
|
$
|
1,266
|
|
|
$
|
|
|
|
$
|
4,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Elimination of equity in earnings
of subsidiaries.
|
F-53
SELECT
MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENT (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, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
548,278
|
|
|
$
|
538,806
|
|
|
$
|
519,179
|
|
|
$
|
547,099
|
|
Income from operations
|
|
|
54,344
|
|
|
|
48,421
|
|
|
|
36,158
|
|
|
|
57,485
|
|
Net income (loss)
|
|
$
|
8,700
|
|
|
$
|
5,753
|
|
|
$
|
(823
|
)
|
|
$
|
8,811
|
|
Net income (loss) per common
share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical Corporation
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(In thousands)
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
548,278
|
|
|
$
|
538,806
|
|
|
$
|
519,179
|
|
|
$
|
547,099
|
|
Income from operations
|
|
|
54,344
|
|
|
|
48,421
|
|
|
|
36,158
|
|
|
|
57,485
|
|
Net income
|
|
$
|
11,554
|
|
|
$
|
12,610
|
|
|
$
|
5,713
|
|
|
$
|
13,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Medical Holdings Corporation
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(In thousands, except per share amounts)
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
561,172
|
|
|
$
|
559,535
|
|
|
$
|
545,621
|
|
|
$
|
573,543
|
|
Income from operations
|
|
|
67,626
|
|
|
|
65,388
|
|
|
|
32,905
|
|
|
|
69,919
|
|
Net income
|
|
$
|
24,996
|
|
|
$
|
19,792
|
|
|
$
|
583
|
|
|
$
|
29,911
|
|
Net income (loss) per common
share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 revenues
|
|
$
|
561,172
|
|
|
$
|
559,535
|
|
|
$
|
545,621
|
|
|
$
|
573,543
|
|
Income from operations
|
|
|
67,626
|
|
|
|
65,388
|
|
|
|
32,905
|
|
|
|
69,919
|
|
Net income
|
|
$
|
31,727
|
|
|
$
|
25,495
|
|
|
$
|
6,708
|
|
|
$
|
34,514
|
|
|
|
|
(1) |
|
Adjusted for the adoption of FASB
Staff Position EITF
03-6-1
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities. See
Note 14 for additional information.
|
F-54
The following Financial Statement Schedule along with the report
thereon of PricewaterhouseCoopers LLP dated March 17, 2010,
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.
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, 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, 2007 allowance for doubtful accounts
|
|
$
|
55,306
|
|
|
$
|
37,572
|
|
|
$
|
9,061
|
|
|
$
|
(46,083
|
)
|
|
$
|
55,856
|
|
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
|
|
Year ended December 31, 2007 income tax valuation allowance
|
|
$
|
14,428
|
|
|
$
|
2,507
|
|
|
$
|
|
|
|
$
|
(174
|
)
|
|
$
|
16,761
|
|
|
|
|
(A) |
|
Represents opening balance sheet reserves resulting from
purchase accounting entries. |
|
(B) |
|
Allowance for doubtful accounts deductions represent write-offs
against the reserve for 2007, 2008 and 2009. |
F-55