Attached files
file | filename |
---|---|
EX-31.2 - EXHIBIT 31.2 - SELECT MEDICAL HOLDINGS CORP | c04571exv31w2.htm |
EX-10.1 - EXHIBIT 10.1 - SELECT MEDICAL HOLDINGS CORP | c04571exv10w1.htm |
EX-32.1 - EXHIBIT 32.1 - SELECT MEDICAL HOLDINGS CORP | c04571exv32w1.htm |
EX-10.2 - EXHIBIT 10.2 - SELECT MEDICAL HOLDINGS CORP | c04571exv10w2.htm |
EX-31.1 - EXHIBIT 31.1 - SELECT MEDICAL HOLDINGS CORP | c04571exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2010
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to .
Commission File Numbers: 001-34465 and 001-31441
SELECT MEDICAL HOLDINGS CORPORATION
SELECT MEDICAL CORPORATION
(Exact name of Registrants as specified in their charters)
Delaware Delaware (State or other jurisdiction of incorporation or organization) |
20-1764048 23-2872718 (I.R.S. employer identification number) |
4714 Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
(717) 972-1100
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods as the Registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days.
YES 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 during the preceding 12 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 whether the Registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or smaller reporting companies. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filers o | Accelerated filers o | Non-accelerated filers þ | Smaller reporting company o |
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2
of the Exchange Act).
YES o NO þ
As of July 31, 2010, Select Medical Holdings Corporation had outstanding 160,010,060 shares of
common stock.
This Form 10-Q is a combined quarterly report being filed separately by two Registrants:
Select Medical Holdings Corporation and Select Medical Corporation. Unless the context indicates
otherwise, any reference in this report to Holdings refers to Select Medical Holdings Corporation
and any reference to Select refers to Select Medical Corporation, the wholly-owned operating
subsidiary of Holdings. References to the Company, we, us, and our refer collectively to
Select Medical Holdings Corporation and Select Medical Corporation.
TABLE OF CONTENTS
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4 | ||||||||
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8 | ||||||||
29 | ||||||||
55 | ||||||||
55 | ||||||||
56 | ||||||||
56 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
57 | ||||||||
58 | ||||||||
Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
Consolidated Balance Sheets
(unaudited)
(in thousands, except per share amounts)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
December 31, | June 30, | December 31, | June 30, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
ASSETS |
||||||||||||||||
Current Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 83,680 | $ | 128,753 | $ | 83,680 | $ | 128,753 | ||||||||
Accounts receivable, net of allowance for doubtful accounts
of $43,357 and $39,392 in 2009 and 2010, respectively |
307,079 | 338,320 | 307,079 | 338,320 | ||||||||||||
Current deferred tax asset |
48,535 | 40,808 | 48,535 | 40,808 | ||||||||||||
Prepaid income taxes |
11,179 | 6,841 | 11,179 | 6,841 | ||||||||||||
Other current assets |
24,240 | 24,730 | 24,240 | 24,730 | ||||||||||||
Total Current Assets |
474,713 | 539,452 | 474,713 | 539,452 | ||||||||||||
Property and equipment, net |
466,131 | 459,567 | 466,131 | 459,567 | ||||||||||||
Goodwill |
1,548,269 | 1,548,269 | 1,548,269 | 1,548,269 | ||||||||||||
Other identifiable intangibles |
65,297 | 63,468 | 65,297 | 63,468 | ||||||||||||
Assets held for sale |
11,342 | 11,342 | 11,342 | 11,342 | ||||||||||||
Other assets |
36,481 | 38,025 | 33,427 | 35,242 | ||||||||||||
Total Assets |
$ | 2,602,233 | $ | 2,660,123 | $ | 2,599,179 | $ | 2,657,340 | ||||||||
LIABILITIES AND EQUITY |
||||||||||||||||
Current Liabilities: |
||||||||||||||||
Bank overdrafts |
$ | | $ | 14,201 | $ | | $ | 14,201 | ||||||||
Current portion of long-term debt and notes payable |
4,145 | 102,410 | 4,145 | 102,410 | ||||||||||||
Accounts payable |
73,434 | 64,634 | 73,434 | 64,634 | ||||||||||||
Accrued payroll |
62,035 | 58,269 | 62,035 | 58,269 | ||||||||||||
Accrued vacation |
41,013 | 43,692 | 41,013 | 43,692 | ||||||||||||
Accrued interest |
32,919 | 31,947 | 23,473 | 22,608 | ||||||||||||
Accrued restructuring |
4,256 | 3,232 | 4,256 | 3,232 | ||||||||||||
Accrued other |
84,234 | 78,505 | 97,134 | 91,144 | ||||||||||||
Due to third party payors |
1,905 | 2,492 | 1,905 | 2,492 | ||||||||||||
Total Current Liabilities |
303,941 | 399,382 | 307,395 | 402,682 | ||||||||||||
Long-term debt, net of current portion |
1,401,426 | 1,305,069 | 1,096,842 | 999,567 | ||||||||||||
Non-current deferred tax liability |
66,768 | 66,604 | 66,768 | 66,604 | ||||||||||||
Other non-current liabilities |
60,543 | 61,712 | 60,543 | 61,712 | ||||||||||||
Total Liabilities |
1,832,678 | 1,832,767 | 1,531,548 | 1,530,565 | ||||||||||||
Stockholders Equity: |
||||||||||||||||
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 159,981,000
shares and
160,010,060 shares issued and outstanding in 2009 and 2010, respectively |
160 | 160 | ||||||||||||||
Common stock of Select, $0.01 par value, 100 shares issued and outstanding |
| | ||||||||||||||
Capital in excess of par |
578,648 | 579,719 | 822,664 | 828,621 | ||||||||||||
Retained earnings |
169,094 | 217,782 | 223,314 | 268,459 | ||||||||||||
Accumulated other comprehensive loss |
(8,914 | ) | (1,898 | ) | (8,914 | ) | (1,898 | ) | ||||||||
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders Equity |
738,988 | 795,763 | 1,037,064 | 1,095,182 | ||||||||||||
Non-controlling interest |
30,567 | 31,593 | 30,567 | 31,593 | ||||||||||||
Total Equity |
769,555 | 827,356 | 1,067,631 | 1,126,775 | ||||||||||||
Total Liabilities and Equity |
$ | 2,602,233 | $ | 2,660,123 | $ | 2,599,179 | $ | 2,657,340 | ||||||||
The accompanying notes are an integral part of this statement.
3
Table of Contents
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Quarter Ended June 30, | For the Quarter Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Net operating revenues |
$ | 559,535 | $ | 579,877 | $ | 559,535 | $ | 579,877 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
453,011 | 470,044 | 453,011 | 470,044 | ||||||||||||
General and administrative |
12,885 | 9,802 | 12,885 | 9,802 | ||||||||||||
Bad debt expense |
10,312 | 10,845 | 10,312 | 10,845 | ||||||||||||
Depreciation and amortization |
17,939 | 16,610 | 17,939 | 16,610 | ||||||||||||
Total costs and expenses |
494,147 | 507,301 | 494,147 | 507,301 | ||||||||||||
Income from operations |
65,388 | 72,576 | 65,388 | 72,576 | ||||||||||||
Other income and expense: |
||||||||||||||||
Gain on early retirement of debt |
3,562 | | 3,562 | | ||||||||||||
Other income (expense) |
| 182 | (32 | ) | 182 | |||||||||||
Interest income |
28 | | 28 | | ||||||||||||
Interest expense |
(33,658 | ) | (29,279 | ) | (24,853 | ) | (22,325 | ) | ||||||||
Income from operations before income taxes |
35,320 | 43,479 | 44,093 | 50,433 | ||||||||||||
Income tax expense |
15,137 | 17,306 | 18,207 | 19,740 | ||||||||||||
Net income |
20,183 | 26,173 | 25,886 | 30,693 | ||||||||||||
Less: Net income attributable to non-controlling interests |
391 | 1,711 | 391 | 1,711 | ||||||||||||
Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation |
19,792 | 24,462 | $ | 25,495 | $ | 28,982 | ||||||||||
Less: Preferred dividends |
6,508 | | ||||||||||||||
Net income available to common stockholders
and participating securities |
$ | 13,284 | $ | 24,462 | ||||||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | 0.20 | $ | 0.15 | ||||||||||||
Diluted |
$ | 0.19 | $ | 0.15 |
The accompanying notes are an integral part of this statement.
4
Table of Contents
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
(unaudited)
(in thousands, except per share amounts)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Six Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Net operating revenues |
$ | 1,120,707 | $ | 1,164,690 | $ | 1,120,707 | $ | 1,164,690 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
904,405 | 942,421 | 904,405 | 942,421 | ||||||||||||
General and administrative |
25,660 | 22,591 | 25,660 | 22,591 | ||||||||||||
Bad debt expense |
21,958 | 20,132 | 21,958 | 20,132 | ||||||||||||
Depreciation and amortization |
35,670 | 34,321 | 35,670 | 34,321 | ||||||||||||
Total costs and expenses |
987,693 | 1,019,465 | 987,693 | 1,019,465 | ||||||||||||
Income from operations |
133,014 | 145,225 | 133,014 | 145,225 | ||||||||||||
Other income and expense: |
||||||||||||||||
Gain on early retirement of debt |
15,316 | | 15,316 | | ||||||||||||
Other income |
| 316 | 1,621 | 316 | ||||||||||||
Interest income |
80 | | 80 | | ||||||||||||
Interest expense |
(68,330 | ) | (59,321 | ) | (50,822 | ) | (45,363 | ) | ||||||||
Income from operations before income taxes |
80,080 | 86,220 | 99,209 | 100,178 | ||||||||||||
Income tax expense |
33,880 | 34,415 | 40,575 | 39,300 | ||||||||||||
Net income |
46,200 | 51,805 | 58,634 | 60,878 | ||||||||||||
Less: Net income attributable to non-controlling interests |
1,412 | 3,117 | 1,412 | 3,117 | ||||||||||||
Net income attributable to Select Medical Holdings Corporation
and Select Medical Corporation |
44,788 | 48,688 | $ | 57,222 | $ | 57,761 | ||||||||||
Less: Preferred dividends |
12,870 | | ||||||||||||||
Net income available to common stockholders
and participating securities |
$ | 31,918 | $ | 48,688 | ||||||||||||
Income per common share: |
||||||||||||||||
Basic |
$ | 0.47 | $ | 0.30 | ||||||||||||
Diluted |
$ | 0.47 | $ | 0.30 |
The accompanying notes are an integral part of this statement.
5
Table of Contents
Select Medical Holdings Corporation
Consolidated Statement of Changes in Equity and Income (Loss)
(unaudited)
(in thousands)
Select Medical Holdings Corporation Stockholders | ||||||||||||||||||||||||||||||||
Common | Common | Accumulated Other | Non- | |||||||||||||||||||||||||||||
Comprehensive | Stock | Stock Par | Capital in | Retained | Comprehensive | controlling | ||||||||||||||||||||||||||
Total | Income | Issued | Value | Excess of Par | Earnings | Income (Loss) | Interests | |||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 769,555 | 159,981 | $ | 160 | $ | 578,648 | $ | 169,094 | $ | (8,914 | ) | $ | 30,567 | ||||||||||||||||||
Net income |
51,805 | $ | 51,805 | 48,688 | 3,117 | |||||||||||||||||||||||||||
Unrealized gain on interest rate swap,
net of tax |
7,016 | 7,016 | 7,016 | |||||||||||||||||||||||||||||
Total comprehensive income |
$ | 58,821 | $ | 58,821 | ||||||||||||||||||||||||||||
Issuance and vesting of restricted stock |
371 | 371 | ||||||||||||||||||||||||||||||
Exercise of stock options |
125 | 29 | | 125 | ||||||||||||||||||||||||||||
Stock option expense |
575 | 575 | ||||||||||||||||||||||||||||||
Distributions to non-controlling interests |
(2,091 | ) | (2,091 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2010 |
$ | 827,356 | 160,010 | $ | 160 | $ | 579,719 | $ | 217,782 | $ | (1,898 | ) | $ | 31,593 | ||||||||||||||||||
Select Medical Corporation
Consolidated Statement of Changes in Equity and Income (Loss)
(unaudited)
(in thousands)
Consolidated Statement of Changes in Equity and Income (Loss)
(unaudited)
(in thousands)
Select Medical Corporation Stockholders | ||||||||||||||||||||||||||||||||
Common | Common | Accumulated Other | Non- | |||||||||||||||||||||||||||||
Comprehensive | Stock | Stock Par | Capital in | Retained | Comprehensive | controlling | ||||||||||||||||||||||||||
Total | Income | Issued | Value | Excess of Par | Earnings | Income (Loss) | Interests | |||||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 1,067,631 | | $ | | $ | 822,664 | $ | 223,314 | $ | (8,914 | ) | $ | 30,567 | ||||||||||||||||||
Net income |
60,878 | $ | 60,878 | 57,761 | 3,117 | |||||||||||||||||||||||||||
Unrealized gain on interest rate swap, net of tax |
7,016 | 7,016 | 7,016 | |||||||||||||||||||||||||||||
Total comprehensive income |
$ | 67,894 | $ | 67,894 | ||||||||||||||||||||||||||||
Federal tax benefit of losses contributed by Holdings |
4,887 | 4,887 | ||||||||||||||||||||||||||||||
Additional investment by Holdings |
125 | 125 | ||||||||||||||||||||||||||||||
Dividends declared to Holdings |
(12,639 | ) | (12,639 | ) | ||||||||||||||||||||||||||||
Settlement of dividends paid to Holdings |
23 | 23 | ||||||||||||||||||||||||||||||
Distributions to non-controlling interests |
(2,091 | ) | (2,091 | ) | ||||||||||||||||||||||||||||
Contribution related to restricted stock awards and
stock
option issuances by Holdings |
945 | 945 | ||||||||||||||||||||||||||||||
Balance at June 30, 2010 |
$ | 1,126,775 | | $ | | $ | 828,621 | $ | 268,459 | $ | (1,898 | ) | $ | 31,593 | ||||||||||||||||||
The accompanying notes are an integral part of this statement.
6
Table of Contents
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||
For the Six Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Operating activities |
||||||||||||||||
Net income |
$ | 46,200 | $ | 51,805 | $ | 58,634 | $ | 60,878 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||||||
Depreciation and amortization |
35,670 | 34,321 | 35,670 | 34,321 | ||||||||||||
Provision for bad debts |
21,958 | 20,132 | 21,958 | 20,132 | ||||||||||||
Gain on early retirement of debt |
(15,316 | ) | | (15,316 | ) | | ||||||||||
Loss from disposal of assets |
117 | 660 | 117 | 660 | ||||||||||||
Non-cash gain from interest rate swaps |
| (316 | ) | (1,621 | ) | (316 | ) | |||||||||
Non-cash stock compensation expense |
594 | 945 | 594 | 945 | ||||||||||||
Amortization of debt discount |
815 | 918 | | | ||||||||||||
Changes in operating assets and liabilities,
net of
effects from acquisition of businesses: |
||||||||||||||||
Accounts receivable |
(49,155 | ) | (51,373 | ) | (49,155 | ) | (51,373 | ) | ||||||||
Other current assets |
(667 | ) | (495 | ) | (667 | ) | (495 | ) | ||||||||
Other assets |
4,242 | (1,140 | ) | 3,959 | (1,410 | ) | ||||||||||
Accounts payable |
(3,693 | ) | (8,796 | ) | (3,693 | ) | (8,796 | ) | ||||||||
Due to third-party payors |
(216 | ) | 587 | (216 | ) | 587 | ||||||||||
Accrued expenses |
(5,927 | ) | 1,546 | (5,927 | ) | 1,659 | ||||||||||
Income and deferred taxes |
22,613 | 9,925 | 29,308 | 14,810 | ||||||||||||
Net cash provided by operating activities |
57,235 | 58,719 | 73,645 | 71,602 | ||||||||||||
Investing activities |
||||||||||||||||
Purchases of property and equipment |
(20,981 | ) | (26,454 | ) | (20,981 | ) | (26,454 | ) | ||||||||
Proceeds from sale of property |
1,341 | | 1,341 | | ||||||||||||
Net cash used in investing activities |
(19,640 | ) | (26,454 | ) | (19,640 | ) | (26,454 | ) | ||||||||
Financing activities |
||||||||||||||||
Borrowings on revolving credit facility |
138,000 | | 138,000 | | ||||||||||||
Payments on revolving credit facility |
(173,000 | ) | | (173,000 | ) | | ||||||||||
Payment on credit facility term loan |
(3,400 | ) | | (3,400 | ) | | ||||||||||
Repurchase of 7 5/8% senior subordinated notes |
(30,114 | ) | | (30,114 | ) | | ||||||||||
Borrowings of other debt |
5,184 | 5,015 | 5,184 | 5,015 | ||||||||||||
Principal payments on seller and other debt |
(3,891 | ) | (4,442 | ) | (3,891 | ) | (4,442 | ) | ||||||||
Dividends paid to Holdings |
| | (16,490 | ) | (12,883 | ) | ||||||||||
Payment of initial public offering costs |
(417 | ) | | (417 | ) | | ||||||||||
Repurchase of common and preferred stock |
(80 | ) | | | | |||||||||||
Proceeds from issuance of common stock |
24 | 125 | | | ||||||||||||
Equity investment by Holdings |
| | 24 | 125 | ||||||||||||
Proceeds from (repayment of) bank overdrafts |
(4,658 | ) | 14,201 | (4,658 | ) | 14,201 | ||||||||||
Distributions to non-controlling interests |
(1,814 | ) | (2,091 | ) | (1,814 | ) | (2,091 | ) | ||||||||
Net cash provided by (used in) financing activities |
(74,166 | ) | 12,808 | (90,576 | ) | (75 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents |
(36,571 | ) | 45,073 | (36,571 | ) | 45,073 | ||||||||||
Cash and cash equivalents at beginning of period |
64,260 | 83,680 | 64,260 | 83,680 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 27,689 | $ | 128,753 | $ | 27,689 | $ | 128,753 | ||||||||
Supplemental Cash Flow Information |
||||||||||||||||
Cash paid for interest |
$ | 64,710 | $ | 55,928 | $ | 48,301 | $ | 43,055 | ||||||||
Cash paid for taxes |
$ | 11,090 | $ | 24,664 | $ | 11,090 | $ | 24,664 |
The accompanying notes are an integral part of this statement.
7
Table of Contents
SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Select Medical Corporation (Select) was formed in December 1996 and commenced operations
during February 1997 upon the completion of its first acquisition. Select Medical Holdings
Corporation (Holdings) was formed in October 2004 for the purpose of effecting a leveraged buyout
of Select, which was a publicly traded entity. Holdings was originally owned by an investor group
that included 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. 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 unaudited condensed consolidated financial statements of the Company as of June 30, 2010
and for the three and six month periods ended June 30, 2009 and 2010 have been prepared in
accordance with generally accepted accounting principles. In the opinion of management, such
information contains all adjustments, which are normal and recurring in nature, necessary for a
fair statement of the financial position, results of operations and cash flow for such periods.
All significant intercompany transactions and balances have been eliminated. The results of
operations for the three and six months ended June 30, 2010 are not necessarily indicative of the
results to be expected for the full fiscal year ending December 31, 2010.
Certain information and disclosures normally included in the notes to consolidated financial
statements have been condensed or omitted consistent with the rules and regulations of the
Securities and Exchange Commission (the SEC), although the Company believes the disclosure is
adequate to make the information presented not misleading. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2009 contained in the Companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2010.
2. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could differ materially from
those estimates.
8
Table of Contents
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving
Disclosures about Fair Value Measurements (Update 2010-06), which amends the guidance on fair
value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. The Company adopted update
2010-06 on January 1, 2010, except for the requirement to provide the Level 3 activity of
purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010, and for interim periods within those fiscal years. The
adoption of Update 2010-06 did not have an impact on the Companys consolidated financial
statements. The Company currently has no Level 3 measurements.
3. Intangible Assets
The Companys intangible assets consist of the following:
As of June 30, 2010 | ||||||||
Gross Carrying | Accumulated | |||||||
Amount | Amortization | |||||||
(in thousands) | ||||||||
Amortized intangible assets |
||||||||
Contract therapy relationships |
$ | 20,456 | $ | (20,456 | ) | |||
Non-compete agreements |
25,909 | (23,068 | ) | |||||
Total |
$ | 46,365 | $ | (43,524 | ) | |||
Indefinite-lived intangible assets |
||||||||
Goodwill |
$ | 1,548,269 | ||||||
Trademarks |
47,858 | |||||||
Certificates of need |
11,430 | |||||||
Accreditations |
1,339 | |||||||
Total |
$ | 1,608,896 | ||||||
The Companys accreditations and trademarks have renewal terms. The costs to renew these
intangibles are expensed as incurred. At June 30, 2010, the accreditations and trademarks have a
weighted average time until next renewal of approximately 0.9 years and 4.0 years, respectively.
9
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Amortization expense for the Companys intangible assets with finite lives follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Amortization expense |
$ | 2,208 | $ | 1,185 | $ | 4,416 | $ | 3,052 |
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 outpatient rehabilitation division of HealthSouth Corporation, Kessler
Rehabilitation Corporation and SemperCare Inc. and the value assigned to the Companys contract
therapy relationships. The useful lives of the outpatient rehabilitation division of HealthSouth
Corporations non-compete, the Kessler Rehabilitation Corporation non-compete, the SemperCare Inc.
non-compete and the Companys contract therapy relationships are
approximately five, seven, seven and
five years, respectively. Amortization expense related to these intangible assets for each of the
next five years commencing January 1, 2010 is approximately as follows (in thousands):
2010 |
$ | 4,247 | ||
2011 |
1,306 | |||
2012 |
340 | |||
2013 |
0 | |||
2014 |
0 |
4. Restructuring Reserves
In connection with the acquisition of the outpatient rehabilitation division of HealthSouth
Corporation, the Company recorded an estimated liability of $18.7 million in 2007 for business
restructuring which was accounted for as additional purchase price. This reserve primarily included
costs associated with workforce reductions and lease termination costs in accordance with the
Companys restructuring plan.
The following summarizes the Companys restructuring activity:
Lease Termination Costs | ||||
(in thousands) | ||||
December 31, 2009 |
$ | 4,256 | ||
Amounts paid in 2010 |
(699 | ) | ||
Revision of estimate |
(325 | ) | ||
June 30, 2010 |
$ | 3,232 | ||
The Company expects to pay out the remaining lease termination costs through 2014.
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5. Extension of Revolving Credit Facility
On June 7, 2010, the Company entered into an amendment to its senior secured credit facility
that extended the maturity of its $300.0 million revolving credit facility from February 24, 2011
to August 22, 2013. The applicable margin percentage and commitment fee for revolving loans have
increased and are determined based on a pricing grid whereby changes in the leverage ratio, as
defined in the credit agreement, results in changes to the applicable margin percentage. Under the
pricing grid, the applicable margin percentage for revolving ABR
loans ranges from 2% per annum to
3% per annum, the applicable margin percentage for revolving
Eurodollar loans ranges from 3% per
annum to 4% per annum, and the commitment fee rate for extended revolving commitments ranges from
0.375% to 0.75%.
6. Fair Value
Fair Value Measurements
The Company measures its interest rate swaps at fair value on a recurring basis. The Company
determines the fair value of its interest rate swaps based on financial models that consider
current and future market interest rates and adjustments for non-performance risk. The Company
considers those inputs utilized in the valuation process to be Level 2 in the fair value hierarchy.
Level 2 in the fair value hierarchy is defined as inputs other than quoted prices that are
observable for the asset or liability, either directly or indirectly. These include quoted prices
for similar assets or liabilities in active markets and quoted prices for identical or similar
assets or liabilities in markets that are not active. The fair value of the Companys interest
rate swaps was a liability of $3.8 million at June 30, 2010 and $14.1 million at December 31, 2009.
These liabilities are reported on the consolidated balance sheet as a current liability in accrued
other.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, notes payable and long-term debt.
The carrying amount of cash and cash equivalents approximates fair value because of the short-term
maturity of these instruments.
The carrying value of Selects senior secured credit facility was $483.1 million at both
December 31, 2009 and June 30, 2010, respectively. The fair value of Selects senior secured
credit facility was $471.0 million and $461.4 million at December 31, 2009 and June 30, 2010,
respectively. The fair value of Selects senior secured credit facility was based on quoted market
prices for this debt in the syndicated loan market.
The carrying value of the 75/8% senior subordinated notes was $611.5 million at both December
31, 2009 and June 30, 2010, respectively. The fair value of the 75/8% senior subordinated notes was
$593.2 million and $575.5 million at December 31, 2009 and June 30, 2010, respectively. The fair
value of this registered debt was based on quoted market prices.
The carrying value of the senior floating rate notes was $167.3 million at both December 31,
2009 and June 30, 2010, respectively. The fair value of the senior floating rate notes was $155.6
million and $144.7 million at December 31, 2009 and June 30, 2010, respectively. The fair value
of this registered debt was based on quoted market prices.
11
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Interest Rate Swaps
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 weighted average variable interest rate of the
debt was 3.54% and the weighted average fixed rate of the swaps
was 7.34% at June 30, 2010. The swaps are for a period of five years and mature on August 23, 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. The swap is designated
as a cash flow hedge of forecasted LIBOR based variable rate interest payments. The notional amount
of the interest rate swap is $100.0 million, and the underlying variable rate debt is associated
with Selects senior secured credit facility. The weighted
average variable interest rate of the debt was 3.54% and
the weighted average fixed rate of the swap was 7.33% at June 30, 2010. 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. A gain of $0.1 million, net of tax, was recorded in
Holdings stockholders equity as a component of other comprehensive income (loss) for the six
months ended June 30, 2009. A gain of $7.0 million, net of tax, was recorded for the six months
ended June 30, 2010. Select recorded a loss of $0.4 million, net of tax, for the six months ended
June 30, 2009, and a gain of $7.0 million, net of tax, for the six months ended June 30, 2010
related to the swaps in Selects stockholders equity as a component of other comprehensive income
(loss). The Company tests for ineffectiveness whenever financial statements are issued or at least
every three months using the Hypothetical Derivative Method. See also Note 7, Accumulated Other
Comprehensive Loss.
7. Accumulated Other Comprehensive Loss
Included in accumulated other comprehensive loss at December 31, 2009 and June 30, 2010 were
cumulative losses of $8.9 million (net of tax) and $1.9 million (net of tax), respectively, on
interest rate swaps accounted for as cash flow hedges.
8. Stockholders Equity
Participating Preferred Stock
Upon completion of Holdings initial public offering of common stock on September 30, 2009,
Holdings outstanding participating preferred stock converted into a total of 64,276,974 common
shares. Each share of preferred stock converted into a number of shares of common stock determined
by:
| dividing the original cost of a share of the preferred stock ($26.90 per share of preferred stock) plus all accrued and unpaid dividends through September 30, 2009 thereon less the amount of any previously declared and paid special dividends, or the accreted value of such preferred stock, by the initial public offering price per share net of any expenses incurred and underwriting commissions or concessions paid or allowed in connection with the offering; plus |
| .30 shares of common stock for each share of preferred stock owned. |
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Table of Contents
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.
9. Segment Information
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 on early retirement of debt,
stock compensation expense and other income (expense).
The following tables summarize selected financial data for the Companys reportable segments
for the three and six months ended June 30, 2009 and 2010. The segment results of Holdings are
identical to those of Select with the exception of total assets:
Three Months Ended June 30, 2009 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 386,331 | $ | 173,190 | $ | 14 | $ | 559,535 | ||||||||
Adjusted EBITDA |
70,960 | 25,294 | (12,628 | ) | 83,626 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
1,920,040 | 492,936 | 115,324 | 2,528,300 | ||||||||||||
Select Medical Holdings Corporation |
1,920,040 | 492,936 | 119,706 | 2,532,682 | ||||||||||||
Capital expenditures |
11,222 | 2,199 | 524 | 13,945 |
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Three Months Ended June 30, 2010 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 403,079 | $ | 176,785 | $ | 13 | $ | 579,877 | ||||||||
Adjusted EBITDA |
73,344 | 25,956 | (9,677 | ) | 89,623 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
1,969,566 | 495,399 | 192,375 | 2,657,340 | ||||||||||||
Select Medical Holdings
Corporation |
1,969,566 | 495,399 | 195,158 | 2,660,123 | ||||||||||||
Capital expenditures |
10,026 | 3,133 | 248 | 13,407 |
Six Months Ended June 30, 2009 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 779,563 | $ | 341,009 | $ | 135 | $ | 1,120,707 | ||||||||
Adjusted EBITDA |
147,741 | 46,578 | (25,041 | ) | 169,278 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
1,920,040 | 492,936 | 115,324 | 2,528,300 | ||||||||||||
Select Medical Holdings Corporation |
1,920,040 | 492,936 | 119,706 | 2,532,682 | ||||||||||||
Capital expenditures |
15,377 | 5,009 | 595 | 20,981 |
Six Months Ended June 30, 2010 | ||||||||||||||||
Specialty | Outpatient | |||||||||||||||
Hospitals | Rehabilitation | All Other | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Net operating revenue |
$ | 814,764 | $ | 349,850 | $ | 76 | $ | 1,164,690 | ||||||||
Adjusted EBITDA |
156,241 | 46,474 | (22,224 | ) | 180,491 | |||||||||||
Total assets: |
||||||||||||||||
Select Medical Corporation |
1,969,566 | 495,399 | 192,375 | 2,657,340 | ||||||||||||
Select Medical Holdings
Corporation |
1,969,566 | 495,399 | 195,158 | 2,660,123 | ||||||||||||
Capital expenditures |
20,624 | 5,168 | 662 | 26,454 |
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A reconciliation of Adjusted EBITDA to income (loss) from operations before income taxes is as
follows (in thousands):
Three Months Ended June 30, 2009 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 70,960 | $ | 25,294 | $ | (12,628 | ) | |||||||||||||
Depreciation and amortization |
(10,790 | ) | (6,264 | ) | (885 | ) | ||||||||||||||
Stock compensation expense |
| | (299 | ) | ||||||||||||||||
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 60,170 | $ | 19,030 | $ | (13,812 | ) | $ | 65,388 | $ | 65,388 | |||||||||
Gain on early retirement of debt |
3,562 | 3,562 | ||||||||||||||||||
Other expense |
| (32 | ) | |||||||||||||||||
Interest expense, net |
(33,630 | ) | (24,825 | ) | ||||||||||||||||
Income from operations
before income taxes |
$ | 35,320 | $ | 44,093 | ||||||||||||||||
Three Months Ended June 30, 2010 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 73,344 | $ | 25,956 | $ | (9,677 | ) | |||||||||||||
Depreciation and amortization |
(10,899 | ) | (4,943 | ) | (768 | ) | ||||||||||||||
Stock compensation expense |
| | (437 | ) | ||||||||||||||||
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 62,445 | $ | 21,013 | $ | (10,882 | ) | $ | 72,576 | $ | 72,576 | |||||||||
Other income |
182 | 182 | ||||||||||||||||||
Interest expense, net |
(29,279 | ) | (22,325 | ) | ||||||||||||||||
Income from operations
before income taxes |
$ | 43,479 | $ | 50,433 | ||||||||||||||||
Six Months Ended June 30, 2009 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 147,741 | $ | 46,578 | $ | (25,041 | ) | |||||||||||||
Depreciation and amortization |
(21,537 | ) | (12,397 | ) | (1,736 | ) | ||||||||||||||
Stock compensation expense |
| | (594 | ) | ||||||||||||||||
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 126,204 | $ | 34,181 | $ | (27,371 | ) | $ | 133,014 | $ | 133,014 | |||||||||
Gain on early retirement of debt |
15,316 | 15,316 | ||||||||||||||||||
Other income |
| 1,621 | ||||||||||||||||||
Interest expense, net |
(68,250 | ) | (50,742 | ) | ||||||||||||||||
Income from operations
before income taxes |
$ | 80,080 | $ | 99,209 | ||||||||||||||||
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Six Months Ended June 30, 2010 | ||||||||||||||||||||
Specialty | Outpatient | |||||||||||||||||||
Hospitals | Rehabilitation | All Other | ||||||||||||||||||
Adjusted EBITDA |
$ | 156,241 | $ | 46,474 | $ | (22,224 | ) | |||||||||||||
Depreciation and amortization |
(21,858 | ) | (10,799 | ) | (1,664 | ) | ||||||||||||||
Stock compensation expense |
| | (945 | ) | ||||||||||||||||
Select Medical Holdings Corporation | Select Medical Corporation | |||||||||||||||||||
Income (loss) from operations |
$ | 134,383 | $ | 35,675 | $ | (24,833 | ) | $ | 145,225 | $ | 145,225 | |||||||||
Other income |
316 | 316 | ||||||||||||||||||
Interest expense, net |
(59,321 | ) | (45,363 | ) | ||||||||||||||||
Income from operations
before income taxes |
$ | 86,220 | $ | 100,178 | ||||||||||||||||
10. Income per Common Share
The Company applies the two-class method for calculating and presenting income per common
share. The two-class method is an earnings allocation formula that determines earnings per share
for each class of stock participation rights in undistributed earnings. Effective January 1, 2009
the Financial Accounting Standards Board (FASB) clarified that share based payment awards that
have not yet vested meet the definition of a participating security provided the right to receive
the dividend is non-forfeitable and non-contingent. Participating securities are defined as
securities that participate in dividends with common stock according to a predetermined formula.
These participating securities should be included in the computation of basic earnings per share
under the two class method. Based upon the clarification made by FASB, the Company concluded that
its non-vested restricted stock awards meet the definition of a participating security and should
be included in the Companys computation of basic earnings per share.
16
Table of Contents
The following table sets forth for the periods indicated the calculation of net income per
share in the Companys consolidated statement of operations and the differences between basic
weighted average shares outstanding and diluted weighted average shares outstanding used to compute
basic and diluted earnings per share, respectively:
For the Quarter Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Numerator: |
||||||||||||||||
Net income attributable to
Select Medical Holdings
Corporation |
$ | 19,792 | $ | 24,462 | $ | 44,788 | $ | 48,688 | ||||||||
Less: Preferred stock dividends |
6,508 | 12,870 | ||||||||||||||
Less: Earnings allocated to
preferred stockholders |
1,296 | 3,115 | ||||||||||||||
Less: Earnings allocated to
unvested restricted stockholders |
161 | 46 | 443 | 97 | ||||||||||||
Income available to common and
preferred stockholders basic
and diluted |
$ | 11,827 | $ | 24,416 | $ | 28,360 | $ | 48,591 | ||||||||
Denominator: |
||||||||||||||||
Weighted average shares basic |
60,632 | 159,709 | 60,509 | 159,686 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
482 | 266 | 482 | 298 | ||||||||||||
Weighted average shares diluted |
61,114 | 159,975 | 60,991 | 159,984 | ||||||||||||
Basic income per common share |
$ | 0.20 | $ | 0.15 | $ | 0.47 | $ | 0.30 | ||||||||
Diluted income per common share |
$ | 0.19 | $ | 0.15 | $ | 0.47 | $ | 0.30 |
The following share amounts are shown here for informational and comparative purposes
only since their inclusion would be anti-dilutive:
For the Quarter Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(in thousands) | ||||||||||||||||
Stock options |
141 | 2,399 | 136 | 1,620 |
17
Table of Contents
11. Early Retirement of Debt
During the first quarter of 2009, the Company paid approximately $19.0 million to repurchase
and retire a portion of its 75/8% senior subordinated notes. These notes had a carrying value of
$31.5 million. A gain on early retirement of debt in the amount of $11.8 million was recognized,
which was net of the write-off of $0.7 million in unamortized deferred financing costs related to
the debt. In the second quarter of 2009, the Company paid approximately $11.1 million to
repurchase and retire additional 75/8% senior subordinated notes with a carrying value of $15.0
million. A gain on the early retirement of debt in the amount of $3.6 million was recognized in the
second quarter of 2009 which was net of the write-off of $0.3 million in unamortized deferred
financing cost related to the debt.
12. Commitments and Contingencies
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 amount, are 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 believes that the subpoena has been issued in connection with a qui tam lawsuit, and that
the government is currently investigating the matter to determine whether to intervene. The
Company has produced documents in response to the subpoena and intends to fully cooperate with the
governments investigation. In addition, the Company has initiated an internal review of its
policies and practices related to physician relationships in the Columbus market. At this time,
the Company is unable to predict the timing and outcome of this matter.
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Table of Contents
On March 8, 2010, the Company received a letter from the United States Senate Finance
Committee in response to a New York Times article published February 10, 2010 focusing on our
Company and the long term
acute care hospital industry entitled Long-Term Care Hospitals Face Little Scrutiny. The
letter from the Senate Finance Committee asked the Company to respond to a variety of questions
regarding our long-term care hospitals. On March 23, 2010, the Company responded to the letter. On
May 25, 2010 the Company received follow-up questions from the committee, which the Company
responded to on June 4, 2010. The Company intends on fully
cooperating and, at this time, the Company is unable to predict the timing and outcome of this matter.
Construction Commitments
At June 30, 2010, the Company had outstanding commitments under construction contracts related
to new construction, improvements and renovations at some of the Companys long term acute care
properties and inpatient rehabilitation facilities totaling approximately $15.2 million.
13. Agreement to Purchase Regency Hospital Company, L.L.C.
On June 18, 2010, the Company entered into an agreement to acquire all the issued and
outstanding equity securities of Regency Hospital Company, L.L.C. (Regency) an operator of
long-term acute care hospitals, for approximately $210 million, including certain assumed
liabilities. The purchase price is subject to adjustment based on Regencys net working capital on
the closing date. The Company anticipates financing the acquisition with cash and borrowings under
its senior secured credit facility.
Regency operates a network of 23 long-term acute care hospitals located in 9 states. The
transaction, which is expected to close in the third quarter of 2010, is subject to a number of
closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and receipt of certain healthcare regulatory approvals.
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14. 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 June 30, 2009 and 2010 and for the three and six months ended
June 30, 2009 and 2010.
The equity method has been used by Select with respect to investments in subsidiaries.
The equity method has been used by Subsidiary Guarantors with respect to investments in
Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not
presented.
The following table sets forth the Non-Guarantor Subsidiaries at June 30, 2010:
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. |
20
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Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Balance Sheet | ||||||||||||||||||||
June 30, 2010 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | ||||||||||||||||||||
Corporation (Parent | Subsidiary | Non-Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
( in thousands) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 126,145 | $ | 2,136 | $ | 472 | $ | | $ | 128,753 | ||||||||||
Accounts receivable, net |
| 304,081 | 34,239 | | 338,320 | |||||||||||||||
Current deferred tax asset |
8,914 | 26,569 | 5,325 | | 40,808 | |||||||||||||||
Other current assets |
5,017 | 23,787 | 2,767 | | 31,571 | |||||||||||||||
Total Current Assets |
140,076 | 356,573 | 42,803 | | 539,452 | |||||||||||||||
Property and equipment, net |
5,770 | 403,892 | 49,905 | | 459,567 | |||||||||||||||
Investment in affiliates |
2,208,389 | 83,661 | | (2,292,050 | )(a)(b) | | ||||||||||||||
Goodwill |
| 1,548,269 | | | 1,548,269 | |||||||||||||||
Other identifiable intangibles |
| 63,468 | | | 63,468 | |||||||||||||||
Assets held for sale |
11,342 | | | | 11,342 | |||||||||||||||
Other assets |
24,917 | 7,595 | 2,730 | | 35,242 | |||||||||||||||
Total Assets |
$ | 2,390,494 | $ | 2,463,458 | $ | 95,438 | $ | (2,292,050 | ) | $ | 2,657,340 | |||||||||
Liabilities and Equity |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Bank overdrafts |
$ | 14,201 | $ | | $ | | $ | | $ | 14,201 | ||||||||||
Current portion of long-term debt
and notes payable |
101,113 | 795 | 502 | | 102,410 | |||||||||||||||
Accounts payable |
5,947 | 51,074 | 7,613 | | 64,634 | |||||||||||||||
Intercompany accounts |
569,652 | (484,442 | ) | (85,210 | ) | | | |||||||||||||
Accrued payroll |
205 | 57,785 | 279 | | 58,269 | |||||||||||||||
Accrued vacation |
3,053 | 35,119 | 5,520 | | 43,692 | |||||||||||||||
Accrued interest |
22,354 | 254 | | | 22,608 | |||||||||||||||
Accrued restructuring |
| 3,232 | | | 3,232 | |||||||||||||||
Accrued other |
32,390 | 53,406 | 5,348 | | 91,144 | |||||||||||||||
Due to third party payors |
| 18,369 | (15,877 | ) | | 2,492 | ||||||||||||||
Total Current Liabilities |
748,915 | (264,408 | ) | (81,825 | ) | | 402,682 | |||||||||||||
Long-term debt, net of current portion |
511,062 | 431,475 | 57,030 | | 999,567 | |||||||||||||||
Non-current deferred tax liability |
(306 | ) | 61,585 | 5,325 | | 66,604 | ||||||||||||||
Other non-current liabilities |
35,641 | 26,071 | | | 61,712 | |||||||||||||||
Total Liabilities |
1,295,312 | 254,723 | (19,470 | ) | | 1,530,565 | ||||||||||||||
Stockholders Equity: |
||||||||||||||||||||
Common stock |
| | | | | |||||||||||||||
Capital in excess of par |
828,621 | | | | 828,621 | |||||||||||||||
Retained earnings |
268,459 | 474,070 | 29,293 | (503,363 | )(b) | 268,459 | ||||||||||||||
Subsidiary investment |
| 1,734,665 | 54,022 | (1,788,687 | )(a) | | ||||||||||||||
Accumulated other comprehensive loss |
(1,898 | ) | | | | (1,898 | ) | |||||||||||||
Total Select Medical Corporation
Stockholders Equity |
1,095,182 | 2,208,735 | 83,315 | (2,292,050 | ) | 1,095,182 | ||||||||||||||
Non-controlling interest |
| | 31,593 | | 31,593 | |||||||||||||||
Total Equity |
1,095,182 | 2,208,735 | 114,908 | (2,292,050 | ) | 1,126,775 | ||||||||||||||
Total Liabilities and Equity |
$ | 2,390,494 | $ | 2,463,458 | $ | 95,438 | $ | (2,292,050 | ) | $ | 2,657,340 | |||||||||
(a) | Elimination of investments in subsidiaries. | |
(b) | Elimination of investments in subsidiaries earnings. |
21
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Operations | ||||||||||||||||||||
For the Quarter Ended June 30, 2010 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 13 | $ | 499,330 | $ | 80,534 | $ | | $ | 579,877 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
326 | 403,366 | 66,352 | | 470,044 | |||||||||||||||
General and administrative |
9,785 | 17 | | | 9,802 | |||||||||||||||
Bad debt expense |
| 9,070 | 1,775 | | 10,845 | |||||||||||||||
Depreciation and amortization |
680 | 13,888 | 2,042 | | 16,610 | |||||||||||||||
Total costs and expenses |
10,791 | 426,341 | 70,169 | | 507,301 | |||||||||||||||
Income (loss) from operations |
(10,778 | ) | 72,989 | 10,365 | | 72,576 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(887 | ) | 882 | 5 | | | ||||||||||||||
Intercompany management fees |
22,413 | (18,458 | ) | (3,955 | ) | | | |||||||||||||
Other income |
182 | | | | 182 | |||||||||||||||
Interest expense |
(12,652 | ) | (8,477 | ) | (1,196 | ) | | (22,325 | ) | |||||||||||
Income (loss) from operations before income taxes |
(1,722 | ) | 46,936 | 5,219 | | 50,433 | ||||||||||||||
Income tax expense (benefit) |
1,402 | 19,067 | (729 | ) | | 19,740 | ||||||||||||||
Equity in earnings of subsidiaries |
32,106 | 4,270 | | (36,376 | )(a) | | ||||||||||||||
Net income |
28,982 | 32,139 | 5,948 | (36,376 | ) | 30,693 | ||||||||||||||
Less: Net income attributable to non-controlling
interests |
| | 1,711 | | 1,711 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 28,982 | $ | 32,139 | $ | 4,237 | $ | (36,376 | ) | $ | 28,982 | |||||||||
(a) | Elimination of equity in net income from consolidated subsidiaries. |
22
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Operations | ||||||||||||||||||||
For the Six Months Ended June 30, 2010 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 76 | $ | 1,001,657 | $ | 162,957 | $ | | $ | 1,164,690 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
654 | 808,631 | 133,136 | | 942,421 | |||||||||||||||
General and administrative |
22,559 | 32 | | | 22,591 | |||||||||||||||
Bad debt expense |
| 16,741 | 3,391 | | 20,132 | |||||||||||||||
Depreciation and amortization |
1,498 | 28,538 | 4,285 | | 34,321 | |||||||||||||||
Total costs and expenses |
24,711 | 853,942 | 140,812 | | 1,019,465 | |||||||||||||||
Income (loss) from operations |
(24,635 | ) | 147,715 | 22,145 | | 145,225 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(1,961 | ) | 1,952 | 9 | | | ||||||||||||||
Intercompany management fees |
45,229 | (37,769 | ) | (7,460 | ) | | | |||||||||||||
Other income |
316 | | | | 316 | |||||||||||||||
Interest expense |
(26,100 | ) | (17,004 | ) | (2,259 | ) | | (45,363 | ) | |||||||||||
Income (loss) from operations before income taxes |
(7,151 | ) | 94,894 | 12,435 | | 100,178 | ||||||||||||||
Income tax expense (benefit) |
1,490 | 38,559 | (749 | ) | | 39,300 | ||||||||||||||
Equity in earnings of subsidiaries |
66,402 | 9,866 | | (76,268 | )(a) | | ||||||||||||||
Net income |
57,761 | 66,201 | 13,184 | (76,268 | ) | 60,878 | ||||||||||||||
Less: Net income attributable to non-controlling
interests |
| | 3,117 | | 3,117 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 57,761 | $ | 66,201 | $ | 10,067 | $ | (76,268 | ) | $ | 57,761 | |||||||||
(a) | Elimination of equity in net income from consolidated subsidiaries. |
23
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Cash Flows | ||||||||||||||||||||
For the Six Months Ended June 30, 2010 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating activities |
||||||||||||||||||||
Net income |
$ | 57,761 | $ | 66,201 | $ | 13,184 | $ | (76,268 | )(a) | $ | 60,878 | |||||||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
1,498 | 28,538 | 4,285 | | 34,321 | |||||||||||||||
Provision for bad debts |
| 16,741 | 3,391 | | 20,132 | |||||||||||||||
Loss from disposal of assets |
| 643 | 17 | | 660 | |||||||||||||||
Non-cash gain from interest rate swaps |
(316 | ) | | | | (316 | ) | |||||||||||||
Non-cash stock compensation expense |
945 | | | | 945 | |||||||||||||||
Changes in operating assets and
liabilities, net of
effects from acquisition of businesses: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(66,402 | ) | (9,866 | ) | | 76,268 | (a) | | ||||||||||||
Intercompany |
48,740 | (38,047 | ) | (10,693 | ) | | | |||||||||||||
Accounts receivable |
| (38,152 | ) | (13,221 | ) | | (51,373 | ) | ||||||||||||
Other current assets |
369 | (3,363 | ) | 2,499 | | (495 | ) | |||||||||||||
Other assets |
(2,517 | ) | 1,526 | (419 | ) | | (1,410 | ) | ||||||||||||
Accounts payable |
2,718 | (10,137 | ) | (1,377 | ) | | (8,796 | ) | ||||||||||||
Due to third-party payors |
| 7,050 | (6,463 | ) | | 587 | ||||||||||||||
Accrued expenses |
(13,018 | ) | 14,022 | 655 | | 1,659 | ||||||||||||||
Income and deferred taxes |
14,810 | | | | 14,810 | |||||||||||||||
Net cash provided by (used in) operating activities |
44,588 | 35,156 | (8,142 | ) | | 71,602 | ||||||||||||||
Investing activities |
||||||||||||||||||||
Purchases of property and equipment |
(662 | ) | (24,041 | ) | (1,751 | ) | | (26,454 | ) | |||||||||||
Net cash used in investing activities |
(662 | ) | (24,041 | ) | (1,751 | ) | | (26,454 | ) | |||||||||||
Financing activities |
||||||||||||||||||||
Borrowings of other debt |
5,015 | | | | 5,015 | |||||||||||||||
Principal payments on seller and other debt |
3,556 | (8,503 | ) | 505 | | (4,442 | ) | |||||||||||||
Dividends paid to Holdings |
(12,883 | ) | | | | (12,883 | ) | |||||||||||||
Equity investment by Holdings |
125 | | | | 125 | |||||||||||||||
Proceeds from bank overdrafts |
14,201 | | | | 14,201 | |||||||||||||||
Intercompany debt reallocation |
(8,735 | ) | (2,429 | ) | 11,164 | | | |||||||||||||
Distributions to non-controlling interests |
| (345 | ) | (1,746 | ) | | (2,091 | ) | ||||||||||||
Net cash provided by (used in) financing activities |
1,279 | (11,277 | ) | 9,923 | | (75 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
45,205 | (162 | ) | 30 | | 45,073 | ||||||||||||||
Cash and cash equivalents at beginning of period |
80,940 | 2,298 | 442 | | 83,680 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 126,145 | $ | 2,136 | $ | 472 | $ | | $ | 128,753 | ||||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
24
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Balance Sheet | ||||||||||||||||||||
December 31, 2009 | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
( in thousands) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 80,940 | $ | 2,298 | $ | 442 | $ | | $ | 83,680 | ||||||||||
Accounts receivable, net |
| 282,670 | 24,409 | | 307,079 | |||||||||||||||
Current deferred tax asset |
13,677 | 29,854 | 5,004 | | 48,535 | |||||||||||||||
Prepaid income taxes |
11,179 | | | | 11,179 | |||||||||||||||
Other current assets |
5,386 | 13,588 | 5,266 | | 24,240 | |||||||||||||||
Total Current Assets |
111,182 | 328,410 | 35,121 | | 474,713 | |||||||||||||||
Property and equipment, net |
6,649 | 409,258 | 50,224 | | 466,131 | |||||||||||||||
Investment in affiliates |
2,142,189 | 72,628 | | (2,214,817 | )(a)(b) | | ||||||||||||||
Goodwill |
| 1,548,269 | | | 1,548,269 | |||||||||||||||
Other identifiable intangibles |
| 65,297 | | | 65,297 | |||||||||||||||
Assets held for sale |
11,342 | | | | 11,342 | |||||||||||||||
Other assets |
22,400 | 8,716 | 2,311 | | 33,427 | |||||||||||||||
Total Assets |
$ | 2,293,762 | $ | 2,432,578 | $ | 87,656 | $ | (2,214,817 | ) | $ | 2,599,179 | |||||||||
Liabilities and Equity |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Current portion of long-term debt
and notes payable |
$ | 2,545 | $ | 803 | $ | 797 | $ | | $ | 4,145 | ||||||||||
Accounts payable |
3,229 | 61,215 | 8,990 | | 73,434 | |||||||||||||||
Intercompany accounts |
495,981 | (416,944 | ) | (79,037 | ) | | | |||||||||||||
Accrued payroll |
81 | 61,860 | 94 | | 62,035 | |||||||||||||||
Accrued vacation |
2,942 | 33,024 | 5,047 | | 41,013 | |||||||||||||||
Accrued interest |
23,354 | 119 | | | 23,473 | |||||||||||||||
Accrued restructuring |
| 4,256 | | | 4,256 | |||||||||||||||
Accrued other |
50,122 | 41,661 | 5,351 | | 97,134 | |||||||||||||||
Due to third party payors |
| 11,319 | (9,414 | ) | | 1,905 | ||||||||||||||
Total Current Liabilities |
578,254 | (202,687 | ) | (68,172 | ) | | 307,395 | |||||||||||||
Long-term debt, net of current portion |
616,906 | 434,384 | 45,552 | | 1,096,842 | |||||||||||||||
Non-current deferred tax liability |
995 | 58,346 | 7,427 | | 66,768 | |||||||||||||||
Other non-current liabilities |
60,543 | | | | 60,543 | |||||||||||||||
Total Liabilities |
1,256,698 | 290,043 | (15,193 | ) | | 1,531,548 | ||||||||||||||
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. |
25
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Operations | ||||||||||||||||||||
For the Quarter Ended June 30, 2009 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 14 | $ | 500,206 | $ | 59,315 | $ | | $ | 559,535 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
58 | 401,855 | 51,098 | | 453,011 | |||||||||||||||
General and administrative |
12,872 | 13 | | | 12,885 | |||||||||||||||
Bad debt expense |
| 9,045 | 1,267 | | 10,312 | |||||||||||||||
Depreciation and amortization |
805 | 15,555 | 1,579 | | 17,939 | |||||||||||||||
Total costs and expenses |
13,735 | 426,468 | 53,944 | | 494,147 | |||||||||||||||
Income (loss) from operations |
(13,721 | ) | 73,738 | 5,371 | | 65,388 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(1,449 | ) | 1,440 | 9 | | | ||||||||||||||
Intercompany management fees |
23,884 | (21,427 | ) | (2,457 | ) | | | |||||||||||||
Gain on early retirement of debt |
3,562 | | | | 3,562 | |||||||||||||||
Other expense |
(32 | ) | | | | (32 | ) | |||||||||||||
Interest income |
12 | 15 | 1 | | 28 | |||||||||||||||
Interest expense |
(15,058 | ) | (9,012 | ) | (783 | ) | | (24,853 | ) | |||||||||||
Income (loss) from operations before income taxes |
(2,802 | ) | 44,754 | 2,141 | | 44,093 | ||||||||||||||
Income tax expense (benefit) |
(554 | ) | 18,989 | (228 | ) | | 18,207 | |||||||||||||
Equity in earnings of subsidiaries |
27,743 | 2,101 | | (29,844 | )(a) | | ||||||||||||||
Net income |
25,495 | 27,866 | 2,369 | (29,844 | ) | 25,886 | ||||||||||||||
Less: Net income attributable to non-controlling
interests |
| | 391 | | 391 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 25,495 | $ | 27,866 | $ | 1,978 | $ | (29,844 | ) | $ | 25,495 | |||||||||
(a) | Elimination of equity in net income from consolidated subsidiaries. |
26
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Operations | ||||||||||||||||||||
For the Six Months Ended June 30, 2009 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net operating revenues |
$ | 135 | $ | 1,000,941 | $ | 119,631 | $ | | $ | 1,120,707 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Cost of services |
111 | 802,691 | 101,603 | | 904,405 | |||||||||||||||
General and administrative |
25,616 | 44 | | | 25,660 | |||||||||||||||
Bad debt expense |
| 19,422 | 2,536 | | 21,958 | |||||||||||||||
Depreciation and amortization |
1,577 | 31,018 | 3,075 | | 35,670 | |||||||||||||||
Total costs and expenses |
27,304 | 853,175 | 107,214 | | 987,693 | |||||||||||||||
Income (loss) from operations |
(27,169 | ) | 147,766 | 12,417 | | 133,014 | ||||||||||||||
Other income and expense: |
||||||||||||||||||||
Intercompany interest and royalty fees |
(5,151 | ) | 5,114 | 37 | | | ||||||||||||||
Intercompany management fees |
63,134 | (58,524 | ) | (4,610 | ) | | | |||||||||||||
Gain on early retirement of debt |
15,316 | | | | 15,316 | |||||||||||||||
Other income |
1,621 | | | | 1,621 | |||||||||||||||
Interest income |
63 | 16 | 1 | | 80 | |||||||||||||||
Interest expense |
(32,401 | ) | (16,944 | ) | (1,477 | ) | | (50,822 | ) | |||||||||||
Income from operations before income taxes |
15,413 | 77,428 | 6,368 | | 99,209 | |||||||||||||||
Income tax expense (benefit) |
7,188 | 33,515 | (128 | ) | | 40,575 | ||||||||||||||
Equity in earnings of subsidiaries |
48,997 | 5,196 | | (54,193 | )(a) | | ||||||||||||||
Net income |
57,222 | 49,109 | 6,496 | (54,193 | ) | 58,634 | ||||||||||||||
Less: Net income attributable to non-controlling
interests |
| | 1,412 | | 1,412 | |||||||||||||||
Net income attributable to Select Medical Corporation |
$ | 57,222 | $ | 49,109 | $ | 5,084 | $ | (54,193 | ) | $ | 57,222 | |||||||||
(a) | Elimination of equity in net income from consolidated subsidiaries. |
27
Table of Contents
Select Medical Corporation | ||||||||||||||||||||
Condensed Consolidating Statement of Cash Flows | ||||||||||||||||||||
For the Six Months Ended June 30, 2009 | ||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Select Medical | Non- | |||||||||||||||||||
Corporation (Parent | Subsidiary | Guarantor | ||||||||||||||||||
Company Only) | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating activities |
||||||||||||||||||||
Net income |
$ | 57,222 | $ | 49,109 | $ | 6,496 | $ | (54,193 | )(a) | $ | 58,634 | |||||||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
1,577 | 31,018 | 3,075 | | 35,670 | |||||||||||||||
Provision for bad debts |
| 19,422 | 2,536 | | 21,958 | |||||||||||||||
Gain on early retirement of debt |
(15,316 | ) | | | | (15,316 | ) | |||||||||||||
Loss from disposal of assets |
1 | 113 | 3 | | 117 | |||||||||||||||
Non-cash gain from interest rate swaps |
(1,621 | ) | | | | (1,621 | ) | |||||||||||||
Non-cash stock compensation expense |
594 | | | | 594 | |||||||||||||||
Changes in operating assets and
liabilities, net of
effects from acquisition of businesses: |
||||||||||||||||||||
Equity in earnings of subsidiaries |
(48,997 | ) | (5,196 | ) | | 54,193 | (a) | | ||||||||||||
Intercompany |
95,550 | (94,903 | ) | (647 | ) | | | |||||||||||||
Accounts receivable |
(130 | ) | (45,637 | ) | (3,388 | ) | | (49,155 | ) | |||||||||||
Other current assets |
(1,971 | ) | 2,174 | (870 | ) | | (667 | ) | ||||||||||||
Other assets |
4,358 | (456 | ) | 57 | | 3,959 | ||||||||||||||
Accounts payable |
(1,293 | ) | (2,666 | ) | 266 | | (3,693 | ) | ||||||||||||
Due to third-party payors |
| 1,603 | (1,819 | ) | | (216 | ) | |||||||||||||
Accrued expenses |
(2,101 | ) | (4,360 | ) | 534 | | (5,927 | ) | ||||||||||||
Income and deferred taxes |
29,308 | | | | 29,308 | |||||||||||||||
Net cash provided by (used in) operating activities |
117,181 | (49,779 | ) | 6,243 | | 73,645 | ||||||||||||||
Investing activities |
||||||||||||||||||||
Purchases of property and equipment |
(785 | ) | (14,110 | ) | (6,086 | ) | | (20,981 | ) | |||||||||||
Proceeds from sale of property |
| 1,341 | | | 1,341 | |||||||||||||||
Net cash used in investing activities |
(785 | ) | (12,769 | ) | (6,086 | ) | | (19,640 | ) | |||||||||||
Financing activities |
||||||||||||||||||||
Borrowings on revolving credit facility |
138,000 | | | | 138,000 | |||||||||||||||
Payments on revolving credit facility |
(173,000 | ) | | | | (173,000 | ) | |||||||||||||
Payments on credit facility term loan |
(3,400 | ) | | | | (3,400 | ) | |||||||||||||
Repurchase
of 7 5/8% senior subordinated notes |
(30,114 | ) | | | | (30,114 | ) | |||||||||||||
Borrowings of other debt |
5,184 | | | | 5,184 | |||||||||||||||
Principal payments on seller and other debt |
(3,330 | ) | (555 | ) | (6 | ) | | (3,891 | ) | |||||||||||
Dividends paid to Holdings |
(16,490 | ) | | | | (16,490 | ) | |||||||||||||
Payment of initial public offering costs |
(417 | ) | | | (417 | ) | ||||||||||||||
Equity investment by Holdings |
24 | | | | 24 | |||||||||||||||
Repayment of bank overdrafts |
(4,658 | ) | | | | (4,658 | ) | |||||||||||||
Intercompany debt reallocation |
(61,872 | ) | 60,504 | 1,368 | | | ||||||||||||||
Distributions to non-controlling interests |
| | (1,814 | ) | | (1,814 | ) | |||||||||||||
Net cash provided by (used in) financing activities |
(150,073 | ) | 59,949 | (452 | ) | | (90,576 | ) | ||||||||||||
Net decrease in cash and cash equivalents |
(33,677 | ) | (2,599 | ) | (295 | ) | | (36,571 | ) | |||||||||||
Cash and cash equivalents at beginning of period |
58,332 | 5,108 | 820 | | 64,260 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 24,655 | $ | 2,509 | $ | 525 | $ | | $ | 27,689 | ||||||||||
(a) | Elimination of equity in earnings of subsidiaries. |
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read this discussion together with our unaudited consolidated financial statements
and accompanying notes.
Forward Looking Statements
This report contains forward-looking statements within the meaning of the federal securities
laws. Statements that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Forward-looking statements include statements
preceded by, followed by or that include the words may, could, would, should, believe,
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:
| 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, the American Recovery and Reinvestment Act, and the Patient Protection and Affordable Care Act may result in a reduction in net operating revenues, an increase in costs and a reduction in profitability; | ||
| the failure of our specialty hospitals to maintain their Medicare certifications as such may cause our net operating revenues and profitability to decline; | ||
| the failure of our facilities operated as hospitals within hospitals to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline; | ||
| a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs; | ||
| future acquisitions or joint ventures (such as the acquisition of Regency Hospital Company, LLC) may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities; | ||
| private third-party payors for our services may undertake future cost containment initiatives that limit our future net operating revenues and profitability; | ||
| the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability; | ||
| shortages in qualified nurses or therapists could increase our operating costs significantly; | ||
| competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability; | ||
| the loss of key members of our management team could significantly disrupt our operations; |
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| the effect of claims asserted against us or lack of adequate available insurance could subject us to substantial uninsured liabilities; | ||
| other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2009. |
Except as required by applicable law, including the securities laws of the United States and
the rules and regulations of the SEC, we are under no obligation to publicly update or revise any
forward-looking statements, whether as a result of any new information, future events or otherwise.
You should not place undue reliance on our forward-looking statements. Although we believe that the
expectations reflected in forward-looking statements are reasonable, we cannot guarantee future
results or performance.
Investors should also be aware that while we do, from time to time, communicate with
securities analysts, it is against our policy to disclose to security analysts any material
non-public information or other confidential commercial information. Accordingly, stockholders
should not assume that we agree with any statement or report issued by any analyst irrespective of
the content of the statement or report. Thus, to the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are not the responsibility of
the Company.
Overview
We believe that we are one of the largest operators of both specialty hospitals and outpatient
rehabilitation clinics in the United States based on number of facilities. As of June 30, 2010, we
operated 89 long term acute care hospitals and six inpatient rehabilitation facilities in 25
states, and 953 outpatient rehabilitation clinics in 36 states and the District of Columbia. We
also provide medical rehabilitation services on a contracted basis to nursing homes, hospitals,
assisted living and senior care centers, schools and work sites. We began operations in 1997 under
the leadership of our current management team.
We manage our Company through two business segments, our specialty hospital segment and our
outpatient rehabilitation segment. We had net operating revenues of $1,164.7 million for the six
months ended June 30, 2010. Of this total, we earned approximately 70% of our net operating
revenues from our specialty hospitals and approximately 30% from our outpatient rehabilitation
business. Our specialty hospital segment consists of hospitals designed to serve the needs of long
term stay acute patients and hospitals designed to serve patients that require intensive inpatient
medical rehabilitation care. Patients are typically admitted to our long term acute care hospitals
from general acute care hospitals. These patients have specialized needs, and serious and often
complex medical conditions such as respiratory failure, neuromuscular disorders, traumatic brain
and spinal cord injuries, strokes, non-healing wounds, cardiac disorders, renal disorders and
cancer. Our outpatient rehabilitation segment consists of clinics and contract services that
provide physical, occupational and speech rehabilitation services. Our outpatient rehabilitation
patients are typically diagnosed with musculoskeletal impairments that restrict their ability to
perform normal activities of daily living.
Recent Trends and Events
Agreement to Purchase Regency Hospital Company, L.L.C.
On June 18, 2010, we entered into an agreement to acquire all the issued and outstanding
equity securities of Regency Hospital Company, L.L.C. (Regency) an operator of long-term acute
care hospitals, for approximately $210 million, including certain assumed liabilities. The
purchase price is subject to adjustment based on Regencys net working capital on the closing date.
We anticipate financing the acquisition with cash and borrowings under our senior secured credit
facility.
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Regency operates a network of 23 long-term acute care hospitals located in 9 states. The
transaction, which is expected to close in the third quarter of 2010, is subject to a number of
closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and receipt of certain healthcare regulatory approvals.
Extension of Revolving Credit Facility
On June 7, 2010, we entered into an amendment to our senior secured credit facility that
extended the maturity of our $300.0 million revolving credit facility from February 24, 2011 to
August 22, 2013. The applicable margin percentage and commitment fee for revolving loans have
increased and are determined based on a pricing grid whereby changes in the leverage ratio, as
defined in the credit agreement, results in changes to the applicable margin percentage. Under the
pricing grid, the applicable margin percentage for revolving ABR
loans ranges from 2% per annum to
3% per annum, the applicable margin percentage for revolving
Eurodollar loans ranges from 3% per
annum to 4% per annum, and the commitment fee rate for extended revolving commitments ranges from
0.375% to 0.75%.
Summary Financial Results
Second Quarter Ended June 30, 2010
For the three months ended June 30, 2010, our net operating revenues increased 3.6% to $579.9
million compared to $559.5 million for the three months ended June 30, 2009. This increase in net
operating revenues resulted from a 4.3% increase in our specialty hospital net operating revenue
and a 2.1% increase in our outpatient rehabilitation net operating revenue. The increase in our
specialty hospital net operating revenue is principally due to the growth in the hospitals opened
as of January 1, 2009 and operated by us throughout both periods and the hospitals acquired in
2009. The increase in our outpatient rehabilitation net operating revenue is due to an increase in
both our contract services based revenue and revenue from our rehabilitation clinics. We had
income from operations for the three months ended June 30, 2010 of $72.6 million compared to $65.4
million for the three months ended June 30, 2009. The increase in income from operations was
related to (1) increase in profitability of our specialty hospitals opened as of January 1, 2009
and operated throughout both periods, and (2) growth in our outpatient operations, and (3) a
reduction in our general and administrative expenses. Holdings interest expense for the three
months ended June 30, 2010 was $29.3 million compared to $33.7 million for the three months ended
June 30, 2009. Selects interest expense for the three months ended June 30, 2010 was $22.3 million
compared to $24.9 million for the three months ended June 30, 2009. The decrease in interest
expense for both Holdings and Select was attributable to a reduction in outstanding debt balances
that occurred throughout 2009.
For the six months ended June 30, 2010, our net operating revenues increased 3.9% to $1,164.7
million compared to $1,120.7 million for the six months ended June 30, 2009. This increase in net
operating revenues resulted from a 4.5% increase in our specialty hospital net operating revenue
and a 2.6% increase in our outpatient rehabilitation net operating revenue. The increase in our
specialty hospital net operating revenue is principally due to the hospitals opened as of January
1, 2009 and operated by us throughout both periods. The increase in our outpatient rehabilitation
net operating revenue is principally due to an increase in contract services based revenue. We had
income from operations for the six months ended June 30, 2010 of $145.2 million compared to $133.0
million for the six months ended June 30, 2009. The increase in income from operations was
principally related to an increase in profitability of our specialty hospitals opened as of
January 1, 2009 and operated throughout both periods and a reduction in our general and
administrative expenses. Holdings interest expense for the six months ended June 30, 2010 was
$59.3 million compared to
$68.3 million for the six months ended June 30, 2009. Selects interest expense for the six
months ended June 30, 2010 was $45.4 million compared to $50.8 million for the six months ended
June 30, 2009. The decrease in interest expense for both Holdings and Select was attributable to a
reduction in outstanding debt balances that occurred throughout 2009.
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Cash flow from operations provided $58.7 million of cash for the six months ended June 30,
2010 for Holdings and $71.6 million of cash for the six months ended June 30, 2010 for Select. The
difference primarily relates to interest payments on Holdings senior subordinated notes and senior
floating rate notes.
Regulatory Changes
In the last few years, there have been significant regulatory changes that have affected our
net operating revenues and, in some cases, caused us to change our operating models and strategies.
The following is a discussion of significant regulatory changes that have occurred since we filed
our Annual Report on Form 10-K for the year ended December 31, 2009 with the Securities and
Exchange Commission (SEC) on March 17, 2010. Our Annual Report on Form 10-K for the year ended
December 31, 2009 contains a more detailed discussion of the regulations that affect our business
in Part I Business Government Regulations, and the information below should be read in
connection with that more detailed discussion.
Health Reform Legislation
On March 23, 2010, President Obama signed into law H.R. 3590, the Patient Protection and
Affordable Care Act (PPACA). The PPACA expands access to health insurance through subsidies,
coverage mandates and other insurance market reforms. In addition, PPACA makes dramatic changes to
the Medicare and Medicaid programs by adopting numerous initiatives addressing, among other things,
reductions in healthcare spending, patient safety incentives, and protections against fraud and
abuse of federal healthcare programs. The PPACA adopts significant changes to the Medicare program
that are particularly relevant to long term acute care hospitals (LTCHs), inpatient
rehabilitation facilities (IRFs) and outpatient rehabilitation services. As part of health
reform legislation, President Obama also signed H.R. 4872, the Health Care and Education
Affordability Reconciliation Act of 2010, which made some limited but important changes to the
PPACA.
Extension of Changes Made by the Medicare, Medicaid, and SCHIP Extension Act of 2007
The PPACA includes a two-year extension to Sections 114(c) and (d) of the Medicare, Medicaid,
and SCHIP Extension Act of 2007 (SCHIP Extension Act), as amended by the American Recovery and
Reinvestment Act of 2009 (Public Law 111-5) (ARRA). The two-year extension applies the relief
granted by Section 114(c) to the 25% Rule payment adjustment, the one-time budget neutrality
adjustment and the very short stay outlier payment adjustment. The two-year extension also applies
to the moratorium on new LTCHs and new LTCH beds adopted in Section 114(d) of the SCHIP Extension
Act. These changes are described further below.
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25% Rule
The 25% Rule is a downward payment adjustment that applies to Medicare patients discharged
from LTCHs who were admitted from a co-located (host) hospital or a non-co-located hospital and
who exceed applicable percentage thresholds of discharged Medicare patients. The following table
describes the types of LTCHs and the relief they have received under the SCHIP Extension Act as
amended by the ARRA and PPACA, from the payment adjustment for these discharges:
Type of LTCH | Non Co-located Admissions | Co-located Admissions | ||
Non-grandfathered HIHs opened before October 1, 2004 (54 owned hospitals) |
Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCHs total Medicare population. | Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after October 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%. | ||
Non-grandfathered
satellite facilities opened before October 1, 2004 (five owned hospitals) |
Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCHs total Medicare population. | Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after October 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%. | ||
Grandfathered HIHs (two owned hospitals) |
Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | Percentage admission threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | ||
Grandfathered satellites (no owned hospitals) |
Not subject to any extensions of the admissions thresholds under the 25% Rule. LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCHs total Medicare population. | Percentage admissions threshold was raised from 25% to 50%. This relief is now effective for five years starting with cost reporting periods beginning on or after July 1, 2007. In the special case of rural LTCHs, LTCHs co-located with an urban single hospital, or LTCHs co-located with an MSA-dominate hospital the referral percentage was raised to 75%. |
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Type of LTCH | Non Co-located Admissions | Co-located Admissions | ||
Freestanding facilities (23 owned hospitals) |
Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | 25% Rule not applicable. | ||
Facilities co-located
with a provider-based,
off-campus,
non-inpatient location
of an inpatient
prospective payment
system hospital
(no owned hospitals)
|
Percentage admissions threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | Percentage admission threshold is suspended for five years starting with cost reporting periods beginning on or after July 1, 2007. | ||
HIHs and satellite
facilities opened on or
after October 1, 2004. (four owned hospitals) |
LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCHs total Medicare population. | LTCHs in this category are subject to a payment adjustment for discharged Medicare patients exceeding 25% of the LTCHs total Medicare population. |
One-Time Budget Neutrality Adjustment
The regulations governing the prospective payment system specifically applicable to LTCHs,
referred to as LTCH-PPS, give the Centers for Medicare and Medicaid Services (CMS) the ability
to make a one-time adjustment to the standard federal rate to correct any significant difference
between actual payments and estimated payments for the first year of LTCH-PPS. In the rate year
2009 LTCH-PPS final rule, CMS estimated this one-time adjustment would result in a negative
adjustment of 3.75% to the base rate. The SCHIP Extension Act precluded CMS from implementing the
one-time prospective adjustment to the LTCH standard amount for a period of three years. PPACA
extends by two years the stay on CMSs ability to adopt a one-time budget neutrality adjustment to
LTCH-PPS. PPACA prohibits such a one-time adjustment before December 29, 2012.
Short Stay Outlier Policy
The SCHIP Extension Act prevented CMS from applying the so-called very short stay outlier
policy that was added to LTCH-PPS in the 2008 rate year update published on May 11, 2007. This
policy would result in a payment equivalent to the short-term care hospital rate for cases with a
length of stay that is less than the average length of stay plus one standard deviation of a case
with the same diagnosis related group under the inpatient prospective payment system, regardless of
the clinical considerations for admission to the LTCH or the average length of stay an LTCH must
satisfy for Medicare certification. The SCHIP Extension Act precluded CMS from implementing the
very short stay outlier policy for a period of three years. PPACA extends this prohibition by two
years. CMS may not apply the very short stay outlier policy before December 29, 2012.
Moratorium on New LTCHs and New LTCH Beds
The SCHIP Extension Act imposed a moratorium on the establishment and classification of new
LTCHs, LTCH satellite facilities and LTCH beds in existing LTCHs or satellite facilities. PPACA
extends this moratorium by two years. The moratorium will now expire on December 28, 2012.
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Medicare Quality Reporting
The PPACA requires that CMS establish new quality data reporting programs for LTCHs and IRFs.
By rate year 2014, CMS is required to select and implement quality measures for these providers.
These programs are mandatory. If a provider fails to report on the selected quality measures, it
will see its reimbursement reduced by 2% of the annual market basket update. The reduction can
result in payment rates less than the prior year. However, the reduction will not carry over into
the subsequent rate years. CMS is required to establish the quality measures applicable to rate
year 2014 no later than October 1, 2012.
Medicare Market Basket Adjustments
The PPACA institutes a market basket payment adjustment to LTCHs. In rate year 2010, LTCHs
are subject to a market basket reduction of minus 0.25% for discharges occurring after April 1,
2010. In rate year 2011, LTCHs are subject to a market basket reduction of minus 0.5%. There will
be a slightly smaller 0.1% market basket reduction for LTCHs in rate years 2012 and 2013. Rate
year 2014 the market basket update will be reduced by 0.3%. Rate years 2015 and 2016 the market
basket update will be reduced by 0.2%. Finally, in rate years 2017-2019, the market basket update
will be reduced by 0.75%. The PPACA specifically allows these market basket reductions to result
in less than a 0% payment update and payment rates that are less than the prior year.
The PPACA also implements a market basket payment adjustment for IRFs. For fiscal years 2010
and 2011, IRFs are subject to a market basket reduction of minus 0.25%. For fiscal years 2012 and
2013, the reduction is 0.1%. For fiscal year 2014, the reduction is 0.3%. For fiscal years 2015
and 2016, the reduction is 0.2%. For fiscal years 2017 2019, the reduction is 0.75%.
Medicare Productivity Adjustment
PPACA implements a separate productivity adjustment for the first time for hospital inpatient
services beginning in rate year 2012 for LTCHs and fiscal year 2012 for IRFs. This provision will
apply a negative productivity adjustment to the market basket that is used to update the standard
federal rate on an annual basis. The adjustment will be applied each year. The market basket does
not currently account for increases in provider productivity that could reduce the actual cost of
providing services (e.g., through new technology or fewer inputs). The productivity adjustment
will equal the 10-year moving average of changes in the annual economy-wide private nonfarm
business multi-factor productivity. This is a statistic reported by the Bureau of Labor Statistics
and updated in the spring of each year. While this adjustment will change year-to-year, it is
currently estimated that this adjustment to the market basket will be approximately minus 1.0% on
average.
Hospital Wage Index
The PPACA abandons the current system of calculating the hospital wage index based on data
submitted in hospital cost reports, which currently has a four year lag in data. In its place, CMS
is required to develop a comprehensive reform plan to present to Congress by December 31, 2011
using Bureau of Labor Statistics data, or other data or methodologies, to calculate relative wages
for each geographic area involved. Although the PPACA addresses the hospital wage index generally,
this change presumably applies to LTCHs given that the LTCH-PPS wage index is computed using wage
data from inpatient acute care hospitals.
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Independent Payment Advisory Board
The PPACA establishes an independent board called the Independent Payment Advisory Board
that will develop and submit proposals to the President and Congress beginning in 2014. The
Independent Payment Advisory Boards proposals must be designed to reduce Medicare spending by
targeted amounts compared to the trajectory of Medicare spending under current law. The
Independent Payment Advisory Boards first proposal with savings recommendations could be submitted
by January 14, 2014, for implementation in 2015, if the Medicare per capita target growth rate is
exceeded, as described in the PPACA. However, the Independent Payment Advisory Board is precluded
from submitting proposals that reduce Medicare payments prior to December 31, 2019 for providers
scheduled to receive a reduction in their payment updates as a result of the Medicare productivity
adjustment (discussed above).
Physician-Owned Hospital Limitations
Under the transparency and program integrity provisions of the PPACA, the exception to the
federal self-referral law (or Stark law) that currently permits physicians to refer patients to
hospitals in which they have an ownership or investment interest will be dramatically curtailed.
Only hospitals, including LTCHs, with physician ownership and a provider agreement in place on
December 31, 2010 are exempt from the general ban on self-referral. Existing physician-owned
hospitals are prohibited from increasing the percentage of physician ownership or investment
interests held in the hospital after March 23, 2010. In addition, physician-owned hospitals are
prohibited from increasing the number of licensed beds after March 23, 2010, unless meeting
specific exceptions related to the hospitals location and patient population. The Secretary of
the Department of Health and Human Services is required to implement a process for allowing bed
increases by August 1, 2011 and must promulgate regulations to carry out this process no later than
January 1, 2012. In order to retain their exemption from the general ban on self-referrals, our
physician-owned hospitals are required to adopt specific measures relating to conflicts of
interest, bona fide investments and patient safety.
Provider and Employee Screening
The PPACA imposes new screening requirements on all Medicare providers. The screening must
include a licensure check and may include other procedures such as a criminal background check,
fingerprinting, unscheduled and unannounced site visits, database checks, and other screening
techniques CMS deems appropriate to prevent fraud, waste and abuse. Medicare providers and
suppliers will be required to pay a fee in connection with the screening procedures. The PPACA
also imposes new disclosure requirements and authorizes surety bonds for the enrollment of new
providers and suppliers.
In addition, the PPACA requires LTCHs to conduct national and state criminal background
checks, including fingerprint checks of their employees and contractors who have (or may have)
one-on-one contact with patients. Our LTCHs are prohibited from hiring or retaining workers with a
finding of patient or resident abuse that is disqualifying.
Medicare Compliance Requirements and Penalties
The PPACA includes new compliance requirements and increases existing penalties for
non-compliance with federal law and the Medicare conditions of participation. In addition,
Medicare claims will be paid only if submitted within 12 months. Penalties for submitting false
claims and for submitting false statements material to a false claim will be increased. The
Secretary will be granted the authority to suspend payments to a provider pending an investigation
of credible allegations of fraud. Further, the Recovery Audit Contractor or RAC program will be
extended to Medicare Parts C and D and Medicaid no later than December 31, 2010.
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Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2010
On June 2, 2010, CMS published a notice of changes to the payment rates for LTCH-PPS during
the portion of rate year 2010 occurring on or after April 1, 2010. The standard federal rate for
discharges occurring on or after April 1, 2010 is revised to
$39,795. This change reflects a
decrease from $39,897 established in the original final rule for RY 2010. This change to the
LTCH-PPS standard federal rate for the remainder of FY 2010 is based on a market basket increase
estimate of 2.5% less a reduction of 0.5% to account for what CMS attributes as an increase in
case-mix resulting from changes in documentation and coding practices less an additional reduction
of 0.25% as mandated by the PPACA. The notice revises the fixed-loss amount for high cost outlier
cases for RY 2010 discharges occurring on or after April 1, 2010 to $18,615, which is higher than
the RY 2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010.
Medicare Payment of Long-Term Acute Care Hospitals during Fiscal Year 2011
On July 30, 2010, CMS released the policies and payment rates for LTCH-PPS for fiscal year
2011 (affecting discharges and cost reporting periods beginning on or after October 1, 2010 and
before September 30, 2011). The standard federal rate for FY
2011 is $39,600, which is a
decrease from the RY 2010 federal rate of $39,897 in effect from October 1, 2009 to March 31,
2010 and the RY 2010 federal rate of $39,795 that went into effect on April 1, 2010. This
update to the LTCH-PPS standard federal rate for FY 2011 is based on a market basket increase of
2.5% less a reduction of 2.5% to account for what CMS attributes as an increase in case-mix in
prior periods (FYs 2008 and 2009) that resulted from changes in documentation and coding practices
less an additional reduction of 0.5% as mandated by the PPACA. The final rule establishes a
fixed-loss amount for high cost outlier cases for FY 2011 of $18,785, which is higher than the RY
2010 fixed-loss amount of $18,425 in effect from October 1, 2009 to March 31, 2010 and the $18,615
that went into effect on April 1, 2010. The final rule includes revisions to the relative weights
for the MS-LTC-DRGs for FY 2011 based on the standard federal rate. Consistent with the May 4,
2010 proposed rule for FY 2011, CMS replaced the term rate year for LTCHs with fiscal year in
order to reflect the fact that the policies and payment rates for LTCHs are now revised on a fiscal
year basis (from October 1st through September 30th).
Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2010
On July 22, 2010, CMS published a notice of changes to the payment rates for IRF-PPS during
the portion of rate year 2010 occurring on or after April 1, 2010 and before October 1, 2010. As
described above, the PPACA mandates a market basket reduction of 0.25% for FY 2010. The standard
federal rate for discharges occurring on or after April 1, 2010 is revised to $13,627. This change
reflects a decrease from $13,661 established in the original final rule for FY 2010. In the same
notice, CMS increased the outlier threshold amount to $10,721 for discharges occurring on or after
April 1, 2010. The outlier threshold was $10,652 for discharges occurring on or after October 1,
2010 through March 31, 2010.
Medicare Payment of Inpatient Rehabilitation Facilities during Fiscal Year 2011
On July 22, 2010, CMS published an update to the payment rates for IRF-PPS for fiscal year
2011 (affecting discharges and cost reporting periods beginning on or after October 1, 2010 and
before September 30, 2011). The standard federal rate for discharges during FY 2011 is revised to
$13,860. This change reflects an increase from $13,627 established in the revised final rule for
the final months of FY 2010, as well as the market basket reduction of 0.25% required by PPACA.
CMS also increased the outlier threshold amount for FY 2011 to $11,410 from $10,721.
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Table of Contents
Reductions to the Medicare Physician Fee Schedule
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 June 25, 2010, President Obama signed into law the Preservation of Access
to Care for Medicare Beneficiaries and Pension Relief Act of 2010, which, among other things,
provides a 2.2% increase to Medicare physician fee schedule payment rates, retroactive from June 1,
2010 through November 30, 2010, suspending a 21.3% reduction that briefly became effective on June
1, 2010.
Medicare Payment 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 exceptions process to the annual limit for therapy expenses.
Under this process, a Medicare enrollee (or person acting on behalf of the Medicare enrollee) is
able to request an exception from the therapy caps if the provision of therapy services was deemed
to be medically necessary. Therapy cap exceptions were available automatically for certain
conditions and on a case-by-case basis upon submission of documentation of medical necessity. The
PPACA extended the exceptions process through December 31, 2010.
On July 2, 2010 CMS published a proposed update to the Medicare Physician Fee Schedule for
calendar year 2011, CMS discusses three specific short-term alternatives to the current therapy
caps that could potentially reduce the number of patients impacted by the therapy cap in a given
year. CMS requests public comments on the potential alternatives. In the same proposed rule, CMS
suggests that it may adopt a Multiple Procedure Payment Reduction (MPPR) Policy to therapy
services by applying a 50% payment reduction to the practice expense component of the second and
subsequent therapy services for certain therapy services furnished to a single patient in a single
day. The proposed MPPR policy would apply to multiple units of the same therapy service, as well
as to multiple different services. Full payment would be made for the service or unit with the
highest practice expense.
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Table of Contents
Facility Licensure, Certification and Accreditation
Our specialty hospitals and outpatient rehabilitation clinics are subject to extensive and
changing federal, state and local regulations and private accreditation standards. Hospitals are
required to comply with state hospital standards setting requirements related to patient rights,
composition and responsibilities of the hospital governing body, medical staff, quality
improvement, infection control, nursing services, food and nutrition, medical records, drug
distribution, diagnostic and treatment services, surgical services, emergency services and social
work. Our 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, previously
known as The Joint Commission on Accreditation of Healthcare Organizations, and The Commission on
Accreditation of Rehabilitation Facilities, by voluntarily complying with a specific set of
accreditation standards.
Our 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.
39
Table of Contents
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.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Specialty hospital data(1): |
||||||||||||||||
Number of hospitals start of period |
92 | 94 | 93 | 94 | ||||||||||||
Number of hospital start-ups |
| | | | ||||||||||||
Number of hospitals acquired |
| | | | ||||||||||||
Number of hospitals consolidated |
| | | | ||||||||||||
Number of hospitals closed |
| | (1 | ) | | |||||||||||
Number of hospitals owned end of period |
92 | 94 | 92 | 94 | ||||||||||||
Number of hospitals managed end of period |
| 1 | | 1 | ||||||||||||
Total number of hospitals (all) end of period |
92 | 95 | 92 | 95 | ||||||||||||
Available licensed beds |
4,160 | 4,250 | 4,160 | 4,250 | ||||||||||||
Admissions |
10,504 | 10,616 | 21,309 | 21,717 | ||||||||||||
Patient days |
252,710 | 264,898 | 508,983 | 532,746 | ||||||||||||
Average length of stay (days) |
24 | 24 | 24 | 25 | ||||||||||||
Net revenue per patient day(2) |
$ | 1,491 | $ | 1,474 | $ | 1,494 | $ | 1,483 | ||||||||
Occupancy rate |
67 | % | 68 | % | 67 | % | 69 | % | ||||||||
Percent patient days Medicare |
64 | % | 63 | % | 64 | % | 64 | % | ||||||||
Outpatient rehabilitation data: |
||||||||||||||||
Number of clinics owned start of period |
875 | 885 | 880 | 883 | ||||||||||||
Number of clinics acquired |
| | 1 | | ||||||||||||
Number of clinic start-ups |
7 | 5 | 7 | 10 | ||||||||||||
Number of clinics closed/sold |
(7 | ) | (10 | ) | (13 | ) | (13 | ) | ||||||||
Number of clinics owned end of period |
875 | 880 | 875 | 880 | ||||||||||||
Number of clinics managed end of period |
73 | 73 | 73 | 73 | ||||||||||||
Total number of clinics (all) end of period |
948 | 953 | 948 | 953 | ||||||||||||
Number of visits |
1,163,341 | 1,172,212 | 2,259,637 | 2,298,170 | ||||||||||||
Net revenue per visit (3) |
$ | 101 | $ | 101 | $ | 102 | $ | 101 |
(1) | Specialty hospitals consist of long term acute care hospitals and inpatient rehabilitation facilities. | |
(2) | Net revenue per patient day is calculated by dividing specialty hospital direct inpatient service revenues by the total number of patient days. | |
(3) | Net revenue per visit is calculated by dividing outpatient rehabilitation clinic revenue by the total number of visits. For purposes of this computation, outpatient rehabilitation clinic revenue does not include contract services revenue. |
40
Table of Contents
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 | Select Medical Corporation | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Net operating revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of services(1) |
81.0 | 81.0 | 81.0 | 81.0 | ||||||||||||
General and administrative |
2.3 | 1.7 | 2.3 | 1.7 | ||||||||||||
Bad debt expense |
1.8 | 1.9 | 1.8 | 1.9 | ||||||||||||
Depreciation and amortization |
3.2 | 2.9 | 3.2 | 2.9 | ||||||||||||
Income from operations |
11.7 | 12.5 | 11.7 | 12.5 | ||||||||||||
Gain on early retirement of debt |
0.6 | | 0.6 | | ||||||||||||
Other income (expense) |
| 0.0 | (0.0 | ) | 0.0 | |||||||||||
Interest expense, net |
(6.0 | ) | (5.0 | ) | (4.4 | ) | (3.8 | ) | ||||||||
Income from operations before
income taxes |
6.3 | 7.5 | 7.9 | 8.7 | ||||||||||||
Income tax expense |
2.7 | 3.0 | 3.3 | 3.4 | ||||||||||||
Net income |
3.6 | 4.5 | 4.6 | 5.3 | ||||||||||||
Net income attributable to
non-controlling interest |
0.1 | 0.3 | 0.1 | 0.3 | ||||||||||||
Net income attributable to
Holdings and Select |
3.5 | % | 4.2 | % | 4.5 | % | 5.0 | % | ||||||||
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Net operating revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of services(1) |
80.7 | 80.9 | 80.7 | 80.9 | ||||||||||||
General and administrative |
2.3 | 2.0 | 2.3 | 2.0 | ||||||||||||
Bad debt expense |
2.0 | 1.7 | 2.0 | 1.7 | ||||||||||||
Depreciation and amortization |
3.2 | 2.9 | 3.2 | 2.9 | ||||||||||||
Income from operations |
11.8 | 12.5 | 11.8 | 12.5 | ||||||||||||
Gain on early retirement of debt |
1.4 | | 1.4 | | ||||||||||||
Other income |
| 0.0 | 0.1 | 0.0 | ||||||||||||
Interest expense, net |
(6.1 | ) | (5.1 | ) | (4.5 | ) | (3.9 | ) | ||||||||
Income from operations before
income taxes |
7.1 | 7.4 | 8.8 | 8.6 | ||||||||||||
Income tax expense |
3.0 | 3.0 | 3.6 | 3.4 | ||||||||||||
Net income |
4.1 | 4.4 | 5.2 | 5.2 | ||||||||||||
Net income attributable to
non-controlling interest |
0.1 | 0.2 | 0.1 | 0.2 | ||||||||||||
Net income attributable to
Holdings and Select |
4.0 | % | 4.2 | % | 5.1 | % | 5.0 | % | ||||||||
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Table of Contents
The following tables summarize selected financial data by business segment, for the periods
indicated:
Select Medical Holdings | ||||||||||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2009 | 2010 | % Change | 2009 | 2010 | % Change | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Net operating revenues: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 386,331 | $ | 403,079 | 4.3 | % | $ | 386,331 | $ | 403,079 | 4.3 | % | ||||||||||||
Outpatient rehabilitation |
173,190 | 176,785 | 2.1 | 173,190 | 176,785 | 2.1 | ||||||||||||||||||
Other(3) |
14 | 13 | (7.1 | ) | 14 | 13 | (7.1 | ) | ||||||||||||||||
Total company |
$ | 559,535 | $ | 579,877 | 3.6 | % | $ | 559,535 | $ | 579,877 | 3.6 | % | ||||||||||||
Income (loss) from operations: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 60,170 | $ | 62,445 | 3.8 | % | $ | 60,170 | $ | 62,445 | 3.8 | % | ||||||||||||
Outpatient rehabilitation |
19,030 | 21,013 | 10.4 | 19,030 | 21,013 | 10.4 | ||||||||||||||||||
Other(3) |
(13,812 | ) | (10,882 | ) | 21.2 | (13,812 | ) | (10,882 | ) | 21.2 | ||||||||||||||
Total company |
$ | 65,388 | $ | 72,576 | 11.0 | % | $ | 65,388 | $ | 72,576 | 11.0 | % | ||||||||||||
Adjusted EBITDA:(2) |
||||||||||||||||||||||||
Specialty hospitals |
$ | 70,960 | $ | 73,344 | 3.4 | % | $ | 70,960 | $ | 73,344 | 3.4 | % | ||||||||||||
Outpatient rehabilitation |
25,294 | 25,956 | 2.6 | 25,294 | 25,956 | 2.6 | ||||||||||||||||||
Other(3) |
(12,628 | ) | (9,677 | ) | 23.4 | (12,628 | ) | (9,677 | ) | 23.4 | ||||||||||||||
Adjusted EBITDA margins:(2) |
||||||||||||||||||||||||
Specialty hospitals |
18.4 | % | 18.2 | % | (1.1 | )% | 18.4 | % | 18.2 | % | (1.1 | )% | ||||||||||||
Outpatient rehabilitation |
14.6 | 14.7 | 0.7 | 14.6 | 14.7 | 0.7 | ||||||||||||||||||
Other(3) |
N/M | N/M | N/M | N/M | N/M | N/M | ||||||||||||||||||
Total assets: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 1,920,040 | $ | 1,969,566 | $ | 1,920,040 | $ | 1,969,566 | ||||||||||||||||
Outpatient rehabilitation |
492,936 | 495,399 | 492,936 | 495,399 | ||||||||||||||||||||
Other(3) |
119,706 | 195,158 | 115,324 | 192,375 | ||||||||||||||||||||
Total company |
$ | 2,532,682 | $ | 2,660,123 | $ | 2,528,300 | $ | 2,657,340 | ||||||||||||||||
Purchases of property and
equipment, net: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 11,222 | $ | 10,026 | $ | 11,222 | $ | 10,026 | ||||||||||||||||
Outpatient rehabilitation |
2,199 | 3,133 | 2,199 | 3,133 | ||||||||||||||||||||
Other(3) |
524 | 248 | 524 | 248 | ||||||||||||||||||||
Total company |
$ | 13,945 | $ | 13,407 | $ | 13,945 | $ | 13,407 | ||||||||||||||||
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Select Medical Holdings | ||||||||||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||
2009 | 2010 | % Change | 2009 | 2010 | % Change | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Net operating revenues: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 779,563 | $ | 814,764 | 4.5 | % | $ | 779,563 | $ | 814,764 | 4.5 | % | ||||||||||||
Outpatient rehabilitation |
341,009 | 349,850 | 2.6 | 341,009 | 349,850 | 2.6 | ||||||||||||||||||
Other(3) |
135 | 76 | (43.7 | ) | 135 | 76 | (43.7 | ) | ||||||||||||||||
Total company |
$ | 1,120,707 | $ | 1,164,690 | 3.9 | % | $ | 1,120,707 | $ | 1,164,690 | 3.9 | % | ||||||||||||
Income (loss) from operations: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 126,204 | $ | 134,383 | 6.5 | % | $ | 126,204 | $ | 134,383 | 6.5 | % | ||||||||||||
Outpatient rehabilitation |
34,181 | 35,675 | 4.4 | 34,181 | 35,675 | 4.4 | ||||||||||||||||||
Other(3) |
(27,371 | ) | (24,833 | ) | 9.3 | (27,371 | ) | (24,833 | ) | 9.3 | ||||||||||||||
Total company |
$ | 133,014 | $ | 145,225 | 9.2 | % | $ | 133,014 | $ | 145,225 | 9.2 | % | ||||||||||||
Adjusted EBITDA:(2) |
||||||||||||||||||||||||
Specialty hospitals |
$ | 147,741 | $ | 156,241 | 5.8 | % | $ | 147,741 | $ | 156,241 | 5.8 | % | ||||||||||||
Outpatient rehabilitation |
46,578 | 46,474 | (0.2 | ) | 46,578 | 46,474 | (0.2 | ) | ||||||||||||||||
Other(3) |
(25,041 | ) | (22,224 | ) | (11.2 | ) | (25,041 | ) | (22,224 | ) | (11.2 | ) | ||||||||||||
Adjusted EBITDA margins:(2) |
||||||||||||||||||||||||
Specialty hospitals |
19.0 | % | 19.2 | % | 1.1 | % | 19.0 | % | 19.2 | % | 1.1 | % | ||||||||||||
Outpatient rehabilitation |
13.7 | 13.3 | (2.9 | ) | 13.7 | 13.3 | (2.9 | ) | ||||||||||||||||
Other(3) |
N/M | N/M | N/M | N/M | N/M | N/M | ||||||||||||||||||
Total assets: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 1,920,040 | $ | 1,969,566 | $ | 1,920,040 | $ | 1,969,566 | ||||||||||||||||
Outpatient rehabilitation |
492,936 | 495,399 | 492,936 | 495,399 | ||||||||||||||||||||
Other(3) |
119,706 | 195,158 | 115,324 | 192,375 | ||||||||||||||||||||
Total company |
$ | 2,532,682 | $ | 2,660,123 | $ | 2,528,300 | $ | 2,657,340 | ||||||||||||||||
Purchases of property and
equipment, net: |
||||||||||||||||||||||||
Specialty hospitals |
$ | 15,377 | $ | 20,624 | $ | 15,377 | $ | 20,624 | ||||||||||||||||
Outpatient rehabilitation |
5,009 | 5,168 | 5,009 | 5,168 | ||||||||||||||||||||
Other(3) |
595 | 662 | 595 | 662 | ||||||||||||||||||||
Total company |
$ | 20,981 | $ | 26,454 | $ | 20,981 | $ | 26,454 | ||||||||||||||||
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Table of Contents
The following tables reconcile same hospitals information:
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Net operating revenue |
||||||||||||||||
Specialty hospitals net operating revenue |
$ | 386,331 | $ | 403,079 | $ | 386,331 | $ | 403,079 | ||||||||
Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09 |
2,550 | 10,748 | 2,550 | 10,748 | ||||||||||||
Specialty hospitals same store net
operating revenue |
$ | 383,781 | $ | 392,331 | $ | 383,781 | $ | 392,331 | ||||||||
Adjusted EBITDA(2) |
||||||||||||||||
Specialty hospitals Adjusted EBITDA(2) |
$ | 70,960 | $ | 73,344 | $ | 70,960 | $ | 73,344 | ||||||||
Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09 |
338 | 582 | 338 | 582 | ||||||||||||
Specialty hospitals same store Adjusted
EBITDA(2) |
$ | 70,622 | $ | 72,762 | $ | 70,622 | $ | 72,762 | ||||||||
All specialty hospitals Adjusted EBITDA
margin(2) |
18.4 | % | 18.2 | % | 18.4 | % | 18.2 | % | ||||||||
Specialty hospitals same store Adjusted
EBITDA margin(2) |
18.4 | % | 18.5 | % | 18.4 | % | 18.5 | % |
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Net operating revenue |
||||||||||||||||
Specialty hospitals net operating revenue |
$ | 779,563 | $ | 814,764 | $ | 779,563 | $ | 814,764 | ||||||||
Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09 |
5,572 | 19,575 | 5,572 | 19,575 | ||||||||||||
Specialty hospitals same store net
operating revenue |
$ | 773,991 | $ | 795,189 | $ | 773,991 | $ | 795,189 | ||||||||
Adjusted EBITDA(2) |
||||||||||||||||
Specialty hospitals Adjusted EBITDA(2) |
$ | 147,741 | $ | 156,241 | $ | 147,741 | $ | 156,241 | ||||||||
Less: Specialty hospitals in
development, opened, acquired or closed
after 1/1/09 |
392 | (490 | ) | 392 | (490 | ) | ||||||||||
Specialty hospitals same store Adjusted
EBITDA(2) |
$ | 147,349 | $ | 156,731 | $ | 147,349 | $ | 156,731 | ||||||||
All specialty hospitals Adjusted EBITDA
margin(2) |
19.0 | % | 19.2 | % | 19.0 | % | 19.2 | % | ||||||||
Specialty hospitals same store Adjusted
EBITDA margin(2) |
19.0 | % | 19.7 | % | 19.0 | % | 19.7 | % |
N/M | Not Meaningful. | |
(1) | Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs. |
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Table of Contents
(2) | We define Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, gain on early retirement of debt, stock compensation expense and other income (expense). 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 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 footnote 9 to our interim unaudited consolidated financial statements for the period ended June 30, 2010 for a reconciliation of income from operations before income taxes to Adjusted EBITDA as utilized by us in reporting our segment performance. | |
(3) | Other includes our general and administrative services and non-healthcare services. |
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
In the following discussion, we address the results of operations of Select and Holdings. With
the exception of interest expense and income taxes, the results of operations of Holdings are
identical to those of Select. Therefore, discussion related to net operating revenue, operating
expenses, Adjusted EBITDA, income from operations and non-controlling interest is identical for
Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 3.6% to $579.9 million for the three months ended June
30, 2010 compared to $559.5 million for the three months ended June 30, 2009.
Specialty Hospitals. Our specialty hospital net operating revenues increased by 4.3% to
$403.1 million for the three months ended June 30, 2010 compared to $386.3 million for the three
months ended June 30, 2009. For the three months ended June 30, 2010, the hospitals opened and
acquired in 2009 increased net operating revenues by $9.7 million. These increases were offset
partially by the loss of revenues from hospitals that closed, which accounted for $1.5 million of
the difference in net operating revenues between the three months ended June 30, 2009 and June 30,
2010. Net operating revenues for the specialty hospitals opened as of January 1, 2009 and operated
by us throughout both periods increased by $8.5 million to $392.3 million for the three months
ended June 30, 2010, compared to $383.8 million for the three months ended June 30, 2009. This
increase in net operating revenue is principally related to an increase in our occupancy and
patient days in these same store hospitals. Our patient days for these same store hospitals for
the three months ended June 30, 2010 increased 3.1% as compared to the three months ended June 30,
2009, which was primarily related to an increase in our Medicare patient days. The occupancy
percentage in our same store hospitals increased to 69% for the three months ended June 30, 2010
from 67% for the three months ended June 30, 2009. Our average net revenue per patient day in our
specialty hospitals declined to $1,474 for the three months ended June 30, 2010 compared to $1,491
for the three months ended June 30, 2009. This decrease was principally due to a decline in our
average Medicare revenue per patient day, which resulted from the June 3, 2009 interim final rule
in which
CMS adopted a new table of MS-LTC-DRG relative weights that had the effect of reducing
reimbursement for Medicare cases. This reduction in Medicare payments was partially offset by the
annual payment update that became effective on October 1, 2009. Additionally, on April 1, 2010 we
experienced a further reduction in the standard federal rate per case of 0.25% mandated by PPACA.
The net revenue per patient day was further negatively affected by an increase in the number of
high cost outlier cases in the current period, as our average net revenue per patient day is lower
for high cost outlier cases.
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Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues increased
2.1% to $176.8 million for the three months ended June 30, 2010 compared to $173.2 million for the
three months ended June 30, 2009. The increase in our outpatient rehabilitation net operating
revenues was due to an increase in both our outpatient rehabilitation clinic revenue and contract
services based revenue, both of which primarily resulted from operations acquired in 2009. The net
operating revenues generated by our outpatient rehabilitation clinics for the three months ended
June 30, 2010 grew approximately 1.3% as compared to the three months ended June 30, 2009. The
number of patient visits in our outpatient rehabilitation clinics increased 0.8% for the three
months ended June 30, 2010 to 1,172,212 visits compared to 1,163,341 visits for the three months
ended June 30, 2009. Net revenue per visit in our clinics remained stable at $101 for the three
months ended June 30, 2010 and June 30, 2009.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and
bad debt expense. Our operating expenses increased by $14.5 million to $490.7 million for the
three months ended June 30, 2010 compared to $476.2 million for the three months ended June 30,
2009. As a percentage of our net operating revenues, our operating expenses were 84.6% for the
three months ended June 30, 2010 compared to 85.1% for the three months ended June 30, 2009. Our
cost of services, a major component of which is labor expense, were $470.0 million for the three
months ended June 30, 2010 compared to $453.0 million for the three months ended June 30, 2009. The
principal cause of this increase was increased costs associated with the hospitals acquired in 2009
and the growth experienced in our hospitals opened as of January 1, 2009 and operated by us
throughout both periods. Another component of cost of services is facility rent expense, which was
$28.6 million for the three months ended June 30, 2010 compared to $29.6 million for the three
months ended June 30, 2009. General and administrative expenses were $9.8 million for the three
months ended June 30, 2010 compared to $12.9 million for the three months ended June 30, 2009. The
decrease was primarily related to a reduction in incentive based compensation for executive officers.
Our bad debt expense as a percentage of net operating revenues was 1.9% for the three months ended
June 30, 2010 compared to 1.8% for the three months ended June 30, 2009.
Adjusted EBITDA
Specialty Hospitals. Adjusted EBITDA increased by 3.4% to $73.3 million for the three months
ended June 30, 2010 compared to $71.0 million for the three months ended June 30, 2009. Our
Adjusted EBITDA margins were 18.2% for the three months ended June 30, 2010 compared to 18.4% for
the three months ended June 30, 2009. The hospitals opened as of January 1, 2009 and operated by us
throughout both periods had Adjusted EBITDA of $72.8 million for the three months ended June 30,
2010, an increase of $2.2 million or 3.0% over the Adjusted EBITDA of $70.6 million for these
hospitals for the three months ended June 30, 2009. Our Adjusted EBITDA margin in these same store
hospitals increased to 18.5% for the three months ended June 30, 2010 from 18.4% for the three
months ended June 30, 2009. The principal reason for the growth in our Adjusted EBITDA for these same store hospitals was an increase in the volume of cases we treated in
these hospitals. Our hospitals opened during 2009 or currently still in development incurred
Adjusted EBITDA losses of $0.3 million for the three months ended June 30, 2010.
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Outpatient Rehabilitation. Adjusted EBITDA increased by 2.6% to $26.0 million for the three
months ended June 30, 2010 compared to $25.3 million for the three months ended June 30, 2009. Our
Adjusted EBITDA margins increased to 14.7% for the three months ended June 30, 2010 from 14.6% for
the three months ended June 30, 2009. The increase in Adjusted EBITDA was primarily due to the
EBITDA contribution from the operations acquired in 2009.
Other. The Adjusted EBITDA loss was $9.7 million for the three months ended June 30, 2010
compared to an Adjusted EBITDA loss of $12.6 million for the three months ended June 30, 2009.
This decrease is related to the reduction in our general and administrative expenses described
above under Operating Expenses.
Income from Operations
For the three months ended June 30, 2010 we experienced income from operations of
$72.6 million compared to $65.4 million for the three months ended June 30, 2009. The increase in
income from operations resulted from (1) increased profitability at the hospitals opened as of
January 1, 2009 and operated by us throughout both periods, (2) the growth in our outpatient
operations and (3) a reduction in our general and administrative expenses.
Gain on Early Retirement of Debt
For the three months ended June 30, 2009, we paid approximately $11.1 million to repurchase
and retire a portion of Selects 75/8% senior subordinated notes. These notes had a carrying value
of $15.0 million. A gain on early retirement of debt in the amount of $3.6 million was recognized
on the transactions, which was net of the write-off of unamortized deferred financing costs related
to the debt.
Interest Expense
Select Medical Corporation. Interest expense was $22.3 million for the three months ended
June 30, 2010 compared to $24.9 million for the three months ended June 30, 2009. The decrease in
interest expense is related to a reduction in outstanding debt balances that occurred in 2009 as a
result of repurchases of our 75/8% senior subordinated notes and the repayment of a portion of our
senior secured credit facility with proceeds from Holdings initial public offering of common
stock.
Select Medical Holdings Corporation. Interest expense was $29.3 million for the three months
ended June 30, 2010 compared to $33.7 million for the three months ended June 30, 2009. The
decrease in interest expense is related to a reduction in outstanding debt balances that occurred
in 2009 as a result of repurchases of Selects 75/8% senior subordinated notes, repurchases of our
senior floating rate notes and the repayment of a portion of Selects senior secured credit
facility with proceeds from our initial public offering of common stock.
Income Taxes
Select Medical Corporation. We recorded income tax expense of $19.7 million for the three
months ended June 30, 2010. The expense represented an effective tax rate of 39.1%. We recorded
income tax expense of $18.2 million for the three months ended June 30, 2009. The expense
represented an effective tax rate of 41.3%. The lower effective tax rate we experienced for the
three months ended June 30, 2010 is due to a reduction in our effective tax rate for state and
local taxes and a reduction in the amount of tax reserves provided on uncertain tax positions.
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Select Medical Holdings Corporation. We recorded income tax expense of $17.3 million for the
three months ended June 30, 2010. The expense represented an effective tax rate of 39.8%. We
recorded income tax expense of $15.1 million for the three months ended June 30, 2009. The expense
represented an effective tax rate of 42.9%. The lower effective tax rate we experienced for the
three months ended June 30, 2010 is due to a reduction in our effective tax rate for state and
local taxes and a reduction in the amount of tax reserves provided on uncertain tax positions.
Non-Controlling Interests
Non-controlling interests in consolidated earnings were $1.7 million for the three months
ended June 30, 2010 and $0.4 million for the three months ended June 30, 2009. These amounts
reflect minority owners share of the earnings of joint ventured operations.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
In the following discussion, we address the results of operations of Select and Holdings. With
the exception of interest expense and income taxes, the results of operations of Holdings are
identical to those of Select. Therefore, discussion related to net operating revenue, operating
expenses, Adjusted EBITDA, income from operations and non-controlling interest is identical for
Holdings and Select.
Net Operating Revenues
Our net operating revenues increased by 3.9% to $1,164.7 million for the six months ended June
30, 2010 compared to $1,120.7 million for the six months ended June 30, 2009.
Specialty Hospitals. Our specialty hospital net operating revenues increased by 4.5% to
$814.8 million for the six months ended June 30, 2010 compared to $779.6 million for the six months
ended June 30, 2009. For the six months ended June 30, 2010, the hospitals opened and acquired in
2009 increased net operating revenues by $18.1 million. These increases were offset partially by
the loss of revenues from hospitals that closed during 2009, which accounted for $4.1 million of
the difference in net operating revenues between the six months ended June 30, 2009 and June 30,
2010. Net operating revenues for the specialty hospitals opened as of January 1, 2009 and operated
by us throughout both periods increased by $21.2 million to $795.2 million for the six months ended
June 30, 2010, compared to $774.0 million for the six months ended June 30, 2009. This increase in
net operating revenue is principally related to an increase in our occupancy and patient days in
these same store hospitals. Our patient days for these same store hospitals for the six months
ended June 30, 2010 increased 3.2% as compared to the six months ended June 30, 2009, which was
primarily related to an increase in our Medicare patient days. The occupancy percentage in our
same store hospitals increased to 70% for the six months ended June 30, 2010 from 68% for the six
months ended June 30, 2009. Our average net revenue per patient day in our specialty hospitals was
$1,483 for the six months ended June 30, 2010 compared to $1,494 for the six months ended June 30,
2009. This decline was principally due to a decline in our average Medicare revenue per patient
day, which resulted from the June 3, 2009 interim final rule in which CMS adopted a new table of
MS-LTC-DRG relative weights that had the effect of reducing reimbursement for Medicare cases. This
reduction in Medicare payments was partially offset by the annual payment update that became
effective on October 1, 2009. Additionally, on April 1, 2010 we experienced a further reduction in
the standard federal rate per case of 0.25% mandated by PPACA. The net revenue per patient day was
further negatively affected by an increase in the number of high cost outlier cases in the current
period, as our average net revenue per patient day is lower for high cost outlier cases.
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Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues increased
2.6% to $349.9 million for the six months ended June 30, 2010 compared to $341.0 million for the
six months ended June 30, 2009. The increase in our outpatient rehabilitation net operating
revenues was primarily due to an increase in contracted services based revenue resulting from new
business. The net operating revenues generated by our outpatient rehabilitation clinics for the six
months ended June 30, 2010 grew approximately 1.1% as compared to the six months ended June 30,
2009. The number of patient visits in our outpatient rehabilitation clinics increased 1.7% for the
six months ended June 30, 2010 to 2,298,170 visits compared to 2,259,637 visits for the six months
ended June 30, 2009. Net revenue per visit in our clinics declined 1.0% to $101 for the six months
ended June 30, 2010, compared to $102 for the six months ended June 30, 2009. This reduction in
net revenue per visit is primarily related to a migration of patients in one of the geographic
areas we serve into a managed care plan that has lower reimbursement rates.
Operating Expenses
Our operating expenses include our cost of services, general and administrative expense and
bad debt expense. Our operating expenses increased by $33.1 million to $985.1 million for the six
months ended June 30, 2010 compared to $952.0 million for the six months ended June 30, 2009. As a
percentage of our net operating revenues, our operating expenses were 84.6% for the six months
ended June 30, 2010 compared to 85.0% for the six months ended June 30, 2009. Our cost of
services, a major component of which is labor expense, were $942.4 million for the six months ended
June 30, 2010 compared to $904.4 million for the six months ended June 30, 2009. The principal
cause of this increase was increased costs associated with the hospital operations acquired in 2009
and the growth experienced in our hospitals opened as of January 1, 2009 and operated by us
throughout both periods. Another component of cost of services is facility rent expense, which was
$57.7 million for the six months ended June 30, 2010 compared to $58.3 million for the six months
ended June 30, 2009. General and administrative expenses were $22.6 million for the six months
ended June 30, 2010 compared to $25.7 million for the six months ended June 30 2009. The decrease
was primarily related to a reduction in incentive based compensation for executive officers. Our bad
debt expense as a percentage of net operating revenues was 1.7% for the six months ended June 30,
2010 compared to 2.0% for the six months ended June 30, 2009. The reduction resulted from improved
collections and a reduction in the amount of accounts receivable outstanding greater than 180 days.
Adjusted EBITDA
Specialty Hospitals. Adjusted EBITDA increased by 5.8% to $156.2 million for the six months
ended June 30, 2010 compared to $147.7 million for the six months ended June 30, 2009. Our Adjusted
EBITDA margins increased to 19.2% for the six months ended June 30, 2010 from 19.0% for the six
months ended June 30, 2009. The hospitals opened as of January 1, 2009 and operated by us
throughout both periods had Adjusted EBITDA of $156.7 million for the six months ended June 30,
2010, an increase of $9.4 million or 6.4% over the Adjusted EBITDA of $147.3 million for these
hospitals for the six months ended June 30, 2009. Our Adjusted EBITDA margin in these same store
hospitals increased to 19.7% for the six months ended June 30, 2010 from 19.0% for the six months
ended June 30, 2009. The principal reason for the growth in our Adjusted EBITDA and Adjusted EBITDA
margin for these same store hospitals was an increase in the volume of cases we treated in these
hospitals and our ability to control our costs of services in these hospitals. 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. Our hospitals opened during 2009 or currently still in
development incurred Adjusted EBITDA losses of $1.4 million for the six months ended June 30, 2010.
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Outpatient Rehabilitation. Adjusted EBITDA decreased slightly to $46.5 million for the six
months ended June 30, 2010 compared to $46.6 million for the six months ended June 30, 2009. Our
Adjusted EBITDA margins declined to 13.3% for the six months ended June 30, 2010 from 13.7% for the
six months ended June 30, 2009. The decrease in Adjusted EBITDA and Adjusted EBITDA margin was
primarily the result of higher costs in our contract services business. This resulted from lost
productivity in the Northeast during the three months ended March 31, 2010 due to a difficult
winter weather season and the need to use higher cost agency staffing at some of our locations due
to the turnover of a number of our contracts. This decline was partially offset by increased
Adjusted EBITDA in our outpatient rehabilitation clinics that resulted from the increase in patient
visits.
Other. The Adjusted EBITDA loss was $22.2 million for the six months ended June 30, 2010
compared to an Adjusted EBITDA loss of $25.0 million for the six months ended June 30, 2009. This
decrease is primarily related to the reduction in our general and administrative expenses described
above under Operating Expenses.
Income from Operations
For the six months ended June 30, 2010 we experienced income from operations of $145.2 million
compared to $133.0 million for the six months ended June 30, 2009. The increase in income from
operations resulted primarily from increased profitability at the hospitals opened as of January 1,
2009 and operated by us throughout both periods and a reduction in our general and administrative
expenses.
Gain on Early Retirement of Debt
For the six months ended June 30, 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. 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.
Interest Expense
Select Medical Corporation. Interest expense was $45.4 million for the six months ended June
30, 2010 compared to $50.8 million for the six months ended June 30, 2009. The decrease in interest
expense is related to a reduction in outstanding debt balances that occurred in 2009 as a result of
repurchases of our 75/8% senior subordinated notes and the repayment of a portion of our senior
secured credit facility with proceeds from Holdings initial public offering of common stock.
Select Medical Holdings Corporation. Interest expense was $59.3 million for the six months
ended June 30, 2010 compared to $68.3 million for the six months ended June 30, 2009. The decrease
in interest expense is related to a reduction in outstanding debt balances that occurred in 2009 as
a result of repurchases of Selects 75/8% senior subordinated notes, repurchases of our senior
floating rate notes and the repayment of a portion of Selects senior secured credit facility with
proceeds from our initial public offering of common stock.
Income Taxes
Select Medical Corporation. We recorded income tax expense of $39.3 million for the six months
ended June 30, 2010. The expense represented an effective tax rate of 39.2%. We recorded income tax
expense of $40.6 million for the six months ended June 30, 2009. The expense represented an
effective tax rate of 43.2%.
The lower effective tax rate we experienced for the six months ended June 30, 2010 is due to a
reduction in our effective tax rate for state and local taxes and a reduction in the amount of tax
reserves provided on uncertain tax positions.
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Select Medical Holdings Corporation. We recorded income tax expense of $34.4 million for the
six months ended June 30, 2010. The expense represented an effective tax rate of 39.9%. We recorded
income tax expense of $33.9 million for the six months ended June 30, 2009. The expense represented
an effective tax rate of 42.3%. The lower effective tax rate we experienced for the six months
ended June 30, 2010 is due to a reduction in our effective tax rate for state and local taxes and a
reduction in the amount of tax reserves provided on uncertain tax positions.
Non-Controlling Interests
Non-controlling interests in consolidated earnings were $3.1 million for the six months ended
June 30, 2010 and $1.4 million for the six months ended June 30, 2009. These amounts reflect
minority owners share of the earnings of joint ventured operations.
Liquidity and Capital Resources
Six Months Ended June 30, 2010 and Six Months Ended June 30, 2009
Select Medical Holdings | ||||||||||||||||
Corporation | Select Medical Corporation | |||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash flows provided by operating activities |
$ | 57,235 | $ | 58,719 | $ | 73,645 | $ | 71,602 | ||||||||
Cash flows used in investing activities |
(19,640 | ) | (26,454 | ) | (19,640 | ) | (26,454 | ) | ||||||||
Cash flows provided by (used in) financing
activities |
(74,166 | ) | 12,808 | (90,576 | ) | (75 | ) | |||||||||
Net increase (decrease) in cash and cash
equivalents |
(36,571 | ) | 45,073 | (36,571 | ) | 45,073 | ||||||||||
Cash and cash equivalents at beginning of period |
64,260 | 83,680 | 64,260 | 83,680 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 27,689 | $ | 128,753 | $ | 27,689 | $ | 128,753 | ||||||||
Operating activities for Select provided $71.6 million for the six months ended June 30, 2010.
Our days sales outstanding were 53 days at June 30, 2010 compared to 49 days at December 31, 2009.
The increase in days sales outstanding between December 31, 2009 and June 30, 2010 is primarily
related to the timing of the periodic interim payments we receive from Medicare for the services
provided at our specialty hospitals.
The operating cash flow of Select exceeds the operating cash flow of Holdings by $12.9 million
for the six months ended June 30, 2010 and by $16.4 million for the six months ended June 30, 2009.
The difference relates to interest payments on Holdings senior subordinated notes and senior
floating rate notes.
Investing activities used $26.5 million of cash flow for the six months ended June 30, 2010
and $19.6 million of cash flow for the six months ended June 30, 2009. The use of cash in both
periods related to the purchase of property and equipment.
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Financing activities for Select used $0.1 million of cash flow for the six months ended June
30, 2010. The primary source of cash related to proceeds from bank overdrafts of $14.2 million and
borrowings of other debt of $5.0 million, which were offset by payments on our seller and other
debt of $4.4 million, dividends paid to Holdings to fund interest payments of $12.9 million, and
$2.1 million in distributions to non-controlling interests. Financing activities used $90.6 million
of cash flow for the six months ended June 30, 2009. The primary use of cash related to the
repurchase of Selects 75/8% senior subordinated notes for $30.1 million, repayment of bank
overdrafts of $4.7 million, net payments on our senior secured credit facility of $38.4 million,
dividends paid to Holdings of $16.5 million and $1.8 million in distributions to non-controlling
interests. These payments were offset by net borrowings related to seller and other debt of $1.3
million.
The difference in cash flows provided by (used in) financing activities of Holdings compared
to Select of $12.9 million for the six months ended June 30, 2010 and $16.4 million for the six
months ended June 30, 2009 relates to dividends paid by Select to Holdings to service Holdings
interest obligations related to its senior subordinated notes and its senior floating rate notes.
Capital Resources
Select Medical Corporation. Select had net working capital of $136.8 million at June 30, 2010
compared to net working capital of $167.3 million at December 31, 2009. The decrease in net working
capital is primarily due to an increase in our current portion of long-term debt offset by an
increase in our cash and accounts receivable.
Select Medical Holdings Corporation. Holdings had net working capital of $140.1 million at
June 30, 2010 compared to net working capital of $170.8 million at December 31, 2009. The decrease
in net working capital is primarily due to an increase in our current portion of long-term debt
offset by an increase in our cash and accounts receivable.
At June 30, 2010, our senior secured credit facility provides for senior secured financing
consisting of:
| a $300.0 million revolving loan facility that will terminate on August 22, 2013, including both a letter of credit sub-facility and a swingline loan sub-facility, and | ||
| $191.8 million in term loans that mature on February 24, 2012 (the Tranche B Term Loans), and | ||
| $291.3 million in term loans that mature on August 22, 2014 (the Tranche B-1 Term Loans). |
On June 7, 2010 we entered into an Assignment and Assumption and Amendment No. 4 (Amendment
No. 4) to Selects senior secured credit facility (the Credit Agreement) with a group of lenders
and JPMorgan Chase Bank, N.A. as administrative agent. Amendment No. 4 extended the maturity of
$300.0 million of commitments under Selects revolving credit facility from February 24, 2011 to
August 22, 2013, and made related technical changes to the Credit Agreement. The applicable margin
percentage for extended revolving loans and the commitment fee rate for extended revolving
commitments have increased and will be determined based on a pricing grid set forth in Amendment
No. 4. Under the pricing grid, the applicable margin percentage for revolving ABR loans ranges from
2% per annum to 3% per annum, the applicable margin percentage for revolving Eurodollar loans ranges
from 3% per annum to 4% per annum, and the commitment fee rate for extended revolving commitments
ranges from 0.375% to 0.75%.
On June 7, 2010, we also entered into an Amendment No. 4-A to the Credit Agreement with a
group of lenders and JPMorgan Chase Bank, N.A. as administrative agent. Amendment No. 4-A made a
technical change
to the Credit Agreement that permits us to refinance existing indebtedness with the proceeds
of new indebtedness, including the refinancing of existing senior subordinated indebtedness with
the proceeds of new senior subordinated indebtedness.
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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 Selects leverage ratio (as defined in the credit
agreement). The applicable margin percentage for revolving loans will decrease from (1) 2.75% to
2.50% for alternate base rate loans and (2) 3.75% to 3.50% for adjusted LIBOR loans upon the
delivery of Selects Form 10-Q to JP Morgan 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 (both as defined in our senior secured credit facility) which
become more restrictive over time. For the four consecutive fiscal quarters ended June 30, 2010,
Select was required to maintain an interest expense coverage ratio (its ratio of consolidated
EBITDA to cash interest expense) for the prior four consecutive fiscal quarters of at least 2.00 to
1.00. Selects interest expense coverage ratio was 2.87 to 1.00 for such period. As of June 30,
2010, Select was required to maintain a leverage ratio (its ratio of total indebtedness to
consolidated EBITDA for the prior four consecutive fiscal quarters) at less than 4.75 to 1.00.
Selects leverage ratio was 2.88 to 1.00 as of June 30, 2010.
Also, as of June 30, 2010, we had $271.2 million of availability under our revolving loan
facility (after giving effect to $28.8 million of outstanding letters of credit).
On June 13, 2005, Select entered into two five year interest rate swap transactions with an
effective date of August 22, 2005. On November 23, 2007, Select entered into an additional interest
rate swap transaction for three years with an effective date of November 23, 2007. The swaps are
designated as a cash flow hedge of forecasted LIBOR-based variable rate interest payments. The
underlying variable rate debt is $300.0 million.
Select has outstanding $611.5 million in aggregate principal amount of 75/8% senior
subordinated notes due 2015. Interest on the notes is payable semi-annually in arrears on February
1 and August 1 of each year. The notes are guaranteed by all of Selects wholly-owned subsidiaries,
subject to certain exceptions. 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. Currently through January 31, 2011, Select may redeem the notes at a redemption
price equal to 103.813% of the principal amount of the notes, plus accrued and unpaid interest, if
any, to the redemption date. Upon a change of control of Holdings, each holder of notes
may require us to repurchase all or any portion of the holders notes at a purchase price
equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase.
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As of June 30, 2010, Holdings had outstanding $167.3 million of senior floating rate notes due
2015, which bear interest at a rate per annum, reset semi-annually, equal to the 6-month LIBOR plus
5.75%. Interest is payable semi-annually in arrears on March 15 and September 15 of each year, with
the principal due in full on September 15, 2015. The senior floating rate notes are general
unsecured obligations of Holdings and are not guaranteed by Select or any of its subsidiaries.
We may from time to time seek to retire or purchase our outstanding debt through cash
purchases and/or exchanges for equity securities, in open market purchases, 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 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.
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 as amended by PPACA, which prohibits the establishment
and classification of new LTCHs or satellites during the five calendar years commencing on
December 29, 2007, we have stopped all new LTCH development. However, we continue to evaluate
opportunities to develop new joint venture relationships with significant health systems, and from
time to time we may also develop new inpatient rehabilitation hospitals. We also intend to open new
outpatient rehabilitation clinics in local areas that we currently serve where we can benefit from
existing referral relationships and brand awareness to produce incremental growth. In addition to
our development activities, we may grow our network of specialty hospitals through opportunistic
acquisitions.
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.
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Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving
Disclosures about Fair Value Measurements (Update 2010-06), which amends the guidance on fair
value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurements. It also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. The Company adopted update
2010-06 on January 1, 2010, except for the requirement to provide the Level 3 activity of
purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal
years beginning after December 15, 2010, and for interim periods within those fiscal years. The
adoption of Update 2010-06 did not have an impact on the Companys consolidated financial
statements. The Company currently has no Level 3 measurements.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Quantitative and Qualitative Disclosures About Market Risk
We are subject to interest rate risk in connection with our long-term indebtedness. Our
principal interest rate exposure relates to the loans outstanding under Selects senior secured
credit facility and Holdings senior floating rate notes. As of June 30, 2010, Select had
$483.1 million in term loans outstanding under its senior secured credit facility and Holdings had
$167.3 million in senior floating rate notes outstanding, which bear interest at variable rates. On
June 13, 2005, Select entered into two five year interest rate swap transactions with an effective
date of August 22, 2005. On November 16, 2007, Select entered into an additional interest rate swap
transaction for three years with an effective date of November 23, 2007. Select entered into the
swap transactions to mitigate the risks of future variable rate interest payments. The notional
amount of the interest rate swaps are $300.0 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 4T. | 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.
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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 six
months ended June 30, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. | 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.
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. We
believe that the subpoena has been issued in connection with a qui tam lawsuit, and that the
government is currently investigating the matter to determine whether to intervene. The Company
has produced documents in response to the subpoena and intends to fully cooperate with the
governments investigation. In addition, the Company has initiated an internal review of its
policies and practices related to physician relationships in the Columbus market. At this time,
the Company is unable to predict the timing and outcome of this matter.
On March 8, 2010, the Company received a letter from the United States Senate Finance
Committee in response to a New York Times article published February 10, 2010 focusing on our
Company and the long term acute care hospital industry entitled Long-Term Care Hospitals Face
Little Scrutiny. The letter from the Senate Finance Committee asked us to respond to a variety
of questions regarding our long-term care hospitals. On March 23, 2010, the Company responded to
the letter. On May 25, 2010 the Company received follow-up questions from the committee,
which the Company responded to on June 4, 2010. The Company
intends on fully cooperating and, at this time, the Company is unable to
predict the timing and outcome of this matter.
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ITEM 1A. | RISK FACTORS. |
As a result of the enactment of the PPACA, which President Obama signed into law on March 23,
2010, there have been changes to certain of the laws and regulations that were described in the
risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2009.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Regulatory Changes for a description of these regulatory changes.
Except as set forth above, there have been no material changes from our risk factors as
previously reported in our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | REMOVED AND RESERVED |
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The
exhibits to this report are listed in the Exhibit Index
appearing on page 59 hereof.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SELECT MEDICAL CORPORATION |
||||
By: | /s/ Martin F. Jackson | |||
Martin F. Jackson | ||||
Executive Vice President and Chief Financial Officer (Duly Authorized Officer) |
||||
By: | /s/ Scott A. Romberger | |||
Scott A. Romberger | ||||
Senior Vice President, Chief Accounting Officer and
Controller (Principal Accounting Officer) |
Dated: August 12, 2010
SELECT MEDICAL HOLDINGS CORPORATION |
||||
By: | /s/ Martin F. Jackson | |||
Martin F. Jackson | ||||
Executive Vice President and Chief Financial Officer (Duly Authorized Officer) |
||||
By: | /s/ Scott A. Romberger | |||
Scott A. Romberger | ||||
Senior Vice President, Chief Accounting Officer and
Controller (Principal Accounting Officer) |
Dated: August 12, 2010
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EXHIBIT INDEX
Exhibit | Description | |||
2.1 | Purchase and Sale Agreement by and among Regency Hospital Company,
L.L.C., the Sellers named therein, the Representative named
therein, Intensiva Healthcare Corporation and Select Medical
Corporation, dated June 18, 2010, incorporated herein by reference
to Exhibit 2.1 of the Current Report on Form 8-K of Select Medical
Holdings Corporation and Select Medical Corporation filed on June
23, 2010 (Reg. Nos. 001-34465 and 001-34465) |
|||
10.1 | Assignment and Assumption and Amendment No. 4, dated June 7, 2010,
to Credit Agreement dated as of February 24, 2005, as amended, by
and among Select Medical Holdings Corporation, Select Medical
Corporation, JPMorgan Chase Bank, N.A. as Administrative Agent and
Collateral Agent, Wachovia Bank, National Association as
Syndication Agent, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and CIBC Inc. as Co-Documentation Agents, and the
Lenders named therein. |
|||
10.2 | Amendment No. 4-A, dated June 7, 2010, to Credit Agreement dated
as of February 24, 2005, as amended, by and among Select Medical
Holdings Corporation, Select Medical Corporation, JPMorgan Chase
Bank, N.A. as Administrative Agent and Collateral Agent, Wachovia
Bank, National Association as Syndication Agent, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc. as
Co-Documentation Agents, and the Lenders named therein. |
|||
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. |
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