sv1
As filed with the Securities and Exchange Commission on
July 24, 2008
Registration
No. 333-
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
SELECT MEDICAL HOLDINGS
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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8060
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20-1764048
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(State or Other Jurisdiction
of Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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4714 Gettysburg Road
Mechanicsburg, Pennsylvania 17055
(717) 972-1100
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Michael E. Tarvin, Esq.
Executive Vice President, General Counsel and Secretary
4714 Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
(717) 972-1100
(Name, address including zip
code, and telephone number, including area code, of agent for
service)
With copies to:
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Stephen M. Leitzell, Esq.
Dechert LLP
Cira Centre
2929 Arch Street
Philadelphia, Pennsylvania 19104
(215) 994-4000
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Richard D. Truesdell, Jr., Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of
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Aggregate
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Amount of
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Securities to be Registered
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Offering Price(1)(2)
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Registration Fee
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Common Stock, par value $0.001 per share
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$
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100,000,000
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$
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3,930
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(1)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933, as amended.
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(2)
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Including shares of common stock
which may be purchased by the underwriters to cover
over-allotments, if any.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. A
registration statement relating to these securities has been
filed with the Securities and Exchange Commission. These
securities may not be sold until the registration statement is
effective. This preliminary prospectus is not an offer to sell
nor does it seek an offer to buy these securities in any state
where the offer or sale is not permitted.
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Subject to Completion,
Dated ,
2008
Shares
Select Medical Holdings
Corporation
Common Stock
This is an initial public offering of shares of common stock of
Select Medical Holdings Corporation. We are
offering shares
of our common stock and the selling stockholders are
offering shares
of our common stock. We will not receive any proceeds from the
sale of shares of common stock by the selling stockholders.
There is no existing public market for our common stock. It is
currently estimated that the initial public offering price will
be between $ and
$ per share. We intend to apply to
list our common stock for quotation on the New York Stock
Exchange under the symbol SLC.
See Risk Factors beginning on page 13 to
read about factors you should consider before buying shares of
the common stock.
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Proceeds to
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Underwriting
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Select
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Proceeds to
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Price to
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Discounts and
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Medical Holdings
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Selling
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Public
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Commissions
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Corporation
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Stockholders(1)
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Per Share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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(1)
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We have agreed to reimburse the
selling stockholders for the underwriting discounts and
commissions on the shares sold by them. This amount will be
approximately
$ million.
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To the extent the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an additional shares from Select Medical Holdings Corporation
and the selling stockholders at the initial public offering
price less the underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2008.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Morgan Stanley
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Merrill Lynch &
Co.
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Goldman, Sachs &
Co.
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JPMorgan Securities
Inc.
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Wachovia Securities
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Credit Suisse
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Jefferies &
Company
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Prospectus
dated ,
2008
TABLE OF
CONTENTS
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Page
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PROSPECTUS SUMMARY
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1
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RISK FACTORS
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13
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FORWARD-LOOKING STATEMENTS
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26
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USE OF PROCEEDS
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27
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DIVIDEND POLICY
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28
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CAPITALIZATION
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29
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DILUTION
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30
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
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32
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
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35
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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BUSINESS
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73
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MANAGEMENT
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98
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PRINCIPAL AND SELLING STOCKHOLDERS
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129
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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131
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DESCRIPTION OF CAPITAL STOCK
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134
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DESCRIPTION OF INDEBTEDNESS
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138
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SHARES ELIGIBLE FOR FUTURE SALE
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143
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED
STATES HOLDERS
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145
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UNDERWRITERS
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148
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LEGAL MATTERS
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152
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EXPERTS
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152
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INDUSTRY DATA
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152
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WHERE YOU CAN FIND MORE INFORMATION
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152
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INDEX TO FINANCIAL STATEMENTS
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F-1
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You should rely only on the information contained in this
prospectus. Neither we, the selling stockholders nor the
underwriters have authorized any other person to provide you
with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. Neither we, the selling stockholders nor the underwriters
are making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as
of the date on the front cover of this prospectus or other date
stated in this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date, and we have an obligation to provide updates to this
prospectus only to the extent that the information contained in
this prospectus becomes materially deficient or misleading after
the date on the front cover.
As used in this prospectus, unless the context otherwise
indicates, the references to Holdings refer to
Select Medical Holdings Corporation, and the references to
Select refer to Select Medical Corporation (a
wholly-owned subsidiary of Holdings) and references to our
company, us, we and
our refer to Holdings together with Select and its
subsidiaries.
Unless otherwise indicated or the context otherwise requires,
financial data in this prospectus reflects the consolidated
business and operations of Select Medical Holdings Corporation
and its wholly-owned subsidiaries. Except where otherwise
indicated, $ indicates U.S. dollars.
Until ,
2008 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PROSPECTUS
SUMMARY
The following summary highlights information contained
elsewhere in this prospectus and is qualified in its entirety by
more detailed information and consolidated financial statements
included elsewhere in this prospectus. Because it is a summary,
it does not contain all of the information that you should
consider before investing in our common stock. You should read
this prospectus carefully, including the section entitled
Risk Factors and the consolidated financial
statements and the related notes to those statements included
elsewhere in this prospectus.
Our
Business
Overview
We believe that we are one of the largest operators of both
specialty hospitals and outpatient rehabilitation clinics in the
United States based on number of facilities. As of
March 31, 2008, we operated 88 long term acute care
hospitals and four inpatient rehabilitation facilities in
25 states, and 985 outpatient rehabilitation clinics in
37 states and the District of Columbia. We also provide
medical rehabilitation services on a contract basis at nursing
homes, hospitals, assisted living and senior care centers,
schools and worksites. We began operations in 1997 under the
leadership of our current management team, including our
co-founders, Rocco A. Ortenzio and Robert A. Ortenzio, who have
a combined 66 years of experience in the healthcare
industry. Under this leadership, we have grown our business from
its founding to a business that generated net operating revenue
of $1,991.7 million for the year ended December 31,
2007.
Business
Segments and Strategy
We manage our company through two business segments, our
specialty hospital and our outpatient rehabilitation segments,
which accounted for approximately 70% and 30%, respectively, of
our net operating revenues for the year ended December 31,
2007. Our specialty hospital segment consists of hospitals
designed to serve the needs of long term stay acute patients and
hospitals designed to serve patients who require intensive
inpatient medical rehabilitation. Our outpatient rehabilitation
business consists of clinics and contract services that provide
physical, occupational and speech rehabilitation services.
Specialty
Hospitals
The key elements to our specialty hospital strategy are to:
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Focus on Specialized Inpatient Services. We
serve highly acute patients and patients with debilitating
injuries that cannot be adequately cared for in a less medically
intensive environment, such as a skilled nursing facility.
Generally, patients in our specialty hospitals require longer
stays and higher levels of clinical care than patients treated
in general acute care hospitals. Our patients average
length of stay in our specialty hospitals is 25 days for
the year ended December 31, 2007.
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Provide High Quality Care and Service. We
believe that our specialty hospitals serve a critical role in
comprehensive healthcare delivery. Through our specialized
treatment programs and staffing models, we treat patients with
acute, complex and specialized medical needs who are typically
referred to us by general acute care hospitals. Our specialized
treatment programs focus on specific patient needs and medical
conditions such as specific ventilator weaning programs and
wound care protocols. Our responsive staffing models ensure that
patients have the appropriate clinical resources over the course
of their stay. We believe that we are recognized for providing
quality care and service, as evidenced by accreditation by The
Joint Commission and the Commission on Accreditation of
Rehabilitation Facilities. We also believe we develop brand
loyalty in the local areas we serve allowing us to strengthen
our relationships with physicians and other referral sources and
drive additional patient volume to our hospitals.
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Reduce Operating Costs. We continually seek to
improve operating efficiency and reduce costs at our hospitals
by standardizing operations and centralizing key administrative
functions. These initiatives include optimizing staffing based
on our occupancy and the clinical needs of our patients,
centralizing
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administrative functions, standardizing management information
systems and participating in group purchasing arrangements.
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Increase Higher Margin Commercial Volume. With
reimbursement rates from commercial insurers typically higher
than the federal Medicare program, we have focused on continued
expansion of our relationships with commercial insurers to
increase our volume of patients with commercial insurance in our
specialty hospitals. Although the level of care we provide is
complex and staff intensive, we typically have lower relative
operating expenses than a general acute care hospital because we
provide a much narrower range of patient services at our
hospitals. We believe that commercial payors seek to contract
with our hospitals because we offer patients high quality,
cost-effective care at more attractive rates than general acute
care hospitals.
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Develop New Inpatient Rehabilitation
Facilities. By leveraging the experience of our
senior management and dedicated development team, we intend to
pursue new inpatient rehabilitation hospital development
opportunities.
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Pursue Opportunistic Acquisitions. In addition
to our development initiatives, we may grow our network of
specialty hospitals through opportunistic acquisitions. Our
immediate focus is on acquisitions of inpatient rehabilitation
facilities, although we will still consider acquisitions of long
term acute care hospitals if they are at attractive valuations.
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Outpatient
Rehabilitation
The key elements to our outpatient rehabilitation strategy are
to:
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Provide High Quality Care and Service. We are
focused on providing a high level of service to our patients
throughout their entire course of treatment. This high quality
of care and service allows us to strengthen our relationships
with referring physicians, employers and health insurers and
drive additional patient volume.
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Increase Market Share. We strive to establish
a leading presence within the local areas we serve. This allows
us to realize economies of scale, heightened brand loyalty,
workforce continuity and increased leverage when negotiating
payor contracts.
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Expand Rehabilitation Programs and
Services. Through our local clinical directors of
operations and clinic managers within their service areas, we
assess the healthcare needs of the areas we serve. Based on
these assessments, we implement additional programs and services
specifically targeted to meet demand in the local community.
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Optimize the Profitability of Our Payor
Contracts. We rigorously review payor contracts
up for renewal and potential new payor contracts to optimize our
profitability. We believe that our size and our strong
reputation enables us to negotiate favorable outpatient
contracts with commercial insurers.
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Maintain Strong Employee Relations. We seek to
retain, motivate and educate our employees whose relationships
with referral sources are key to our success.
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Pursue Opportunistic Acquisitions. We may grow
our network of outpatient rehabilitation facilities through
opportunistic acquisitions. We significantly expanded our
network with the 2007 acquisition of the outpatient
rehabilitation division of HealthSouth Corporation, consisting
of 569 clinics in 35 states and the District of Columbia,
including eighteen states in which we did not previously have
outpatient rehabilitation facilities. We believe our size and
centralized infrastructure allow us to take advantage of
operational efficiencies and increase margins at acquired
facilities.
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Our
Competitive Strengths
We believe that the success of our business model is based on a
number of competitive strengths, including:
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Leading Operator in Distinct but Complementary Lines of
Business. We believe that we are a leading
operator in each of our principal business segments, based on
number of facilities in the United States. Our leadership
position and reputation as a high quality, cost-effective health
care provider in each of our
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business segments allows us to attract patients and employees,
aids us in our marketing efforts to payors and referral sources
and helps us negotiate payor contracts.
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Diversified Base of Revenue. In addition to
our diversification of business mix by segment and geography,
with facilities in 42 states and the District of Columbia,
we are further diversified by payor source within our two
business segments. On a consolidated basis, Medicare, Medicaid,
and commercial and other represented approximately 47%, 2% and
51% of our net operating revenues for the three months ended
March 31, 2008, respectively. Our Medicare revenues are
further diversified because Medicare employs distinct payment
methodologies for services provided in each of long term acute
care hospitals, inpatient rehabilitation facilities and
outpatient rehabilitation clinics.
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Proven Financial Performance and Strong Cash
Flow. We have established a track record of
improving the financial performance of our facilities due to our
disciplined approach to revenue growth, expense reduction and an
intense focus on free cash flow generation.
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Significant Scale. By building significant
scale in each of our business segments, we have been able to
leverage our operating costs by centralizing administrative
functions at our corporate office. As a result, we have been
able to minimize our general and administrative expense as a
percentage of revenues, which was 2.2% for the year ended
December 31, 2007.
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Well-Positioned to Capitalize on Consolidation
Opportunities. We believe that we are
well-positioned to capitalize on consolidation opportunities
within each of our business segments and selectively augment our
internal growth. With our geographically diversified portfolio
of facilities in the United States, we believe that our
footprint provides us with a wide-ranging perspective on
multiple potential acquisition opportunities.
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Experience in Successfully Completing and Integrating
Acquisitions. From our inception in 1997 through
2007, we completed six significant acquisitions for
approximately $894.8 million in aggregate consideration. We
believe that we have improved the operating performance of these
facilities over time by applying our standard operating
practices and by realizing efficiencies from our centralized
operations and management.
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Experienced and Proven Management Team. Prior
to co-founding our company with our current Chief Executive
Officer, our Executive Chairman founded and operated three other
healthcare companies focused on inpatient and outpatient
rehabilitation services. In addition, our four senior operations
executives have an average of over 30 years of experience
in the healthcare industry, including extensive experience
working together for our company and for past companies focused
on operating acute rehabilitation hospitals and outpatient
rehabilitation facilities.
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Industry
In the United States, spending on healthcare accounted for
approximately 16% of the gross domestic product in 2007,
according to the Centers for Medicare & Medicaid
Services. An important factor driving healthcare spending is
increased consumption of services due to the aging of the
population. The number of individuals age 65 and older has
grown 1.2% compounded annually over the past twenty years and is
expected to grow 2.9% compounded annually over the next twenty
years, approximately three times faster than the overall
population, according to the U.S. Census Bureau. We believe
that an increasing number of individuals age 65 and older
will drive demand for our specialized medical services.
For individuals age 65 and older, the primary source of
health insurance is the federal Medicare program. Medicare
utilizes distinct payment methodologies for services provided in
long term acute hospitals, inpatient rehabilitation facilities
and outpatient rehabilitation clinics. In the federal fiscal
year 2006, Medicare payments for long term acute hospital
services accounted for 1.1% of overall Medicare outlays and
Medicare payments for inpatient rehabilitation services
accounted for 1.5%, according to the Medicare Payment Advisory
Commission.
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Risk
Factors
Before you invest in our shares, you should carefully consider
all of the information in this prospectus, including matters set
forth under the heading Risk Factors. For instance,
we conduct business in the healthcare services industry, which
is subject to extensive federal, state and local laws and
regulations. Changes in regulations could have a material
adverse effect on our business, financial condition and results
of operations. For example, approximately 48% and 47% of our net
operating revenues for the year ended December 31, 2007 and
the three months ended March 31, 2008, respectively, came
from the highly regulated federal Medicare program. If there are
changes in the rates or methods of government reimbursements for
our services, our business, financial condition and results of
operations could decline.
Company
Information
Select was formed in December 1996 by Rocco A. Ortenzio and
Robert A. Ortenzio and commenced operations during February 1997
upon the completion of its first acquisition. Holdings was
formed in October 2004. On February 24, 2005, EGL
Acquisition Corp., a wholly-owned subsidiary of Holdings, was
merged with Select, with Select continuing as the surviving
corporation and a wholly-owned subsidiary of Holdings. We refer
to this merger and the related transactions collectively as the
Merger Transactions. Holdings was formerly known as
EGL Holding Company. Holdings primary asset is its
investment in Select. Holdings is owned by an investor group
that includes Welsh, Carson, Anderson & Stowe IX,
L.P., WCAS Capital Partners IV, L.P. and WCAS Management
Corporation, Thoma Cressey Bravo and members of our senior
management. We refer to Welsh, Carson, Anderson &
Stowe IX, L.P., WCAS Capital Partners IV, L.P. and WCAS
Management Corporation, collectively as Welsh Carson
and Thoma Cressey Bravo as Thoma Cressey.
Select Medical Holdings Corporation was incorporated on
October 14, 2004 as a Delaware corporation. Our principal
executive office is located at 4714 Gettysburg Road,
Mechanicsburg, Pennsylvania 17055 and our telephone number is
(717) 972-1100.
Our website address is www.selectmedicalcorp.com. Our website
and the information contained therein or connected thereto shall
not be deemed to be incorporated into this prospectus or the
registration statement of which it forms a part.
4
THE
OFFERING
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Shares of common stock offered by us
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shares,
or shares
if the underwriters exercise their over-allotment option in full. |
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Shares of common stock offered by the selling stockholders
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shares,
or shares
if the underwriters exercise their over-allotment option in full. |
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The number of shares offered by the selling stockholders
includes shares
of common stock into which the preferred stock held by them will
convert immediately prior to the consummation of the offering. |
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Common stock to be outstanding after this offering
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shares,
or shares
if the underwriters exercise their over-allotment option in full. |
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Use of proceeds
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We estimate that we will receive net proceeds from the sale of
shares of our common stock in this offering of
$ million, or
$ million if the underwriters
exercise their over-allotment option in full, after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. We intend to use the net
proceeds of this offering to: |
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repay approximately
$ million of loans
outstanding under our senior secured credit facilities, and any
related prepayment costs;
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make payments under the Long Term Cash Incentive
Plan in the amount of approximately
$ million;
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pay approximately $ to
the holders of our preferred stock who are not selling
stockholders in this offering in payment for a portion of the
value of their preferred shares; and
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pay approximately $ to
reimburse the selling stockholders for the underwriting discount
incurred on shares sold by them in this offering.
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Any remaining net proceeds will be used for general corporate
purposes. Affiliates of J.P. Morgan Securities Inc.,
Wachovia Capital Markets, LLC and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, underwriters in this
offering, are parties to our senior secured credit facility and
will receive a portion of the proceeds from this offering. |
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We will not receive any of the proceeds from the sale of shares
of common stock by the selling stockholders. See Use of
Proceeds, Principal and Selling Stockholders
and Underwriters. |
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Dividend policy
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We do not anticipate paying any dividends on our common stock in
the foreseeable future. Any future determination relating to our
dividend policy will be made at the discretion of our board of
directors and will depend on then existing conditions, including
our financial condition, results of operations, contractual
restrictions, capital requirements, business prospects and other
factors our board of directors may deem relevant. In addition,
our ability to declare and pay dividends is restricted by
covenants in our senior secured credit facility and the
indentures governing Selects senior subordinated notes due
2015, which we refer to as Selects
75/8% senior
subordinated notes, and our senior floating rate notes due
2015, which we refer to as the |
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senior floating rate notes. See Description of
Indebtedness Senior Secured Credit
Facility Restrictive Covenants and Other
Matters and Risk Factors. |
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Proposed New York Stock Exchange symbol
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SLC. |
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Risk factors
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Investment in our common stock involves substantial risks. You
should read this prospectus carefully, including the section
entitled Risk Factors and the consolidated financial
statements and the related notes to those statements included
elsewhere in this prospectus before investing in our common
stock. |
It is anticipated that prior to the consummation of this
offering, our stockholders will approve an amendment to our
amended and restated certificate of incorporation that will
provide that immediately prior to this offering, each share of
our outstanding preferred stock owned by the selling
stockholders will convert into a number of common shares to be
determined by:
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dividing the original cost of a share of the preferred stock
($26.90 per share) plus all accrued and unpaid dividends 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 in this
offering; plus
|
|
|
|
one share of common stock for each share of participating
preferred shares owned.
|
The amendment will also provide that immediately prior to this
offering, each share of our outstanding participating preferred
stock owned by a stockholder that is not identified as a selling
stockholder in this prospectus will convert into the right to
payment upon consummation of this offering of an amount of cash
equal to
$
per share, which amount
represents % of the accreted value
of each share of our participating preferred stock immediately
prior to this offering, plus a number of common shares to be
determined by:
|
|
|
|
|
dividing % of the accreted value of
such share of preferred stock by the initial public offering
price per share in this offering; plus
|
|
|
|
one share of common stock for each share of participating
preferred shares owned.
|
In this prospectus, unless otherwise indicated it is assumed
that the conversions described above will be effected at
$ per share, the midpoint of the
range set forth on the cover page of this prospectus. Unless
otherwise indicated, references in this prospectus to the
conversion of our preferred stock refer to the transactions
contemplated by the amendment to our amended and restated
certificate of incorporation that is described above.
The number of shares of our common stock to be outstanding after
this offering is based on 205,086,152 shares outstanding as
of March 31, 2008 and excludes:
|
|
|
|
|
120,000 shares of our common stock issuable upon exercise of
options granted under our director stock option plan. See
Management Compensation Discussion and
Analysis Director Compensation Table
Option Awards.
|
|
|
|
4,584,175 shares of our common stock issuable upon exercise of
options granted under the Select Medical Holdings Corporation
2005 Equity Incentive Plan. See Management
Compensation Discussion and Analysis Elements of
Compensation Equity Compensation.
|
Unless otherwise noted, all information in this prospectus:
|
|
|
|
|
assumes that the underwriters do not exercise their
over-allotment option; and
|
|
|
|
other than historical financial information, reflects the
conversion
of shares
of our issued and outstanding preferred stock
into shares
of common stock at a conversion ratio of
1: immediately prior to the consummation
of this offering, based upon an assumed public offering price of
$ per
share, the midpoint of the range set forth on the cover page of
this prospectus.
|
6
SUMMARY
HISTORICAL AND OTHER FINANCIAL DATA
The following table sets forth, for the periods and dates
indicated, our summary historical and other financial data. We
have derived the statements of operations data for the period
from January 1 through February 24, 2005, or the
Predecessor Period, and February 25 through
December 31, 2005 and for the years ended December 31,
2006 and 2007, or the Successor Period, and the
balance sheet data as of December 31, 2006 and 2007 from
our audited consolidated financial statements appearing
elsewhere in this prospectus. We have derived the statements of
operations data for the three months ended March 31, 2007
and 2008 and balance sheet data as of March 31, 2008 from
our unaudited consolidated financial statements appearing
elsewhere in this prospectus. The summary financial data
presented below represent portions of our financial statements
and are not complete. You should read this information in
conjunction with Use of Proceeds,
Capitalization, Selected Historical
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
related notes included elsewhere in this prospectus.
The pro forma as adjusted consolidated financial statements of
operations for the year ended December 31, 2007 and for the
three months ended March 31, 2008 gives effect to the
conversion of our preferred stock, based upon an assumed public
offering price of
$
per share, the midpoint of the range set forth on the cover page
of this prospectus, and the expected proceeds from this offering
as if they had occurred on January 1, 2007. The balance
sheet data as of March 31, 2008, gives effect to the
conversion of our preferred stock, based upon an assumed public
offering price of $ per share, the midpoint of
the range set forth on the cover page of this prospectus, and
the expected use of proceeds from this offering as if they had
occurred on March 31, 2008. The pro forma consolidated
financial statement of operations excludes non-recurring charges
directly attributable to the offering, including
$ million (net of tax) related to
payments under the Long Term Cash Investment Plan and
$ million (net of tax) related to
reimbursing the selling stockholders for the underwriting
discounts and commissions incurred on shares sold by them in
this offering. You should read this information in conjunction
with Unaudited Pro Forma Consolidated Financial
Information included elsewhere in this prospectus.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
Successor Period
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
Year Ended December 31,
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
(in thousands, except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
277,736
|
|
|
|
$
|
1,580,706
|
|
|
$
|
1,851,498
|
|
|
$
|
1,991,666
|
|
|
|
|
|
Operating
expenses(1)(2)
|
|
|
373,418
|
|
|
|
|
1,322,068
|
|
|
|
1,546,956
|
|
|
|
1,740,484
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,933
|
|
|
|
|
37,922
|
|
|
|
46,668
|
|
|
|
57,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(101,615
|
)
|
|
|
|
220,716
|
|
|
|
257,874
|
|
|
|
193,885
|
|
|
|
|
|
Loss on early retirement of
debt(3)
|
|
|
(42,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger related
charges(4)
|
|
|
(12,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
267
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
|
|
Interest expense,
net(5)
|
|
|
(4,128
|
)
|
|
|
|
(101,441
|
)
|
|
|
(130,538
|
)
|
|
|
(138,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority
interests and income taxes
|
|
|
(160,237
|
)
|
|
|
|
120,367
|
|
|
|
127,336
|
|
|
|
55,666
|
|
|
|
|
|
Minority interests in consolidated subsidiary
companies(6)
|
|
|
330
|
|
|
|
|
1,776
|
|
|
|
1,414
|
|
|
|
1,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(160,567
|
)
|
|
|
|
118,591
|
|
|
|
125,922
|
|
|
|
54,129
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(59,794
|
)
|
|
|
|
49,336
|
|
|
|
43,521
|
|
|
|
18,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(100,773
|
)
|
|
|
|
69,255
|
|
|
|
82,401
|
|
|
|
35,430
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
522
|
|
|
|
|
3,072
|
|
|
|
12,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(100,251
|
)
|
|
|
|
72,327
|
|
|
|
94,879
|
|
|
|
35,430
|
|
|
|
|
|
Less: Preferred dividends
|
|
|
|
|
|
|
|
23,519
|
|
|
|
22,663
|
|
|
|
23,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common and preferred stockholders
|
|
$
|
(100,251
|
)
|
|
|
$
|
48,808
|
|
|
$
|
72,216
|
|
|
$
|
11,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.23
|
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.25
|
|
|
$
|
0.36
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.05
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.24
|
|
|
$
|
0.34
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
$
|
35,861
|
|
|
$
|
81,600
|
|
|
$
|
4,529
|
|
|
|
|
|
Working capital
|
|
|
|
|
|
|
|
77,556
|
|
|
|
59,468
|
|
|
|
14,730
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
2,168,385
|
|
|
|
2,182,524
|
|
|
|
2,495,046
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
|
|
1,628,889
|
|
|
|
1,538,503
|
|
|
|
1,755,635
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
444,765
|
|
|
|
467,395
|
|
|
|
491,194
|
|
|
|
|
|
Total stockholders equity
|
|
|
|
|
|
|
|
(244,658
|
)
|
|
|
(169,139
|
)
|
|
|
(165,889
|
)
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
Hospitals(7):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenue
|
|
$
|
202,781
|
|
|
|
$
|
1,169,702
|
|
|
$
|
1,378,543
|
|
|
$
|
1,386,410
|
|
|
|
|
|
Adjusted
EBITDA(8)
|
|
|
44,384
|
|
|
|
|
263,760
|
|
|
|
283,270
|
|
|
|
217,175
|
|
|
|
|
|
Outpatient Rehabilitation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenue
|
|
|
73,344
|
|
|
|
|
407,367
|
|
|
|
470,339
|
|
|
|
603,413
|
|
|
|
|
|
Adjusted
EBITDA(8)
|
|
|
9,848
|
|
|
|
|
56,109
|
|
|
|
64,823
|
|
|
|
75,437
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
466,829
|
|
|
$
|
548,278
|
|
|
|
|
|
Operating
expenses(1)(2)
|
|
|
394,800
|
|
|
|
476,537
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,704
|
|
|
|
17,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
60,325
|
|
|
|
54,344
|
|
|
|
|
|
Other income
|
|
|
1,173
|
|
|
|
|
|
|
|
|
|
Interest expense,
net(5)
|
|
|
(31,274
|
)
|
|
|
(36,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before minority interests and income taxes
|
|
|
30,224
|
|
|
|
17,551
|
|
|
|
|
|
Minority interests in consolidated subsidiary
companies(6)
|
|
|
323
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
29,901
|
|
|
|
17,242
|
|
|
|
|
|
Income tax expense
|
|
|
12,430
|
|
|
|
8,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,471
|
|
|
|
8,700
|
|
|
|
|
|
Less: Preferred dividends
|
|
|
5,759
|
|
|
|
6,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common and preferred stockholders
|
|
$
|
11,712
|
|
|
$
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
|
|
|
|
Diluted
|
|
|
0.06
|
|
|
|
0.01
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,536
|
|
|
$
|
8,180
|
|
|
|
|
|
Working capital
|
|
|
33,372
|
|
|
|
105,278
|
|
|
|
|
|
Total assets
|
|
|
2,192,191
|
|
|
|
2,554,414
|
|
|
|
|
|
Total debt
|
|
|
1,537,256
|
|
|
|
1,826,364
|
|
|
|
|
|
Preferred stock
|
|
|
473,145
|
|
|
|
496,983
|
|
|
|
|
|
Total stockholders equity
|
|
|
(159,665
|
)
|
|
|
(174,203
|
)
|
|
|
|
|
Segment Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
Hospitals(7):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenue
|
|
$
|
354,228
|
|
|
$
|
378,604
|
|
|
|
|
|
Adjusted
EBITDA(8)
|
|
|
66,031
|
|
|
|
63,243
|
|
|
|
|
|
Outpatient Rehabilitation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenue
|
|
|
112,380
|
|
|
|
169,577
|
|
|
|
|
|
Adjusted
EBITDA(8)
|
|
|
17,618
|
|
|
|
20,097
|
|
|
|
|
|
9
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 table 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Specialty hospital
data(7):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals start of period
|
|
|
86
|
|
|
|
101
|
|
|
|
96
|
|
Number of hospital
start-ups
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
Number of hospitals acquired
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Number of hospitals closed/sold
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(8
|
)
|
Number of hospitals consolidated
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals end of period
|
|
|
101
|
|
|
|
96
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available licensed beds
|
|
|
3,829
|
|
|
|
3,867
|
|
|
|
3,819
|
|
Admissions
|
|
|
39,963
|
|
|
|
39,668
|
|
|
|
40,008
|
|
Patient days
|
|
|
985,025
|
|
|
|
969,590
|
|
|
|
987,624
|
|
Average length of stay (days)
|
|
|
25
|
|
|
|
24
|
|
|
|
25
|
|
Net revenue per patient
day(9)
|
|
$
|
1,370
|
|
|
$
|
1,392
|
|
|
$
|
1,378
|
|
Occupancy rate
|
|
|
70
|
%
|
|
|
69
|
%
|
|
|
69
|
%
|
Percent patient days Medicare
|
|
|
75
|
%
|
|
|
73
|
%
|
|
|
69
|
%
|
Outpatient rehabilitation
data(10):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of clinics owned start of period
|
|
|
589
|
|
|
|
553
|
|
|
|
477
|
|
Number of clinics acquired
|
|
|
|
|
|
|
|
|
|
|
570
|
|
Number of clinic
start-ups
|
|
|
22
|
|
|
|
12
|
|
|
|
15
|
|
Number of clinics
closed/sold(11)
|
|
|
(58
|
)
|
|
|
(88
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of clinics owned end of period
|
|
|
553
|
|
|
|
477
|
|
|
|
918
|
|
Number of clinics managed end of period
|
|
|
55
|
|
|
|
67
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of clinics (all) end of period
|
|
|
608
|
|
|
|
544
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of visits
|
|
|
3,308,620
|
|
|
|
2,972,243
|
|
|
|
4,032,197
|
|
Net revenue per
visit(12)
|
|
$
|
89
|
|
|
$
|
94
|
|
|
$
|
100
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Specialty hospital
data(7):
|
|
|
|
|
|
|
|
|
Number of hospitals start of period
|
|
|
96
|
|
|
|
87
|
|
Number of hospital
start-ups
|
|
|
|
|
|
|
5
|
|
Number of hospitals closed/sold
|
|
|
(1
|
)
|
|
|
|
|
Number of hospitals consolidated
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals end of period
|
|
|
92
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
Available licensed beds
|
|
|
3,899
|
|
|
|
4,111
|
|
Admissions
|
|
|
10,416
|
|
|
|
10,736
|
|
Patient days
|
|
|
252,476
|
|
|
|
259,559
|
|
Average length of stay (days)
|
|
|
25
|
|
|
|
25
|
|
Net revenue per patient
day(9)
|
|
$
|
1,378
|
|
|
$
|
1,432
|
|
Occupancy rate
|
|
|
72
|
%
|
|
|
71
|
%
|
Percent patient days Medicare
|
|
|
72
|
%
|
|
|
67
|
%
|
Outpatient rehabilitation data:
|
|
|
|
|
|
|
|
|
Number of clinics owned start of period
|
|
|
477
|
|
|
|
918
|
|
Number of clinics acquired
|
|
|
1
|
|
|
|
|
|
Number of clinic
start-ups
|
|
|
4
|
|
|
|
5
|
|
Number of clinics closed/sold
|
|
|
(5
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Number of clinics owned end of period
|
|
|
477
|
|
|
|
905
|
|
Number of clinics managed end of period
|
|
|
68
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total number of clinics (all) end of period
|
|
|
545
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
Number of visits
|
|
|
646,651
|
|
|
|
1,155,907
|
|
Net revenue per
visit(12)
|
|
$
|
101
|
|
|
$
|
103
|
|
|
|
|
(1)
|
|
Operating expenses include cost of
services, general and administrative expenses, and bad debt
expenses.
|
(2)
|
|
Includes stock compensation expense
related to the repurchase of outstanding stock options in the
Predecessor period from January 1 through February 24,
2005, compensation expense related to restricted stock, stock
options and long term incentive compensation in the Successor
Periods from February 25 through December 31, 2005, and for
the years ended December 31, 2006 and 2007 and for the
three months ended March 31, 2007 and 2008.
|
(3)
|
|
In connection with the Merger
Transactions, Select completed tender offers for all of its
91/2% senior
subordinated notes due 2009 and all of its
71/2% senior
subordinated notes due 2013. The loss in the Predecessor period
of January 1 through February 24, 2005 consists of the
tender premium cost of $34.8 million and the remaining
write-off of unamortized deferred financing costs of
$7.9 million.
|
(4)
|
|
As a result of the Merger
Transactions, Select incurred costs in the Predecessor period of
January 1 through February 24, 2005 directly related to the
Merger. This included the cost of the investment advisor hired
by the special committee of Selects board of directors to
evaluate the Merger, legal and accounting fees, costs associated
with the
Hart-Scott-Rodino
filing relating to the Merger, the cost associated with
purchasing a six year extended reporting period under our
directors and officers liability insurance policy and other
associated expenses.
|
(5)
|
|
Net interest equals interest
expense minus interest income.
|
(6)
|
|
Reflects interests held by other
parties in subsidiaries, limited liability companies and limited
partnerships owned and controlled by us.
|
(7)
|
|
Specialty hospitals consist of long
term acute care hospitals and inpatient rehabilitation
facilities.
|
(8)
|
|
We define Adjusted EBITDA as net
income before interest, income taxes, depreciation and
amortization, income from discontinued operations, loss on early
retirement of debt, merger related charges, stock compensation
expense, long term incentive compensation, other income/expense
and minority interest. We believe that the presentation of
Adjusted EBITDA is important to investors because Adjusted
EBITDA is commonly used as an analytical indicator of
performance by investors within the healthcare industry.
Adjusted EBITDA is used by management to evaluate financial
performance and determine resource allocation for each of our
operating units. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles.
Items excluded from Adjusted EBITDA are significant components
in understanding and assessing financial performance. Adjusted
EBITDA should not be considered in isolation or as an
alternative to, or substitute for, net income, cash flows
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
|
11
|
|
|
|
|
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 13 to
our audited consolidated financial statements and footnote 7 to
our interim unaudited consolidated financial statements for the
period ended March 31, 2008 for a reconciliation of net
income to Adjusted EBITDA as utilized by us in reporting our
segment performance in accordance with SFAS No. 131.
|
(9)
|
|
Net revenue per patient day is
calculated by dividing specialty hospital patient service
revenues by the total number of patient days.
|
(10)
|
|
Clinic data has been restated to
remove the clinics operated by Canadian Back Institute Limited,
which we refer to as CBIL, which was sold on
March 31, 2006 and is being reported as a discontinued
operation in 2005 and 2006.
|
(11)
|
|
The number of clinics closed/sold
for the year ended December 31, 2007 relate primarily to
clinics closed in connection with the restructuring plan for
integrating the acquisition of HealthSouth Corporations
outpatient rehabilitation division.
|
(12)
|
|
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.
|
12
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should consider carefully the following risk factors and the
other information in this prospectus, including our consolidated
financial statements and related notes, before you decide to
purchase our common stock. If any of the following risks
actually occur, our business, financial condition and operating
results could be adversely affected. As a result, the trading
price of our common stock could decline and you could lose part
or all of your investment.
Risks
Relating to Our Business and Industry
If
there are changes in the rates or methods of government
reimbursements for our services, our net operating revenues and
profitability could decline.
Approximately 48% and 47% of our net operating revenues for the
year ended December 31, 2007 and the three months ended
March 31, 2008, respectively, came from the highly
regulated federal Medicare program. In recent years, through
legislative and regulatory actions, the federal government has
made substantial changes to various payment systems under the
Medicare program. Additional changes to these payment systems,
including modifications to the conditions on qualification for
payment and the imposition of enrollment limitations on new
providers, may be proposed or could be adopted, either by the
U.S. Congress or by the Centers for Medicare &
Medicaid Services, also known as CMS. Because of the
possibility of adoption of changes in applicable regulations,
the availability, methods and rates of Medicare reimbursements
for services of the type furnished at our facilities could
change at any time. Some of these changes and proposed changes
could adversely affect our business strategy, operations and
financial results. In addition, there can be no assurance that
any increases in Medicare reimbursement rates established by CMS
will fully reflect increases in our operating costs.
We
conduct business in a heavily regulated industry, and changes in
regulations, new interpretations of existing regulations or
violations of regulations may result in increased costs or
sanctions that reduce our net operating revenues and
profitability.
The healthcare industry is subject to extensive federal, state
and local laws and regulations relating to:
|
|
|
|
|
facility and professional licensure, including certificates of
need;
|
|
|
|
conduct of operations, including financial relationships among
healthcare providers, Medicare fraud and abuse, and physician
self-referral;
|
|
|
|
addition of facilities and services and enrollment of newly
developed facilities in the Medicare program;
|
|
|
|
payment for services; and
|
|
|
|
safeguarding protected health information.
|
There have been heightened coordinated civil and criminal
enforcement efforts by both federal and state government
agencies relating to the healthcare industry. The ongoing
investigations relate to, among other things, various referral
practices, cost reporting, billing practices, physician
ownership and joint ventures involving hospitals. In the future,
different interpretations or enforcement of these laws and
regulations could subject our current practices to allegations
of impropriety or illegality or could require us to make changes
in our facilities, equipment, personnel, services and capital
expenditure programs, increase our operating expenses and reduce
our operating revenues. If we fail to comply with these
extensive laws and government regulations, we could become
ineligible to receive government program reimbursement, suffer
civil or criminal penalties or be required to make significant
changes to our operations. In addition, we could be forced to
expend considerable resources responding to an investigation or
other enforcement action under these laws or regulations. See
Business Government Regulations.
13
Compliance
with changes in federal regulations applicable to long term
acute care hospitals operated as hospitals within
hospitals or as satellites may have an adverse
effect on our future net operating revenues and
profitability.
On August 11, 2004, CMS published final regulations
applicable to long term acute care hospitals that are operated
as hospitals within hospitals or as
satellites, which we collectively refer to as
HIHs. HIHs are separate hospitals located in space
leased from, and located in or on the same campus of, another
hospital, known as a host hospital. Effective for
hospital cost reporting periods beginning on or after
October 1, 2004, the final regulations, subject to certain
exceptions, provide lower rates of reimbursement to HIHs for
those Medicare patients admitted from their host hospitals that
are in excess of a specified percentage threshold. For HIHs
opened after October 1, 2004, the Medicare admissions
threshold has been established at 25% except for HIHs located in
rural hospitals, metropolitan statistical area, or MSA
dominant hospitals or single urban hospitals (as defined
by the current regulations) where the percentage is no more than
50%, nor less than 25%. For HIHs that meet specified criteria
and were in existence as of October 1, 2004, including all
but two of our then existing HIHs, which are referred to as
grandfathered HIHs and satellites, the Medicare
admissions thresholds are phased in over a four year period
starting with hospital cost reporting periods beginning on or
after October 1, 2004, as follows: (1) for discharges
during the cost reporting period beginning on or after
October 1, 2004 and before October 1, 2005, the
Medicare admissions threshold was the Fiscal
2004 Percentage (as defined below) of Medicare discharges
admitted from the host hospital; (2) for discharges during
the cost reporting period beginning on or after October 1,
2005 and before October 1, 2006, the Medicare admissions
threshold was the lesser of the Fiscal 2004 Percentage of
Medicare discharges admitted from the host hospital or 75%;
(3) for discharges during the cost reporting period
beginning on or after October 1, 2006 and before
October 1, 2007, the Medicare admissions threshold was the
lesser of the Fiscal 2004 Percentage of Medicare discharges
admitted from the host hospital or 50%; and (4) for
discharges during cost reporting periods beginning on or after
October 1, 2007, the Medicare admissions threshold is 25%,
however; the Medicare, Medicaid and SCHIP Extension Act of 2007,
or the SCHIP Extension Act, generally limits the
application of the Medicare admission threshold to no lower than
50% for a three year period to commence on a long term acute
care hospitals, or LTCHs, first cost
reporting period to begin on or after December 29, 2007.
Under the SCHIP Extension Act, for HIHs and satellite facilities
located in rural areas and those which receive referrals from
MSA dominant hospitals or single urban hospitals, the percentage
threshold is no more than 75% during the same three year period.
At March 31, 2008, 67 of our 88 long term acute care
hospitals operated as HIHs.
As used above, Fiscal 2004 Percentage means,
with respect to any HIH, the percentage of all Medicare patients
discharged by such HIH during its cost reporting period
beginning on or after October 1, 2003 and before
October 1, 2004 who were admitted to such HIH from its host
hospital, but in no event is the Fiscal 2004 Percentage
less than 25%. Grandfathered HIHs and satellites refer to
certain HIHs that were in existence on or before
September 30, 1995, and certain satellite facilities that
were in existence on or before September 30, 1999, all of
which were excluded from the inpatient prospective payment
system for general acute care hospitals on that date and
continue to operate on substantially the same terms and
conditions.
During the year ended December 31, 2007, we recorded a
reduction in our net operating revenues of approximately
$5.9 million related to estimated repayments to Medicare
for host admissions exceeding an HIHs threshold. The
liability has been recorded through a reduction in our net
operating revenue. Additionally, changes in our admissions
patterns may have further adversely impacted our potential
revenues. Because these rules are complex and are based on the
volume of Medicare admissions from our host hospitals as a
percent of our overall Medicare admissions, we cannot predict
with any certainty the impact on our future net operating
revenues of compliance with these regulations. However, after
the expiration of the three year moratorium provided by the
SCHIP Extension Act, we expect the adverse financial impact to
increase when the Medicare admissions thresholds decline to 25%.
As a result, compliance with changes in federal regulations
after the expiration of the three year moratorium may adversely
affect our future net operating revenues and profitability.
14
Expiration
of the three year moratorium imposed on certain federal
regulations otherwise applicable to long term acute care
hospitals operated as free-standing or grandfathered
hospitals within hospitals or grandfathered
satellites will have an adverse effect on our future
net operating revenues and profitability.
All Medicare payments to our long term acute care hospitals are
made in accordance with a prospective payment system
specifically applicable to long term acute care hospitals,
referred to as LTCH-PPS. On May 1, 2007, CMS
published its annual payment rate update for the 2008 LTCH-PPS
rate year (RY 2008). The May 2007 final rule makes
several changes to LTCH-PPS payment methodologies and amounts
during RY 2008 although, as described below, many of these
changes have been postponed for a three year period by the SCHIP
Extension Act.
For cost reporting periods beginning on or after July 1,
2007, the May 2007 final rule expanded the current Medicare HIH
admissions threshold to apply to Medicare patients admitted from
any individual hospital. Previously, the admissions threshold
was applicable only to Medicare HIH admissions from hospitals
co-located with an LTCH or satellite of an LTCH. Under the final
rule, free-standing LTCHs and grandfathered LTCH HIHs are
subject to the Medicare admission thresholds, as well as HIHs
and satellites that admit Medicare patients from non-co-located
hospitals. To the extent that any LTCHs or LTCH satellite
facilitys discharges that are admitted from an individual
hospital (regardless of whether the referring hospital is
co-located with the LTCH or LTCH satellite) exceed the
applicable percentage threshold during a particular cost
reporting period, the payment rate for those discharges would be
subject to a downward payment adjustment. Cases admitted in
excess of the applicable threshold will be reimbursed at a rate
comparable to that under general acute care inpatient
prospective payment system, or IPPS, which is
generally lower than LTCH-PPS rates. Cases that reach outlier
status in the discharging hospital would not count toward the
limit and would be paid under LTCH-PPS.
The SCHIP Extension Act postpones the application of the
percentage threshold to free-standing LTCHs and grandfathered
satellites for a three year period commencing on an LTCHs
first cost reporting period on or after December 29, 2007.
However, the SCHIP Extension Act does not postpone the
application of the percentage threshold, or the transition
period stated above, to those Medicare patients discharged from
an LTCH HIH or satellite that were admitted from a
non-co-located hospital. In addition, the SCHIP Extension Act,
as interpreted by CMS, does not provide relief from the
application of the threshold for patients admitted from a
co-located hospital to certain nongrandfathered HIHs and
satellites.
Of the 88 long term acute care hospitals we operated as of
March 31, 2008, 21 were operated as free-standing hospitals
and two qualified as grandfathered LTCH HIHs. If the May 2007
rule is applied as currently written at the end of the three
year moratorium, it would adversely affect our net operating
revenues and profitability.
The
moratorium on the Medicare certification of new long term care
hospitals and beds in existing long term care hospitals will
limit our ability to increase long term acute care hospital bed
capacity, expand into new areas or increase services in existing
areas we serve.
Beginning on December 29, 2007, the SCHIP Extension Act
imposed a three year moratorium on the establishment and
classification of new LTCHs, LTCH satellite facilities, and LTCH
beds in existing LTCH or satellite facilities. The moratorium
does not apply to LTCHs that, before December 29, 2007,
(1) began the qualifying period for payment under the
LTCH-PPS, (2) have a written agreement with an unrelated
party for the construction, renovation, lease or demolition for
a LTCH and have expended at least 10% of the estimated cost of
the project or $2,500,000, or (3) have obtained an approved
certificate of need. The moratorium does not apply to an
increase in beds in an existing hospital or satellite facility
if the LTCH is located in a state where there is only one other
LTCH and the LTCH requests an increase in beds following the
closure or the decrease in the number of beds of the other LTCH.
The moratorium will adversely affect our ability to increase
long term acute care bed capacity, expand into new areas or
increase bed capacity in existing areas we serve.
Government
implementation of recent changes to Medicares method of
reimbursing our long term acute care hospitals will reduce our
future net operating revenues and profitability.
The May 2007 final rule changed the payment methodology for
Medicare patients with a length of stay less than or equal to
five-sixths of the geometric average length of stay for each
long term care diagnosis-related group,
15
commonly referred to as a LTC-DRG (also referred to
as short-stay outlier or SSO cases).
Under this methodology, as a patients length of stay
increases, the percentage of the per diem amount based upon the
IPPS component decreases and the percentage based on the LTC-DRG
component increases. The SCHIP Extension Act negates, for the
three year period beginning on December 29, 2007, the SSO
policy changes made in the May 2007 final rule. In the
May 6, 2008 Interim Final Rule, CMS revised the regulations
to provide that the change in the SSO policy adopted in the RY
2008 annual payment update does not apply for a three year
period beginning with discharges occurring on or after
December 29, 2007 and before December 29, 2010. The
implementation of the payment methodology for short-stay
outliers discharged after December 29, 2010 will reduce our
future net operating revenues and profitability.
Under LTCH-PPS, a long term acute care hospital is paid a
pre-determined fixed amount depending upon the LTC-DRG, to which
each patient is assigned. LTCH-PPS includes special payment
policies that adjust the payments for some patients based on a
variety of factors. On May 2, 2006, CMS released its final
annual payment rate updates for the 2007 LTCH-PPS rate year. The
May 2006 final rule made several changes to LTCH-PPS payment
methodologies and amounts. For discharges occurring on or after
July 1, 2006, the rule changed the payment methodology for
SSO cases. Previously, payment for these patients was based on
the lesser of (1) 120% of the cost of the case,
(2) 120% of the LTC-DRG specific per diem amount multiplied
by the patients length of stay, or (3) the full
LTC-DRG payment. The May 2006 final rule modified the limitation
in clause (1) above to reduce payment for SSO cases to 100%
(rather than 120%) of the cost of the case. The final rule also
added a fourth limitation, capping payment for SSO cases at a
per diem rate derived from blending 120% of the LTC-DRG specific
per diem amount with a per diem rate based on the general acute
care hospital IPPS. Under this methodology, as a patients
length of stay increases, the percentage of the per diem amount
based upon the IPPS component decreases and the percentage based
on the LTC-DRG component increases.
On May 1, 2007, CMS published its final annual payment rate
updates for the 2007 LTCH-PPS rate year. The May 2007 final rule
further revised the payment adjustment for SSO cases. Beginning
with discharges on or after July 1, 2007, for cases with a
length of stay that is less than the average length of stay plus
one standard deviation for the same diagnosis-related group,
commonly referred to as a DRG, under IPPS, referred
to as the so-called IPPS comparable threshold, the
rule effectively lowered the LTCH payment to a rate based on the
general acute care hospital IPPS. SSO cases with covered lengths
of stay that exceed the IPPS comparable threshold would continue
to be paid under the SSO payment policy described above under
the May 2006 final rule. Cases with a covered length of stay
less than or equal to the IPPS comparable threshold and less
than five-sixths of the geometric average length of stay for
that LTC-DRG would be paid at an amount comparable to the IPPS
per diem. As previously stated, the SCHIP Extension Act negates,
for the three year period beginning on December 29, 2007,
the SSO policy changes made in the May 2007 final rule.
CMS estimated that the changes in the May 2006 final rule would
result in an approximately 3.7% decrease in LTCH Medicare
payments-per-discharge
compared to the 2006 rate year, largely attributable to the
revised SSO payment methodology. We estimated that the May 2006
final rule reduced Medicare revenues associated with SSO cases
and high-cost outlier cases to our long term acute care
hospitals by approximately $29.3 million for the 2007 rate
year (July 1, 2006 to June 30, 2007). Of this amount,
we estimate an effect of approximately $15.3 million on our
Medicare payments for 2007 and $14.0 million on our
Medicare payments for 2006. Additionally, had CMS updated the
LTCH-PPS standard federal rate by the 2007 estimated market
basket index of 3.4% rather than applying the zero-percent
update, we estimated that we would have received approximately
$31.0 million in additional annual Medicare revenues, based
on our historical Medicare patient volumes and revenues (such
revenues would have been paid to our hospitals for discharges
beginning on or after July 1, 2006). See
Business Government Regulations
Regulatory Changes and Business
Government Regulations Overview of U.S. and
State Government Reimbursements Long term acute care
hospital Medicare reimbursement.
If our
long term acute care hospitals fail to maintain their
certifications as long term acute care hospitals or if our
facilities operated as HIHs fail to qualify as hospitals
separate from their host hospitals, our net operating revenues
and profitability may decline.
As of March 31, 2008, 83 of our 88 long term acute care
hospitals were certified by Medicare as long term acute care
hospitals, and five more were in the process of becoming
certified as Medicare long term acute care
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hospitals. If our long term acute care hospitals fail to meet or
maintain the standards for certification as long term acute care
hospitals, specifically minimum average length of patient stay,
they will receive payments under the general acute care
hospitals IPPS rather than payment under the system applicable
to long term acute care hospitals. Payments at rates applicable
to general acute care hospitals would result in our long term
acute care hospitals receiving significantly less Medicare
reimbursement than they currently receive for their patient
services.
Implementation
of additional patient or facility criteria for LTCHs that limit
the population of patients eligible for our hospitals
services or change the basis on which we are paid could
adversely affect our net operating revenue and
profitability.
For a number of years, CMS and industry stakeholders have
explored the development of facility and patient certification
criteria for LTCHs, potentially as an alternative to the
specific payment adjustment features of LTCH-PPS currently in
place. In its June 2004 Report to Congress, the
Medical Payment Advisory Commission, also known as
MedPAC, an independent federal body that advises
Congress on issues affecting the Medicare program, recommended
the adoption by CMS of new facility staffing and services
criteria and patient clinical characteristics and treatment
requirements for LTCHs in order to ensure that only appropriate
patients are admitted to these facilities. Thereafter, CMS
awarded a contract to Research Triangle Institute International,
or RTI, to examine the recommendations made by
MedPAC. However, while acknowledging that RTIs findings
are expected to have a substantial impact on future Medicare
policy for LTCHs, in the May 2006 final rule, CMS stated that
many of the specific payment adjustment features of LTCH-PPS
then in place may still be necessary and appropriate even with
the development of patient- and facility-level criteria for
LTCHs. In the preamble to the RY 2009 LTCH-PPS proposed rule,
CMS indicated that RTI continues to work with the clinical
community to make recommendations to CMS regarding payment and
treatment of critically ill patients in LTCHs. The SCHIP
Extension Act requires the Secretary of the Department of Health
and Human Services to conduct a study and submit a report to
Congress by June 29, 2009 on the establishment of national
LTCH facility and patient criteria and to consider the
recommendations contained in MedPACs June 2004 report to
Congress. Implementation of additional criteria that may limit
the population of patients eligible for our hospitals
services or change the basis on which we are paid could
adversely affect our net operating revenues and profitability.
See Business Government
Regulations Overview of U.S. and State
Government Reimbursements Long term acute care
hospital Medicare reimbursement.
Implementation
of modifications to the admissions policies for our inpatient
rehabilitation facilities as required in order to achieve
compliance with Medicare regulations may result in a reduction
of patient volume at these hospitals and, as a result, may
reduce our future net operating revenues and
profitability.
As of March 31, 2008, our four acute medical rehabilitation
hospitals were certified by Medicare as inpatient rehabilitation
facilities. Under the historic inpatient rehabilitation
facility, or IRF, certification criteria that had
been in effect since 1983, in order to qualify as an IRF, a
hospital was required to satisfy certain operational criteria as
well as demonstrate that, during its most recent
12-month
cost reporting period, it served an inpatient population of whom
at least 75% required intensive rehabilitation services for one
or more of ten conditions specified in the regulations, which we
refer to as the 75% test. In 2002, CMS became aware
that its various contractors were using inconsistent methods to
assess compliance with the 75% test and that many inpatient
rehabilitation facilities were not in compliance with the 75%
test. In response, in June 2002, CMS suspended enforcement of
the 75% test and, on September 9, 2003, proposed
modifications to the regulatory standards for certification as
an IRF. Notwithstanding concerns stated by the industry and
Congress in late 2003 and early 2004 about the adverse impact
that CMSs proposed changes and renewed enforcement efforts
might have on access to inpatient rehabilitation facility
services, and notwithstanding Congressional requests that CMS
delay implementation of changes to the 75% test for additional
study of clinically appropriate certification criteria, on
May 7, 2004, CMS adopted a final rule that made significant
changes to the certification standard. CMS temporarily lowered
the 75% compliance threshold to 50%, with a gradual increase
back to 75% over the course of a four year period. CMS also
expanded from ten to 13 the number of medical conditions used to
determine compliance with the 75% test (or any phase-in
percentage) and finalized the conditions under which
comorbidities may be used to satisfy the 75% test. Finally, CMS
changed the timeframe used to determine a providers
compliance with the inpatient rehabilitation facility criteria
including the 75% test so that any changes in a facilitys
certification based on compliance with the 75% test may be made
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effective in the cost reporting period immediately following the
review period for determining compliance. Congress temporarily
suspended enforcement of the 75% test when it enacted the
Consolidated Appropriations Act, 2005, which required the
Secretary of Health and Human Services to respond within
60 days to a report by the Government Accountability
Office, or GAO, on the standards for defining
inpatient rehabilitation services before the Secretary may
terminate a hospitals designation as an inpatient
rehabilitation facility for failure to meet the 75% test. The
GAO issued its report on April 22, 2005 and recommended
that CMS, based on further research, refine the 75% test to
describe more thoroughly the subgroups of patients within the
qualifying conditions that are appropriate for care in an
inpatient rehabilitation facility. The Secretary issued a formal
response to the GAO study on June 24, 2005 in which it
concluded that the revised inpatient rehabilitation facility
certification standards, including the 75% test, were consistent
with the recommendations in the GAO report. In light of this
determination, the Secretary announced that CMS would
immediately begin enforcement of the revised certification
standards.
Subsequently, under the Deficit Reduction Act of 2005, enacted
on February 8, 2006, Congress extended the phase-in period
for the 75% test by maintaining the compliance threshold at 60%
(rather than increasing it to 65%) during the
12-month
period beginning on July 1, 2006. The compliance threshold
then increased to 65% for cost reporting periods beginning on or
after July 1, 2007 and increases again to 75% for cost
reporting periods beginning on or after July 1, 2008.
The SCHIP Extension Act includes a permanent freeze in the
patient classification criteria compliance threshold at 60%
(with comorbidities counting toward this threshold) and a rate
freeze from April 1, 2008 through September 30, 2009.
On April 25, 2008, CMS published the proposed rule for the
inpatient rehabilitation facility prospective payment system, or
IRF-PPS, for FY 2009. The proposed rule includes
changes to the
IRF-PPS
regulations designed to implement portions of the SCHIP
Extension Act. In particular, the patient classification
criteria compliance threshold is established at 60% (with
comorbidities counting toward this threshold). In the preamble
discussion to the proposed rule, CMS notes that the
Presidents FY 2009 budget proposes to repeal that portion
of the SCHIP Extension Act that requires the compliance rate to
be set no higher than 60% for cost reporting periods beginning
on or after July 1, 2006. For this reason and others, CMS
proposes to set the compliance rate at the highest level
possible within current statutory authority.
In order to comply with Medicare inpatient rehabilitation
facility certification criteria, it may be necessary for us to
implement more restrictive admissions policies at our inpatient
rehabilitation facilities and not admit patients whose diagnoses
fall outside the specified conditions. Such policies may result
in a reduction of patient volume at these hospitals and, as a
result, may reduce our future net operating revenues and
profitability. See Business Government
Regulations Regulatory Changes Medicare
Reimbursement of Inpatient Rehabilitation Facility
Services.
Implementation
of annual caps that limit the amount that can be paid for
outpatient therapy services rendered to any Medicare beneficiary
may reduce our future net operating revenues and
profitability.
Our outpatient rehabilitation clinics receive payments from the
Medicare program under a fee schedule. Congress has established
annual caps that limit the amount that can be paid (including
deductible and coinsurance amounts) for outpatient therapy
services rendered to any Medicare beneficiary. These annual caps
were to go into effect on January 1, 1999; however, after
their adoption, Congress imposed a moratorium on the caps
through 2002, and then re-imposed the moratorium for 2004 and
2005. Congress allowed the therapy caps to go back into effect
on January 1, 2006. Effective January 1, 2008, the
annual limit on outpatient therapy services is $1,810 for
combined physical and speech language pathology services and
$1,810 for occupational therapy services. As directed by
Congress in the Deficit Reduction Act of 2005, CMS implemented
an exception process for therapy expenses incurred in 2006.
Under this process, a Medicare enrollee (or person acting on
behalf of the Medicare enrollee) was able to request an
exception from the therapy caps if the provision of therapy
services was deemed to be medically necessary. Therapy cap
exceptions were available automatically for certain conditions
and on a
case-by-case
basis upon submission of documentation of medical necessity. The
SCHIP Extension Act extended the cap exception process through
June 30, 2008. The Medicare Improvements for Patients and
Providers Act of 2008 further extended the caps exceptions
process through December 31, 2009. Elimination of the
therapy cap exceptions may reduce our future net operating
revenues and profitability.
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Expiration of the exception process may reduce our future net
operating revenues and profitability. For both the year ended
December 31, 2007 and the three months ended March 31,
2008, we received approximately 9.5% of our outpatient
rehabilitation net operating revenues from Medicare. See
Business Government Regulations
Regulatory Changes Medicare Reimbursement of
Outpatient Rehabilitation Services.
Future
acquisitions may use significant resources, may be unsuccessful
and could expose us to unforeseen liabilities.
As part of our growth strategy, we may pursue acquisitions of
specialty hospitals, outpatient rehabilitation clinics and other
related health care facilities and services, such as our
acquisition of HealthSouth Corporations outpatient
rehabilitation division. These acquisitions may involve
significant cash expenditures, debt incurrence, additional
operating losses and expenses that could have a material adverse
effect on our financial condition and results of operations.
Acquisitions involve numerous risks, including:
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difficulty and expense of integrating acquired personnel into
our business;
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diversion of managements time from existing operations;
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potential loss of key employees or customers of acquired
companies; and
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assumption of the liabilities and exposure to unforeseen
liabilities of acquired companies, including liabilities for
failure to comply with healthcare regulations.
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We cannot assure you that we will succeed in obtaining financing
for acquisitions at a reasonable cost, or that such financing
will not contain restrictive covenants that limit our operating
flexibility. We also may be unable to operate acquired hospitals
and outpatient rehabilitation clinics profitably or succeed in
achieving improvements in their financial performance.
Future
cost containment initiatives undertaken by private third-party
payors may limit our future net operating revenues and
profitability.
Initiatives undertaken by major insurers and managed care
companies to contain healthcare costs affect the profitability
of our specialty hospitals and outpatient rehabilitation
clinics. These payors attempt to control healthcare costs by
contracting with hospitals and other healthcare providers to
obtain services on a discounted basis. We believe that this
trend may continue and may limit reimbursements for healthcare
services. If insurers or managed care companies from whom we
receive substantial payments reduce the amounts they pay for
services, our profit margins may decline, or we may lose
patients if we choose not to renew our contracts with these
insurers at lower rates.
If we
fail to maintain established relationships with the physicians
in the areas we serve, our net operating revenues may
decrease.
Our success is, in part, dependent upon the admissions and
referral practices of the physicians in the communities our
hospitals and our outpatient rehabilitation clinics serve, and
our ability to maintain good relations with these physicians.
Physicians referring patients to our hospitals and clinics are
generally not our employees and, in many of the local areas that
we serve, most physicians have admitting privileges at other
hospitals and are free to refer their patients to other
providers. If we are unable to successfully cultivate and
maintain strong relationships with these physicians, our
hospitals admissions and clinics businesses may
decrease, and our net operating revenues may decline.
Changes
in federal or state law limiting or prohibiting certain
physician referrals may preclude physicians from investing in
our hospitals or referring to hospitals in which they already
own an interest.
The federal self referral law, commonly referred to as the
Stark Law, 42 U.S.C. § 1395nn,
prohibits a physician who has a financial relationship with an
entity from referring his or her Medicare or Medicaid patients
to that entity for certain designated health services, including
inpatient and outpatient hospital services. Under current law,
physicians who have a direct or indirect ownership interest in a
hospital will not be prohibited from referring to the hospital
because of the applicability of the whole hospital
exception to the Stark Law. Recently, various bills
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introduced in Congress have included provisions that further
restrict physician ownership in hospitals to which the physician
refers patients. Typically, these provisions would limit the
Stark Laws whole hospital exception to
existing hospitals with physician ownership. Physicians with
ownership in new hospitals would be prohibited from
referring, and certain requirements and limitations would be
placed on existing hospitals with physician ownership, such as
limiting the expansion of any such hospital and limiting the
amount and terms of physician investment. Furthermore,
initiatives are underway in some states to restrict physician
referrals to physician-owned hospitals. There can be no
assurance that new legislation or regulation prohibiting or
limiting physician referrals to physician-owned hospitals will
not be successfully enacted in the future. If such federal or
state laws are adopted, among other outcomes, physicians who
have invested in, or considered investing in, our hospitals
could be precluded from referring to, investing in or continuing
to be physician owners of a hospital, or expansion of our
physician-owned hospitals may be limited, and the revenues,
profitability and overall financial performance of our hospitals
may be negatively affected.
Shortages
in qualified nurses or therapists could increase our operating
costs significantly.
Our specialty hospitals are highly dependent on nurses for
patient care and our outpatient rehabilitation clinics are
highly dependant on therapists for patient care. The
availability of qualified nurses and therapists nationwide has
declined in recent years, and the salaries for nurses and
therapists have risen accordingly. We cannot assure you we will
be able to attract and retain qualified nurses or therapists in
the future. Additionally, the cost of attracting and retaining
nurses and therapists may be higher than we anticipate, and as a
result, our profitability could decline.
Competition
may limit our ability to acquire hospitals and clinics and
adversely affect our growth.
We have historically faced limited competition in acquiring
specialty hospitals and outpatient rehabilitation clinics, but
we may face heightened competition in the future. Our
competitors may acquire or seek to acquire many of the hospitals
and clinics that would be suitable acquisition candidates for
us. This increased competition could hamper our ability to
acquire companies, or such increased competition may cause us to
pay a higher price than we would otherwise pay in a less
competitive environment. Increased competition from both
strategic and financial buyers could limit our ability to grow
by acquisitions or make our cost of acquisitions higher and
therefore decrease our profitability.
If we
fail to compete effectively with other hospitals, clinics and
healthcare providers in our local areas, our net operating
revenues and profitability may decline.
The healthcare business is highly competitive, and we compete
with other hospitals, rehabilitation clinics and other
healthcare providers for patients. If we are unable to compete
effectively in the specialty hospital and outpatient
rehabilitation businesses, our net operating revenues and
profitability may decline. Many of our specialty hospitals
operate in geographic areas where we compete with at least one
other hospital that provides similar services. Our outpatient
rehabilitation clinics face competition from a variety of local
and national outpatient rehabilitation providers. Other
outpatient rehabilitation clinics in local areas we serve may
have greater name recognition and longer operating histories
than our clinics. The managers of these clinics may also have
stronger relationships with physicians in their communities,
which could give them a competitive advantage for patient
referrals.
Our
business operations could be significantly disrupted if we lose
key members of our management team.
Our success depends to a significant degree upon the continued
contributions of our senior officers and key employees, both
individually and as a group. Our future performance will be
substantially dependent in particular on our ability to retain
and motivate four key employees, Rocco A. Ortenzio, Robert A.
Ortenzio, Patricia A. Rice and Martin F. Jackson. We currently
have an employment agreement in place with each of
Messrs. Rocco and Robert Ortenzio and Ms. Rice and a
change in control agreement with Mr. Jackson. Each of these
individuals also has a significant equity ownership in us. We
have no reason to believe that we will lose the services of any
of these individuals in the foreseeable future; however, we
currently have no effective replacement for any of these
individuals due to their experience, reputation in the industry
and special role in our operations. The loss of the
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services of any of these individuals would disrupt significant
aspects of our business, could prevent us from successfully
executing our business strategy and could have a material
adverse affect on our results of operations.
Significant
legal actions as well as the cost and possible lack of available
insurance could subject us to substantial uninsured
liabilities.
In recent years, physicians, hospitals and other healthcare
providers have become subject to an increasing number of legal
actions alleging malpractice, product liability or related legal
theories. Many of these actions involve large claims and
significant defense costs. We are also subject to lawsuits under
federal and state whistleblower statutes designed to combat
fraud and abuse in the healthcare industry. These whistleblower
lawsuits are not covered by insurance and can involve
significant monetary damages and award bounties to private
plaintiffs who successfully bring the suits.
We maintain professional malpractice liability insurance and
general liability insurance coverages under a combination of
policies with a total annual aggregate limit of
$30.0 million. Our insurance for the professional liability
coverage is written on a claims-made basis and our
commercial general liability coverage is maintained on an
occurrence basis. These coverages are generally
subject to a self-insured retention of $2.0 million per
medical incident for professional liability claims and
$2.0 million per occurrence for general liability claims.
In recent years, many insurance underwriters have become more
selective in the insurance limits and types of coverage they
will provide as a result of rising settlement costs. In some
instances, insurance underwriters will no longer underwrite risk
in certain states that have a history of high medical
malpractice awards. There can be no assurance that in the
future, malpractice insurance will be available in certain
states nor that we will be able to obtain insurance coverage at
a reasonable price. Since our professional liability insurance
is on a claims-made basis, any failure to obtain malpractice
insurance in any state in the future would increase our exposure
not only to claims arising in the future in such state but also
to claims arising from injuries that may have already occurred
but which had not been reported during the period in which we
previously had insurance coverage in that state. In addition,
our insurance coverage does not cover punitive damages and may
not cover all claims against us. See Business
Government Regulations Other Healthcare
Regulations.
Concentration
of ownership among our existing executives, directors and
principal stockholders may prevent new investors from
influencing significant corporate decisions.
Upon completion of this offering, Welsh Carson and Thoma Cressey
will beneficially own
approximately %
and %,
respectively, of our outstanding common stock, and our
executives, directors and principal stockholders, including
Welsh Carson and Thoma Cressey, will beneficially own, in the
aggregate,
approximately %
of our outstanding common stock. As a result, these stockholders
will be able to exercise influence over all matters requiring
stockholder approval, including the election of directors,
amendment of our certificate of incorporation and approval of
significant corporate transactions and will have significant
control over our management and policies. The directors elected
by these stockholders will be able to make decisions affecting
our capital structure, including decisions to issue additional
capital stock, implement stock repurchase programs and incur
indebtedness. This influence may have the effect of deterring
hostile takeovers, delaying or preventing changes in control or
changes in management, or limiting the ability of our other
stockholders to approve transactions that they may deem to be in
their best interest.
Our
substantial indebtedness may limit the amount of cash flow
available to invest in the ongoing needs of our business, and
our senior secured credit facility requires Select to comply
with certain financial covenants, the default of which may
result in the acceleration of certain of our
indebtedness.
We have a substantial amount of indebtedness. As of
March 31, 2008, we had approximately $1,826.4 million
of total indebtedness.
Our indebtedness could have important consequences to you. For
example, it:
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requires us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, reducing the
availability of our cash flow to fund working capital, capital
expenditures, development activity, acquisitions and other
general corporate purposes;
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limits our flexibility in planning for, or reacting to, changes
in our business or the industries in which we operate;
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makes us more vulnerable to increases in interest rates, as
borrowings under our senior secured credit facility and the
senior floating rate notes, are at variable rates;
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limits our ability to obtain additional financing in the future
for working capital or other purposes, such as raising the funds
necessary to repurchase all notes tendered to us upon the
occurrence of specified changes of control in our
ownership; or
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places us at a competitive disadvantage compared to our
competitors that have less indebtedness.
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Our senior secured credit facility also requires Select to
maintain certain interest expense coverage ratios and leverage
ratios which become more restrictive over time. Selects
ability to comply with these ratios in the future may be
affected by events beyond its control. Inability to comply with
the required financial ratios could result in a default under
our senior secured credit facility. In the event of any default
under our senior secured credit facility, the lenders under our
senior secured credit facility could elect to terminate
borrowing commitments and declare all borrowings outstanding,
together with accrued and unpaid interest and other fees, to be
immediately due and payable. Any default under our senior
secured credit facility that results in the acceleration of the
outstanding indebtedness under our senior secured credit
facility would also constitute an event of default under
Selects
75/8% senior
subordinated notes and the senior floating rate notes, and the
trustee or holders of each such notes could elect to declare
such notes to be immediately due and payable.
See Description of Indebtedness, Unaudited Pro
Forma Consolidated Financial Information and
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
Despite
our substantial level of indebtedness, we and our subsidiaries
may be able to incur additional indebtedness. This could further
exacerbate the risks described above.
We and our subsidiaries may be able to incur additional
indebtedness in the future. Although our senior secured credit
facility, the indentures governing each of Selects
75/8% senior
subordinated notes and the senior floating rate notes each
contain restrictions on the incurrence of additional
indebtedness, these restrictions are subject to a number of
qualifications and exceptions, and the indebtedness incurred in
compliance with these restrictions could be substantial. Also,
these restrictions do not prevent us or our subsidiaries from
incurring obligations that do not constitute indebtedness. As of
March 31, 2008, we had $80.3 million of revolving loan
availability under our senior secured credit facility (after
giving effect to $29.7 million of outstanding letters of
credit). To the extent new debt is added to our and our
subsidiaries current debt levels, the substantial leverage
risks described above would increase. See Description of
Indebtedness.
Risks
Relating to this Offering
The
price of our common stock may be volatile and you could lose all
or part of your investment.
Volatility in the market price of our common stock may prevent
you from being able to sell your shares at or above the price
you paid for your shares. The market price of our common stock
could fluctuate significantly for various reasons, which include:
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our quarterly or annual earnings or those of other companies in
our industry;
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changes in laws or regulations, or new interpretations or
applications of laws and regulations, that are applicable to our
business;
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the publics reaction to our press releases, our other
public announcements and our filings with the SEC;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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additions or departures of our senior management personnel;
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sales of common stock by our directors and executive officers;
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sales or distribution of common stock by our sponsors;
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adverse market reaction to any indebtedness we may incur or
securities we may issue in the future;
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downgrades of our stock or negative research reports published
by securities or industry analysts;
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actions by stockholders; and
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changes in general conditions in the United States and global
economies or financial markets, including those resulting from
Acts of God, war, incidents of terrorism or responses to such
events.
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In addition, in recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a
significant impact on the market price of securities issued by
many companies, including companies in our industry. The price
of our common stock could fluctuate based upon factors that have
little or nothing to do with our company, and these fluctuations
could materially reduce our stock price.
In the past, following periods of market volatility in the price
of a companys securities, security holders have often
instituted class action litigation. If the market value of our
common stock experiences adverse fluctuations and we become
involved in this type of litigation, regardless of the outcome,
we could incur substantial legal costs and our managements
attention could be diverted from the operation of our business,
causing our business to suffer.
There
is no existing market for our common stock and we do not know if
one will develop to provide you with adequate
liquidity.
There is no existing public market for our common stock. An
active market for our common stock may not develop following the
completion of this offering, or if it does develop, may not be
maintained. If an active trading market does not develop, you
may have difficulty selling any of our common stock that you
buy. The initial public offering price for the shares will be
determined by negotiations between us, the selling stockholders
and the representatives of the underwriters and may not be
indicative of prices that will prevail in the open market
following this offering. Consequently, you may not be able to
sell shares of our common stock at prices equal to or greater
than the price paid by you in this offering. In addition, our
existing officers, directors and principal stockholders will
maintain significant ownership interests in our stock following
completion of this offering, which may restrict liquidity in the
trading market for our stock.
Future
sales of our common stock, including shares purchased in this
offering, in the public market could lower our stock
price.
Sales of substantial amounts of our common stock in the public
market following this offering by our existing stockholders,
upon the exercise of outstanding stock options or by persons who
acquire shares in this offering may adversely affect the market
price of our common stock. Such sales could also create public
perception of difficulties or problems with our business. These
sales might also make it more difficult for us to sell
securities in the future at a time and price that we deem
necessary or appropriate.
Upon the completion of this offering, we will have
outstanding shares
of common stock, of which:
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shares
are shares that we and the selling stockholders are selling in
this offering and, unless purchased by affiliates, may be resold
in the public market immediately after this offering; and
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shares
will be restricted securities, as defined in
Rule 144 under the Securities Act, and eligible for sale in
the public market pursuant to the provisions of Rule 144,
of
which shares
are subject to
lock-up
agreements and will become available for resale in the public
market beginning 180 days after the date of this prospectus.
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With limited exceptions, as described under the caption
Underwriters, these
lock-up
agreements prohibit a stockholder from selling, contracting to
sell or otherwise disposing of any common stock or securities
that are convertible or exchangeable for common stock or
entering into any arrangement that transfers the economic
consequences of ownership of our common stock for at least
180 days from the date of this prospectus,
although
may,
in
sole discretion and at any time without notice, release all or
any portion of the securities subject to these
lock-up
agreements.
has advised us
that
has no present
23
intent or arrangement to release any shares subject to a
lock-up and
will consider the release of any
lock-up on a
case-by-case
basis. Upon a request to release any shares subject to a
lock-up,
would consider the particular circumstances surrounding the
request including, but not limited to, the length of time before
the lock-up
expires, the number of shares requested to be released, reasons
for the request, the possible impact on the market for our
common stock and whether the holder of our shares requesting the
release is an officer, director or other affiliate of ours. As a
result of these
lock-up
agreements, notwithstanding earlier eligibility for sale under
the provisions of Rule 144, none of these shares may be
sold until at least 180 days after the date of this
prospectus.
At our request, the underwriters have reserved up
to shares,
or % of our common stock offered by
this prospectus, for sale under a directed share program to our
officers, directors, employees, business associates and other
individuals who have family or personal relationships with our
employees. If any of our current directors or executive officers
subject to
lock-up
agreements purchase these reserved shares, the shares will be
restricted from sale under the
lock-up
agreements. If any of these shares are purchased by other
persons, such shares will not be subject to
lock-up
agreements.
As restrictions on resale end, our stock price could drop
significantly if the holders of these restricted shares sell
them or are perceived by the market as intending to sell them.
These sales might also make it more difficult for us to sell
securities in the future at a time and at a price that we deem
appropriate.
You
will suffer immediate and substantial dilution.
The initial public offering price per share is substantially
higher than the pro forma net tangible book value per share
immediately after the offering. As a result, you will pay a
price per share that substantially exceeds the book value of our
assets after subtracting our liabilities. Assuming an offering
price of $ per share, you will
incur immediate and substantial dilution in the amount of
$ per share. If the underwriters
exercise their over-allotment option, or if outstanding options
to purchase our common stock are exercised, you will experience
additional dilution. Any future equity issuances will result in
even further dilution to holders of our common stock.
Certain
provisions of Delaware law and our certificate of incorporation
and bylaws that will be in effect after this offering may deter
takeover attempts, which may limit the opportunity of our
stockholders to sell their shares at a favorable price, and may
make it more difficult for our stockholders to remove our board
of directors and management.
Provisions in our certificate of incorporation and bylaws, as
they will be in effect upon the closing of this offering, may
have the effect of delaying or preventing a change of control or
changes in our management. These provisions include the
following:
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prohibition on stockholder action through written consents;
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a requirement that special meetings of stockholders be called
only by our board of directors;
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advance notice requirements for stockholder proposals and
nominations;
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availability of blank check preferred stock;
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establish a classified board of directors so that not all
members of our board of directors are elected at one time;
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the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors or
due to the resignation or departure of an existing board member;
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the prohibition of cumulative voting in the election of
directors, which would otherwise allow less than a majority of
stockholders to elect director candidates;
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the ability of our board of directors to alter our bylaws
without obtaining stockholder approval;
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limitations on the removal of directors; and
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the required approval of at least
662/3%
of the shares entitled to vote at an election of directors to
adopt, amend or repeal our bylaws or repeal the provisions of
our amended and restated certificate of incorporation
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24
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regarding the election and removal of directors and the
inability of stockholders to take action by written consent in
lieu of a meeting.
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In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit large
stockholders, particularly those owning 15% or more of our
outstanding voting stock, from merging or combining with us.
These provisions in our certificate of incorporation and bylaws
and under Delaware law could discourage potential takeover
attempts, could reduce the price that investors are willing to
pay for shares of our common stock in the future and could
potentially result in the market price being lower than they
would without these provisions.
Although no shares of preferred stock will be outstanding upon
the completion of this offering and although we have no present
plans to issue any preferred stock, our certificate of
incorporation authorizes the board of directors to issue up
to shares
of preferred stock. The preferred stock may be issued in one or
more series, the terms of which will be determined at the time
of issuance by our board of directors without further action by
the stockholders. These terms may include voting rights,
including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of
any preferred stock could diminish the rights of holders of our
common stock and, therefore, could reduce the value of our
common stock. In addition, specific rights granted to future
holders of preferred stock could be used to restrict our ability
to merge with, or sell assets to, a third party. The ability of
our board of directors to issue preferred stock and the
foregoing anti-takeover provisions may prevent or frustrate
attempts by a third party to acquire control of our company,
even if some of our stockholders consider such change of control
to be beneficial. See Description of Capital Stock.
Since
we do not expect to pay any dividends for the foreseeable
future, investors in this offering may be forced to sell their
stock in order to realize a return on their
investment.
We do not anticipate that we will pay any dividends to holders
of our common stock for the foreseeable future. Any payment of
cash dividends will be at the discretion of our board of
directors and will depend on our financial condition, capital
requirements, legal requirements, earnings and other factors.
Our ability to pay dividends is restricted by the terms of our
senior secured credit facilities and might be restricted by the
terms of any indebtedness that we incur in the future.
Consequently, you should not rely on dividends in order to
receive a return on your investment. See Dividend
Policy.
25
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements. These
statements relate to future events or our future financial
performance. We have attempted to identify forward-looking
statements by terminology including anticipates,
believes, can, continue,
could, estimates, expects,
intends, may, plans,
potential, predicts, should,
or will or the negative of these terms or other
comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties, and other
factors, including those discussed under Risk
Factors. The following factors, among others, could cause
our actual results and performance to differ materially from the
results and performance projected in, or implied by, the
forward-looking statements:
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additional changes in government reimbursement for our services
may result in a reduction in net operating revenues, an increase
in costs and a reduction in profitability;
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the failure of our long term acute care hospitals to maintain
their status as such may cause our net operating revenues and
profitability to decline;
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the failure of our facilities operated as hospitals within
hospitals to qualify as hospitals separate from their host
hospitals may cause our net operating revenues and profitability
to decline;
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implementation of modifications to the admissions policies for
our inpatient rehabilitation facilities, as required to achieve
compliance with Medicare guidelines, may result in a loss of
patient volume at these hospitals and, as a result, may reduce
our future net operating revenues and profitability;
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a government investigation or assertion that we have violated
applicable regulations may result in sanctions or reputational
harm and increased costs;
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integration of acquired operations (such as the outpatient
rehabilitation division of HealthSouth Corporation) and future
acquisitions may prove difficult or unsuccessful, use
significant resources or expose us to unforeseen liabilities;
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private third-party payors for our services may undertake future
cost containment initiatives that limit our future net operating
revenues and profitability;
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the failure to maintain established relationships with the
physicians in the areas we serve could reduce our net operating
revenues and profitability;
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shortages in qualified nurses or therapists could increase our
operating costs significantly;
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competition may limit our ability to grow and result in a
decrease in our net operating revenues and profitability;
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the loss of key members of our management team could
significantly disrupt our operations;
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the effect of claims asserted against us or lack of adequate
available insurance could subject us to substantial uninsured
liabilities;
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the ability to obtain any necessary or desired waiver or
amendment from our existing lenders may be difficult due to the
current uncertainty in the credit markets;
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concentration of ownership among our existing executives,
directors and principal stockholders may prevent new investors
from influencing significant corporate decisions; and
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other factors discussed under the headings Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations, and
Business.
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Although we believe that the expectations reflected in the
forward-looking statements are reasonable based on our current
knowledge of our business and operations, we cannot guarantee
future results, levels of activity, performance or achievements.
You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
We assume no obligation to provide revisions to any
forward-looking statements should circumstances change.
26
USE OF
PROCEEDS
We estimate that the net proceeds to us from this offering will
be approximately $ million,
assuming an initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus, and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us. Each $1.00
increase or decrease in the assumed initial public offering
price of $ per share would
increase or decrease, as applicable, the net proceeds to us by
approximately $ , assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. If the underwriters
option to purchase additional shares in this offering is
exercised in full, we estimate that our net proceeds will be
approximately $ .
The selling stockholders will receive
$ million in proceeds from
their sale
of shares
of common stock in the offering. We will not receive any
proceeds from the sale of shares by the selling stockholders.
The number of shares offered by the selling stockholders
includes shares
of common stock into which the preferred stock held by them will
convert immediately prior to the consummation of the offering.
See Principal and Selling Stockholders and
Underwriters.
We intend to use the net proceeds of this offering as follows:
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To repay approximately
$ million of loans
outstanding under our senior secured credit facilities, and any
related prepayment costs. The average interest rate for the year
ended December 31, 2007 of our indebtedness under our
senior secured credit facilities was 6.9%. Our term loan
facility matures on February 24, 2012. The revolving loan
facility terminates on February 24, 2011. JPMorgan Chase
Bank, N.A., an affiliate of J.P. Morgan Securities Inc.,
Wachovia Bank, National Association, an affiliate of Wachovia
Capital Markets, LLC, and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are lenders under our
senior secured credit facilities and therefore affiliates of
these underwriters may each receive more than 10% of the entire
net proceeds from this offering, including proceeds from the
sale of shares by the selling stockholders. See
Underwriters.
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To make payments under the Long Term Cash Incentive Plan in the
amount of approximately
$ million, which will be
recognized as an expense in the quarter in which the offering
occurs. We expect approximately
$ will be paid to Rocco A.
Ortenzio, approximately $ will be
paid to Robert A. Ortenzio, approximately
$ will be paid to Patricia A. Rice,
approximately $ will be paid to
Martin F. Jackson, approximately
$ will be paid to S. Frank Fritsch,
approximately $ will be paid to
David W. Cross, approximately
$ will be paid to James J. Talalai
and approximately $ will be paid
to Michael E. Tarvin.
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To pay approximately $ to the
holders of our preferred stock who are not selling stockholders
in this offering in payment for a portion of the value of their
preferred shares.
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To reimburse the selling stockholders approximately
$ for the underwriting discount on
the shares sold by them in this offering, which will be
recognized as an expense in the quarter in which the offering
occurs.
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Any remaining net proceeds will be used for general corporate
purposes.
27
DIVIDEND
POLICY
Since its formation, Holdings has not declared or paid cash
dividends on its common stock. Any payment of cash dividends on
our common stock in the future will be at the discretion of our
board of directors and will depend upon our results of
operations, earnings, capital requirements, financial condition,
future prospects, contractual restrictions and other factors
deemed relevant by our board of directors. In addition, our
ability to declare and pay dividends is restricted by covenants
in our senior secured credit facility and the indentures
governing Selects
75/8% senior
subordinated notes and the senior floating rate notes. We
currently intend to retain any future earnings to fund the
operation, development and expansion of our business and repay
outstanding indebtedness, and therefore we do not anticipate
paying any cash dividends in the foreseeable future.
28
CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2008:
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on an actual basis; and
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on a pro forma basis to give effect to the conversion of all
shares of our issued and outstanding preferred stock
into shares
of common stock immediately prior to the consummation of the
offering based upon an assumed public offering price of
$ per share, the midpoint of the
range set forth on the cover page of this prospectus and the
right to receive $ in cash upon
the consummation of this offering;
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on a pro forma as adjusted basis to give effect to (1) the
sale of shares of common stock in this offering at an assumed
initial public offering price of $
per share, which is the midpoint of the range listed on the
cover page of this prospectus, and after deducting underwriting
discounts and commissions and estimated fees and expenses
payable by us, (2) the conversion of all shares of our
issued and outstanding preferred stock
into shares
of common stock immediately prior to the consummation of the
offering based upon an assumed public offering price of
$ per share, the midpoint of the
range set forth on the cover page of this prospectus and the
payment of $ in cash upon
consummation of this offering, and (3) the application of
the net proceeds of this offering as described under Use
of Proceeds, as if the events had occurred on
March 31, 2008.
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You should read this information in conjunction with
Prospectus Summary The Offering,
Use of Proceeds, Selected Historical
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, and with our consolidated financial statements
and related notes included elsewhere in this prospectus.
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As of March 31, 2008
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Pro
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Pro Forma As
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Actual
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Forma
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Adjusted(4)
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Cash and cash equivalents
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$
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8,180
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$
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$
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Debt:
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Senior floating rate notes
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175,000
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10% senior subordinated notes due
2015(1)
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134,465
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Revolving credit
facility(2)
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190,000
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Term loan
facility(3)
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658,718
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75/8% senior
subordinated notes due 2015
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660,000
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Other debt
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8,181
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Total debt
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1,826,364
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Preferred stock
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496,983
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Total stockholders equity
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(174,203
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Total capitalization
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$
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2,149,144
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$
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$
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(1)
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Reflects the balance sheet
liability of our 10% senior subordinated notes calculated
in accordance with GAAP. The balance sheet liability so
reflected is less than the $150.0 million aggregate
principal amount of such notes because such notes were issued
with original issue discount. The remaining unamortized original
issue discount is $15.5 million at March 31, 2008.
Interest on our 10% senior subordinated notes accrues on
the full principal amount thereof, and we will be obligated to
repay the full principal amount thereof at maturity or upon any
mandatory or voluntary prepayment thereof. On any interest
payment date on or after February 24, 2010, Holdings will
be obligated to pay an amount of accrued original issue discount
on the 10% senior subordinated notes if necessary to ensure that
the notes will not be considered applicable high yield
discount obligations within the meaning of the Internal
Reserve Code of 1986, as amended. The $150.0 million
aggregate principal payable at maturity on our 10% senior
subordinated notes would be reduced by prior payments of accrued
original issue discount.
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(2)
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The revolving credit facility is a
part of our senior secured credit facility and provides for
borrowings of up to $300.0 million of which
$80.3 million was available as of March 31, 2008 for
working capital and general corporate purposes (after giving
effect to $29.7 million of outstanding letters of credit at
March 31, 2008).
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(3)
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We borrowed $680.0 million in
term loans under our existing senior secured credit facility.
Between February 24, 2005 and March 31, 2008 we repaid
approximately $21.3 million of our outstanding term loans.
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(4)
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A $1.00 increase (decrease) in the
assumed initial public offering price of
$ per share, which is the midpoint
of the range set forth on the cover page of this prospectus,
would increase (decrease) each of total stockholders
equity and total capitalization by
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
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29
DILUTION
Purchasers of shares of common stock in this offering will
experience immediate and substantial dilution in the net
tangible book value of the common stock from the initial public
offering price. Net tangible book value per share represents the
amount of our total tangible assets less our total liabilities,
divided by the number of shares of our common stock outstanding.
Dilution in net tangible book value per share represents the
difference between the amount per share that you pay in this
offering and the net tangible book value per share immediately
after this offering. Our net tangible book value (deficit) as of
March 31, 2008 was approximately
$ million, or
$ per share.
After giving effect to the sale
of shares
of our common stock in this offering at an assumed initial
public offering price of $ per
share, which is the midpoint of the range listed on the cover
page of this prospectus, the conversion of all shares of our
issued and outstanding preferred stock into shares of common
stock based upon an assumed public offering price of
$ per share, the mid point of the
range set forth on the cover page of this prospectus, and after
the deduction of estimated underwriting discounts and
commissions and estimated fees and expenses payable by us, our
pro forma net tangible book value at March 31, 2008 would
have been approximately
$ million, or
$ per share. This represents an
immediate increase in net tangible book value of
$ per share to existing
stockholders and an immediate and substantial dilution of
$ per share to new investors. The
following table illustrates this per share dilution:
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Per Share
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Assumed public offering price per share (the midpoint of the
range listed on the cover page of this prospectus)
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$
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Actual net tangible book value per share as of March 31,
2008
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$
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Increase attributable to conversion of preferred stock
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Increase per share attributable to new investors
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Pro forma net tangible book value per share after this offering
as of March 31, 2008
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$
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Dilution per share to new investors
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$
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If the underwriters exercise in full their over-allotment option
to purchase additional shares of our common stock in this
offering at the assumed initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus, the
number of shares of common stock held by existing stockholders
will be reduced
to ,
or % of the aggregate number of
shares of common stock outstanding after this offering, the
number of shares of common stock held by new investors will be
increased
to ,
or % of the aggregate number of
shares of common stock outstanding after this offering, the
increase per share attributable to new investors would be
$ ,
the pro forma net tangible book value per share after this
offering would be $ , and the
dilution per share to new investors would be
$ .
Sales
of shares
of common stock by the selling stockholders in this offering
will reduce the number of shares of common stock held by
existing stockholders
to ,
or approximately % of the total
shares of common stock outstanding after this offering, and will
increase the number of shares held by new investors
to ,
or approximately % of the total
shares of common stock outstanding after this offering.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share,
which is the midpoint of the range listed on the cover page of
this prospectus, would increase (decrease) our pro forma net
tangible book value by
$ million, the pro forma net
tangible book value per share after this offering by
$ per share, and the dilution
per share to new investors by $
per share, assuming the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
30
The following table summarizes, on the pro forma basis described
above as of March 31, 2008, after giving effect to the
conversion of shares of our issued and outstanding
preferred stock
into shares
of common stock immediately prior to the consummation of the
offering based upon as assumed offering price of
$ per share, the mid point of the
range set forth on the cover page of this prospectus, the total
number of shares of common stock purchased from us and the
selling stockholders and the total consideration and the average
price per share paid by existing holders and by investors
participating in this offering. The calculation below is based
on the assumed initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus, before
deducting estimated underwriting discounts and commissions and
estimated fees and expenses payable by us.
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Shares Purchased
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Total Consideration
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Average Price
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Number
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Percentage
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Amount
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Percentage
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per Share
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Existing holders
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$
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%
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$
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%
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$
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New investors
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%
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%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each $1.00 increase (decrease) in the assumed offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus, would
increase (decrease) total consideration paid by new investors
and total consideration paid by all stockholders by
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same, and before deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us.
The pro forma dilution information above is for illustration
purposes only. Our net tangible book value following the
completion of this offering is subject to adjustment based on
the actual initial public offering price of our shares and other
terms of this offering determined at pricing. The number of
shares of our common stock outstanding after the offering as
shown above is based on the number of shares outstanding as of
March 31, 2008. As of March 31, 2008, there were
options outstanding to purchase 4,704,175 shares of our
common stock, with exercise prices ranging from $1.00 to $2.50
per share and a weighted average exercise price of $1.91 per
share. The tables and calculations above assume that those
options have not been exercised. To the extent outstanding
options are exercised, you would experience further dilution if
the exercise price is less than our net tangible book value per
share. In addition, if we grant options, warrants, preferred
stock, or other convertible securities or rights to purchase our
common stock in the future with exercise prices below the
initial public offering price, new investors will incur
additional dilution upon exercise of such securities or rights.
31
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
You should read the following selected historical consolidated
financial data in conjunction with our consolidated financial
statements and the accompanying notes. You should also read
Managements Discussion and Analysis of Financial
Condition and Results of Operations. All of these
materials are contained elsewhere in this prospectus. The
historical financial data as of December 31, 2003, 2004,
2005, 2006 and 2007 and for the years ended December 31,
2003 and 2004, for the period from January 1 through
February 24, 2005 (Predecessor Period), for the period from
February 25 through December 31, 2005 and for the years
ended December 31, 2006 and 2007 (Successor Period) have
been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm. The selected historical consolidated financial
data as of December 31, 2006 and 2007, for the period from
January 1 through February 24, 2005, for the period from
February 25 through December 31, 2005 and for the years
ended December 31, 2006 and 2007 have been derived from our
consolidated financial information included elsewhere in this
prospectus. The selected historical consolidated financial data
as of December 31, 2003, 2004 and 2005 and for the years
ended December 31, 2003 and 2004 have been derived from our
audited consolidated financial information not included
elsewhere in this prospectus. We derived the historical
financial data as of March 31, 2008 and for the three
months ended March 31, 2007 and 2008 from our unaudited
interim consolidated financial statements, which are included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Period
|
|
|
|
Successor Period
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
through
|
|
|
|
through
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
(in thousands, except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
|
$
|
1,341,657
|
|
|
|
$
|
1,601,524
|
|
|
|
$
|
277,736
|
|
|
|
$
|
1,580,706
|
|
|
|
$
|
1,851,498
|
|
|
|
$
|
1,991,666
|
|
Operating
expenses(1)(2)
|
|
|
|
1,165,814
|
|
|
|
|
1,340,068
|
|
|
|
|
373,418
|
|
|
|
|
1,322,068
|
|
|
|
|
1,546,956
|
|
|
|
|
1,740,484
|
|
Depreciation and amortization
|
|
|
|
33,663
|
|
|
|
|
38,951
|
|
|
|
|
5,933
|
|
|
|
|
37,922
|
|
|
|
|
46,668
|
|
|
|
|
57,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
142,180
|
|
|
|
|
222,505
|
|
|
|
|
(101,615
|
)
|
|
|
|
220,716
|
|
|
|
|
257,874
|
|
|
|
|
193,885
|
|
Loss on early retirement of
debt(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger related
charges(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income from joint ventures
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
1,096
|
|
|
|
|
267
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
Interest expense,
net(5)
|
|
|
|
(24,499
|
)
|
|
|
|
(30,716
|
)
|
|
|
|
(4,128
|
)
|
|
|
|
(101,441
|
)
|
|
|
|
(130,538
|
)
|
|
|
|
(138,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority
interests and income taxes
|
|
|
|
118,505
|
|
|
|
|
192,885
|
|
|
|
|
(160,237
|
)
|
|
|
|
120,367
|
|
|
|
|
127,336
|
|
|
|
|
55,666
|
|
Minority interests in consolidated subsidiary
companies(6)
|
|
|
|
1,661
|
|
|
|
|
2,608
|
|
|
|
|
330
|
|
|
|
|
1,776
|
|
|
|
|
1,414
|
|
|
|
|
1,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
|
116,844
|
|
|
|
|
190,277
|
|
|
|
|
(160,567
|
)
|
|
|
|
118,591
|
|
|
|
|
125,922
|
|
|
|
|
54,129
|
|
Income tax expense (benefit)
|
|
|
|
46,238
|
|
|
|
|
76,551
|
|
|
|
|
(59,794
|
)
|
|
|
|
49,336
|
|
|
|
|
43,521
|
|
|
|
|
18,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
|
70,606
|
|
|
|
|
113,726
|
|
|
|
|
(100,773
|
)
|
|
|
|
69,255
|
|
|
|
|
82,401
|
|
|
|
|
35,430
|
|
Income from discontinued operations, net of tax
|
|
|
|
3,865
|
|
|
|
|
4,458
|
|
|
|
|
522
|
|
|
|
|
3,072
|
|
|
|
|
12,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
74,471
|
|
|
|
|
118,184
|
|
|
|
|
(100,251
|
)
|
|
|
|
72,327
|
|
|
|
|
94,879
|
|
|
|
|
35,430
|
|
Less: Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,519
|
|
|
|
|
22,663
|
|
|
|
|
23,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common and preferred stockholders
|
|
|
$
|
74,471
|
|
|
|
$
|
118,184
|
|
|
|
$
|
(100,251
|
)
|
|
|
$
|
48,808
|
|
|
|
$
|
72,216
|
|
|
|
$
|
11,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Period
|
|
|
|
Successor Period
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
through
|
|
|
|
through
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
(in thousands, except per share data)
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
$
|
0.72
|
|
|
|
$
|
1.11
|
|
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.23
|
|
|
|
$
|
0.30
|
|
|
|
$
|
0.05
|
|
Income from discontinued operations, net of tax
|
|
|
|
0.04
|
|
|
|
|
0.04
|
|
|
|
|
0.01
|
|
|
|
|
0.02
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
0.76
|
|
|
|
$
|
1.15
|
|
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.25
|
|
|
|
$
|
0.36
|
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
$
|
0.68
|
|
|
|
$
|
1.07
|
|
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.22
|
|
|
|
$
|
0.28
|
|
|
|
$
|
0.05
|
|
Income from discontinued operations, net of tax
|
|
|
|
0.04
|
|
|
|
|
0.04
|
|
|
|
|
0.01
|
|
|
|
|
0.02
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
0.72
|
|
|
|
$
|
1.11
|
|
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.24
|
|
|
|
$
|
0.34
|
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
97,452
|
|
|
|
|
102,165
|
|
|
|
|
102,026
|
|
|
|
|
171,330
|
|
|
|
|
180,183
|
|
|
|
|
190,286
|
|
Diluted
|
|
|
|
103,991
|
|
|
|
|
106,529
|
|
|
|
|
102,026
|
|
|
|
|
181,070
|
|
|
|
|
188,287
|
|
|
|
|
192,748
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
165,507
|
|
|
|
$
|
247,476
|
|
|
|
|
|
|
|
|
$
|
35,861
|
|
|
|
$
|
81,600
|
|
|
|
$
|
4,529
|
|
Working capital
|
|
|
|
188,380
|
|
|
|
|
313,715
|
|
|
|
|
|
|
|
|
|
77,556
|
|
|
|
|
59,468
|
|
|
|
|
14,730
|
|
Total assets
|
|
|
|
1,078,998
|
|
|
|
|
1,113,721
|
|
|
|
|
|
|
|
|
|
2,168,385
|
|
|
|
|
2,182,524
|
|
|
|
|
2,495,046
|
|
Total debt
|
|
|
|
367,503
|
|
|
|
|
354,590
|
|
|
|
|
|
|
|
|
|
1,628,889
|
|
|
|
|
1,538,503
|
|
|
|
|
1,755,635
|
|
Total stockholders equity
|
|
|
|
419,175
|
|
|
|
|
515,943
|
|
|
|
|
|
|
|
|
|
(244,658
|
)
|
|
|
|
(169,139
|
)
|
|
|
|
(165,889
|
)
|
33
|
|
|
|
|
|
|
|
|
|
|
Successor Period
|
|
|
|
For the Quarter Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Net operating revenues
|
|
$
|
466,829
|
|
|
$
|
548,278
|
|
Operating
expenses(1)(2)
|
|
|
394,800
|
|
|
|
476,537
|
|
Depreciation and amortization
|
|
|
11,704
|
|
|
|
17,397
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
60,325
|
|
|
|
54,344
|
|
Other income
|
|
|
1,173
|
|
|
|
|
|
Interest expense,
net(5)
|
|
|
(31,274
|
)
|
|
|
(36,793
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations before minority interests and income taxes
|
|
|
30,224
|
|
|
|
17,551
|
|
Minority interests in consolidated subsidiary
companies(6)
|
|
|
323
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
29,901
|
|
|
|
17,242
|
|
Income tax expense
|
|
|
12,430
|
|
|
|
8,542
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,471
|
|
|
|
8,700
|
|
Less: Preferred dividends
|
|
|
5,759
|
|
|
|
6,084
|
|
|
|
|
|
|
|
|
|
|
Net income available to common and preferred stockholders
|
|
$
|
11,712
|
|
|
$
|
2,616
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
Diluted
|
|
|
0.06
|
|
|
|
0.01
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
186,463
|
|
|
|
196,503
|
|
Diluted
|
|
|
186,463
|
|
|
|
201,997
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,536
|
|
|
$
|
8,180
|
|
Working capital
|
|
|
33,372
|
|
|
|
105,278
|
|
Total assets
|
|
|
2,192,191
|
|
|
|
2,554,414
|
|
Total debt
|
|
|
1,537,256
|
|
|
|
1,826,364
|
|
Total stockholders equity
|
|
|
(159,665
|
)
|
|
|
(174,203
|
)
|
|
|
|
(1)
|
|
Operating expenses include cost of
services, general and administrative expenses, and bad debt
expenses.
|
(2)
|
|
Includes stock compensation expense
related to the repurchase of outstanding stock options in the
Predecessor Period from January 1 through February 24,
2005, compensation expense related to restricted stock, stock
options and long term incentive compensation in the Successor
Periods from February 25 through December 31, 2005, and for
the years ended December 31, 2006 and 2007 and for the
three months ended March 31, 2007 and 2008.
|
(3)
|
|
In connection with the Merger,
Select completed tender offers for all of its
91/2% senior
subordinated notes due 2009 and all of its
71/2% senior
subordinated notes due 2013. The loss in the Predecessor Period
of January 1 through February 24, 2005 consists of the
tender premium cost of $34.8 million and the remaining
write-off of unamortized deferred financing costs of
$7.9 million.
|
(4)
|
|
As a result of the Merger, Select
incurred costs in the Predecessor Period of January 1 through
February 24, 2005 directly related to the Merger. This
included the cost of the investment advisor hired by the special
committee of Selects board of directors to evaluate the
Merger, legal and accounting fees, costs associated with the
Hart-Scott-Rodino
filing relating to the Merger, the cost associated with
purchasing a six year extended reporting period under our
directors and officers liability insurance policy and other
associated expenses.
|
(5)
|
|
Net interest equals interest
expense minus interest income.
|
(6)
|
|
Reflects interests held by other
parties in subsidiaries, limited liability companies and limited
partnerships owned and controlled by us.
|
34
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Our consolidated financial statements are included elsewhere in
this prospectus. The unaudited pro forma consolidated financial
information presented here should be read together with these
financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
We adjusted our historical consolidated balance sheet at
March 31, 2008 and our historical consolidated statement of
operations for the year ended December 31, 2007 and the
three months ended March 31, 2008 to reflect (1) the
issuance
of shares
of our common stock in this offering at an assumed initial
public offering price of $ per
share, which is the midpoint of the range listed on the cover
page of this prospectus, (2) the conversion of
all shares of our issued and outstanding preferred stock
into shares
of common stock immediately prior to the consummation of this
offering based upon an assumed public offering price of
$
per share, the midpoint of the range set forth on the cover page
of this prospectus and the payment of
$ in cash upon consummation of
this offering and (3) the application of the estimated net
proceeds from this offering as if these events had occurred on
March 31, 2008 for the unaudited pro forma consolidated
balance sheet and at January 1, 2007 for the respective
unaudited pro forma consolidated statement of operations. The
pro forma consolidated financial statement of operations
excludes non-recurring charges directly attributable to this
offering, including $ million (net
of tax) related to payments under the Long Term Cash Investment
Plan and $ million (net of tax)
related to reimbursing the selling stockholders for the
underwriting discounts and commissions incurred on shares sold
by them in this offering.
Certain information normally included in financial statements
prepared in accordance with generally accepted accounting
principles has been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
The pro forma consolidated balance sheet and pro forma
consolidated statements of operations are not necessarily
indicative of our financial position and results that would have
occurred had the above events been completed on the above
indicated dates and should not be construed as being
representative of future results of operations.
35
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
Adjustments
|
|
|
Pro forma
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
for
|
|
|
as
|
|
|
|
Historical
|
|
|
Conversion
|
|
|
Pro forma
|
|
|
Offering
|
|
|
Adjusted
|
|
|
|
(in thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,180
|
|
|
|
|
|
|
$
|
8,180
|
|
|
|
|
|
|
$
|
8,180
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
330,637
|
|
|
|
|
|
|
|
330,637
|
|
|
|
|
|
|
|
330,637
|
|
Current deferred tax asset
|
|
|
43,296
|
|
|
|
|
|
|
|
43,296
|
|
|
|
|
|
|
|
43,296
|
|
Prepaid income taxes
|
|
|
7,093
|
|
|
|
|
|
|
|
7,093
|
|
|
|
|
(2)
|
|
|
|
|
Other current assets
|
|
|
28,864
|
|
|
|
|
|
|
|
28,864
|
|
|
|
|
|
|
|
28,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
418,070
|
|
|
|
|
|
|
|
418,070
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
486,337
|
|
|
|
|
|
|
|
486,337
|
|
|
|
|
|
|
|
486,337
|
|
Goodwill
|
|
|
1,503,263
|
|
|
|
|
|
|
|
1,503,263
|
|
|
|
|
|
|
|
1,503,263
|
|
Other identifiable intangibles
|
|
|
78,435
|
|
|
|
|
|
|
|
78,435
|
|
|
|
|
|
|
|
78,435
|
|
Assets held for sale
|
|
|
13,696
|
|
|
|
|
|
|
|
13,696
|
|
|
|
|
|
|
|
13,696
|
|
Other assets
|
|
|
54,613
|
|
|
|
|
|
|
|
54,613
|
|
|
|
|
|
|
|
54,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,554,414
|
|
|
|
|
|
|
$
|
2,554,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
$
|
5,630
|
|
|
|
|
|
|
$
|
5,630
|
|
|
|
|
|
|
$
|
5,630
|
|
Current portion of long term debt and notes payable
|
|
|
9,795
|
|
|
|
|
|
|
|
9,795
|
|
|
|
|
|
|
|
9,795
|
|
Accounts payable
|
|
|
89,765
|
|
|
|
|
|
|
|
89,765
|
|
|
|
|
|
|
|
89,765
|
|
Accrued payroll
|
|
|
70,229
|
|
|
|
|
|
|
|
70,229
|
|
|
|
|
|
|
|
70,229
|
|
Accrued vacation
|
|
|
34,853
|
|
|
|
|
|
|
|
34,853
|
|
|
|
|
|
|
|
34,853
|
|
Accrued interest
|
|
|
16,565
|
|
|
|
|
|
|
|
16,565
|
|
|
|
|
|
|
|
16,565
|
|
Accrued restructuring
|
|
|
12,914
|
|
|
|
|
|
|
|
12,914
|
|
|
|
|
|
|
|
12,914
|
|
Accrued other
|
|
|
68,134
|
|
|
|
|
|
|
|
68,134
|
|
|
|
|
|
|
|
68,134
|
|
Due to third party payors
|
|
|
4,907
|
|
|
|
|
|
|
|
4,907
|
|
|
|
|
|
|
|
4,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
312,792
|
|
|
|
|
|
|
|
312,792
|
|
|
|
|
|
|
|
312,792
|
|
Long term debt, net of current portion
|
|
|
1,816,569
|
|
|
|
|
|
|
|
1,816,569
|
|
|
|
|
(2)
|
|
|
|
|
Non-current deferred tax liability
|
|
|
14,934
|
|
|
|
|
|
|
|
14,934
|
|
|
|
|
|
|
|
14,934
|
|
Other non-current liabilities
|
|
|
82,144
|
|
|
|
|
|
|
|
82,144
|
|
|
|
|
|
|
|
82,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,226,439
|
|
|
|
|
|
|
|
2,226,439
|
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary companies
|
|
|
5,195
|
|
|
|
|
|
|
|
5,195
|
|
|
|
|
|
|
|
5,195
|
|
Preferred stock
|
|
|
496,983
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
(2)
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
205
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
(2)
|
|
|
|
|
Capital in excess of par
|
|
|
(290,567
|
)
|
|
|
|
(1)
|
|
|
|
|
|
|
|
(2)
|
|
|
|
|
Retained earnings
|
|
|
133,332
|
|
|
|
|
|
|
|
133,332
|
|
|
|
|
(2)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(17,173
|
)
|
|
|
|
|
|
|
(17,173
|
)
|
|
|
|
|
|
|
(17,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
(174,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
2,554,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(footnotes begin on page 40)
36
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
for
|
|
|
As
|
|
|
|
Historical
|
|
|
Conversion
|
|
|
Pro Forma
|
|
|
Offering
|
|
|
Adjusted
|
|
|
|
(in thousands, except per share data)
|
|
|
Net operating revenues
|
|
$
|
1,991,666
|
|
|
|
|
|
|
$
|
1,991,666
|
|
|
|
|
|
|
$
|
1,991,666
|
|
Operating expenses
|
|
|
1,740,484
|
|
|
|
|
|
|
|
1,740,484
|
|
|
|
|
|
|
|
1,740,484
|
|
Depreciation and amortization
|
|
|
57,297
|
|
|
|
|
|
|
|
57,297
|
|
|
|
|
|
|
|
57,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
1,797,781
|
|
|
|
|
|
|
|
1,797,781
|
|
|
|
|
|
|
|
1,797,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
193,885
|
|
|
|
|
|
|
|
193,885
|
|
|
|
|
|
|
|
193,885
|
|
Other expense
|
|
|
(167
|
)
|
|
|
|
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(138,052
|
)
|
|
|
|
|
|
|
(138,052
|
)
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests and income taxes
|
|
|
55,666
|
|
|
|
|
|
|
|
55,666
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiary companies
|
|
|
1,537
|
|
|
|
|
|
|
|
1,537
|
|
|
|
|
|
|
|
1,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
54,129
|
|
|
|
|
|
|
|
54,129
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
18,699
|
|
|
|
|
|
|
|
18,699
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
35,430
|
|
|
|
|
|
|
|
35,430
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividends
|
|
|
23,807
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to stockholders
|
|
$
|
11,623
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.05
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Weighted average basic common shares outstanding
|
|
|
190,286
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
Diluted income per common share
|
|
$
|
0.05
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Weighted average diluted common shares outstanding
|
|
|
192,748
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
(footnotes begin on page 40)
37
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
for
|
|
|
As
|
|
|
|
Historical
|
|
|
Conversion
|
|
|
Pro Forma
|
|
|
Offering
|
|
|
Adjusted
|
|
|
|
(in thousands, except per share data)
|
|
|
Net operating revenues
|
|
$
|
548,278
|
|
|
|
|
|
|
$
|
548,278
|
|
|
|
|
|
|
$
|
548,278
|
|
Operating expenses
|
|
|
476,537
|
|
|
|
|
|
|
|
476,537
|
|
|
|
|
|
|
|
476,537
|
|
Depreciation and amortization
|
|
|
17,397
|
|
|
|
|
|
|
|
17,397
|
|
|
|
|
|
|
|
17,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
493,934
|
|
|
|
|
|
|
|
493,934
|
|
|
|
|
|
|
|
493,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
54,344
|
|
|
|
|
|
|
|
54,344
|
|
|
|
|
|
|
|
54,344
|
|
Interest expense, net
|
|
|
(36,793
|
)
|
|
|
|
|
|
|
(36,793
|
)
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests and income taxes
|
|
|
17,551
|
|
|
|
|
|
|
|
17,551
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated subsidiary companies
|
|
|
309
|
|
|
|
|
|
|
|
309
|
|
|
|
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,242
|
|
|
|
|
|
|
|
17,242
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
8,542
|
|
|
|
|
|
|
|
8,542
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
8,700
|
|
|
|
|
|
|
|
8,700
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividends
|
|
|
6,084
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to stockholders
|
|
$
|
2,616
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Weighted average basic common shares outstanding
|
|
|
196,503
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
Diluted income per common share
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Weighted average diluted common shares outstanding
|
|
|
201,997
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
(footnotes begin on page 40)
38
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to our Consolidated
Balance Sheet to arrive at the Unaudited Pro Forma Consolidated
Balance Sheet.
(1) We reflected the elimination of
$
million liquidation value of our preferred stock reflecting the
conversion of all shares of our issued and outstanding preferred
stock into shares of common stock
immediately prior to the consummation of the offering and the
right to receive
$ in
cash upon the consummation of the offering.
(2) We reflected:
|
|
|
|
(i)
|
our issuance of shares in this
offering;
|
|
|
|
|
(ii)
|
the repayment of
$ million
of loans outstanding under our senior secured credit facilities;
|
|
|
|
|
(iii)
|
the payments under the Long Term Cash Investment Plan in the
amount of
$ million
reduced by
$
million of income tax benefit;
|
|
|
|
|
(iv)
|
the payment of
$ in
cash to the holders of our preferred stock who are not selling
stockholders in this offering in payment for a portion of the
value of their preferred shares; and
|
|
|
|
|
(v)
|
the payment of
$
million to reimburse the selling stockholders for the
underwriting discounts and commissions incurred on shares sold
by them in this offering reduced by
$
million of income tax benefit.
|
The following adjustments were applied to our Consolidated
Statement of Operations to arrive at the Unaudited Pro Forma
Consolidated Statement of Operations.
(3) We reflected the elimination of
$ million
of preferred dividends on the preferred stock reflecting the
conversion of shares of our issued
outstanding preferred stock into
shares of common stock immediately prior to the consummation of
the offering.
(4) We reflected:
|
|
|
|
(i)
|
the reduction in interest expense of
$ million
and
$ million
for the year ended December 31, 2007 and the three months
ended March 31, 2008 for the repayment of
$ million
of % senior debt under our
bank credit facility;
|
|
|
|
|
(ii)
|
the issuance of shares in this offering; and
|
|
|
|
|
(iii)
|
additional tax expense of
$ million
and
$ million
for the year ended December 31, 2007 and the three months
ended March 31, 2008, respectively, related to the
reduction in interest expense.
|
39
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Selected Historical Consolidated Financial Data, and
our consolidated financial statements and the related notes
included elsewhere in this prospectus. The following discussion
contains, in addition to historical information, forward-looking
statements that include risks and uncertainties. Our actual
results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including those set forth under the heading Risk
Factors and elsewhere in this prospectus.
Overview
We are a leading operator of specialty hospitals and outpatient
rehabilitation clinics in the United States. As of
March 31, 2008, we operated 88 long term acute care
hospitals and four acute medical rehabilitation hospitals in
25 states, and 985 outpatient rehabilitation clinics in
37 states and the District of Columbia. We also provide
medical rehabilitation services on a contracted basis to nursing
homes, hospitals, assisted living and senior care centers,
schools and work sites. We began operations in 1997 under the
leadership of our current management team.
On February 24, 2005, Select merged with a wholly-owned
subsidiary of Holdings pursuant to which Select became a
wholly-owned subsidiary of Holdings. Holdings primary
asset is its investment in Select. Holdings is owned by an
investor group that includes Welsh Carson, Thoma Cressey and
members of our senior management. As a result of the Merger,
Selects assets and liabilities have been adjusted to their
fair value as of the closing. We have also experienced an
increase in our aggregate outstanding indebtedness as a result
of the financing transactions associated with the Merger.
Accordingly, our amortization expense and interest expense are
higher in periods following the Merger. The excess of the total
purchase price over the fair value of our tangible and
identifiable intangible assets of $1.4 billion has been
allocated to goodwill, which is subject to an annual impairment
test. In determining the total economic consideration to use for
financial accounting purposes, we have applied guidance found in
Financial Accounting Standards Board Emerging Issues Task Force
Issue
No. 88-16
Basis in Leveraged Buyout Transactions. This has
resulted in a portion of the equity related to our continuing
stockholders being recorded at the stockholders
predecessor basis and a corresponding portion of the acquired
assets being recorded likewise.
Although the Predecessor Period and Successor Period results are
not comparable by definition due to the Merger Transactions and
the resulting change in basis, for ease of comparison in the
following discussion and to assist the reader in understanding
our operating performance and operating trends, the financial
data for the period after the Merger, February 25 through
December 31, 2005 (Successor Period), have been added to
the financial data for the period from January 1 through
February 24, 2005 (Predecessor Period), to arrive at the
combined year ended December 31, 2005. The combined data is
referred to herein as the combined year ended December 31,
2005. As a result of the Merger, interest expense, loss on early
retirement of debt, merger related charges, stock compensation
expense, long term incentive compensation, depreciation and
amortization have been impacted. We believe this combined
presentation is a reasonable means of presenting our operating
results.
We manage our company through two business segments, our
specialty hospital segment and our outpatient rehabilitation
segment. We had net operating revenues of $1,991.7 million
for the year ended December 31, 2007 and
$548.3 million for the three months ended March 31,
2008. Of these totals, we earned approximately 70% and 69% of
our net operating revenues from our specialty hospitals and
approximately 30% and 31% from our outpatient rehabilitation
business for the year ended December 31, 2007 and the three
months ended March 31, 2008, respectively.
Our specialty hospital segment consists of hospitals designed to
serve the needs of long term stay acute patients and hospitals
designed to serve patients who require intensive medical
rehabilitation care. Patients in our long term acute care
hospitals typically suffer from serious and often complex
medical conditions that require a high degree of care. Patients
in our inpatient rehabilitation facilities typically suffer from
debilitating injuries, including traumatic brain and spinal cord
injuries, and require rehabilitation care in the form of
physical and vocational rehabilitation services. Our outpatient
rehabilitation business consists of clinics and contract
services that provide physical,
40
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
Acquisition
of HealthSouth Corporations Outpatient Rehabilitation
Division
In 2007 we completed the acquisition of the outpatient
rehabilitation division of HealthSouth Corporation. At the
closing on May 1, 2007, we acquired 539 outpatient
rehabilitation clinics. On June 20, 2007, one additional
outpatient facility located in Washington, D.C. was
acquired upon the receipt of regulatory approval. The closing of
the purchase of 29 additional outpatient rehabilitation clinics
that was deferred pending certain state regulatory approval was
completed as of October 31, 2007 and resulted in the
release of an additional $23.4 million of the purchase
price. The aggregate purchase price of $245.0 million was
reduced by approximately $7.0 million at closing for
assumed indebtedness and other matters. We funded the
acquisition through borrowings under our senior secured credit
facility and cash on hand.
In conjunction with the acquisition, we have recorded an
estimated liability of $18.7 million for restructuring
costs associated with workforce reductions and lease termination
costs resulting from our preliminary plans for integrating the
acquired business. This estimated liability was accounted for as
additional purchase price. We expect to pay the severance costs
through 2008 and the lease termination costs through 2017.
Amendment
to Credit Agreement
On March 19, 2007, we entered into an Amendment No. 2
and Waiver to our senior secured credit facility, or
Amendment No. 2, and on March 28, 2007, we
entered into an Incremental Facility Amendment with a group of
lenders and JPMorgan Chase Bank, N.A. as administrative agent.
Amendment No. 2 increased the general exception to the
prohibition on asset sales under our senior secured credit
facility from $100.0 million to $200.0 million,
relaxed certain financial covenants starting March 31, 2007
and waived our requirement to prepay certain term loan
borrowings following the year ended December 31, 2006. The
Incremental Facility Amendment provided to our company an
incremental term loan of $100.0 million, the proceeds of
which we used to pay a portion of the purchase price for the
HealthSouth transaction.
CBIL
Sale
On March 1, 2006, we sold our wholly-owned subsidiary CBIL
for approximately C$89.8 million in cash
(US$79.0 million). At the time of the sale, CBIL operated
109 outpatient rehabilitation clinics in seven Canadian
provinces and had approximately 1,000 employees. We
conducted all of our Canadian operations through CBIL. The
financial results of CBIL have been reclassified as discontinued
operations for all periods presented in this report, and its
assets and liabilities have been reclassified as held for sale
on our December 31, 2005 balance sheet. As a result of this
transaction, we have recognized a gain on sale (net of tax) of
$11.5 million in 2006.
Summary
Financial Results
First
Quarter Ended March 31, 2008
For the three months ended March 31, 2008, our net
operating revenues increased 17.4% to $548.3 million
compared to $466.8 million for the three months ended
March 31, 2007. This increase in net operating revenues
resulted from a 6.9% increase in our specialty hospital net
operating revenue and a 50.9% increase in our outpatient
rehabilitation net operating revenue. The significant increase
in our outpatient rehabilitation net operating revenue is
primarily attributable to the net operating revenues generated
by clinics acquired from HealthSouth Corporation in 2007. We
realized income from operations for the three months ended
March 31, 2008 of $54.3 million compared to
$60.3 million for the three months ended March 31,
2007. The decline in income from operations is primarily
attributable to the operating losses incurred in our specialty
hospitals opened in 2007 and 2008. Our interest expense for the
three months ended March 31, 2008 was $36.9 million
compared to $32.2 million for the three months ended
March 31, 2007. The increase in interest expense is
attributable to increased borrowings under our senior secured
credit facility.
41
Our cash flow from operations used $24.9 million of cash
for the three months ended March 31, 2008. The deficit in
operating cash flow is principally due to an increase in our
accounts receivable related to a decline in cash collections
associated with timing of the periodic interim payments we
receive from Medicare for services provided at our specialty
hospitals.
Year
Ended December 31, 2007
For the year ended December 31, 2007, our net operating
revenues increased 7.6% to $1,991.7 million compared to
$1,851.5 million for the year ended December 31, 2006.
This increase in net operating revenues resulted from a 0.6%
increase in our specialty hospital net operating revenue and a
28.3% increase in our outpatient rehabilitation net operating
revenue. The significant increase in our outpatient
rehabilitation net operating revenue is primarily attributable
to the net operating revenues generated by clinics acquired from
HealthSouth Corporation in 2007. We had income from operations
for the year ended December 31, 2007 of $193.9 million
compared to $257.9 million for the year ended
December 31, 2006. The decline in income from operations is
principally related to a decline in the profitability of our
specialty hospitals which resulted primarily from LTCH
regulatory changes. Our interest expense for the year ended
December 31, 2007 was $140.2 million compared to
$131.8 million for the year ended December 31, 2006.
The increase in interest expense resulted from higher average
debt levels resulting primarily from the outpatient
rehabilitation clinics acquired from HealthSouth Corporation and
higher interest rates experienced during the year ended
December 31, 2007. Our cash flow from operations provided
$86.0 million of cash for the year ended December 31,
2007.
Year
Ended December 31, 2006
For the year ended December 31, 2006, our net operating
revenues decreased 0.4% to $1,851.5 million compared to
$1,858.4 million for the combined year ended
December 31, 2005. This decrease in net operating revenues
resulted from a 2.2% decrease in our outpatient rehabilitation
net revenues offset by a 0.4% increase in our specialty hospital
net operating revenue. The decline in our outpatient
rehabilitation net revenues resulted from a decline in the
number of clinics we operate and in the number of visits
occurring at the operating clinics. We had income from
operations for the year ended December 31, 2006 of
$257.9 million compared to $119.1 million for the
combined year ended December 31, 2005. For the combined
year ended December 31, 2005, we incurred
$152.5 million of stock compensation costs as a result of
the Merger Transactions and a non-recurring long term incentive
compensation payment of $14.5 million in September 2005.
Interest expense for the year ended December 31, 2006 was
$131.8 million compared to $106.9 million for the
combined year end December 31, 2005. This increase resulted
from higher average debt levels and interest rates experienced
during the year ended December 31, 2006. Our cash flow from
operations provided $227.7 million of cash for the year
ended December 31, 2006.
Regulatory
Changes
A significant portion of our specialty hospital net operating
revenues are generated directly from the Medicare program. For
the years ended December 31, 2007 and 2006 and the combined
year ended December 31, 2005, revenues from the federal
Medicare program amounted to 65%, 69% and 73% of our specialty
hospital net operating revenues, respectively. In the last few
years, there have been significant regulatory changes affecting
LTCHs that have affected our net operating revenues and, in some
cases, caused us to change our operating models and strategies.
The following is a summary of some of the more significant
healthcare regulatory changes that have affected our financial
performance in the past or are likely to affect our financial
performance in the future. See Business
Government Regulations.
We have been subject to regulatory changes that occur through
the CMS rulemaking procedures. Generally, rule updates have
occurred twice each year. Proposed rules specifically related to
LTCHs are generally published in January, finalized in May and
effective on July 1st of each year. Additionally,
LTCHs are subject to annual updates to the IPPS rules that are
typically proposed in May, finalized in August and effective on
October 1st of
each year.
August 2004 Final Rule. On August 11,
2004, CMS published final regulations applicable to LTCHs that
are operated as HIHs. Effective for hospital cost reporting
periods beginning on or after October 1, 2004, subject to
42
certain exceptions, the final regulations provide lower rates of
reimbursement to HIHs for those Medicare patients admitted from
their host hospitals that are in excess of a specified
percentage threshold. For HIHs opened after October 1,
2004, the Medicare admissions threshold has been established at
25% except for HIHs located in rural hospitals, MSA dominant
hospitals or single urban hospitals where the percentage is no
more than 50%, nor less than 25%. For HIHs that meet specified
criteria and were in existence as of October 1, 2004,
including all but two of our then existing HIHs, the Medicare
admissions thresholds are phased in over a four year period
starting with hospital cost reporting periods that began on or
after October 1, 2004. However, as described below, many of
these changes have been postponed for a three year period by the
SCHIP Extension Act.
During the year ended December 31, 2007, we recorded a
liability of approximately $5.9 million related to
estimated repayments to Medicare for host admissions exceeding
HIHs applicable admission threshold. The liability has
been recorded through a reduction in our net operating revenue.
August 2005 Final Rule. On August 12,
2005, CMS published the final rules for general acute care
hospitals IPPS, for fiscal year 2006, which included an update
of the LTC-DRG relative weights. CMS estimated the changes to
the relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 4.2% in fiscal year 2006 (the period from
October 1, 2005 through September 30, 2006).
May 2006 Final Rule. On May 2, 2006, CMS
released its final annual payment rate updates for the 2007
LTCH-PPS rate year (affecting discharges and cost reporting
periods beginning on or after July 1, 2006 and before
July 1, 2007), or RY 2007. The May 2006 final
rule revised the payment adjustment formula for SSO patients.
For discharges occurring on or after July 1, 2006, the rule
changed the payment methodology for Medicare patients with a
length of stay less than or equal to five-sixths of the
geometric average length of stay for each SSO case. In addition,
for discharges occurring on or after July 1, 2006, the May
2006 final rule provided for (1) a zero-percent update to
the LTCH-PPS standard federal rate used as a basis for LTCH-PPS
payments for RY 2007; (2) the elimination of the
surgical case exception to the three day or less interruption of
stay policy, under which surgical exception Medicare reimburses
a general acute care hospital directly for surgical services
furnished to a long term acute care hospital patient during a
brief interruption of stay from the long term acute care
hospital, rather than requiring the long term acute care
hospital to bear responsibility for such surgical services; and
(3) increasing the costs that a long term acute care
hospital must bear before Medicare will make additional payments
for a case under its high-cost outlier policy for RY 2007.
CMS estimated that the changes in the May 2006 final rule would
result in an approximately 3.7% decrease in LTCH Medicare
payments-per-discharge
compared to the 2006 rate year, largely attributable to the
revised SSO payment methodology. We estimated that the May 2006
final rule reduced Medicare revenues associated with SSO cases
and high-cost outlier cases to our long term acute care
hospitals by approximately $29.3 million for RY 2007.
Additionally, had CMS updated the LTCH-PPS standard federal rate
by the 2007 estimated market basket index of 3.4% rather than
applying the zero-percent update, we estimated that we would
have received approximately $31.0 million in additional
annual Medicare revenues based on our historical Medicare
patient volumes and revenues (such revenues would have been paid
to our hospitals for discharges beginning on or after
July 1, 2006).
August 2006 Final Rule. On August 18,
2006, CMS published the IPPS final rule for fiscal year 2007,
which is the period from October 1, 2006 through
September 30, 2007, that included an update of the LTC-DRG
relative weights for fiscal year 2007. CMS estimated the changes
to the relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 1.3% in fiscal year 2007. The August 2006 final
rule also included changes to the DRGs in IPPS that apply to
LTCHs, as the LTC-DRGs are based on the IPPS DRGs.
May 2007 Final Rule. On May 1, 2007, CMS
published its annual payment rate update for the 2008
LTCH-PPS
rate year, or RY 2008 (affecting discharges and cost
reporting periods beginning on or after July 1, 2007 and
before July 1, 2008). The May 2007 final rule makes several
changes to LTCH-PPS payment methodologies and amounts during RY
2008 although, as described below, many of these changes have
been postponed for a three year period by the SCHIP Extension
Act.
For cost reporting periods beginning on or after July 1,
2007, the May 2007 final rule expands the current Medicare HIH
admissions threshold to apply to Medicare patients admitted from
any individual hospital. Previously, the admissions threshold
was applicable only to Medicare HIH admissions from hospitals
co-located
43
with an LTCH or satellite of an LTCH. Under the May 2007 final
rule, free-standing LTCHs and grandfathered HIHs are subject to
the Medicare admission thresholds, as well as HIHs and
satellites that admit Medicare patients from non-co-located
hospitals. To the extent that any LTCHs or LTCH satellite
facilitys discharges that are admitted from an individual
hospital (regardless of whether the referring hospital is
co-located with the LTCH or LTCH satellite) exceed the
applicable percentage threshold during a particular cost
reporting period, the payment rate for those discharges would be
subject to a downward payment adjustment. Cases admitted in
excess of the applicable threshold will be reimbursed at a rate
comparable to that under general acute care IPPS, which is
generally lower than LTCH-PPS rates. Cases that reach outlier
status in the discharging hospital would not count toward the
limit and would be paid under LTCH-PPS. CMS estimates the impact
of the expansion of the Medicare admission thresholds will
result in a reduction of 2.2% of the aggregate payments to all
LTCHs in RY 2008.
The applicable percentage threshold is generally 25% after the
completion of the phase-in period described below. The
percentage threshold for LTCH discharges from a referring
hospital that is an MSA dominant hospital or a single urban
hospital is the percentage of total Medicare discharges in the
MSA that are from the referring hospital, but no less than 25%
nor more than 50%. For Medicare discharges from LTCHs or LTCH
satellites located in rural areas, as defined by the Office of
Management and Budget, the percentage threshold is 50% from any
individual referring hospital. The expanded 25% rule is being
phased in over a three year period. The three year transition
period starts with cost reporting periods beginning on or after
July 1, 2007 and before July 1, 2008, when the
threshold is the lesser of 75% or the percentage of the
LTCHs or LTCH satellites admissions discharged from
the referring hospital during its cost reporting period
beginning on or after July 1, 2004 and before July 1,
2005, or RY 2005. For cost reporting periods
beginning on or after July 1, 2008 and before July 1,
2009, the threshold will be the lesser of 50% or the percentage
of the LTCHs or LTCH satellites admissions from the
referring hospital, during its RY 2005 cost reporting period.
For cost reporting periods beginning on or after July 1,
2009, all LTCHs will be subject to the 25% threshold (or
applicable threshold for rural, urban-single, or MSA dominant
hospitals). The SCHIP Extension Act postpones the application of
the percentage threshold to all free-standing and grandfathered
HIHs for a three year period commencing on an LTCHs first
cost reporting period on or after December 29, 2007.
However, the SCHIP Extension Act does not postpone the
application of the percentage threshold, or the transition
period stated above, to those Medicare patients discharged from
an LTCH HIH or HIH satellite that were admitted from a
non-co-located hospital. The SCHIP Extension Act only postpones
the expansion of the admission threshold in the May 2007 final
rule to free-standing LTCHs and grandfathered HIHs.
The May 2007 final rule further revised the payment adjustment
for SSO cases. Beginning with discharges on or after
July 1, 2007, for cases with a length of stay that is less
than the IPPS comparable threshold, the rule effectively lowers
the LTCH payment to a rate based on the general acute care
hospital IPPS. SSO cases with covered lengths of stay that
exceed the IPPS comparable threshold would continue to be paid
under the SSO payment policy described above under the May 2006
final rule. Cases with a covered length of stay less than or
equal to the IPPS comparable threshold and less than five-sixths
of the geometric average length of stay for that LTC-DRG will be
paid at an amount comparable to the IPPS per diem. The SCHIP
Extension Act also postpones, for the three year period
beginning on December 29, 2007, the SSO policy changes made
in the May 2007 final rule.
The May 2007 final rule updated the standard federal rate by
0.71% for RY 2008. As a result, the federal rate for RY 2008 is
equal to $38,356.45, compared to $38,086.04 for RY 2007.
Subsequently, the SCHIP Extension Act eliminated the update to
the standard federal rate that occurred for RY 2008 effective
April 1, 2008. This adjustment to the standard federal rate
was applied prospectively on April 1, 2008 and reduced the
federal rate back to $38,086.04. In a technical correction to
the May 2007 final rule, CMS increased the fixed-loss amount for
high cost outlier in RY 2008 to $20,738, compared to $14,887 in
RY 2007. CMS projected an estimated 0.4% decrease in LTCH
payments in RY 2008 due to this change in the fixed-loss amount
and the overall impact of the May 2007 final rule to be a 1.2%
decrease in total estimated LTCH PPS payments for RY 2008.
The May 2007 final rule provides that beginning with the annual
payment rate updates to the LTC-DRG classifications and relative
weights for the fiscal year 2008, or FY 2008
(affecting discharges beginning on or after October 1, 2007
and before September 30, 2008), annual updates to the
LTC-DRG classification and relative weights are to have a budget
neutral impact. Under the May 2007 final rule, future LTC-DRG
reclassification and recalibrations, by themselves, should
neither increase nor decrease the estimated aggregated LTCH PPS
payments.
44
The May 2007 final rules are complex and the SCHIP Extension Act
has postponed the implementation of certain of the May 2007
final rules. While we cannot predict the ultimate long term
impact of LTCH-PPS because the payment system remains subject to
significant change, if the May 2007 final rules become effective
as currently written, after the expiration of the SCHIP
Extension Act, our future net operating revenues and
profitability will be adversely affected.
August 2007 Final Rule. On August 1,
2007, CMS published the IPPS final rule for FY 2008, which
creates a new patient classification system with categories
referred to as MS-DRGs and MS-LTC-DRGs, respectively, for
hospitals reimbursed under IPPS and LTCH PPS. Beginning with
discharges on or after October 1, 2007, the new
classification categories take into account the severity of the
patients condition. CMS assigned proposed relative weights
to each MS-DRG and MS-LTC-DRG to reflect their relative use of
medical care resources. We believe that, because of the proposed
relative weights and length of stay assigned to the MS-LTC-DRGs
for the patient populations served by our hospitals, our long
term acute care hospital payments may be adversely affected.
The August 2007 final rule published a budget neutral update to
the MS-LTC-DRG classification and relative weights. In the
preamble to the IPPS final rule for FY 2008 CMS restated that it
intends to continue to update the LTC-DRG weights annually in
the IPPS rulemaking and those weights would be modified by a
budget neutrality adjustment factor to ensure that estimated
aggregate LTCH payments after reweighting are equal to estimated
aggregate LTCH payments before reweighting.
Medicare, Medicaid and SCHIP Extension Act of
2007. On December 29, 2007, the President
signed into law the SCHIP Extension Act. Among other changes in
the federal health care programs, the SCHIP Extension Act makes
significant changes to Medicare policy for LTCHs including a new
statutory definition of an LTCH, a report to Congress on new
LTCH patient criteria, relief from certain LTCH-PPS payment
policies for three years, a three year moratorium on the
development of new LTCHs and LTCH beds, elimination of the
payment update for the last quarter of RY 2008 and new medical
necessity reviews by Medicare contractors through at least
October 1, 2010.
The SCHIP Extension Act precludes the Secretary from
implementing, during the three year moratorium period, the
provisions added by the May 2007 final rule that extended the
25% rule to free-standing LTCHs, including grandfathered LTCHs.
The SCHIP Extension Act also modifies, during the moratorium,
the effect of the 25% rule for LTCHs that are co-located with
other hospitals. For HIHs and satellite facilities, the
applicable percentage threshold is set at 50% and not phased in
to the 25% level. For HIHs and satellite facilities located in
rural areas and those which receive referrals from MSA dominant
hospitals or single urban hospitals, the percentage threshold is
set at no more than 75%. These moratoria relating to LTCH
admission thresholds extend for an LTCHs three cost
reporting periods beginning on or after December 29, 2007.
The SCHIP Extension Act also precludes the Secretary from
implementing, for the three year period beginning on
December 29, 2007, a one-time adjustment to the LTCH
standard federal rate. This rule, established in the original
LTCH-PPS regulations, permits CMS to restate the standard
federal rate to reflect the effect of changes in coding since
the LTCH-PPS base year. In the preamble to the May 2007 final
rule, CMS discussed making a one-time prospective adjustment to
the LTCH-PPS rates for the 2009 rate year. In addition, the
SCHIP Extension Act reduces the Medicare payment update for the
portion of RY 2008 from April 1, 2008 to June 30, 2008
to the same base rate applied to LTCH discharges during RY 2007.
For the three years following December 29, 2007, the
Secretary must impose a moratorium on the establishment and
classification of new LTCHs, LTCH satellite facilities, and LTCH
beds in existing LTCH or satellite facilities. This moratorium
does not apply to LTCHs that, before the date of enactment,
(1) began the qualifying period for payment under the
LTCH-PPS, (2) have a written agreement with an unrelated
party for the construction, renovation, lease or demolition for
a LTCH and have expended at least 10% of the estimated cost of
the project or $2,500,000, or (3) have obtained an approved
certificate of need. As a result of the SCHIP Extension
Acts three year moratorium on the development of new
LTCHs, we have stopped all LTCH development, except for five
LTCHs currently under construction that are excluded from the
moratorium.
May 6, 2008 Interim Final Rule. On
May 6, 2008, CMS published an interim final rule with
comment period, which implements portions of the SCHIP Extension
Act. The interim final rule addresses: (1) the payment
adjustment for very short-stay outliers, (2) the standard
federal rate for the last three months of RY 2008,
45
(3) adjustment of the high cost outlier fixed-loss amount
for the last three months of RY 2008, and (4) references
the SCHIP Extension Act in the discussion of the basis and scope
of the LTCH-PPS rules.
May 9, 2008 Final Rule. On May 9,
2008, CMS published its annual payment rate update for the 2009
LTCH-PPS
rate year, or RY 2009 (affecting discharges and cost
reporting periods beginning on or after July 1, 2008). The
final rule adopts a
15-month
rate update, from July 1, 2008 through September 30,
2009 and moves LTCH-PPS from a July-June update cycle to the
same update cycle as the general acute care hospital inpatient
rule (October September). For RY 2009, the rule
establishes a 2.7% update to the standard federal rate. The rule
increases the fixed-loss amount for high cost outlier cases to
$22,960, which is $2,222 higher than the 2008
LTCH-PPS
rate year. The final rule provides that CMS may make a one-time
reduction in the LTCH-PPS rates to reflect a budget neutrality
adjustment no earlier than December 29, 2010 and no later
than October 1, 2012. CMS estimated this reduction will be
approximately 3.75%.
May 2008 Interim Final Rule. On May 22,
2008, CMS published an interim final rule with comment period,
which implements portions of the SCHIP Extension Act not
addressed in the May 6, 2008 Interim Final Rule. Among
other things, the second May 2008 Interim Final Rule establishes
a definition for free-standing LTCHs as a hospital
that: (1) has a Medicare provider agreement, (2) has
an average length of stay of greater than 25 days,
(3) does not occupy space in a building used by another
hospital, (4) does not occupy space in one or more separate
or entire buildings located on the same campus as buildings used
by another hospital, and (5) is not part of a hospital that
provides inpatient services in a building also used by another
hospital.
Development
of New Specialty Hospitals and Clinics
As a result of the SCHIP Extension Act, which has a three year
moratorium on the development of new LTCHs, we have stopped all
LTCH development, except for five LTCHs currently under
construction that are excluded from the moratorium. However, we
continue to evaluate opportunities to develop inpatient
rehabilitation hospitals. We also intend to open new outpatient
rehabilitation clinics in the local areas that we currently
serve where we can benefit from existing referral relationships
and brand awareness to produce incremental growth.
Critical
Accounting Matters
Sources
of Revenue
Our net operating revenues are derived from a number of sources,
including commercial, managed care, private and governmental
payors. Our net operating revenues include amounts estimated by
management to be reimbursable from each of the applicable payors
and the federal Medicare program. Amounts we receive for
treatment of patients are generally less than the standard
billing rates. We account for the differences between the
estimated reimbursement rates and the standard billing rates as
contractual adjustments, which we deduct from gross revenues to
arrive at net operating revenues.
Net operating revenues generated directly from the Medicare
program from all segments represented approximately 48%, 53% and
56% of net operating revenues for the years ended
December 31, 2007 and 2006, and the combined year ended
December 31, 2005, respectively. Net operating revenues
generated directly from the Medicare program from all segments
represented approximately 47% and 53% of net operating revenues
for the three months ended March 31, 2008 and 2007,
respectively. Approximately 65%, 69% and 73% of our specialty
hospital revenues for the years ended December 31, 2007 and
2006, and the combined year ended December 31, 2005,
respectively, were received for services provided to Medicare
patients. Approximately 63% and 68% of our specialty hospital
revenues for the three months ended March 31, 2008 and
2007, respectively, were received for services provided to
Medicare patients. For the years ended December 31, 2006
and 2007 and the combined year ended December 31, 2005 and
the three months ended March 31, 2008, all of our Medicare
payments were paid under prospective payment systems.
The LTCH-PPS regulations also refined the criteria that must be
met in order for a hospital to be certified as a long term acute
care hospital. For cost reporting periods beginning on or after
October 1, 2002, a long term acute care hospital must have
an average inpatient length of stay for Medicare patients
(including both Medicare covered
46
and non-covered days) of greater than 25 days. Previously,
average lengths of stay were measured with respect to all
patients.
Most of our specialty hospitals receive bi-weekly periodic
interim payments, or PIP, from Medicare instead of
being paid on an individual claim basis. Under a PIP payment
methodology, Medicare estimates a hospitals claim volume
based on historical trends and periodically reconciles the
differences between the actual claim data and the estimated
payments. At each balance sheet date, we record the difference
between our actual claims and the PIP payments as a receivable
or payable from third-party payors on our balance sheet.
Contractual
Adjustments
Net operating revenues include amounts estimated by us to be
reimbursable by Medicare and Medicaid under prospective payment
systems and provisions of cost-reimbursement and other payment
methods. In addition, we are reimbursed by non-governmental
payors using a variety of payment methodologies. Amounts we
receive for treatment of patients covered by these programs are
generally less than standard billing rates. Contractual
allowances are calculated and recorded through our internally
developed systems. Within our hospital segment our billing
system automatically calculates estimated Medicare reimbursement
and associated contractual allowances. For non-governmental
payors, we manually calculate the contractual allowance for each
patient based upon the contractual provisions associated with
the specific payor. In our outpatient segment, we perform
provision testing, using internally developed systems, whereby
we monitor a payors historical paid claims data and
compare it against the associated gross charges. This difference
is determined as a percentage of gross charges and is applied
against gross billing revenue to determine the contractual
allowances for the period. Additionally, these contractual
percentages are applied against the gross receivables on the
balance sheet to determine that adequate contractual reserves
are maintained for the gross accounts receivables reported on
the balance sheet. We account for any difference as additional
contractual adjustments deducted from gross revenues to arrive
at net operating revenues in the period that the difference is
determined. The estimation processes described above and used in
recording our contractual adjustments have historically yielded
consistent and reliable results.
Allowance
for Doubtful Accounts
Substantially all of our accounts receivable are related to
providing healthcare services to patients. Collection of these
accounts receivable is our primary source of cash and is
critical to our operating performance. Our primary collection
risks relate to non-governmental payors who insure these
patients, and deductibles, co-payments and self-insured amounts
owed by the patient. Deductibles, co-payments and self-insured
amounts are an immaterial portion of our net accounts receivable
balance. At March 31, 2008, deductibles, co-payments and
self-insured amounts owed by patients accounted for
approximately 0.3% of our net accounts receivable balance before
doubtful accounts. Our general policy is to verify insurance
coverage prior to the date of admission for a patient admitted
to our hospitals or, in the case of our outpatient
rehabilitation clinics, we verify insurance coverage prior to
their first therapy visit. Our estimate for the allowance for
doubtful accounts is calculated by generally reserving as
uncollectible all governmental accounts over 365 days and
non-governmental accounts over 180 days from discharge.
This method is monitored based on our historical cash
collections experience. Collections are impacted by the
effectiveness of our collection efforts with non-governmental
payors and regulatory or administrative disruptions with the
fiscal intermediaries that pay our governmental receivables.
We estimate bad debts for total accounts receivable within each
of our operating units. We believe our policies have resulted in
reasonable estimates determined on a consistent basis. We
believe that we collect substantially all of our third-party
insured receivables (net of contractual allowances) which
include receivables from governmental agencies. To date, we
believe there has not been a material difference between our bad
debt allowances and the ultimate historical collection rates on
accounts receivable. We review our overall reserve adequacy by
monitoring historical cash collections as a percentage of net
revenue less the provision for bad debts. Uncollected accounts
are written off the balance sheet when they are turned over to
an outside collection agency, or when management determines that
the balance is uncollectible, whichever occurs first.
47
The following table is an aging of our net (after allowances for
contractual adjustments but before doubtful accounts) accounts
receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
|
|
|
|
Balance as of March 31,
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
0-90
|
|
|
Over 90
|
|
|
|
0-90
|
|
|
Over 90
|
|
|
|
0-90
|
|
|
Over 90
|
|
|
|
Days
|
|
|
Days
|
|
|
|
Days
|
|
|
Days
|
|
|
|
Days
|
|
|
Days
|
|
Medicare and Medicaid
|
|
$
|
56,558
|
|
|
$
|
15,216
|
|
|
|
$
|
76,927
|
|
|
$
|
15,131
|
|
|
|
$
|
117,931
|
|
|
$
|
15,862
|
|
Commercial insurance, and other
|
|
|
116,552
|
|
|
|
66,907
|
|
|
|
|
175,152
|
|
|
|
60,052
|
|
|
|
|
186,849
|
|
|
|
66,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net accounts receivable
|
|
$
|
173,110
|
|
|
$
|
82,123
|
|
|
|
$
|
252,079
|
|
|
$
|
75,183
|
|
|
|
$
|
304,780
|
|
|
$
|
82,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The approximate percentage of total net accounts receivable
(after allowance for contractual adjustments but before doubtful
accounts) summarized by aging categories is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
0 to 90 days
|
|
|
67.8
|
%
|
|
|
|
77.0
|
%
|
|
|
|
78.8
|
%
|
91 to 180 days
|
|
|
10.8
|
%
|
|
|
|
10.0
|
%
|
|
|
|
9.9
|
%
|
181 to 365 days
|
|
|
8.4
|
%
|
|
|
|
6.0
|
%
|
|
|
|
5.7
|
%
|
Over 365 days
|
|
|
13.0
|
%
|
|
|
|
7.0
|
%
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The approximate percentage of total net accounts receivable
(after allowance for contractual adjustments but before doubtful
accounts) summarized by insured status is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
Insured receivables
|
|
|
99.1
|
%
|
|
|
|
99.7
|
%
|
|
|
|
99.7
|
%
|
Self-pay receivables (including deductibles and copayments)
|
|
|
0.9
|
%
|
|
|
|
0.3
|
%
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
Under a number of our insurance programs, which include our
employee health insurance program and certain components under
our property and casualty insurance program, we are liable for a
portion of our losses. In these cases, we accrue for our losses
under an occurrence-based principle whereby we estimate the
losses that will be incurred by us in a given accounting period
and accrue that estimated liability. Where we have substantial
exposure, we utilize actuarial methods in estimating the losses.
In cases where we have minimal exposure, we will estimate our
losses by analyzing historical trends. We monitor these programs
quarterly and revise our estimates as necessary to take into
account additional information. At March 31, 2008,
December 31, 2007 and December 31, 2006, we have
recorded a liability of $59.3 million, $58.9 million
and $60.0 million, respectively, for our estimated losses
under these insurance programs.
Related
Party Transactions
We are party to various rental and other agreements with
companies affiliated with us through common ownership. Our
payments to these related parties amounted to $2.3 million
for both the year ended December 31,
48
2007 and the year ended December 31, 2006. Our payments to
these related parties amounted to $0.7 million for both the
three months ended March 31, 2008 and the three months
ended March 31, 2007. Our future commitments are related to
commercial office space we lease for our corporate headquarters
in Mechanicsburg, Pennsylvania. These future commitments as of
March 31, 2008 amount to $48.1 million through 2023.
These transactions and commitments are described more fully in
the notes to our consolidated financial statements included
herein. See also Certain Relationships and Related
Transactions.
Consideration
of Impairment Related to Goodwill and Other Intangible
Assets
Goodwill and certain other indefinite-lived intangible assets
are no longer amortized, but instead are subject to periodic
impairment evaluations under Statement of Financial Accounting
Standards, or SFAS, No. 142, Goodwill and
Other Intangible Assets. Our most recent impairment
assessment was completed during the fourth quarter of 2007,
which indicated that there was no impairment with respect to
goodwill or other recorded intangible assets. With the exception
of goodwill, the majority of our intangible assets are subject
to amortization. The majority of our goodwill resides in our
specialty hospital reporting unit. In performing periodic
impairment tests, the fair value of the reporting unit is
compared to the carrying value, including goodwill and other
intangible assets. If the carrying value exceeds the fair value,
an impairment condition exists, which results in an impairment
loss equal to the excess carrying value. Impairment tests are
required to be conducted at least annually, or when events or
conditions occur that might suggest a possible impairment. These
events or conditions include, but are not limited to, a
significant adverse change in the business environment,
regulatory environment or legal factors, a current period
operating or cash flow loss combined with a history of such
losses or a projection of continuing losses, or a sale or
disposition of a significant portion of a reporting unit. The
occurrence of one of these events or conditions could
significantly impact an impairment assessment, necessitating an
impairment charge and adversely affecting our results of
operations. For purposes of goodwill impairment assessment, we
have defined our reporting units as specialty hospitals,
outpatient rehabilitation clinics and contract therapy, with
goodwill having been allocated among reporting units based on
the relative fair value of those divisions when the Merger
Transactions occurred in 2005 and based on subsequent
acquisitions.
To determine the fair value of our reporting units, we use a
discounted cash flow approach. Included in the discounted cash
flow are assumptions regarding revenue growth rates, internal
development of specialty hospitals and rehabilitation clinics,
future EBITDA margin estimates, future selling, general and
administrative expense rates and our weighted average cost of
capital. We also must estimate residual values at the end of the
forecast period and future capital expenditure requirements.
Each of these assumptions requires us to use our knowledge of
(1) our industry, (2) our recent transactions, and
(3) reasonable performance expectations for our operations.
If any one of the above assumptions changes or fails to
materialize, the resulting decline in our estimated fair value
could result in a material impairment charge to the goodwill
associated with any one of the reporting units.
Realization
of Deferred Tax Assets
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes,
or SFAS No. 109, which requires that
deferred tax assets and liabilities be recognized using enacted
tax rates for the effect of temporary differences between the
book and tax bases of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be
realized. As part of the process of preparing our consolidated
financial statements, we estimate our income taxes based on our
actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. We also recognize as deferred tax
assets the future tax benefits from net operating loss
carryforwards. We evaluate the realizability of these deferred
tax assets by assessing their valuation allowances and by
adjusting the amount of such allowances, if necessary. Among the
factors used to assess the likelihood of realization are our
projections of future taxable income streams, the expected
timing of the reversals of existing temporary differences and
the impact of tax planning strategies that could be implemented
to avoid the potential loss of future tax benefits. However,
changes in tax codes, statutory tax rates or future taxable
income levels could materially impact our valuation of tax
accruals and assets and could cause our provision for income
taxes to vary significantly from period to period.
49
At December 31, 2007 and March 31, 2008, we had
deferred tax assets in excess of deferred tax liabilities of
approximately $26.0 million and $28.4 million,
respectively. Those amounts are net of approximately
$16.8 million and $17.1 million of valuation reserves
related primarily to state and federal tax net operating losses
that may not be realized at December 31, 2007 and
March 31, 2008, respectively.
Uncertain
Tax Positions
We record and review quarterly our uncertain tax positions.
Reserves for uncertain tax positions are established for
exposure items related to various federal and state tax matters.
Income tax reserves are recorded when an exposure is identified
and when, in the opinion of management, it is more likely than
not that a tax position will not be sustained and the amount of
the liability can be estimated. While we believe that our
reserves for uncertain tax positions are adequate, the
settlement of any such exposures at amounts that differ from
current reserves may require us to materially increase or
decrease our reserves for uncertain tax positions.
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 table 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Specialty hospital
data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals start of period
|
|
|
86
|
|
|
|
101
|
|
|
|
96
|
|
Number of hospital
start-ups
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
Number of hospitals acquired
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Number of hospitals closed/sold
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(8
|
)
|
Number of hospitals consolidated
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals end of period
|
|
|
101
|
|
|
|
96
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available licensed beds
|
|
|
3,829
|
|
|
|
3,867
|
|
|
|
3,819
|
|
Admissions
|
|
|
39,963
|
|
|
|
39,668
|
|
|
|
40,008
|
|
Patient days
|
|
|
985,025
|
|
|
|
969,590
|
|
|
|
987,624
|
|
Average length of stay (days)
|
|
|
25
|
|
|
|
24
|
|
|
|
25
|
|
Net revenue per patient
day(2)
|
|
$
|
1,370
|
|
|
$
|
1,392
|
|
|
$
|
1,378
|
|
Occupancy rate
|
|
|
70
|
%
|
|
|
69
|
%
|
|
|
69
|
%
|
Percent patient days Medicare
|
|
|
75
|
%
|
|
|
73
|
%
|
|
|
69
|
%
|
Outpatient rehabilitation
data(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of clinics owned start of period
|
|
|
589
|
|
|
|
553
|
|
|
|
477
|
|
Number of clinics acquired
|
|
|
|
|
|
|
|
|
|
|
570
|
|
Number of clinic
start-ups
|
|
|
22
|
|
|
|
12
|
|
|
|
15
|
|
Number of clinics
closed/sold(4)
|
|
|
(58
|
)
|
|
|
(88
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of clinics owned end of period
|
|
|
553
|
|
|
|
477
|
|
|
|
918
|
|
Number of clinics managed end of period
|
|
|
55
|
|
|
|
67
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of clinics (all) end of period
|
|
|
608
|
|
|
|
544
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of visits
|
|
|
3,308,620
|
|
|
|
2,972,243
|
|
|
|
4,032,197
|
|
Net revenue per
visit(5)
|
|
$
|
89
|
|
|
$
|
94
|
|
|
$
|
100
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Specialty hospital
data(1):
|
|
|
|
|
|
|
|
|
Number of hospitals start of period
|
|
|
96
|
|
|
|
87
|
|
Number of hospital
start-ups
|
|
|
|
|
|
|
5
|
|
Number of hospitals closed/sold
|
|
|
(1
|
)
|
|
|
|
|
Number of hospitals consolidated
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals end of period
|
|
|
92
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
Available licensed beds
|
|
|
3,899
|
|
|
|
4,111
|
|
Admissions
|
|
|
10,416
|
|
|
|
10,736
|
|
Patient days
|
|
|
252,476
|
|
|
|
259,559
|
|
Average length of stay (days)
|
|
|
25
|
|
|
|
25
|
|
Net revenue per patient
day(2)
|
|
$
|
1,378
|
|
|
$
|
1,432
|
|
Occupancy rate
|
|
|
72
|
%
|
|
|
71
|
%
|
Percent patient days Medicare
|
|
|
72
|
%
|
|
|
67
|
%
|
Outpatient rehabilitation data:
|
|
|
|
|
|
|
|
|
Number of clinics owned start of period
|
|
|
477
|
|
|
|
918
|
|
Number of clinics acquired
|
|
|
1
|
|
|
|
|
|
Number of clinic
start-ups
|
|
|
4
|
|
|
|
5
|
|
Number of clinics closed/sold
|
|
|
(5
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Number of clinics owned end of period
|
|
|
477
|
|
|
|
905
|
|
Number of clinics managed end of period
|
|
|
68
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total number of clinics (all) end of period
|
|
|
545
|
|
|
|
985
|
|
|
|
|
|
|
|
|
|
|
Number of visits
|
|
|
646,651
|
|
|
|
1,155,907
|
|
Net revenue per
visit(5)
|
|
$
|
101
|
|
|
$
|
103
|
|
|
|
|
(1)
|
|
Specialty hospitals consist of long
term acute care hospitals and inpatient rehabilitation
facilities.
|
(2)
|
|
Net revenue per patient day is
calculated by dividing specialty hospital patient service
revenues by the total number of patient days.
|
(3)
|
|
Clinic data has been restated to
remove the clinics operated by CBIL. CBIL was sold on
March 31, 2006 and is being reported as a discontinued
operation in 2005 and 2006.
|
(4)
|
|
The number of clinics closed/sold
for the year ended December 31, 2007 relate primarily to
clinics closed in connection with the restructuring plan for
integrating the acquisition of HealthSouth Corporations
outpatient rehabilitation division.
|
(5)
|
|
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.
|
51
Results
of Operations
The following table presents the combined consolidated statement
of operations for the combined year ended December 31,
2005. This data was derived by adding the financial data for the
period after the Merger, February 25 through December 31,
2005 (Successor Period) to the financial data for the period
from January 1 through February 24, 2005 (Predecessor
Period).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Combined
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
January 1
|
|
|
February 25
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended
|
|
|
|
February 24,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Net operating revenues
|
|
$
|
277,736
|
|
|
$
|
1,580,706
|
|
|
$
|
1,858,442
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
244,321
|
|
|
|
1,244,361
|
|
|
|
1,488,682
|
|
General and administrative
|
|
|
122,509
|
|
|
|
59,494
|
|
|
|
182,003
|
|
Bad debt expense
|
|
|
6,588
|
|
|
|
18,213
|
|
|
|
24,801
|
|
Depreciation and amortization
|
|
|
5,933
|
|
|
|
37,922
|
|
|
|
43,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
379,351
|
|
|
|
1,359,990
|
|
|
|
1,739,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(101,615
|
)
|
|
|
220,716
|
|
|
|
119,101
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on early retirement of debt
|
|
|
(42,736
|
)
|
|
|
|
|
|
|
(42,736
|
)
|
Merger related charges
|
|
|
(12,025
|
)
|
|
|
|
|
|
|
(12,025
|
)
|
Other income
|
|
|
267
|
|
|
|
1,092
|
|
|
|
1,359
|
|
Interest income
|
|
|
523
|
|
|
|
767
|
|
|
|
1,290
|
|
Interest expense
|
|
|
(4,651
|
)
|
|
|
(102,208
|
)
|
|
|
(106,859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority
interests and income taxes
|
|
|
(160,237
|
)
|
|
|
120,367
|
|
|
|
(39,870
|
)
|
Minority interest in consolidated subsidiary companies
|
|
|
330
|
|
|
|
1,776
|
|
|
|
2,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(160,567
|
)
|
|
|
118,591
|
|
|
|
(41,976
|
)
|
Income tax expense (benefit)
|
|
|
(59,794
|
)
|
|
|
49,336
|
|
|
|
(10,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(100,773
|
)
|
|
|
69,255
|
|
|
|
(31,518
|
)
|
Income from discontinued operations, net of tax
|
|
|
522
|
|
|
|
3,072
|
|
|
|
3,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(100,251
|
)
|
|
$
|
72,327
|
|
|
$
|
(27,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The following tables outline, for the periods indicated,
selected operating data as a percentage of net operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005(1)
|
|
|
2006
|
|
|
2007
|
|
|
Net operating revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of
services(2)
|
|
|
80.1
|
|
|
|
80.2
|
|
|
|
83.3
|
|
General and administrative
|
|
|
9.8
|
|
|
|
2.4
|
|
|
|
2.2
|
|
Bad debt expense
|
|
|
1.3
|
|
|
|
1.0
|
|
|
|
1.9
|
|
Depreciation and amortization
|
|
|
2.4
|
|
|
|
2.5
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6.4
|
|
|
|
13.9
|
|
|
|
9.7
|
|
Loss on early retirement of debt
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
Merger related charges
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(5.7
|
)
|
|
|
(7.1
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority
interests and income taxes
|
|
|
(2.2
|
)
|
|
|
6.8
|
|
|
|
2.8
|
|
Minority interests
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(2.3
|
)
|
|
|
6.7
|
|
|
|
2.7
|
|
Income tax expense (benefit)
|
|
|
(0.6
|
)
|
|
|
2.4
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1.7
|
)
|
|
|
4.3
|
|
|
|
1.8
|
|
Income from discontinued operations, net of tax
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1.5
|
)%
|
|
|
5.0
|
%
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Net operating revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of
services(2)
|
|
|
80.9
|
|
|
|
82.5
|
|
General and administrative
|
|
|
2.5
|
|
|
|
2.1
|
|
Bad debt expense
|
|
|
1.2
|
|
|
|
2.3
|
|
Depreciation and amortization
|
|
|
2.5
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12.9
|
|
|
|
9.9
|
|
Other income
|
|
|
0.3
|
|
|
|
|
|
Interest expense, net
|
|
|
(6.7
|
)
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations before minority interests and income taxes
|
|
|
6.5
|
|
|
|
3.2
|
|
Minority interests
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
6.4
|
|
|
|
3.2
|
|
Income tax expense
|
|
|
2.7
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.7
|
%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
54
The following tables summarize selected financial data by
business segment, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Change
|
|
|
Change
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
2005-
|
|
|
2006-
|
|
|
|
2005(1)
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
1,372,483
|
|
|
$
|
1,378,543
|
|
|
$
|
1,386,410
|
|
|
|
0.4
|
%
|
|
|
0.6
|
%
|
Outpatient rehabilitation
|
|
|
480,711
|
|
|
|
470,339
|
|
|
|
603,413
|
|
|
|
(2.2
|
)
|
|
|
28.3
|
|
Other(4)
|
|
|
5,248
|
|
|
|
2,616
|
|
|
|
1,843
|
|
|
|
(50.2
|
)
|
|
|
(29.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
1,858,442
|
|
|
$
|
1,851,498
|
|
|
$
|
1,991,666
|
|
|
|
(0.4
|
)%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
280,789
|
|
|
$
|
252,539
|
|
|
$
|
180,090
|
|
|
|
(10.1
|
)%
|
|
|
(28.7
|
)%
|
Outpatient rehabilitation
|
|
|
56,052
|
|
|
|
51,859
|
|
|
|
57,979
|
|
|
|
(7.5
|
)
|
|
|
11.8
|
|
Other(4)
|
|
|
(217,740
|
)
|
|
|
(46,524
|
)
|
|
|
(44,184
|
)
|
|
|
78.6
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
119,101
|
|
|
$
|
257,874
|
|
|
$
|
193,885
|
|
|
|
116.5
|
%
|
|
|
(24.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
308,144
|
|
|
$
|
283,270
|
|
|
$
|
217,175
|
|
|
|
(8.1
|
)%
|
|
|
(23.3
|
)%
|
Outpatient rehabilitation
|
|
|
65,957
|
|
|
|
64,823
|
|
|
|
75,437
|
|
|
|
(1.7
|
)
|
|
|
16.4
|
|
Other(4)
|
|
|
(44,167
|
)
|
|
|
(39,769
|
)
|
|
|
(37,684
|
)
|
|
|
10.0
|
|
|
|
5.2
|
|
Adjusted EBITDA
margins:(3)
Specialty hospitals
|
|
|
22.5
|
%
|
|
|
20.5
|
%
|
|
|
15.7
|
%
|
|
|
(8.9
|
)%
|
|
|
(23.4
|
)%
|
Outpatient rehabilitation
|
|
|
13.7
|
|
|
|
13.8
|
|
|
|
12.5
|
|
|
|
0.7
|
|
|
|
(9.4
|
)
|
Other(4)
:
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
1,656,224
|
|
|
$
|
1,742,803
|
|
|
$
|
1,882,476
|
|
|
|
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
293,720
|
|
|
|
258,773
|
|
|
|
513,397
|
|
|
|
|
|
|
|
|
|
Other(4)
|
|
|
218,441
|
|
|
|
180,948
|
|
|
|
99,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
2,168,385
|
|
|
$
|
2,182,524
|
|
|
$
|
2,495,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
102,323
|
|
|
$
|
146,291
|
|
|
$
|
146,901
|
|
|
|
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
3,750
|
|
|
|
6,527
|
|
|
|
14,737
|
|
|
|
|
|
|
|
|
|
Other(4)
|
|
|
3,873
|
|
|
|
2,278
|
|
|
|
4,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
109,946
|
|
|
$
|
155,096
|
|
|
$
|
166,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
Net operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
354,228
|
|
|
$
|
378,604
|
|
|
|
6.9
|
%
|
Outpatient rehabilitation
|
|
|
112,380
|
|
|
|
169,577
|
|
|
|
50.9
|
|
Other(4)
|
|
|
221
|
|
|
|
97
|
|
|
|
(56.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
466,829
|
|
|
$
|
548,278
|
|
|
|
17.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
57,683
|
|
|
$
|
52,501
|
|
|
|
(9.0
|
)%
|
Outpatient rehabilitation
|
|
|
14,861
|
|
|
|
14,304
|
|
|
|
(3.7
|
)
|
Other(4)
|
|
|
(12,219
|
)
|
|
|
(12,461
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
60,325
|
|
|
$
|
54,344
|
|
|
|
(9.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
66,031
|
|
|
$
|
63,243
|
|
|
|
(4.2
|
)%
|
Outpatient rehabilitation
|
|
|
17,618
|
|
|
|
20,097
|
|
|
|
14.1
|
|
Other(4)
|
|
|
(10,693
|
)
|
|
|
(10,845
|
)
|
|
|
(1.4
|
)
|
Adjusted EBITDA
margins:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
|
18.6
|
%
|
|
|
16.7
|
%
|
|
|
(10.2
|
)%
|
Outpatient rehabilitation
|
|
|
15.7
|
|
|
|
11.9
|
|
|
|
(24.2
|
)
|
Other(4)
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
N/M
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
1,795,902
|
|
|
$
|
1,922,107
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
258,372
|
|
|
|
520,418
|
|
|
|
|
|
Other(4)
|
|
|
137,917
|
|
|
|
111,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
2,192,191
|
|
|
$
|
2,554,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals
|
|
$
|
35,879
|
|
|
$
|
9,988
|
|
|
|
|
|
Outpatient rehabilitation
|
|
|
2,021
|
|
|
|
3,851
|
|
|
|
|
|
Other(4)
|
|
|
199
|
|
|
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company
|
|
$
|
38,099
|
|
|
$
|
15,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The following tables reconcile same hospitals information:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005(1)
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Net operating revenue
|
|
|
|
|
|
|
|
|
Specialty hospitals net operating revenue
|
|
$
|
1,372,483
|
|
|
$
|
1,378,543
|
|
Less: Specialty hospitals opened, acquired or closed after 1/1/05
|
|
|
49,046
|
|
|
|
23,764
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store net operating revenue
|
|
$
|
1,323,437
|
|
|
$
|
1,354,779
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(3)
|
|
|
|
|
|
|
|
|
Specialty hospitals Adjusted
EBITDA(3)
|
|
$
|
308,144
|
|
|
$
|
283,270
|
|
Less: Specialty hospitals opened, acquired or closed after 1/1/05
|
|
|
5,404
|
|
|
|
(9,344
|
)
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store Adjusted
EBITDA(3)
|
|
$
|
302,740
|
|
|
$
|
292,614
|
|
|
|
|
|
|
|
|
|
|
All specialty hospitals Adjusted EBITDA
margin(3)
|
|
|
22.5
|
%
|
|
|
20.5
|
%
|
Specialty hospitals same store Adjusted EBITDA
margin(3)
|
|
|
22.9
|
%
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Net operating revenue
|
|
|
|
|
|
|
|
|
Specialty hospitals net operating revenue
|
|
$
|
1,378,543
|
|
|
$
|
1,386,410
|
|
Less: Specialty hospitals opened, acquired or closed after 1/1/06
|
|
|
106,940
|
|
|
|
81,514
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store net operating revenue
|
|
$
|
1,271,603
|
|
|
$
|
1,304,896
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(3)
|
|
|
|
|
|
|
|
|
Specialty hospitals Adjusted
EBITDA(3)
|
|
$
|
283,270
|
|
|
$
|
217,175
|
|
Less: Specialty hospitals opened, acquired or closed after 1/1/06
|
|
|
5,867
|
|
|
|
(13,524
|
)
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store Adjusted
EBITDA(3)
|
|
$
|
277,403
|
|
|
$
|
230,699
|
|
|
|
|
|
|
|
|
|
|
All specialty hospitals Adjusted EBITDA
margin(3)
|
|
|
20.5
|
%
|
|
|
15.7
|
%
|
Specialty hospitals same store Adjusted EBITDA
margin(3)
|
|
|
21.8
|
%
|
|
|
17.7
|
%
|
57
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Net operating revenue
|
|
|
|
|
|
|
|
|
Specialty hospitals net operating revenue
|
|
$
|
354,228
|
|
|
$
|
378,604
|
|
Less: Specialty hospitals in development, opened or closed after
1/1/07
|
|
|
18,442
|
|
|
|
8,928
|
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store net operating revenue
|
|
$
|
335,786
|
|
|
$
|
369,676
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(3)
|
|
|
|
|
|
|
|
|
Specialty hospitals Adjusted
EBITDA(3)
|
|
$
|
66,031
|
|
|
$
|
63,243
|
|
Less: Specialty hospitals in development, opened or closed after
1/1/07
|
|
|
911
|
|
|
|
(6,036
|
)
|
|
|
|
|
|
|
|
|
|
Specialty hospitals same store Adjusted
EBITDA(3)
|
|
$
|
65,120
|
|
|
$
|
69,279
|
|
|
|
|
|
|
|
|
|
|
All specialty hospitals Adjusted EBITDA
margin(3)
|
|
|
18.6
|
%
|
|
|
16.7
|
%
|
Specialty hospitals same store Adjusted EBITDA
margin(3)
|
|
|
19.4
|
%
|
|
|
18.7
|
%
|
|
|
|
|
|
N/M Not Meaningful.
|
(1)
|
|
The financial data for the period
after the Merger, February 25 through December 31, 2005
(Successor Period), have been added to the financial data for
the period from January 1 through February 24, 2005
(Predecessor Period) to arrive at the combined year ended
December 31, 2005.
|
(2)
|
|
Cost of services includes salaries,
wages and benefits, operating supplies, lease and rent expense
and other operating costs.
|
(3)
|
|
We define Adjusted EBITDA as net
income before interest, income taxes, depreciation and
amortization, income from discontinued operations, loss on early
retirement of debt, merger related charges, stock compensation
expense, long term incentive compensation, other income/expense
and minority interest. We believe that the presentation of
Adjusted EBITDA is important to investors because Adjusted
EBITDA is commonly used as an analytical indicator of
performance by investors within the healthcare industry.
Adjusted EBITDA is used by management to evaluate financial
performance and determine resource allocation for each of our
operating units. Adjusted EBITDA is not a measure of financial
performance under generally accepted accounting principles.
Items excluded from Adjusted EBITDA are significant components
in understanding and assessing financial performance. Adjusted
EBITDA should not be considered in isolation or as an
alternative to, or substitute for, net income, cash flows
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 13 to
our audited consolidated financial statements and footnote 7 to
our interim unaudited consolidated financial statements for the
period ended March 31, 2008 for a reconciliation of net
income to Adjusted EBITDA as utilized by us in reporting our
segment performance in accordance with SFAS No. 131.
|
(4)
|
|
Other includes our general and
administrative services, as well as businesses associated with
the sale of home medical equipment, infusion/intravenous
services and non-healthcare services.
|
Three
Months Ended March 31, 2008 Compared to Three Months Ended
March 31, 2007
Net
Operating Revenues
Our net operating revenues increased by 17.4% to
$548.3 million for the three months ended March 31,
2008 compared to $466.8 million for the three months ended
March 31, 2007.
Specialty Hospitals. Our specialty hospital
net operating revenues increased 6.9% to $378.6 million for
the three months ended March 31, 2008 compared to
$354.2 million for the three months ended March 31,
2007. Net operating revenues for the specialty hospitals opened
as of January 1, 2007 and operated by us throughout both
periods increased 10.1% to $369.7 million for the three
months ended March 31, 2008, from $335.8 million for
the three months ended March 31, 2007. This increase was
offset by the loss of revenues from closed hospitals, which
accounted for $17.7 million of net revenue. Hospitals
opened in 2007 and 2008 increased net operating revenues by
$8.2 million. The increase in same store hospitals net
operating revenues resulted from an increase in our patient days
and our average net revenue per patient day. Our patient days
for these same store hospitals increased 5.7% and
58
was attributable to an increase in our non-Medicare patient
days. The occupancy percentage in our same store hospitals
remained constant at 73% for both the three months ended
March 31, 2008 and the three months ended March 31,
2007. Our average net revenue per patient day increased 3.9% to
$1,432 for the three months ended March 31, 2008 from
$1,378 for the three months ended March 31, 2007. This
increase in net revenue per patient day occurred in our Medicare
revenues and was primarily related to the increased severity of
the cases we treated.
Outpatient Rehabilitation. Our outpatient
rehabilitation net operating revenues increased 50.9% to
$169.6 million for the three months ended March 31,
2008 compared to $112.4 million for the three months ended
March 31, 2007. The number of patient visits in our
outpatient rehabilitation clinics increased 78.8% for the three
months ended March 31, 2008 to 1,155,907 visits compared to
646,651 visits for the three months ended March 31, 2007.
Substantially all of the increase in net operating revenues and
patient visits was related to the addition of the outpatient
rehabilitation clinics acquired from HealthSouth Corporation.
Net revenue per visit in our clinics was $103 for the three
months ended March 31, 2008 compared to $101 for the three
months ended March 31, 2007.
Other. Our other revenues were
$0.1 million for the three months ended March 31, 2008
compared to $0.2 million for the three months ended
March 31, 2007. These revenues relate to revenue from other
nonhealthcare services.
Operating
Expenses
Our operating expenses increased by 20.7% to $476.5 million
for the three months ended March 31, 2008 compared to
$394.8 million for the three months ended March 31,
2007. Our operating expenses include our cost of services,
general and administrative expense and bad debt expense. As a
percentage of our net operating revenues, our operating expenses
were 86.9% for the three months ended March 31, 2008
compared to 84.6% for the three months ended March 31,
2007. Cost of services as a percentage of net operating revenues
was 82.5% for the three months ended March 31, 2008
compared to 80.9% for the three months ended March 31,
2007. These costs primarily reflect our labor expenses. The
increase in cost of services as a percentage of net operating
revenues was primarily related to higher relative costs incurred
in the outpatient rehabilitation clinics acquired from
HealthSouth Corporation. Another component of cost of services
is facility rent expense, which was $27.1 million for the
three months ended March 31, 2008 compared to
$20.2 million for the three months ended March 31,
2007. During the same time period, general and administrative
expense declined as a percentage of net operating revenues.
General and administrative expenses were 2.1% of net operating
revenues for the three months ended March 31, 2008 compared
to 2.5% of net operating revenues for the three months ended
March 31, 2007. Our bad debt expense as a percentage of net
operating revenues was 2.3% for the three months ended
March 31, 2008 compared to 1.2% for the three months ended
March 31, 2007. This increase occurred across both business
segments. In our specialty hospital segment we have experienced
an aging of our accounts receivable which generated higher
reserve requirements for the three months ended March 31,
2008. Additionally, we are experiencing an increase in the
write-off of uncollectible Medicare copayments and deductibles
which has the effect of increasing our bad debt expense. In our
outpatient segment, we have experienced a higher write-off of
uncollectible accounts for the three months ended March 31,
2008 compared to the three months ended March 31, 2007.
Depreciation and amortization expenses were $17.4 million
for the three months ended March 31, 2008 compared to
$11.7 million for the three months ended March 31,
2007. Of the $5.7 million increase, $2.6 million is
related to the outpatient rehabilitation clinics acquired from
HealthSouth Corporation and the remaining increase is
principally related to buildings and equipment associated with
our hospital development and relocation activities.
Adjusted
EBITDA
Specialty Hospitals. Adjusted EBITDA decreased
by 4.2% to $63.2 million for the three months ended
March 31, 2008 compared to $66.0 million for the three
months ended March 31, 2007. Our Adjusted EBITDA margins
decreased to 16.7% for the three months ended March 31,
2008 from 18.6% for the three months ended March 31, 2007.
The hospitals opened as of January 1, 2007 and operated by
us throughout both periods had Adjusted EBITDA of
$69.3 million for the three months ended March 31,
2008, an increase of $4.2 million or 6.4% over the Adjusted
EBITDA of these hospitals for the three months ended
March 31, 2007. Our Adjusted EBITDA margin in these same
store hospitals decreased to 18.7% for the three months ended
March 31, 2008 from 19.4% for
59
the three months ended March 31, 2007. The decrease in our
adjusted EBITDA margin is principally related to the increase in
bad debt expense. Our hospitals opened during 2007 and 2008
incurred Adjusted EBITDA losses of $7.2 million and
$1.0 million for the three months ended March 31, 2008
and 2007, respectively.
Outpatient Rehabilitation. Adjusted EBITDA
increased by 14.1% to $20.1 million for the three months
ended March 31, 2008 compared to $17.6 million for the
three months ended March 31, 2007. Our Adjusted EBITDA
margins decreased to 11.9% for the three months ended
March 31, 2008 from 15.7% for the three months ended
March 31, 2007. The increase in Adjusted EBITDA was the
result of Adjusted EBITDA contributed by the outpatient
rehabilitation clinics acquired from HealthSouth Corporation and
an increase in the net revenue per visit at our existing
clinics. Our Adjusted EBITDA margins decreased due to lower
margins generated by the outpatient rehabilitation clinics
acquired from HealthSouth Corporation and an increase in bad
debt expense.
Other. The Adjusted EBITDA loss was
$10.8 million for the three months ended March 31,
2008 compared to an Adjusted EBITDA loss of $10.7 million
for the three months ended March 31, 2007 and is primarily
related to our general and administrative expenses.
Income
from Operations
For the three months ended March 31, 2008, we experienced
income from operations of $54.3 million compared to
$60.3 million for the three months ended March 31,
2007. The decrease in income from operations resulted primarily
from operating losses incurred in our specialty hospitals opened
in 2007 and 2008.
Interest
Expense
Interest expense was $36.9 million for the three months
ended March 31, 2008 compared to $32.2 million for the
three months ended March 31, 2007. The increase in interest
expense is related to increased borrowings under our senior
secured credit facility. The increase in borrowings was
principally used to fund the acquisition of the outpatient
rehabilitation division of HealthSouth Corporation.
Minority
Interests
Minority interests in consolidated earnings were
$0.3 million for both the three months ended March 31,
2008 and for the three months ended March 31, 2007.
Income
Taxes
We recorded income tax expense of $8.5 million for the
three months ended March 31, 2008. The expense represented
an effective tax rate of 49.5%. For the three months ended
March 31, 2007 we recorded income tax expense of
$12.4 million. This expense represented an effective tax
rate of 41.6%. The increase in the effective rate is principally
due to an increase in our reserves for uncertain tax positions
and an increase in the accrued interest and penalties associated
with these uncertain tax positions.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Net
Operating Revenues
Our net operating revenues increased by 7.6% to
$1,991.7 million for the year ended December 31, 2007
compared to $1,851.5 million for the year ended
December 31, 2006.
Specialty Hospitals. Our specialty hospital
net operating revenues increased 0.6% to $1,386.4 million
for the year ended December 31, 2007 compared to
$1,378.5 million for the year ended December 31, 2006.
Net operating revenues for the specialty hospitals opened before
January 1, 2006 and operated by us throughout both years
increased 2.6% to $1,304.9 million for the year ended
December 31, 2007 from $1,271.6 million for the year
ended December 31, 2006. This increase was offset by the
effect of closed hospitals, which accounted for
$57.2 million of net revenue for the year ended
December 31, 2006. Hospitals opened in 2006 and 2007
increased net operating revenues by $31.8 million. The
increase in same store hospitals net operating revenues resulted
from an increase in our patient days. Our patient days for these
same store hospitals increased 4.0% and our occupancy percentage
60
remained constant at 71% for both the year ended
December 31, 2007 and the year ended December 31,
2006. The $33.3 million increase in our same store
specialty hospitals net operating revenue was the result of a
$63.7 million increase in our non-Medicare net operating
revenues that was offset by a reduction in our Medicare net
operating revenues of $30.4 million. The reduction in
Medicare net operating revenues has resulted from LTACH
regulatory changes that have reduced the payment rates for
Medicare cases and a reduction in our Medicare volume.
Outpatient Rehabilitation. Our outpatient
rehabilitation net operating revenues increased 28.3% to
$603.4 million for the year ended December 31, 2007
compared to $470.3 million for the year ended
December 31, 2006. The number of patient visits in our
outpatient rehabilitation clinics increased 35.7% for the year
ended December 31, 2007 to 4,032,197 visits compared to
2,972,243 visits for the year ended December 31, 2006.
Substantially all of the increase in net operating revenues and
patient visits was related to the outpatient rehabilitation
clinics acquired from HealthSouth Corporation, offset in part by
a decrease in net operating revenues due to the sale of a group
of clinics at the end of 2006. Net revenue per visit in our
clinics was $100 for the year ended December 31, 2007
compared to $94 for the year ended December 31, 2006.
Other. Our other revenues were
$1.8 million for the year ended December 31, 2007
compared to $2.6 million for the year ended
December 31, 2006. These revenues were generated from
non-healthcare related services.
Operating
Expenses
Our operating expenses increased 12.5% to $1,740.5 million
for the year ended December 31, 2007 compared to
$1,547.0 million for the year ended December 31, 2006.
Our operating expenses include our cost of services, general and
administrative expense and bad debt expense. The increase in
operating expenses was principally related to the outpatient
rehabilitation clinics acquired from HealthSouth Corporation.
As a percentage of our net operating revenues, our operating
expenses were 87.4% for the year ended December 31, 2007
compared to 83.6% for the year ended December 31, 2006.
Cost of services as a percentage of operating revenues was 83.3%
for the year ended December 31, 2007 compared to 80.2% for
the year ended December 31, 2006. This increase in the
relative percentage for cost of services is principally due to
the significant decline in our specialty hospital Medicare
revenue and an increase in labor costs at our specialty
hospitals. We also experienced a higher relative labor component
in the outpatient operations acquired from HeathSouth
Corporation. Another component of cost of services is facility
rent expense, which was $98.5 million for the year ended
December 31, 2007 compared to $84.0 million for the
year ended December 31, 2006. The increase in rent expense
was principally related to the facility rent expense for the
outpatient rehabilitation clinics acquired from HealthSouth
Corporation. During the same period general and administrative
expense decreased as a percentage of net operating revenue to
2.2% compared to 2.4% for the year ended December 31, 2006,
principally due to the increase in our net operating revenues.
Our bad debt expense as a percentage of net operating revenues
was 1.9% for the year ended December 31, 2007 compared to
1.0% for the year ended December 31, 2006. This increase
occurred across both business segments. In our specialty
hospital segment we have experienced an increase in our bad
debts associated with the write-off of uncollectible Medicare
co-payments and deductibles. In our outpatient segment we have
experienced an aging of our accounts receivable which has
generated higher reserve requirements and an increase in bad
debt expense under our reserve methodology.
Adjusted
EBITDA
Specialty Hospitals. Adjusted EBITDA decreased
23.3% to $217.2 million for the year ended
December 31, 2007 compared to $283.3 million for the
year ended December 31, 2006. Our Adjusted EBITDA margins
decreased to 15.7% for the year ended December 31, 2007
from 20.5% for the year ended December 31, 2006. The
hospitals opened before January 1, 2006 and operated
throughout both years had Adjusted EBITDA of
$230.7 million, a decrease of 16.8% over the Adjusted
EBITDA of these hospitals in 2006. Our Adjusted EBITDA margin in
these same store hospitals decreased to 17.7% for the year ended
December 31, 2007 from 21.8% for the year ended
December 31, 2006. The decrease in our Adjusted EBITDA is
principally due to a $16.6 million decline in our Medicare
net operating revenues resulting from LTCH regulatory changes
that reduced our payment rates for Medicare cases without any
corresponding reduction in the cost of services associated with
those cases. We also experienced a decline in our non-Medicare
rate per patient day and an increase in our labor, bad debt and
facility
61
costs that contributed to the decrease in our Adjusted EBITDA.
These contributors to the decline in our Adjusted EBITDA were
offset by an increase in Adjusted EBITDA resulting from an
increase in our non-Medicare volume.
Outpatient Rehabilitation. Adjusted EBITDA
increased 16.4% to $75.4 million for the year ended
December 31, 2007 compared to $64.8 million for the
year ended December 31, 2006. Our Adjusted EBITDA margins
decreased to 12.5% for the year ended December 31, 2007
from 13.8% for the year ended December 31, 2006. The
increase in Adjusted EBITDA was the result of Adjusted EBITDA
contributed by the outpatient rehabilitation clinics acquired
from HealthSouth Corporation and an increase in the net revenue
per visit at our existing clinics, offset in part by a reduction
in Adjusted EBITDA due to the sale of a group of clinics at the
end of 2006. Our Adjusted EBITDA margins decreased due to lower
margins generated by the outpatient rehabilitation clinics
acquired from HealthSouth Corporation.
Other. The Adjusted EBITDA loss, which
primarily includes our general and administrative expenses, was
$37.7 million for the year ended December 31, 2007
compared to a loss of $39.8 million for the year ended
December 31, 2006.
Income
from Operations
For the year ended December 31, 2007, we experienced income
from operations of $193.9 million compared to income from
operations of $257.9 million for the year ended
December 31, 2006. The decrease in income from operations
resulted from the Adjusted EBITDA changes described above and an
increase in depreciation and amortization expense. The increase
in depreciation and amortization expense resulted primarily from
increased depreciation expense associated with free-standing
hospitals we have placed in service and an increase in
depreciation and amortization expense related to the outpatient
rehabilitation clinics acquired from HealthSouth Corporation.
Interest
Expense
Interest expense was $140.2 million for the year ended
December 31, 2007 compared to $131.8 million for the
year ended December 31, 2006. The increase in interest
expense is related to higher outstanding debt balances and
slightly higher interest rates under our senior secured credit
facility. The increase in outstanding debt is principally
related to the borrowings used to fund the acquisition of the
outpatient rehabilitation division of HealthSouth Corporation.
Minority
Interests
Minority interests in consolidated earnings were
$1.5 million for the year ended December 31, 2007
compared to $1.4 million for the year ended
December 31, 2006.
Income
Taxes
We recorded income tax expense of $18.7 million for the
year ended December 31, 2007. This expense represented an
effective tax rate of 34.5%. For the year ended
December 31, 2006, we recorded income tax expense of
$43.5 million. This expense represented an effective tax
rate of 34.6%. In both the years ended December 31, 2007
and December 31, 2006 we experienced an effective tax rate
that was lower than our expected blended federal and state tax
rate. For the year ended December 31, 2007 we recognized a
lower effective tax rate as a result of greater than expected
tax benefits generated on the sale of equipment and
subsidiaries. For the year ended December 31, 2006 we
recognized a lower effective tax rate as a result of a
significant tax loss we recognized on the sale of a group of
legal entities that operated outpatient rehabilitation clinics.
These legal entities were sold at an amount that approximated
their GAAP book value. However, the stock of these legal
entities that were originally acquired as part of our
acquisition of the NovaCare Physical Rehabilitation and
Occupational Health Group in 1999 had a substantial tax basis.
62
Income
from Discontinued Operations, Net of Tax
On March 1, 2006, we sold our wholly-owned subsidiary,
CBIL, for approximately C$89.8 million in cash
(US$79.0 million). We conducted all of our Canadian
operations through CBIL. The financial results of CBIL have been
reclassified as discontinued operations for all periods
presented in this report. We recognized a gain on sale (net of
tax) of $9.1 million in the quarter ended March 31,
2006.
Year
Ended December 31, 2006 Compared to Combined Year Ended
December 31, 2005
Net
Operating Revenues
Our net operating revenues decreased 0.4% to
$1,851.5 million for the year ended December 31, 2006
compared to $1,858.4 million for the combined year ended
December 31, 2005.
Specialty Hospitals. Our specialty hospital
net operating revenues increased 0.4% to $1,378.5 million
for the year ended December 31, 2006 compared to
$1,372.5 million for the combined year ended
December 31, 2005. Net operating revenues for the specialty
hospitals opened before January 1, 2005 and operated by us
throughout both years increased 2.4% to $1,354.8 million
for the year ended December 31, 2006 from
$1,323.4 million for the combined year ended
December 31, 2005. This increase was offset by the effect
of closed hospitals, which amounted to $28.0 million of net
revenue. Hospitals opened in 2006 increased net operating
revenues by $2.6 million. The increase in same store
hospitals net operating revenues resulted from both an
increase in our patient days and higher net revenue per patient
day. Our patient days for these same store hospitals increased
0.3% and our occupancy percentage remained constant at 70% for
both the year ended December 31, 2006 and the combined year
ended December 31, 2005. Although we have experienced a
small increase in our same store specialty hospitals net
operating revenue, we experienced a reduction in our Medicare
net operating revenues of $21.4 million that was offset by
a $52.8 million increase in our non-Medicare net operating
revenues. The reduction in Medicare net operating revenues has
resulted from LTCH regulatory changes that have reduced the
payment rates for Medicare cases.
Outpatient Rehabilitation. Our outpatient
rehabilitation net operating revenues declined 2.2% to
$470.3 million for the year ended December 31, 2006
compared to $480.7 million for the combined year ended
December 31, 2005. The number of patient visits in our
outpatient rehabilitation clinics declined 10.2% for the year
ended December 31, 2006 to 2,972,243 visits compared to
3,308,620 visits for the combined year ended December 31,
2005. The decrease in net operating revenues and patient visits
was principally related to a decline in the volume of visits per
clinic and in the number of clinics we own. Net revenue per
visit in these clinics was $94 for the year ended
December 31, 2006 compared to $89 for the combined year
ended December 31, 2005.
Other. Our other revenues were
$2.6 million for the year ended December 31, 2006
compared to $5.2 million for the combined year ended
December 31, 2005. These revenues are principally related
to the sales of home medical equipment, infusion/intravenous
services, and non-healthcare services. In May 2005, we sold the
assets of our home medical equipment and infusion/intravenous
service business, which resulted in the reduction in our other
revenues.
Operating
Expenses
Our operating expenses decreased 8.8% to $1,547.0 million
for the year ended December 31, 2006 compared to
$1,695.5 million for the combined year ended
December 31, 2005. Our operating expenses include our cost
of services, general and administrative expense and bad debt
expense. The principal reason for the decline in our operating
expenses resulted from a significant decline in our general and
administrative expenses. There were three major categories of
expenses incurred during the combined year ended
December 31, 2005 that do not exist for the year ended
December 31, 2006. First, we granted restricted stock
awards in connection with the Merger Transactions to certain key
management employees. These awards generally vest over five
years. Effective at the time of the Merger, we also granted
stock options to certain other key employees that vest over five
years. The fair value of restricted stock awards and stock
options vesting and expensed during the Successor Period of
February 25 through December 31, 2005 was
$10.3 million. Of this amount, $10.1 million was
included in general and administrative expense and
$0.2 million was included in cost of services. Second,
during the Predecessor Period of
63
January 1 through February 24, 2005, all of our then
outstanding stock options were cancelled and cashed-out in
accordance with the merger agreement. This resulted in a charge
of $142.2 million of which $115.0 million is included
in general and administrative expense and $27.2 million is
included in cost of services. And third, as a result of the
special dividend of $175.0 million paid to our preferred
stockholders on September 29, 2005, we incurred
$14.5 million of expense in connection with a payment to
certain members of management under the terms of our long term
incentive compensation plan that is included in general and
administrative expense. Our general and administrative cost for
the combined year end December 31, 2005 also contained
costs associated with the SemperCare corporate office which were
not eliminated until the second quarter of 2005.
During the year ended December 31, 2006, we recorded
expense related to the vesting of restricted stock and stock
options in the amount of $3.8 million. Of this amount,
$3.6 million is included in general and administrative
expense and $0.2 million is included in cost of services.
As a percentage of our net operating revenues, our operating
expenses were 83.6% for the year ended December 31, 2006
compared to 91.2% for the combined year ended December 31,
2005. Cost of services as a percentage of operating revenues was
80.2% for the year ended December 31, 2006 compared to
80.1% for the combined year ended December 31, 2005. These
costs primarily reflect our labor expenses. Another component of
cost of services is facility rent expense, which was
$84.0 million for the year ended December 31, 2006
compared to $81.6 million for the combined year ended
December 31, 2005. Our bad debt expense as a percentage of
net operating revenues was 1.0% for the year ended
December 31, 2006 compared to 1.3% for the combined year
ended December 31, 2005. This decrease in bad debt expense
resulted from continued improvement in the aging composition of
our accounts receivable measured in absolute dollars which has
resulted in a lower bad debt requirement and expense.
Adjusted
EBITDA
Specialty Hospitals. Adjusted EBITDA decreased
8.1% to $283.3 million for the year ended December 31,
2006 compared to $308.1 million for the combined year ended
December 31, 2005. Our Adjusted EBITDA margins decreased to
20.5% for the year ended December 31, 2006 from 22.5% for
the combined year ended December 31, 2005. The hospitals
opened before January 1, 2005 and operated throughout both
years had Adjusted EBITDA of $292.6 million, a decrease of
3.3% over the Adjusted EBITDA of these hospitals in 2005. The
decrease in same store hospitals Adjusted EBITDA resulted
primarily from the reduction in our Medicare net operating
revenues resulting from LTACH regulatory changes that have
reduced our payment rates for Medicare cases. Additionally,
during 2005 we recorded a one-time benefit of $3.8 million
due to the reversal of an accrued patient care liability as a
result of the termination of this obligation. Our Adjusted
EBITDA margin in these same store hospitals decreased to 21.6%
for the year ended December 31, 2006 from 22.9% for the
combined year ended December 31, 2005.
Outpatient Rehabilitation. Adjusted EBITDA
decreased 1.7% to $64.8 million for the year ended
December 31, 2006 compared to $66.0 million for the
combined year ended December 31, 2005. Our Adjusted EBITDA
margins increased to 13.8% for the year ended December 31,
2006 from 13.7% for the combined year ended December 31,
2005. The decline in Adjusted EBITDA was the result of the
decline in clinic visit volumes, described under
Net Operating Revenues Outpatient
Rehabilitation above.
Other. The Adjusted EBITDA loss, which
primarily includes our general and administrative expenses, was
$39.8 million for the year ended December 31, 2006
compared to a loss of $44.2 million for the combined year
ended December 31, 2005. This reduction in the Adjusted
EBITDA loss was primarily the result of the decline in our
general and administrative expenses associated with the
SemperCare corporate office which were eliminated in the second
quarter of 2005 and losses incurred during 2005 related to our
home medical equipment and infusion/intravenous service business
which was sold in May 2005.
Income
from Operations
For the year ended December 31, 2006, we experienced income
from operations of $257.9 million compared to income from
operations of $119.1 million for the combined year ended
December 31, 2005. The increase in income from operations
experienced for the year ended December 31, 2006 resulted
from the higher expenses incurred during the combined year ended
December 31, 2005 related to significant stock compensation
costs associated with
64
the Merger Transactions of $152.5 million and the payment
of $14.5 million under the terms of our long term incentive
compensation plan offset by an increase in depreciation and
amortization of $2.8 million and the Adjusted EBITDA
decreases described above. The stock compensation expense was
comprised of $142.2 million related to the redemption of
all vested and unvested outstanding stock options in accordance
with the terms of the merger agreement in the Predecessor Period
of January 1 through February 24, 2005 and an additional
$10.3 million of stock compensation expense related to
shares of restricted stock that were issued in the Successor
Period of February 25 through December 31, 2005.
Loss
on Early Retirement of Debt
In connection with the Merger, Select commenced tender offers to
acquire all of its
91/2% senior
subordinated notes due 2009 and all of its
71/2% senior
subordinated notes due 2013. Upon completion of the tender
offers on February 24, 2005, all $175.0 million of the
71/2% senior
subordinated notes were tendered and $169.3 million of the
$175.0 million of
91/2% notes
were tendered. The loss consists of the tender premium cost of
$34.8 million and the remaining unamortized deferred
financing costs of $7.9 million.
Merger
Related Charges
As a result of the Merger, we incurred costs of
$12.0 million in the Predecessor Period of January 1
through February 24, 2005 directly related to the Merger.
This included the fees of the investment advisor hired by the
special committee of Selects board of directors to
evaluate the Merger, legal and accounting fees, costs associated
with the
Hart-Scott-Rodino
filing related to the Merger, the cost associated with
purchasing a six year extended reporting period under our
directors and officers liability insurance policy and other
associated expenses.
Interest
Expense
Interest expense increased $24.9 million to
$131.8 million for the year ended December 31, 2006
from $106.9 million for the combined year ended
December 31, 2005. The increase in interest expense was due
to higher average debt levels and interest rates experienced
during the year ended December 31, 2006.
Minority
Interests
Minority interests in consolidated earnings were
$1.4 million for the year ended December 31, 2006
compared to $2.1 million for the combined year ended
December 31, 2005.
Income
Taxes
For the year ended December 31, 2006, we recorded income
tax expense of $43.5 million. This expense represented an
effective tax rate of 34.6%. We recognized a lower effective tax
for the year ended December 31, 2006 as a result of a
significant tax loss we recognized on the sale of a group of
legal entities that operated outpatient rehabilitation clinics.
These legal entities were sold at an amount that approximated
their GAAP book value. However, these legal entities that were
originally acquired as part of our acquisition of the NovaCare
Physical and Occupational Health Group in 1999 had a substantial
stock tax basis. We recorded an income tax benefit of
$59.8 million for the Predecessor Period of January 1
through February 24, 2005. The tax benefit represented an
effective tax benefit rate of 37.2%. This effective tax benefit
rate consisted of the statutory federal rate of 35% and a state
rate of 2.2%. The federal tax benefit was carried forward and
used to offset our federal tax throughout the remainder of 2005.
Because of the differing state tax rules related to net
operating losses, a portion of these state net operating losses
were assigned valuation allowances. We recorded an income tax
expense of $49.3 million for the Successor Period of
February 25 through December 31, 2005. The expense
represented an effective tax rate of 41.6%.
Income
from Discontinued Operations, Net of Tax
On March 1, 2006, we sold our wholly-owned subsidiary CBIL
for approximately C$89.8 million in cash
(US$79.0 million). We conducted all of our Canadian
operations through CBIL. The financial results of CBIL have
65
been reclassified as discontinued operations for all periods
presented in this report, and its assets and liabilities have
been reclassified as held for sale on our December 31, 2005
balance sheet.
Liquidity
and Capital Resources
Three
Months Ended March 31, 2007 and March 31,
2008
The following table summarizes the statement of cash flows for
the three months ended March 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Cash flows used in operating activities
|
|
$
|
(7,485
|
)
|
|
$
|
(24,865
|
)
|
Cash flows used in investing activities
|
|
|
(37,353
|
)
|
|
|
(19,302
|
)
|
Cash flows provided by financing activities
|
|
|
774
|
|
|
|
47,818
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(44,064
|
)
|
|
|
3,651
|
|
Cash and cash equivalents at beginning of period
|
|
|
81,600
|
|
|
|
4,529
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
37,536
|
|
|
$
|
8,180
|
|
|
|
|
|
|
|
|
|
|
Our operating activities used $24.9 million and
$7.5 million of cash flow for the three months ended
March 31, 2008 and March 31, 2007, respectively. The
principal reason for the decline in our operating cash flow was
the increase in our accounts receivable. At March 31, 2007
our days sales outstanding were 44 days. Our days sales
outstanding increased to 55 days at March 31, 2008,
from 48 days at December 31, 2007. The increase in
days sales outstanding is primarily related to the timing of the
periodic interim payments we received from Medicare for the
services provided at our specialty hospitals.
Our investing activities used $19.3 million of cash flow
for the three months ended March 31, 2008. The primary use
of cash was $15.1 million related to the purchase of
property and equipment and $4.2 million related to the
acquisition of minority interests and the final settlement of
the purchase price for the acquisition of the outpatient
rehabilitation division of HealthSouth Corporation. Investing
activities used $37.4 million of cash flow for the three
months ended March 31, 2007. The primary use of cash for
the three months ended March 31, 2007 was related to
building improvements and equipment purchases of
$38.1 million, offset by proceeds from a sale of a business
of $0.9 million.
Our financing activities provided $47.8 million of cash
flow for the three months ended March 31, 2008. The primary
source of cash related to borrowings, net of repayments, on our
senior secured credit facility of $65.4 million, offset by
repayment of bank overdrafts of $15.5 million, principal
payments on seller and other debt of $1.3 million,
repurchase of common and preferred stock of $0.4 million
and distributions to minority interests of $0.4 million.
The net borrowings on our senior secured credit facility were
used to fund the slow-down we experienced in our collection of
accounts receivable and our purchase of property and equipment.
Financing activities provided $0.8 million of cash flow for
the three months ended March 31, 2007. The primary source
of cash related to proceeds from bank overdrafts of
$3.0 million, offset by repayments on our senior secured
credit facility of $1.5 million and distributions to
minority interests of $0.8 million.
66
Year
Ended December 31, 2007, Year Ended December 31, 2006
and Combined Year Ended December 31, 2005
The following table summarizes the statement of cash flows for
the year ended December 31, 2007 and 2006, and combined
year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Cash flows provided by operating activities
|
|
$
|
57,211
|
|
|
$
|
227,651
|
|
|
$
|
86,013
|
|
Cash flows used in investing activities
|
|
|
(220,811
|
)
|
|
|
(81,481
|
)
|
|
|
(382,676
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
(48,510
|
)
|
|
|
(100,466
|
)
|
|
|
219,592
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
495
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(211,615
|
)
|
|
|
45,739
|
|
|
|
(77,071
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
247,476
|
|
|
|
35,861
|
|
|
|
81,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
35,861
|
|
|
$
|
81,600
|
|
|
$
|
4,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities generated $86.0 million in cash during
the year ended December 31, 2007. Our days sales
outstanding were 48 days at December 31, 2007 compared
to 41 days at December 31, 2006. Our operating cash
flow was negatively affected by a reduction in our operating
earnings, an increase in interest expense and an increase in our
accounts receivable.
Operating activities generated $227.7 million in cash
during the year ended December 31, 2006. Our operating cash
flow was positively affected by a reduction in our accounts
receivable and tax benefits we realized by changing our tax
accounting method used for deducting bad debts. The tax
accounting change had the effect of accelerating the tax
deduction for bad debt reserves. Our days sales outstanding were
41 days at December 31, 2006 compared to 52 days
at December 31, 2005. The significant reduction in days
sales outstanding was the result of several factors. The timing
of our periodic interim payments from Medicare received by our
specialty hospitals resulted in a seven day decline in the days
sales outstanding. The remaining decline was the result of
improved cash collections.
For the combined year ended December 31, 2005, operating
activities generated $57.2 million of cash. Our operating
cash flow includes $186.0 million in cash expenses related
to the Merger. Our days sales outstanding were 52 days at
December 31, 2005 compared to 48 days at
December 31, 2004. The increase in days sales outstanding
is primarily the result of a change in the way Medicare
calculated our periodic interim payments in our specialty
hospitals. Medicare changed from a per day based calculation to
a discharged based calculation to better align the periodic
interim payment methodology with the current discharge based
reimbursement system. As a result, we are no longer receiving a
periodic payment for those patients that have not yet been
discharged.
Investing activities used $382.7 million,
$81.5 million, and $220.8 million of cash flow for the
year ended December 31, 2007, the year ended
December 31, 2006, and the combined year ended
December 31, 2005, respectively. Of these amounts, we
incurred earnout and acquisition related payments of
$237.0 million, $3.4 million, and $111.6 million,
respectively in 2007, 2006, and 2005. In 2007, the acquisition
of the outpatient division of HealthSouth Corporation accounted
for the $236.9 million in acquisition payments. In 2005,
the SemperCare acquisition accounted for $105.1 million of
the $111.6 million in acquisition payments. The remaining
acquisition payments relate primarily to small acquisitions of
outpatient businesses. The earnout payments related principally
to obligations we assumed as part of our 1999 NovaCare
acquisition. Investing activities also used cash for the
purchases of property and equipment of $166.1 million,
$155.1 million, and $109.9 million in 2007, 2006, and
2005, respectively, which was related principally to
construction and relocation of existing hospitals. During 2005
and 2006 we purchased properties that have been used to relocate
existing hospitals and develop new free-standing hospitals. Each
of these properties required additional improvements to be made
before they become operational. Additionally during 2005 and
2006 we made major improvements and expanded our rehabilitation
hospital in West Orange, New Jersey. During 2007 we sold
business units and real property which generated
67
$16.0 million in cash. During 2006, we sold all of our
Canadian operations and a group of outpatient rehabilitation
clinics. The cash flow from these transactions, net of operating
cash transferred with the businesses, was $75.0 million.
Financing activities provided $219.6 million of cash for
the year ended December 31, 2007. The cash resulted
primarily from borrowings, net of repayments on our credit
facility of $213.5 million and proceeds from bank
overdrafts of $8.9 million. Approximately
$203.0 million of the borrowings from our credit facility
were used to fund the acquisition of the outpatient division of
HealthSouth Corporation. The remaining borrowings were used to
fund our normal operations including our hospital construction
activities.
Financing activities used $100.5 million of cash for the
year ended December 31, 2006. The cash usage resulted
primarily from repayments, net of borrowings, on our credit
facility of $90.8 million and repayment of bank overdrafts
of $7.1 million.
Financing activities used $48.5 million of cash for the
combined year ended December 31, 2005. The principal
financing activities were related to the financing of the Merger
Transactions. The excess proceeds from the transactions were
used to pay Merger Transactions related costs, which include the
cancellation of outstanding stock options. Additionally, during
2005 we repaid $115.0 million of debt under our revolving
loans and $4.4 million of our term loans. Bank overdrafts
of $19.4 million also provided additional financing cash.
Capital
Resources
We had net working capital of $105.3 million at
March 31, 2008 compared to net working capital of
$14.7 million at December 31, 2007. This increase in
working capital was principally related to an increase in our
accounts receivable and the timing of the payments of our
accounts payable and accrued liabilities.
On March 19, 2007, we entered into Amendment No. 2,
and on March 28, 2007, we entered into an Incremental
Facility Amendment with a group of lenders and JPMorgan Chase
Bank, N.A. as administrative agent. Amendment No. 2
increased the general exception to the prohibition on asset
sales under our senior secured credit facility from
$100.0 million to $200.0 million, relaxed certain
financial covenants starting March 31, 2007 and waived our
requirement to prepay certain term loan borrowings following the
year ended December 31, 2006. The Incremental Facility
Amendment provided to our company an incremental term loan of
$100.0 million, the proceeds of which we used to pay a
portion of the purchase price for the HealthSouth transaction.
After giving effect to the Incremental Facility Amendment, our
senior secured credit facility provides for senior secured
financing of up to $980.0 million, consisting of:
|
|
|
|
|
a $300.0 million revolving loan facility that will
terminate on February 24, 2011, including both a letter of
credit sub-facility and a swingline loan sub-facility, and
|
|
|
|
a $680.0 million term loan facility that matures on
February 24, 2012.
|
The interest rates per annum applicable to loans, other than
swingline loans, under our senior secured credit facility are,
at its 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 9 or 12 month period if available, in each case,
plus an applicable margin percentage. The alternate base rate is
the greater of (1) JPMorgan Chase Bank, N.A.s prime
rate and (2) one-half of 1% over the weighted average of
rates on overnight Federal funds as published by the Federal
Reserve Bank of New York. The adjusted LIBOR rate is determined
by reference to settlement rates established for deposits in
dollars in the London interbank market for a period equal to the
interest period of the loan and the maximum reserve percentages
established by the Board of Governors of the United States
Federal Reserve to which our lenders are subject. The applicable
margin percentage for borrowings under our revolving loans is
subject to change based upon the ratio of Selects total
indebtedness to our consolidated EBITDA (as defined in the
credit agreement). The applicable margin percentage for
revolving loans is currently (1) 1.50% for alternate base
rate loans and (2) 2.50% for adjusted LIBOR loans. The
applicable margin percentages for the term loans are
(1) 1.00% for alternate base rate loans and (2) 2.00%
for adjusted LIBOR loans.
Our senior secured credit facility requires Select to maintain
certain interest expense coverage ratios and leverage ratios
which become more restrictive over time. For the four
consecutive fiscal quarters ended March 31,
68
2008, Select was required to maintain an interest expense
coverage ratio (its ratio of consolidated EBITDA (as defined in
our senior secured credit facility) to cash interest expense)
for the prior four consecutive quarters of at least 1.75 to
1.00. Selects interest expense coverage ratio was 1.88 to
1.00 for such period. As of March 31, 2008, Select was
required to maintain its leverage ratio (its ratio of total
indebtedness to consolidated EBITDA for the prior four
consecutive fiscal quarters) at less than 6.00 to 1.00.
Selects leverage ratio was 5.85 to 1.00 as of
March 31, 2008. On a pro forma as adjusted basis, for the
four quarters ended March 31, 2008, Selects interest
expense coverage ratio was to 1.00 and
Selects leverage ratio was to 1.00
based upon an assumed public offering price of
$
per share, the midpoint of the range set forth on the cover page
of this prospectus.
Also, as of March 31, 2008, we had $80.3 million of
revolving loan availability under our senior secured credit
facility (after giving effect to $29.7 million of
outstanding letters of credit). On a pro forma as adjusted basis
as of March 31, 2008 we had
$ million
of revolving loan availability under our senior secured credit
facility (after giving effect to $29.7 million of
outstanding letters of credit) based upon an assumed public
offering price of
$
per share, the midpoint of the range set forth on the cover page
of this prospectus.
On June 13, 2005, Select entered into a five year interest
rate swap transaction with an effective date of August 22,
2005. On March 8, 2007 and November 23, 2007, Select
entered into two additional interest rate swap transactions for
three years with effective dates of May 22, 2007 and
November 23, 2007, respectively. The swaps are designated
as a cash flow hedge of forecasted LIBOR-based variable rate
interest payments. The underlying variable rate debt is
$500.0 million.
On February 24, 2005, EGL Acquisition Corp. issued and sold
$660.0 million in aggregate principal amount of
75/8% senior
subordinated notes due 2015, which Select assumed in connection
with the Merger. The net proceeds of the offering were used to
finance a portion of the funds needed to consummate the Merger
Transactions. The notes were issued under an indenture between
EGL Acquisition Corp. and U.S. Bank Trust National
Association, as trustee. Interest on the notes is payable
semi-annually in arrears on February 1 and August 1 of each
year. The notes are guaranteed by all of Selects
wholly-owned subsidiaries, subject to certain exceptions. On or
after February 1, 2010, the notes may be redeemed at
Selects option, in whole or in part, at redemption prices
that decline annually to 100% on and after February 1,
2013, plus accrued and unpaid interest. Upon a change of control
of Holdings, each holder of notes may require us to repurchase
all or any portion of the holders notes at a purchase
price equal to 101% of the principal amount plus accrued and
unpaid interest to the date of purchase.
On September 29, 2005, we sold $175.0 million of
senior floating rate notes due 2015, which bear interest at a
rate per annum, reset semi-annually, equal to the
6-month
LIBOR plus 5.75%. Interest is payable semi-annually in arrears
on March 15 and September 15 of each year, with the principal
due in full on September 15, 2015. The senior floating rate
notes are general unsecured obligations and are not guaranteed
by us or any of our subsidiaries. In connection with the
issuance of the senior floating rate notes, Select entered into
an interest rate swap transaction. The notional amount of the
interest rate swap is $175.0 million. The variable interest
rate of the debt was 8.4% and the fixed rate after the swap was
10.2% at March 31, 2008. The net proceeds of the issuance
of the senior floating rate notes, together with cash was used
to reduce the amount of our preferred stock, to make a payment
to participants in our long term incentive plan and to pay
related fees and expenses.
In connection with the issuance of our senior floating rate
notes, we entered into an amendment to our senior secured credit
facility. This amendment, among other things, permitted us to
incur this indebtedness and permits Select to make distributions
to us to service our indebtedness. The amendment also permitted
us to use the net proceeds of the offering to make the
$175.0 million special dividend to our preferred
stockholders and to incur $14.5 million of expense in
connection with a payment to certain members of management under
the terms of our long term incentive compensation plan, which is
included in general and administrative expense.
We believe internally generated cash flows and borrowings of
revolving loans under our senior secured credit facility will be
sufficient to finance operations for at least the next 12 months.
As a result of the SCHIP Extension Act, which has a three year
moratorium on the development of new LTCHs, we have stopped all
LTCH development, except for five LTCHs currently under
construction that are excluded from the moratorium. However, we
continue to evaluate opportunities to develop rehabilitation
hospitals. We also intend
69
to open new outpatient rehabilitation clinics in the local areas
that we currently serve where we can benefit from existing
referral relationships and brand awareness to produce
incremental growth.
Commitments
and Contingencies
The following table summarizes contractual obligations at
December 31, 2007, and the effect such obligations are
expected to have on liquidity and cash flow in future periods.
Reserves for uncertain tax positions of $21.4 million have
been excluded from the table below as we cannot reasonably
estimate the amounts or periods in which these liabilities will
be paid.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year
|
|
Contractual
Obligations
|
|
Total
|
|
|
2008
|
|
|
2009-2011
|
|
|
2012-2013
|
|
|
After 2013
|
|
|
|
(in thousands)
|
|
|
75/8% senior
subordinated notes
|
|
$
|
660,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
660,000
|
|
Senior secured credit facility
|
|
|
783,300
|
|
|
|
6,800
|
|
|
|
615,775
|
|
|
|
160,725
|
|
|
|
|
|
10% senior subordinated
notes(1)
|
|
|
134,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,110
|
|
Senior floating rate notes
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
Seller notes
|
|
|
633
|
|
|
|
233
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
2,286
|
|
|
|
635
|
|
|
|
1,651
|
|
|
|
|
|
|
|
|
|
Other debt obligations
|
|
|
306
|
|
|
|
81
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,755,635
|
|
|
|
7,749
|
|
|
|
618,051
|
|
|
|
160,725
|
|
|
|
969,110
|
|
Interest(2)
|
|
|
805,678
|
|
|
|
137,812
|
|
|
|
386,410
|
|
|
|
166,245
|
|
|
|
115,211
|
|
Letters of credit outstanding
|
|
|
29,706
|
|
|
|
|
|
|
|
29,706
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
6,244
|
|
|
|
3,903
|
|
|
|
2,169
|
|
|
|
172
|
|
|
|
|
|
Construction contracts
|
|
|
8,689
|
|
|
|
8,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Naming, promotional and sponsorship agreement
|
|
|
56,382
|
|
|
|
2,559
|
|
|
|
8,040
|
|
|
|
5,676
|
|
|
|
40,107
|
|
Operating leases
|
|
|
473,348
|
|
|
|
100,215
|
|
|
|
171,536
|
|
|
|
46,937
|
|
|
|
154,660
|
|
Related party operating leases
|
|
|
35,918
|
|
|
|
3,069
|
|
|
|
9,237
|
|
|
|
6,433
|
|
|
|
17,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
3,171,600
|
|
|
$
|
263,996
|
|
|
$
|
1,225,149
|
|
|
$
|
386,188
|
|
|
$
|
1,296,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Reflects the balance sheet
liability of our 10% senior subordinated notes calculated
in accordance with GAAP. The balance sheet liability so
reflected is less than the $150.0 million aggregate
principal amount of such notes that were issued with an original
issue discount. The remaining unamortized original issue
discount was $15.9 million at December 31, 2007.
Interest on our 10% senior subordinated notes accrued on
the full principal amount thereof, and Holdings will be
obligated to repay the full principal thereof, at maturity or
upon any mandatory or voluntary prepayment thereof. On any
interest payment date on or after February 24, 2010,
Holdings will be obligated to pay an amount of accrued original
issued discount on the 10% senior subordinated notes if
necessary to ensure that the notes will not be considered
applicable high yield discount obligations within
the meaning of the Internal Revenue Code of 1986, as amended.
The $150.0 million aggregate principal payable at maturity
on our 10% senior subordinated notes would be reduced by prior
payments of accrued original issue discount.
|
(2)
|
|
The interest obligation was
calculated using the average interest rate at December 31,
2007 of 6.8% for the senior secured credit facility, the stated
interest rate for Selects
75/8% senior
subordinated notes and our 10% senior subordinated notes,
10.2% for the senior floating rate notes and 6.0% for seller
notes, capital lease obligations and other debt obligations.
|
Inflation
The healthcare industry is labor intensive. Wages and other
expenses increase during periods of inflation and when labor
shortages occur in the marketplace. In addition, suppliers pass
along rising costs to us in the form of higher prices. We have
implemented cost control measures, including our case and
resource management program,
70
to curtail increases in operating costs and expenses. We cannot
predict our ability to cover or offset future cost increases.
Recent
Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting
Standards, or SFAS, No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133, or
SFAS No. 161. This statement is intended
to improve transparency in financial reporting by requiring
enhanced disclosures of an entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS No. 161 applies to all derivative instruments
within the scope of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, or
SFAS No. 133, as well as related hedged
items, bifurcated derivatives, and nonderivative instruments
that are designated and qualify as hedging instruments. Entities
with instruments subject to SFAS No. 161 must provide
more robust qualitative disclosures and expanded quantitative
disclosures. SFAS No. 161 is effective prospectively
for financial statements issued for years beginning after
November 15, 2008, with early application permitted.
Adoption of this statement will result in changes related to
presentation and disclosure of our interest rate swaps but will
not affect our results of operations.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations which replaces
SFAS No. 141. SFAS No. 141R retains the
purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities
assumed arising from contingencies, requires the capitalization
of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective for business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. This statement will be applied
prospectively and will not result in any changes to our
historical financial statements.
In December 2007, FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51. SFAS No. 160
changes the accounting and reporting for minority interests.
Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate
from the parents equity, and purchases or sales of equity
interests that do not result in a change in control will be
accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement and
upon a loss of control, the interest sold, as well as any
interest retained, will be recorded at fair value with any gain
or loss recognized in earnings. SFAS No. 160 is
effective for financial statements issued for years beginning
after December 15, 2008, except for the presentation and
disclosure requirements, which will apply retrospectively. Our
adoption of this statement will result in changes related to
presentation and disclosure of our minority interest but will
not affect our results of operations.
In February 2007, the FASB Issued SFAS No. 159,
Establishing the Fair Value Option for Financial Assets
and Liabilities, or SFAS No. 159.
SFAS No. 159 was to permit all entities to choose to
elect, at specified election dates, to measure eligible
financial instruments at fair value. An entity shall report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date, and recognize upfront costs and fees related to those
items in earnings as incurred and not deferred.
SFAS No. 159 applies to fiscal years beginning after
November 15, 2007, with early adoption permitted for an
entity that has also elected to apply the provisions of
SFAS No. 157, Fair Value Measurements. An
entity is prohibited from retrospectively applying
SFAS No. 159, unless it chooses early adoption.
SFAS No. 159 also applies to eligible items existing
at November 15, 2007 (or early adoption date). Our adoption
of SFAS No. 159 on January 1, 2008 did not impact our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or
SFAS No. 157. SFAS No. 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of
SFAS No. 157 relate to the definition of fair value,
the methods used to measure fair value, and the expanded
disclosures about fair value measurements. In February 2008, the
FASB issued FASB Staff Position, or FSP,
157-1,
Application of FASB
71
Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements
for Purposes of Lease Classification or Measurement under
Statement 13, or
FSP 157-1,
and
FSP 157-2,
Effective Date of FASB Statement No. 157, or
FSP 157-2.
FSP 157-1
amends SFAS No. 157 to remove certain leasing
transactions from its scope.
FSP 157-2
delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal 2009.
Effective for the first quarter 2008, we adopted
SFAS No. 157 except as it applies to those
nonfinancial assets and nonfinancial liabilities addressed in
FSP 157-2.
We are currently evaluating the effect
FSP 157-2
will have on our consolidated financial statements.
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 our senior secured credit
facility and the senior floating rate notes. As of
March 31, 2008, we had $848.7 million in term and
revolving loans outstanding under our senior secured credit
facility, which bear interest at variable rates. On
June 13, 2005, Select entered into a five year interest
rate swap transaction with an effective date of August 22,
2005. On March 8, 2007 and November 16, 2007, Select
entered into two additional interest rate swap transactions for
three years with effective dates of May 22, 2007 and
November 23, 2007, respectively. Select entered into the
swap transactions to mitigate the risks of future variable rate
interest payments. The notional amount of the interest rate
swaps are $500.0 million and the underlying variable rate
debt is associated with the senior secured credit facility. Each
eighth point change in interest rates on the variable rate
portion of our long term indebtedness would result in a
$0.4 million change in interest expense on our term loans.
In conjunction with the issuance of the senior floating rate
notes, on September 29, 2005, Select entered into a swap
transaction to mitigate the risks of future variable rate
interest payments associated with this debt. The notional amount
of the interest rate swap is $175.0 million and the swap is
for a period of five years.
72
BUSINESS
Overview
We believe that we are one of the largest operators of both
specialty hospitals and outpatient rehabilitation clinics in the
United States based on number of facilities. As of
March 31, 2008, we operated 88 long term acute care
hospitals, or LTCHs and four inpatient
rehabilitation facilities, or IRFs in
25 states, and 985 outpatient rehabilitation clinics in
37 states and the District of Columbia. We also provide
medical rehabilitation services on a contract basis at nursing
homes, hospitals, assisted living and senior care centers,
schools and worksites. We began operations in 1997 under the
leadership of our current management team, including our
co-founders, Rocco A. Ortenzio and Robert A. Ortenzio, who have
a combined 66 years of experience in the healthcare
industry. Under this leadership, we have grown our business from
its founding to a business that generated net operating revenue
of $1,991.7 million for the year ended December 31,
2007.
Business
Segments and Strategy
We manage our company through two business segments, our
specialty hospital and our outpatient rehabilitation segments,
which accounted for approximately 70% and 30%, respectively, of
our net operating revenues for the year ended December 31,
2007. Our specialty hospital segment consists of hospitals
designed to serve the needs of long term stay acute patients and
hospitals designed to serve patients who require intensive
inpatient medical rehabilitation. Our outpatient rehabilitation
business consists of clinics and contract services that provide
physical, occupational and speech rehabilitation services.
Specialty
Hospitals
We are a leading operator of specialty hospitals in the United
States, with 92 facilities throughout 25 states, as of
March 31, 2008. Of this total, 88 operated as long term
acute care hospitals, 83 of which were certified by the federal
Medicare program as long term acute care hospitals, and five
additional specialty hospitals were in the process of becoming
certified as Medicare long term acute care hospitals. The
remaining four specialty hospitals are certified by the federal
Medicare program as inpatient rehabilitation facilities. For the
year ended December 31, 2007 and the three months ended
March 31, 2008, approximately 65% and 63%, respectively, of
the net operating revenues of our specialty hospital segment
came from Medicare reimbursement. As of March 31, 2008, we
operated a total of 4,111 available licensed beds and employed
approximately 12,200 people in our specialty hospital
segment, consisting primarily of registered or licensed nurses,
respiratory therapists, physical therapists, occupational
therapists and speech therapists.
Patients are typically admitted to our specialty hospitals from
general acute care hospitals. These patients have specialized
needs, and serious and often complex medical conditions such as
respiratory failure, neuromuscular disorders, traumatic brain
and spinal cord injuries, strokes, non-healing wounds, cardiac
disorders, renal disorders and cancer. Given their complex
medical needs, these patients generally require a longer length
of stay than patients in a general acute care hospital and
benefit from being treated in a specialty hospital that is
designed to meet their unique medical needs. The average length
of stay for patients in our specialty hospitals is 27 days
in our long term acute care hospitals and 17 days in our
inpatient rehabilitation facilities, for the three months ended
March 31, 2008. Below is a table that shows the
distribution by medical condition (based on primary diagnosis)
of patients in our hospitals for the year ended
December 31, 2007:
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|
|
|
|
|
|
Distribution
|
|
Medical Condition
|
|
of Patients
|
|
|
Respiratory disorders
|
|
|
38
|
%
|
Neuromuscular disorders
|
|
|
23
|
|
Wound care
|
|
|
11
|
|
Cardiac disorders
|
|
|
7
|
|
Other
|
|
|
21
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
73
We believe that we provide our services on a more cost-effective
basis than a typical general acute care hospital because we
provide a much narrower range of services. We believe that our
services are therefore attractive to healthcare payors who are
seeking to provide the most cost-effective level of care to
their enrollees. Additionally, we continually seek to increase
our admissions by expanding and improving our relationships with
the physicians and general acute care hospitals that refer
patients to our facilities. We also maintain a strong focus on
the provision of high-quality medical care within our facilities
and believe that this operational focus is in part reflected in
our specialty hospital accreditation by The Joint Commission,
previously known as the Joint Commission on Accreditation of
Healthcare Organizations, and the Commission on Accreditation of
Rehabilitation Facilities, commonly known as CARF.
When a patient is referred to one of our hospitals by a
physician, case manager, discharge planner, health maintenance
organization or insurance company, a clinical liaison along with
a case manager from our company makes an assessment to determine
the care required. Based on the determinations reached in this
clinical assessment, an admission decision is made by the
attending physician.
Upon admission, an interdisciplinary team reviews a new
patients condition. The interdisciplinary team is
comprised of a number of clinicians and may include any or all
of the following: an attending physician; a specialty nurse; a
physical, occupational or speech therapist; a respiratory
therapist; a dietician; a pharmacist; and a case manager. Upon
completion of an initial evaluation by each member of the
treatment team, an individualized treatment plan is established
and implemented. The case manager coordinates all aspects of the
patients hospital stay and serves as a liaison with the
insurance carriers case management staff when appropriate.
The case manager communicates progress, resource utilization,
and treatment goals between the patient, the treatment team and
the payor.
Each of our specialty hospitals has an onsite management team
consisting of a chief executive officer, a director of clinical
services and a director of provider relations. These teams
manage local strategy and day-to-day operations, including
oversight of clinical care and treatment. They also assume
primary responsibility for developing relationships with the
general acute care providers and clinicians in the local areas
we serve that refer patients to our specialty hospitals. We
provide our hospitals with centralized accounting, payroll,
legal, reimbursement, human resources, compliance, management
information systems and billing and collection services. The
centralization of these services improves efficiency and permits
hospital staff to spend more time on patient care.
We operate the majority of our long term acute care hospitals
using an HIH model. A long term acute care hospital that
operates as an HIH leases space from a general acute care
host hospital and operates as a separately licensed
hospital within the host hospital, or on the same campus as the
host hospital. In contrast, a free-standing long term acute care
hospital does not operate on a host hospital campus. Of the 88
long term acute care hospitals we operated as of March 31,
2008, 67 were operated as HIHs and 21 were operated as
free-standing hospitals. As a result of the HIH regulatory
changes discussed in further detail in Government
Regulations, we developed and implemented a plan that
included, among other things, relocating certain facilities to
alternative settings, building or buying additional
free-standing hospitals and closing some of our facilities. The
significant changes associated with this plan have been
completed.
All Medicare payments to our long term acute care hospitals are
made in accordance with the prospective payment system
specifically applicable to LTCH-PPS. Under LTCH-PPS, a long term
acute care hospital is paid a pre-determined fixed amount
depending upon the LTC-DRG to which each patient is assigned.
LTCH-PPS includes special payment policies that adjust the
payments for some patients based on a variety of factors. Some
of these special payment policies have been the subject of
recent regulatory developments. See Government
Regulations and Managements Discussion and
Analysis of Financial Condition and Results of
Operations Regulatory Changes.
Specialty
Hospital Strategy
Focus on Specialized Inpatient Services. We
serve highly acute patients and patients with debilitating
injuries that cannot be adequately cared for in a less medically
intensive environment, such as a skilled nursing facility.
Generally, patients in our specialty hospitals require longer
stays and higher levels of clinical care than
74
patients treated in general acute care hospitals. Our
patients average length of stay in our specialty hospitals
is 25 days for the year ended December 31, 2007.
Provide High Quality Care and Service. We
believe that our specialty hospitals serve a critical role in
comprehensive healthcare delivery. Through our specialized
treatment programs and staffing models, we treat patients with
acute, complex and specialized medical needs who are typically
referred to us by general acute care hospitals. Our specialized
treatment programs focus on specific patient needs and medical
conditions such as specific ventilator weaning programs and
wound care protocols. Our responsive staffing models ensure that
patients have the appropriate clinical resources over the course
of their stay. We believe that we are recognized for providing
quality care and service, as evidenced by accreditation by The
Joint Commission and CARF. We also believe we develop brand
loyalty in the local areas we serve allowing us to strengthen
our relationships with physicians and other referral sources and
drive additional patient volume to our hospitals.
Our treatment and staffing programs benefit patients because
they give our clinicians access to the regimens that we have
found to be most effective in treating various conditions such
as respiratory failure, non-healing wounds, brain and spinal
cord injuries, strokes and neuromuscular disorders. In addition,
we combine or modify these programs to provide a treatment plan
tailored to meet our patients unique needs.
The quality of the patient care we provide is continually
monitored using several measures, including patient, payor and
physician satisfaction surveys, as well as clinical outcomes
analyses. Quality measures are collected monthly and reported
quarterly and annually. In order to benchmark ourselves against
other healthcare organizations, we have contracted with outside
vendors to collect our clinical and patient satisfaction
information and compare it to other healthcare organizations.
The information collected is reported back to each hospital, to
our corporate office, and directly to The Joint Commission. As
of March 31, 2008, The Joint Commission had accredited all
but seven of our hospitals. These seven hospitals have not yet
undergone a survey by The Joint Commission. Three of our four
inpatient rehabilitation facilities have also received
accreditation from CARF. One of our inpatient rehabilitation
facilities has not yet been surveyed by CARF. See
Government Regulations
Licensure Accreditation.
Reduce Operating Costs. We continually seek to
improve operating efficiency and reduce costs at our hospitals
by standardizing operations and centralizing key administrative
functions. These initiatives include:
|
|
|
|
|
optimizing staffing based on our occupancy and the clinical
needs of our patients;
|
|
|
|
centralizing administrative functions such as accounting,
finance, payroll, legal, reimbursement, compliance, human
resources and billing and collection;
|
|
|
|
standardizing management information systems to aid in financial
reporting as well as billing and collecting; and
|
|
|
|
participating in group purchasing arrangements to receive
discounted prices for pharmaceuticals and medical supplies.
|
Increase Higher Margin Commercial Volume. With
reimbursement rates from commercial insurers typically higher
than the federal Medicare program, we have focused on continued
expansion of our relationships with commercial insurers to
increase our volume of patients with commercial insurance in our
specialty hospitals. Although the level of care we provide is
complex and staff intensive, we typically have lower relative
operating expenses than a general acute care hospital because we
provide a much narrower range of patient services at our
hospitals. We believe that commercial payors seek to contract
with our hospitals because we offer patients high quality, cost-
effective care at more attractive rates than general acute care
hospitals. We also offer commercial enrollees customized
treatment programs not typically offered in general acute care
hospitals.
Develop New Inpatient Rehabilitation
Facilities. As a result of the SCHIP Extension
Act, which has a three year moratorium on the development of new
LTCHs, we have stopped all LTCH development, except for five
LTCHs currently under construction that are excluded from the
moratorium. We expect to continue evaluating opportunities to
develop new inpatient rehabilitation facilities. We have a
dedicated development team with significant experience in
speciality hospital development. In addition, three predecessor
companies founded by our
75
Executive Chairman
and/or
co-founded by our Chief Executive Officer focused on the
development and operation of inpatient rehabilitation hospitals.
By leveraging the experience of our senior management and
dedicated development team, we believe that we are well
positioned to capitalize on development opportunities. When we
target a new local area to serve, our development team conducts
an extensive review of the areas referral patterns and
commercial insurance to determine the general reimbursement
trends and payor mix. Ultimately, when we determine a location
for the development of a new specialty hospital, we evaluate the
opportunities in the area for the construction of new space or
the leasing and renovation of existing space. During
construction or renovation, the project is transitioned to our
start-up
team, which is experienced in preparing a specialty hospital for
opening. The
start-up
team oversees equipment purchases, licensure procedures and the
recruitment of a full-time management team. After the facility
is opened, responsibility for its management is transitioned to
this new management team and our corporate operations group.
Pursue Opportunistic Acquisitions. In addition
to our development initiatives, we may grow our network of
specialty hospitals through opportunistic acquisitions. Our
immediate focus is on acquisitions of inpatient rehabilitation
facilities, although we will still consider acquisitions of long
term acute care hospitals if they are at attractive valuations.
We believe we have historically been able to obtain assets for
what we believe are attractive valuations. When we acquire a
hospital or a group of hospitals, a team of our professionals is
responsible for formulating and executing an integration plan.
We have generally been able to increase margins at acquired
facilities by adding clinical programs that attract commercial
payors, centralizing administrative functions and implementing
our standardized staffing models and resource management
programs. Since our founding in 1997, we have made a total of
four significant specialty hospital acquisitions comprising 55
long term acute care hospitals and four inpatient rehabilitation
facilities for a total of $496.4 million in aggregate
consideration.
Outpatient
Rehabilitation
We believe that we are the largest operator of outpatient
rehabilitation clinics in the United States based on number of
facilities, with 985 facilities throughout 37 states and
the District of Columbia, as of March 31, 2008. Typically,
each of our clinics is located in a medical complex or retail
location. As of March 31, 2008, our outpatient
rehabilitation segment employed approximately 8,300 people.
In our clinics and through our contractual relationships, we
provide physical, occupational and speech rehabilitation
programs and services. We also provide certain specialized
programs such as hand therapy or sports performance enhancement
that treat sports and work related injuries, musculoskeletal
disorders, chronic or acute pain and orthopedic conditions. The
typical patient in one of our clinics suffers from
musculoskeletal impairments that restrict his or her ability to
perform normal activities of daily living. These impairments are
often associated with accidents, sports injuries, strokes, heart
attacks and other medical conditions. Our rehabilitation
programs and services are designed to help these patients
minimize physical and cognitive impairments and maximize
functional ability. We also provide services designed to prevent
short term disabilities from becoming chronic conditions. Our
rehabilitation services are provided by our professionals
including licensed physical therapists, occupational therapists,
speech-language
pathologists and respiratory therapists.
Outpatient rehabilitation patients are generally referred or
directed to our clinics by a physician, employer or health
insurer who believes that a patient, employee or member can
benefit from the level of therapy we provide in an outpatient
setting. We believe that our services are attractive to
healthcare payors who are seeking to provide the most
cost-effective level of care to their enrollees. In addition to
providing therapy in our outpatient clinics, we provide medical
rehabilitation management services on a contract basis at
nursing homes, hospitals, schools, assisted living and senior
care centers and worksites. In our outpatient rehabilitation
segment, approximately 90% of our net operating revenues come
from commercial payors, including healthcare insurers, managed
care organizations and workers compensation programs,
contract management services and private pay sources. The
balance of our reimbursement is derived from Medicare and other
government sponsored programs.
76
Outpatient
Rehabilitation Strategy
Provide High Quality Care and Service. We are
focused on providing a high level of service to our patients
throughout their entire course of treatment. To measure
satisfaction with our service we have developed surveys for both
patients and physicians. Our clinics utilize the feedback from
these surveys to continuously refine and improve service levels.
We believe that by focusing on quality care and offering a high
level of customer service we develop brand loyalty in the local
areas we serve. This high quality of care and service allows us
to strengthen our relationships with referring physicians,
employers and health insurers and drive additional patient
volume.
Increase Market Share. We strive to establish
a leading presence within the local areas we serve. To increase
our presence, we seek to expand our services and programs and to
continue to provide high quality care and strong customer
service. This allows us to realize economies of scale,
heightened brand loyalty, workforce continuity and increased
leverage when negotiating payor contracts.
Expand Rehabilitation Programs and
Services. Through our local clinical directors of
operations and clinic managers within their service areas, we
assess the healthcare needs of the areas we serve. Based on
these assessments, we implement additional programs and services
specifically targeted to meet demand in the local community. In
designing these programs we benefit from the knowledge we gain
through our national network of clinics. This knowledge is used
to design programs that optimize treatment methods and measure
changes in health status, clinical outcomes and patient
satisfaction.
Optimize the Profitability of our Payor
Contracts. We rigorously review payor contracts
up for renewal and potential new payor contracts to optimize our
profitability. Before we enter into a new contract with a
commercial payor, we evaluate it with the aid of our contract
management system. We assess potential profitability by
evaluating past and projected patient volume, clinic capacity,
and expense trends. We create a retention strategy for the top
performing contracts and a renegotiation strategy for contracts
that do not meet our defined criteria. We believe that our size
and our strong reputation enables us to negotiate favorable
outpatient contracts with commercial insurers.
Maintain Strong Employee Relations. We believe
that the relationships between our employees and the referral
sources in their communities are critical to our success. Our
referral sources, such as physicians and healthcare case
managers, send their patients to our clinics based on three
factors: the quality of our care, the service we provide and
their familiarity with our therapists. We seek to retain and
motivate our therapists by implementing a performance-based
bonus program, a defined career path with the ability to be
promoted from within, timely communication on company
developments and internal training programs. We also focus on
empowering our employees by giving them a high degree of
autonomy in determining local area strategy. This management
approach reflects the unique nature of each local area in which
we operate and the importance of encouraging our employees to
assume responsibility for their clinics performance.
Pursue Opportunistic Acquisitions. We may grow
our network of outpatient rehabilitation facilities through
opportunistic acquisitions. We significantly expanded our
network with the 2007 acquisition of the outpatient
rehabilitation division of HealthSouth Corporation, consisting
of 569 clinics in 35 states and the District of Columbia,
including eighteen states in which we did not previously have
outpatient rehabilitation facilities. We believe our size and
centralized infrastructure allow us to take advantage of
operational efficiencies and increase margins at acquired
facilities.
Other
Services
Other services (which accounted for less than 1% of our net
operating revenues for the three months ended March 31,
2008) include corporate services and certain non-healthcare
services.
Our
Competitive Strengths
We believe that the success of our business model is based on a
number of competitive strengths, including our position as a
leading operator in each of our business segments, a diversified
base of revenue and operating profits, proven financial
performance and strong cash flow, significant scale, experience
in completing and integrating acquisitions, ability to
capitalize on consolidation opportunities and an experienced
management team.
77
Leading Operator in Distinct but Complementary Lines of
Business. We believe that we are a leading
operator in each of our principal business segments, based on
number of facilities in the United States. Our leadership
position and reputation as a high quality, cost-effective health
care provider in each of our business segments allows us to
attract patients and employees, aids us in our marketing efforts
to payors and referral sources and helps us negotiate payor
contracts. In our specialty hospital segment, we operated 88
long term acute care hospitals with 3,757 available licensed
beds in 25 states and four inpatient rehabilitation
facilities with 354 beds in two states and derived approximately
69% of net operating revenues from these operations, for the
three months ended March 31, 2008. In our outpatient
rehabilitation segment, we operated 985 outpatient
rehabilitation clinics in 37 states and the District of
Columbia and derived approximately 31% of net operating revenues
from these operations, for the three months ended March 31,
2008. With these leading positions in the areas we serve, we
believe that we are well-positioned to benefit from the rising
demand for medical services due to an aging population in the
United States, which will drive growth across our business lines.
Diversified Base of Revenue. In addition to
our diversification of business mix by segment and geography,
with facilities in 42 states and the District of Columbia,
we are further diversified by payor source within our two
business segments. We derived approximately 70% and 69% of net
operating revenues and 76% and 79% of our income from operations
from our specialty hospital segment; and approximately 30% and
31% of net operating revenues and 24% and 21% of our income from
operations from our outpatient rehabilitation segment, for year
ended December 31, 2007 and the three months ended
March 31, 2008, respectively.
We are further diversified by payor source within our two
business segments. On a consolidated basis, Medicare, Medicaid,
and commercial and other represented approximately 48%, 2% and
50% of our net operating revenues for the year ended
December 31, 2007, respectively, and approximately 47%, 2%
and 51% of our net operating revenues for the three months ended
March 31, 2008, respectively. Our Medicare revenues are
further diversified because Medicare employs distinct payment
methodologies for services provided in each of long term acute
care hospitals, inpatient rehabilitation facilities and
outpatient rehabilitation clinics. Within our specialty hospital
segment, Medicare, Medicaid and commercial and other represented
approximately 65%, 3% and 32% of our net operating revenues for
the year ended December 31, 2007 and approximately 63%, 3%
and 34% of our net operating revenues for the three months ended
March 31, 2008, respectively. Within our outpatient
rehabilitation segment, Medicare, and commercial and other
represented approximately 10% and 90% of our net operating
revenues for both the year ended December 31, 2007 and for
the three months ended March 31, 2008, respectively.
Proven Financial Performance and Strong Cash
Flow. We have established a track record of
improving the financial performance of our facilities due to our
disciplined approach to revenue growth, expense reduction and an
intense focus on free cash flow generation.
Significant Scale. By building significant
scale in each of our business segments, we have been able to
leverage our operating costs by centralizing administrative
functions at our corporate office. As a result, we have been
able to minimize our general and administrative expense as a
percentage of revenues, which was 2.2% for the year ended
December 31, 2007.
Well-Positioned to Capitalize on Consolidation
Opportunities. We believe that we are
well-positioned to capitalize on consolidation opportunities
within each of our business segments and selectively augment our
internal growth. We believe that each of our business segments
is highly fragmented, with many of the nations long term
acute care hospitals, inpatient rehabilitation facilities and
outpatient rehabilitation facilities being operated by
independent operators lacking national or broad regional scope.
With our geographically diversified portfolio of facilities in
the United States, we believe that our footprint provides us
with a wide-ranging perspective on multiple potential
acquisition opportunities.
Experience in Successfully Completing and Integrating
Acquisitions. From our inception in 1997 through
2007, we completed six significant acquisitions for
approximately $894.8 million in aggregate consideration. We
believe that we have improved the operating performance of these
facilities over time by applying our standard operating
practices and by realizing efficiencies from our centralized
operations and management.
Experienced and Proven Management Team. Prior
to co-founding our company with our current Chief Executive
Officer, our Executive Chairman founded and operated three other
healthcare companies focused on
78
inpatient and outpatient rehabilitation services. In addition,
our four senior operations executives have an average of over
30 years of experience in the healthcare industry,
including extensive experience working together for our company
and for past companies focused on operating acute rehabilitation
hospitals and outpatient rehabilitation facilities. Eleven of
our 17 corporate officers worked together at Continental
Medical Systems, Inc., a developer and operator of inpatient
rehabilitation facilities that was managed under the leadership
of Rocco A. Ortenzio and Robert A. Ortenzio from its inception
in 1986 until it was sold in 1995. Over the course of their
operating history, our senior management team has received
national recognition for its management and business operations,
including selection for the Forbes Platinum 400
List, as one of Americas Best Managed
Companies.
Industry
In the United States, spending on healthcare accounted for
approximately 16% of the gross domestic product in 2007 and is
projected to grow at 6.7% compounded annually over the next ten
years, according to CMS. An important factor driving healthcare
spending is increased consumption of services due to the aging
of the population. The number of individuals age 65 and
older has grown 1.2% compounded annually over the past twenty
years and is expected to grow 2.9% compounded annually over the
next twenty years, approximately three times faster than the
overall population, according to the U.S. Census Bureau. We
believe that an increasing number of individuals age 65 and
older will drive demand for our specialized medical services.
For individuals age 65 and older, the primary source of
health insurance is the federal Medicare program. Medicare
utilizes distinct payment methodologies for services provided in
long term acute hospitals, inpatient rehabilitation facilities
and outpatient rehabilitation clinics. In the federal fiscal
year 2006, Medicare payments for long term acute hospitals
services accounted for 1.1% of overall Medicare outlays and
Medicare payments for inpatient rehabilitation services
accounted for 1.5% according to MedPAC. Due to recent regulatory
changes enacted in part to slow growth, over the next five years
Medicare payments for long term acute care hospital services are
projected to grow approximately 4% compounded annually and
Medicare payments for inpatient rehabilitation services are
projected to grow approximately 3% compounded annually, which
compares with approximately 7% compound annual growth projected
for the overall Medicare program, according to information
provided by the Office of the Actuary of the
U.S. Department of Health and Human Services.
Sources
of Net Operating Revenues
The following table presents the approximate percentages by
source of net operating revenue received for healthcare services
we provided for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
|
Months
|
|
|
|
Year Ended December 31,
|
|
|
|
Ended March 31,
|
|
Net Operating Revenues by Payor
Source(1)
|
|
2005(2)
|
|
|
2006
|
|
|
2007
|
|
|
|
2007
|
|
|
2008
|
|
Medicare
|
|
|
56.4
|
%
|
|
|
53.2
|
%
|
|
|
48.0
|
%
|
|
|
|
53.0
|
%
|
|
|
46.5
|
%
|
Commercial
insurance(3)
|
|
|
36.8
|
%
|
|
|
40.0
|
%
|
|
|
44.2
|
%
|
|
|
|
40.4
|
%
|
|
|
45.8
|
%
|
Private and
other(4)
|
|
|
4.7
|
%
|
|
|
5.0
|
%
|
|
|
5.5
|
%
|
|
|
|
4.8
|
%
|
|
|
5.7
|
%
|
Medicaid
|
|
|
2.1
|
%
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
|
|
|
1.8
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This table excludes the net
operating revenues of our Canadian operations which were sold on
March 1, 2006 and are now reported as a discontinued
operation.
|
(2)
|
|
The net operating revenues for the
period after the Merger, February 25 through December 31,
2005 (Successor Period), has been added to the net operating
revenues for the period from January 1 through February 24,
2005 (Predecessor Period), to arrive at the combined year ended
December 31, 2005.
|
(3)
|
|
Includes commercial healthcare
insurance carriers, health maintenance organizations, preferred
provider organizations, workers compensation and managed
care programs.
|
(4)
|
|
Includes self payors, contract
management services and non-patient related payments. Self pay
revenues represent less than 1% of total net operating revenues.
|
79
Government
Sources
Medicare is a federal program that provides medical insurance
benefits to persons age 65 and over, some disabled persons,
and persons with end-stage renal disease. Medicaid is a
federal-state funded program, administered by the states, which
provides medical benefits to individuals who are unable to
afford healthcare. All of our hospitals are currently certified
as Medicare providers. Our outpatient rehabilitation clinics
regularly receive Medicare payments for their services.
Additionally, our specialty hospitals participate in
22 state Medicaid programs. Amounts received under the
Medicare and Medicaid programs are generally less than the
customary charges for the services provided. In recent years
there have been significant changes made to the Medicare and
Medicaid programs. Since a significant portion of our revenues
come from patients under the Medicare program, our ability to
operate our business successfully in the future will depend in
large measure on our ability to adapt to changes in the Medicare
program. See Government Regulations
Overview of U.S. and State Government Reimbursements.
Non-Government
Sources
An increasing amount of our net operating revenues continue to
come from commercial and private payor sources. These sources
include insurance companies, workers compensation
programs, health maintenance organizations, preferred provider
organizations, other managed care companies and employers, as
well as by patients directly. Patients are generally not
responsible for any difference between customary charges for our
services and amounts paid by Medicare and Medicaid programs,
insurance companies, workers compensation companies,
health maintenance organizations, preferred provider
organizations and other managed care companies, but are
responsible for services not covered by these programs or plans,
as well as for deductibles and co-insurance obligations of their
coverage. The amount of these deductibles and co-insurance
obligations has increased in recent years. Collection of amounts
due from individuals is typically more difficult than collection
of amounts due from government or business payors.
Employees
As of March 31, 2008, we employed approximately
21,100 people throughout the United States. A total of
approximately 14,400 of our employees are full time and the
remaining approximately 6,700 are part time employees.
Outpatient, contract therapy and physical rehabilitation and
occupational health employees totaled approximately 8,300 and
specialty hospital employees totaled approximately 12,200. The
remaining approximately 600 employees were in corporate
management, administration and other services.
Competition
We compete on the basis of pricing, the quality of the patient
services we provide and the results that we achieve for our
patients. The primary competitive factors in the long term acute
care and inpatient rehabilitation businesses include quality of
services, charges for services and responsiveness to the needs
of patients, families, payors and physicians. Other companies
operate long term acute care hospitals and inpatient
rehabilitation facilities that compete with our hospitals,
including large operators of similar facilities, such as Kindred
Healthcare Inc. and HealthSouth Corporation. The competitive
position of any hospital is also affected by the ability of its
management to negotiate contracts with purchasers of group
healthcare services, including private employers, managed care
companies, preferred provider organizations and health
maintenance organizations. Such organizations attempt to obtain
discounts from established hospital charges. The importance of
obtaining contracts with preferred provider organizations,
health maintenance organizations and other organizations which
finance healthcare, and its effect on a hospitals
competitive position, vary from area to area, depending on the
number and strength of such organizations.
Our outpatient rehabilitation clinics face competition
principally from locally owned and managed outpatient
rehabilitation clinics in the communities they serve and from
selected national providers such as Physiotherapy Associates and
U.S. Physical Therapy in selected local areas. Many of these
clinics have longer operating histories and greater name
recognition in these communities than our clinics, and they may
have stronger relations with physicians in these communities on
whom we rely for patient referrals.
80
Facilities
We currently lease most of our facilities, including clinics,
offices, specialty hospitals and our corporate headquarters. We
own three of our four inpatient rehabilitation facilities and 13
of our long term acute care hospitals. We also own one facility
currently undergoing renovations that will house a future
specialty hospital.
We lease all but four of our outpatient rehabilitation clinics
and related offices, which, as of March 31, 2008, included
981 leased outpatient rehabilitation clinics throughout the
United States. The outpatient rehabilitation clinics generally
have a five year lease term and include options to renew. We
also lease the majority of our long term acute care hospital
facilities except for the facilities described above. As of
March 31, 2008, in our LTCHs we had 66 hospital within
hospital leases and nine free-standing building leases.
We generally seek a five year lease for our long term acute care
hospitals operated as HIHs, with an additional five year renewal
at our option. We lease our corporate headquarters from
companies owned by a related party affiliated with us through
common ownership or management. Our corporate headquarters is
approximately 139,179 square feet and is located in
Mechanicsburg, Pennsylvania. We lease several other
administrative spaces related to administrative and operational
support functions. As of March 31, 2008, this comprised
12 locations throughout the United States with
approximately 82,121 square feet in total.
The following is a list of our hospitals and the number of beds
at each hospital as of March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
Hospital Name
|
|
City
|
|
State
|
|
|
Beds
|
|
|
Select Specialty Hospital Birmingham
|
|
Birmingham
|
|
|
AL
|
|
|
|
38
|
|
Select Specialty Hospital Fort Smith
|
|
Fort Smith
|
|
|
AR
|
|
|
|
34
|
|
Select Specialty Hospital Little Rock
|
|
Little Rock
|
|
|
AR
|
|
|
|
43
|
|
Select Specialty Hospital Arizona (Phoenix Downtown
Campus)
|
|
Phoenix
|
|
|
AZ
|
|
|
|
33
|
|
Select Specialty Hospital Phoenix
|
|
Phoenix
|
|
|
AZ
|
|
|
|
48
|
|
Select Specialty Hospital Arizona (Scottsdale Campus)
|
|
Scottsdale
|
|
|
AZ
|
|
|
|
29
|
|
Select Specialty Hospital Colorado Springs
|
|
Colorado Springs
|
|
|
CO
|
|
|
|
30
|
|
Select Specialty Hospital Denver
|
|
Denver
|
|
|
CO
|
|
|
|
37
|
|
Select Specialty Hospital Denver (South Campus)
|
|
Denver
|
|
|
CO
|
|
|
|
28
|
|
Select Specialty Hospital Wilmington
|
|
Wilmington
|
|
|
DE
|
|
|
|
35
|
|
Select Specialty Hospital Orlando (South Campus)
|
|
Edgewood
|
|
|
FL
|
|
|
|
40
|
|
Select Specialty Hospital Gainesville
|
|
Gainesville
|
|
|
FL
|
|
|
|
44
|
|
Select Specialty Hospital Palm Beach
|
|
Lake Worth
|
|
|
FL
|
|
|
|
60
|
|
Select Specialty Hospital Miami
|
|
Miami
|
|
|
FL
|
|
|
|
47
|
|
Select Specialty Hospital Orlando (North Campus)
|
|
Orlando
|
|
|
FL
|
|
|
|
35
|
|
Select Specialty Hospital Panama City
|
|
Panama City
|
|
|
FL
|
|
|
|
30
|
|
Select Specialty Hospital Pensacola
|
|
Pensacola
|
|
|
FL
|
|
|
|
54
|
|
Select Specialty Hospital Tallahassee
|
|
Tallahassee
|
|
|
FL
|
|
|
|
29
|
|
Select Specialty Hospital Atlanta
|
|
Atlanta
|
|
|
GA
|
|
|
|
27
|
|
Select Specialty Hospital Augusta
|
|
Augusta
|
|
|
GA
|
|
|
|
80
|
|
Select Specialty Hospital Savannah
|
|
Savannah
|
|
|
GA
|
|
|
|
40
|
|
Select Specialty Hospital Quad Cities
|
|
Davenport
|
|
|
IA
|
|
|
|
50
|
|
Select Specialty Hospital Beech Grove
|
|
Beech Grove
|
|
|
IN
|
|
|
|
40
|
|
Select Specialty Hospital Evansville
|
|
Evansville
|
|
|
IN
|
|
|
|
60
|
|
Select Specialty Hospital Fort Wayne
|
|
Fort Wayne
|
|
|
IN
|
|
|
|
32
|
|
Select Specialty Hospital Indianapolis
|
|
Greenwood
|
|
|
IN
|
|
|
|
51
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Hospital Name
|
|
City
|
|
State
|
|
|
Beds
|
|
|
Select Specialty Hospital Northwest Indiana
|
|
Hammond
|
|
|
IN
|
|
|
|
70
|
|
Select Specialty Hospital Kansas City
|
|
Overland Park
|
|
|
KS
|
|
|
|
40
|
|
Select Specialty Hospital Topeka
|
|
Topeka
|
|
|
KS
|
|
|
|
34
|
|
Select Specialty Hospital Wichita
|
|
Wichita
|
|
|
KS
|
|
|
|
60
|
|
Select Specialty Hospital Lexington
|
|
Lexington
|
|
|
KY
|
|
|
|
41
|
|
Select Specialty Hospital Northwest Detroit
|
|
Detroit
|
|
|
MI
|
|
|
|
36
|
|
Select Specialty Hospital Flint
|
|
Flint
|
|
|
MI
|
|
|
|
32
|
|
Select Specialty Hospital Grosse Pointe
|
|
Grosse Pointe Farms
|
|
|
MI
|
|
|
|
30
|
|
Select Specialty Hospital Kalamazoo
|
|
Kalamazoo
|
|
|
MI
|
|
|
|
25
|
|
Select Specialty Hospital Macomb County
|
|
Mount Clemens
|
|
|
MI
|
|
|
|
36
|
|
Select Specialty Hospital Western Michigan
|
|
Muskegon
|
|
|
MI
|
|
|
|
31
|
|
Select Specialty Hospital Pontiac
|
|
Pontiac
|
|
|
MI
|
|
|
|
30
|
|
Select Specialty Hospital Saginaw
|
|
Saginaw
|
|
|
MI
|
|
|
|
32
|
|
Select Specialty Hospital Downriver
|
|
Taylor
|
|
|
MI
|
|
|
|
40
|
|
Select Specialty Hospital Ann Arbor
|
|
Ypsilanti
|
|
|
MI
|
|
|
|
36
|
|
Select Specialty Hospital Western Missouri
|
|
Kansas
|
|
|
MO
|
|
|
|
34
|
|
Select Specialty Hospital Springfield
|
|
Springfield
|
|
|
MO
|
|
|
|
44
|
|
Select Specialty Hospital St. Louis
|
|
St. Louis
|
|
|
MO
|
|
|
|
33
|
|
Select Specialty Hospital Gulfport
|
|
Gulfport
|
|
|
MS
|
|
|
|
61
|
|
Select Specialty Hospital Jackson
|
|
Jackson
|
|
|
MS
|
|
|
|
53
|
|
Select Specialty Hospital Durham
|
|
Durham
|
|
|
NC
|
|
|
|
30
|
|
Select Specialty Hospital Winston-Salem
|
|
Winston-Salem
|
|
|
NC
|
|
|
|
42
|
|
Select Specialty Hospital Omaha
|
|
Omaha
|
|
|
NE
|
|
|
|
36
|
|
Kessler Institute for Rehabilitation (Welkind Campus)
|
|
Chester
|
|
|
NJ
|
|
|
|
72
|
|
Select Specialty Hospital Northeast New Jersey
|
|
Rochelle Park
|
|
|
NJ
|
|
|
|
62
|
|
Kessler Institute for Rehabilitation (North Campus)
|
|
Saddle Brook
|
|
|
NJ
|
|
|
|
102
|
|
Kessler Institute for Rehabilitation (West Campus)
|
|
West Orange
|
|
|
NJ
|
|
|
|
148
|
|
Select Specialty Hospital Northeast Ohio (Akron
Campus)
|
|
Akron
|
|
|
OH
|
|
|
|
31
|
|
Select Specialty Hospital Akron
|
|
Akron
|
|
|
OH
|
|
|
|
34
|
|
Select Specialty Hospital Northeast Ohio (Canton
Campus)
|
|
Canton
|
|
|
OH
|
|
|
|
30
|
|
Select Specialty Hospital Cincinnati
|
|
Cincinnati
|
|
|
OH
|
|
|
|
36
|
|
Select Specialty Hospital Columbus
|
|
Columbus
|
|
|
OH
|
|
|
|
152
|
|
Select Specialty Hospital Columbus (Mt. Carmel
Campus)
|
|
Columbus
|
|
|
OH
|
|
|
|
24
|
|
Select Specialty Hospital Youngstown
|
|
Youngstown
|
|
|
OH
|
|
|
|
31
|
|
Select Specialty Hospital Youngstown (Boardman
Campus)
|
|
Youngstown
|
|
|
OH
|
|
|
|
20
|
|
Select Specialty Hospital Zanesville
|
|
Zanesville
|
|
|
OH
|
|
|
|
35
|
|
Select Specialty Hospital Oklahoma City
|
|
Oklahoma City
|
|
|
OK
|
|
|
|
72
|
|
Select Specialty Hospital Tulsa
|
|
Tulsa
|
|
|
OK
|
|
|
|
30
|
|
Select Specialty Hospital Central Pennsylvania (Camp
Hill Campus)
|
|
Camp Hill
|
|
|
PA
|
|
|
|
31
|
|
Select Specialty Hospital Danville
|
|
Danville
|
|
|
PA
|
|
|
|
30
|
|
82
|
|
|
|
|
|
|
|
|
|
|
Hospital Name
|
|
City
|
|
State
|
|
|
Beds
|
|
|
Select Specialty Hospital Erie
|
|
Erie
|
|
|
PA
|
|
|
|
50
|
|
Penn State Hershey Rehabilitation
|
|
Harrisburg
|
|
|
PA
|
|
|
|
32
|
|
Select Specialty Hospital Johnstown
|
|
Johnstown
|
|
|
PA
|
|
|
|
39
|
|
Select Specialty Hospital Laurel Highlands
|
|
Latrobe
|
|
|
PA
|
|
|
|
40
|
|
Select Specialty Hospital McKeesport
|
|
McKeesport
|
|
|
PA
|
|
|
|
30
|
|
Select Specialty Hospital Pittsburgh/UPMC
|
|
Pittsburgh
|
|
|
PA
|
|
|
|
32
|
|
Select Specialty Hospital Central Pennsylvania (York
Campus)
|
|
York
|
|
|
PA
|
|
|
|
23
|
|
Select Specialty Hospital Sioux Falls
|
|
Sioux Falls
|
|
|
SD
|
|
|
|
24
|
|
Select Specialty Hospital
Tri-Cities
|
|
Bristol
|
|
|
TN
|
|
|
|
33
|
|
Select Specialty Hospital Knoxville
|
|
Knoxville
|
|
|
TN
|
|
|
|
35
|
|
Select Specialty Hospital North Knoxville
|
|
Knoxville
|
|
|
TN
|
|
|
|
33
|
|
Select Specialty Hospital Memphis
|
|
Memphis
|
|
|
TN
|
|
|
|
37
|
|
Select Specialty Hospital Nashville
|
|
Nashville
|
|
|
TN
|
|
|
|
47
|
|
Select Specialty Hospital Dallas/Ft Worth
|
|
Carrolton
|
|
|
TX
|
|
|
|
60
|
|
Select Specialty Hospital Conroe
|
|
Conroe
|
|
|
TX
|
|
|
|
46
|
|
Select Specialty Hospital South Dallas
|
|
DeSoto
|
|
|
TX
|
|
|
|
100
|
|
Select Specialty Hospital Houston (Houston Heights)
|
|
Houston
|
|
|
TX
|
|
|
|
130
|
|
Select Specialty Hospital Houston (Houston Medical
Center)
|
|
Houston
|
|
|
TX
|
|
|
|
86
|
|
Select Specialty Hospital Houston (Houston West)
|
|
Houston
|
|
|
TX
|
|
|
|
56
|
|
Select Specialty Hospital Longview
|
|
Longview
|
|
|
TX
|
|
|
|
32
|
|
Select Specialty Hospital Midland
|
|
Midland
|
|
|
TX
|
|
|
|
29
|
|
Select Specialty Hospital San Antonio
|
|
San Antonio
|
|
|
TX
|
|
|
|
44
|
|
Select Specialty Hospital Madison
|
|
Madison
|
|
|
WI
|
|
|
|
58
|
|
Select Specialty Hospital Milwaukee
|
|
Milwaukee
|
|
|
WI
|
|
|
|
34
|
|
Select Specialty Hospital Milwaukee (St Lukes
Campus)
|
|
Milwaukee
|
|
|
WI
|
|
|
|
29
|
|
Select Specialty Hospital Charleston
|
|
Charleston
|
|
|
WV
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Beds:
|
|
|
|
|
|
|
|
|
4,111
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
Proceedings
On August 24, 2004, Clifford C. Marsden and Ming Xu filed a
purported class action complaint in the United States
District Court for the Eastern District of Pennsylvania on
behalf of the public stockholders of Select against Martin F.
Jackson, Robert A. Ortenzio, Rocco A. Ortenzio, Patricia A. Rice
and Select. The complaint as later amended alleged, among other
things, failure to disclose adverse information regarding a
potential regulatory change affecting reimbursement for
Selects services applicable to long term acute care
hospitals operated as hospitals within hospitals. On
October 25, 2007, the Court certified a class of investors
who purchased Select stock between July 29, 2003 and
May 11, 2004, inclusive. The Court also appointed class
representatives and class counsel. On July 3, 2008, the
parties reached a settlement in principle. The settlement
requires defendants to pay $5.0 million, which will be paid
entirely by our insurer. The settlement is subject to both
preliminary and final court approval.
We are subject to legal proceedings and claims that arise in the
ordinary course of our 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 our opinion, the
outcome of these actions will not have a material adverse effect
on our financial position or results of operations.
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See Risk Factors Significant legal actions as
well as the cost and possible lack of available insurance could
subject us to substantial uninsured liabilities.
To cover claims arising out of the operations of our specialty
hospitals and outpatient rehabilitation facilities, we maintain
professional malpractice liability insurance and general
liability insurance. We also maintain umbrella liability
insurance covering claims which, due to their nature or amount,
are not covered by or not fully covered by our 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 us to
substantial uninsured liabilities.
Health care providers are subject to lawsuits under the qui tam
provisions of the federal False Claims Act. Qui tam lawsuits
typically remain under seal (hence, usually unknown to the
defendant) for some time while the government decides whether or
not to intervene on behalf of a private qui tam plaintiff (known
as a relator) and take the lead in the litigation. These
lawsuits can involve significant monetary damages and penalties
and award bounties to private plaintiffs who successfully bring
the suits. We have 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.
Government
Regulations
General
The healthcare industry is required to comply with many laws and
regulations at the federal, state and local government levels.
These laws and regulations require that hospitals and outpatient
rehabilitation clinics meet various requirements, including
those relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, maintenance of
adequate records, safeguarding protected health information,
compliance with building codes and environmental protection and
healthcare fraud and abuse. These laws and regulations are
extremely complex and, in many instances, the industry does not
have the benefit of significant regulatory or judicial
interpretation. If we fail to comply with applicable laws and
regulations, we could suffer civil or criminal penalties,
including the loss of our licenses to operate and our ability to
participate in the Medicare, Medicaid and other federal and
state healthcare programs.
Licensure
Facility Licensure. Our healthcare facilities
are subject to state and local licensing regulations ranging
from the adequacy of medical care to compliance with building
codes and environmental protection laws. In order to assure
continued compliance with these various regulations,
governmental and other authorities periodically inspect our
facilities.
Some states still require us to get approval under certificate
of need regulations when we create, acquire or expand our
facilities or services. If we fail to show public need and
obtain approval in these states for our facilities, we may be
subject to civil or even criminal penalties, lose our facility
license or become ineligible for reimbursement if we proceed
with our development or acquisition of the new facility or
service.
Professional Licensure and Corporate
Practice. Healthcare professionals at our
hospitals and outpatient rehabilitation clinics are required to
be individually licensed or certified under applicable state
law. We take steps to ensure that our employees and agents
possess all necessary licenses and certifications. In some
states, business corporations such as ours are restricted from
practicing therapy through the direct employment of therapists.
In those states, in order to comply with the restrictions
imposed, we either contract to obtain therapy services from an
entity permitted to employ therapists or we manage the physical
therapy practice owned by licensed therapists through which the
therapy services are provided.
Certification. In order to participate in the
Medicare program and receive Medicare reimbursement, each
facility must comply with the applicable regulations of the
United States Department of Health and Human Services relating
to, among other things, the type of facility, its equipment, its
personnel and its standards of medical care, as well as
compliance with all applicable state and local laws and
regulations. All of our specialty hospitals participate in the
Medicare program. In addition, we provide the majority of our
outpatient rehabilitation services through clinics certified by
Medicare as rehabilitation agencies or rehab
agencies.
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Accreditation. Our hospitals receive
accreditation from The Joint Commission. As of March 31,
2008, The Joint Commission had accredited all but seven of our
hospitals. These seven hospitals not accredited have not yet
undergone a survey by The Joint Commission. Three of our four
inpatient rehabilitation facilities have also received
accreditation from CARF, an independent, not-for-profit
organization which reviews and grants accreditation for
rehabilitation facilities that meet established standards for
service and quality. One of our inpatient rehabilitation
facilities has not yet undergone a CARF survey.
Overview
of U.S. and State Government Reimbursements
Medicare. The Medicare program reimburses
healthcare providers for services furnished to Medicare
beneficiaries, which are generally persons age 65 and
older, those who are chronically disabled, and those suffering
from end stage renal disease. The program is governed by the
Social Security Act of 1965 and is administered primarily by the
Department of Health and Human Services and CMS. Net operating
revenues generated directly from the Medicare program
represented approximately 56% of our consolidated net operating
revenues for the combined year ended December 31, 2005, 53%
for the year ended December 31, 2006, and 48% for the year
ended December 31, 2007. For the three months ended
March 31, 2008, we generated approximately 47% of our
consolidated net operating revenues from Medicare.
The Medicare program reimburses various types of providers,
including long term acute care hospitals, inpatient
rehabilitation facilities and outpatient rehabilitation
providers, using different payment methodologies. The Medicare
reimbursement systems for long term acute care hospitals,
inpatient rehabilitation facilities and outpatient
rehabilitation providers, as described below, are different than
the system applicable to general acute care hospitals. For
general acute care hospitals, Medicare payments are made under
an inpatient prospective payment system, or IPPS, under which a
hospital receives a fixed payment amount per discharge (adjusted
for area wage differences) using DRGs. The general acute care
hospital DRG payment rate is based upon the national average
cost of treating a Medicare patients condition in that
type of facility. Although the average length of stay varies for
each DRG, the average stay of all Medicare patients in a general
acute care hospital is approximately six days. Thus, the
prospective payment system for general acute care hospitals
creates an economic incentive for those hospitals to discharge
medically complex Medicare patients as soon as clinically
possible. Effective October 1, 2005, CMS expanded its
post-acute care transfer policy under which general acute care
hospitals are paid on a per diem basis rather than the full DRG
rate if a patient is discharged early to certain post-acute care
settings, including LTCHs and IRFs. When a patient is discharged
from selected DRGs to, among other providers, an LTCH, the
general acute care hospital is reimbursed below the full DRG
payment if the patients length of stay is short relative
to the geometric mean length of stay for the DRG. This policy
originally applied to ten DRGs beginning in fiscal year 1999 and
was expanded to additional DRGs in FY 2004 and a total of 182
DRGs effective October 1, 2005. The expansion of this
policy to patients in a greater number of DRGs could cause
general acute care hospitals to delay discharging those patients
to our long term acute care hospitals.
Long Term Acute Care Hospital Medicare
Reimbursement. The Medicare payment system for
long term acute care hospitals is based on a prospective payment
system specifically applicable to LTCH-PPS. LTCH-PPS was
established by final regulations published on August 30,
2002 by CMS, and applies to long term acute care hospitals for
their cost reporting periods beginning on or after
October 1, 2002. Under LTCH-PPS, each patient discharged
from a long term acute care hospital is assigned to a distinct
LTC-DRG and a long term acute care hospital will generally be
paid a pre-determined fixed amount applicable to the assigned
LTC-DRG (adjusted for area wage differences). The payment amount
for each LTC-DRG is intended to reflect the average cost of
treating a Medicare patient assigned to that LTC-DRG in a long
term acute care hospital. Cases with unusually high costs,
referred to as high cost outliers, receive a payment
adjustment to reflect the additional resources utilized.
Conversely, cases with a stay that is considerably shorter than
the average length of stay, a short-stay outlier receive a
reduction in payment. LTCH-PPS also includes special payment
policies that adjust the payments for some patients based on the
patients length of stay, the facilitys costs,
whether the patient was discharged and readmitted and other
factors. Congress required that the LTC-DRG payment rates
maintain budget neutrality during the first years of the
prospective payment system with total expenditures that would
have been made under the previous reasonable cost-based payment
system. The LTCH-PPS regulations permit CMS to make a one-time
adjustment to correct any error CMS made in estimating the
federal rate in the first year of LTCH-PPS.
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The LTCH-PPS regulations also refined the criteria that must be
met in order for a hospital to be certified as a long term acute
care hospital. For cost reporting periods beginning on or after
October 1, 2002, a long term acute care hospital must have
an average inpatient length of stay for Medicare patients
(including both Medicare covered and non-covered days) of
greater than 25 days. Previously, average lengths of stay
were measured with respect to all patients. LTCHs that fail to
exceed an average length of stay of greater than 25 days
during any cost reporting period will be paid under the general
acute care hospital DRG-based reimbursement.
Prior to qualifying under the payment system applicable to long
term acute care hospitals, a new long term acute care hospital
initially receives payments under the general acute care
hospital DRG-based reimbursement system. The long term acute
care hospital must continue to be paid under this system for a
minimum of six months while meeting certain Medicare long term
acute care hospital requirements, the most significant
requirement being an average Medicare length of stay of more
than 25 days.
Regulatory
Changes
August 2004 Final Rule. On August 11,
2004, CMS published final regulations applicable to LTCHs that
are operated as HIHs. Effective for hospital cost reporting
periods beginning on or after October 1, 2004, subject to
certain exceptions, the final regulations provide lower rates of
reimbursement to HIHs for those Medicare patients admitted from
their host hospitals that are in excess of a specified
percentage threshold. For HIHs opened after October 1,
2004, the Medicare admissions threshold has been established at
25% except for HIHs located in rural hospitals, MSA dominant
hospitals or single urban hospitals where the percentage is no
more than 50%, nor less than 25%.
For HIHs that meet specified criteria and were in existence as
of October 1, 2004, including all but two of our then
existing HIHs, the Medicare admissions thresholds are phased in
over a four year period starting with hospital cost reporting
periods that began on or after October 1, 2004. For
discharges during the cost reporting period that began on or
after October 1, 2005 and before October 1, 2006, the
Medicare admissions threshold was the lesser of the Fiscal
2004 Percentage of Medicare discharges admitted from the
host hospital or 75%. For discharges during the cost reporting
period beginning on or after October 1, 2006 and before
October 1, 2007, the Medicare admissions threshold was the
lesser of the Fiscal 2004 Percentage of Medicare discharges
admitted from the host hospital or 50%. For discharges during
cost reporting periods beginning on or after October 1,
2007, the Medicare admissions threshold is 25%; however, the
SCHIP Extension Act generally limits the application of the
Medicare admission threshold to no lower than 50% for a three
year period to commence on an LTCHs first cost reporting period
to begin on or after December 29, 2007. Under the SCHIP
Extension Act, for HIHs and satellite facilities located in
rural areas and those which receive referrals from MSA dominant
hospitals or single urban hospitals (as defined by current
regulations), the percentage threshold is no more than 75%
during the same three cost reporting years. As used above,
Fiscal 2004 Percentage means, with respect to
any HIH, the percentage of all Medicare patients discharged by
such HIH during its cost reporting period beginning on or after
October 1, 2003 and before October 1, 2004 who were
admitted to such HIH from its host hospital, but in no event is
the Fiscal 2004 Percentage less than 25%. The HIH
regulations also established exceptions to the Medicare
admissions thresholds with respect to patients who reach
outlier status at the host hospital, HIHs located in
MSA dominant hospitals or HIHs located in rural areas.
During the year ended December 31, 2007, we recorded a
liability of approximately $5.9 million related to
estimated repayments to Medicare for host admissions exceeding
HIHs applicable admission threshold. The liability has
been recorded through a reduction in our net revenue.
August 2005 Final Rule. On August 12,
2005, CMS published the final rules for general acute care
hospitals IPPS, for fiscal year 2006, which included an update
of the LTC-DRG relative weights. CMS estimated the changes to
the relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 4.2% in fiscal year 2006 (the period from
October 1, 2005 through September 30, 2006).
May 2006 Final Rule. On May 2, 2006, CMS
released its final annual payment rate updates for RY 2007.
The May 2006 final rule revised the payment adjustment formula
for SSO patients. For discharges occurring on or after
July 1, 2006, the rule changed the payment methodology for
Medicare patients with a length of stay less than or equal to
five-sixths of the geometric average length of stay for each SSO
case. Payment for these patients had been
86
based on the lesser of (1) 120% of the cost of the case;
(2) 120% of the LTC-DRG specific per diem amount multiplied
by the patients length of stay; or (3) the full
LTC-DRG payment. The May 2006 final rule modified the limitation
in clause (1) above to reduce payment for SSO cases to 100%
(rather than 120%) of the cost of the case. The final rule also
added a fourth limitation, capping payment for SSO cases at a
per diem rate derived from blending 120% of the LTC-DRG specific
per diem amount with a per diem rate based on the general acute
care hospital IPPS. Under this methodology, as a patients
length of stay increases, the percentage of the per diem amount
based upon the IPPS component will decrease and the percentage
based on the LTC-DRG component will increase.
In addition, for discharges occurring on or after July 1,
2006, the May 2006 final rule provided for (1) a
zero-percent update to the LTCH-PPS standard federal rate used
as a basis for LTCH-PPS payments for the 2007
LTCH-PPS
rate year; (2) the elimination of the surgical case
exception to the three day or less interruption of stay policy
(under the surgical exception, Medicare reimburses a general
acute care hospital directly for surgical services furnished to
a long term acute care hospital patient during a brief
interruption of stay from the long term acute care hospital,
rather than requiring the long term acute care hospital to bear
responsibility for such surgical services); and
(3) increasing the costs that a long term acute care
hospital must bear before Medicare will make additional payments
for a case under its high-cost outlier policy for RY 2007.
CMS estimated that the changes in the May 2006 final rule would
result in an approximately 3.7% decrease in LTCH Medicare
payments-per-discharge
compared to the 2006 rate year, largely attributable to the
revised SSO payment methodology. We estimated that the May 2006
final rule reduced Medicare revenues associated with SSO cases
and high-cost outlier cases to our long term acute care
hospitals by approximately $29.3 million for RY 2007.
Additionally, had CMS updated the LTCH-PPS standard federal rate
by the 2007 estimated market basket index of 3.4% rather than
applying the zero-percent update, we estimated that we would
have received approximately $31.0 million in additional
annual Medicare revenues based on our historical Medicare
patient volumes and revenues (such revenues would have been paid
to our hospitals for discharges beginning on or after
July 1, 2006).
August 2006 Final Rule. On August 18,
2006, CMS published the IPPS final rule for fiscal year 2007,
which is the period from October 1, 2006 through
September 30, 2007, that included an update of the LTC-DRG
relative weights for fiscal year 2007. CMS estimated the changes
to the relative weights would reduce LTCH Medicare
payments-per-discharge
by approximately 1.3% in fiscal year 2007. The August 2006 final
rule also included changes to the DRGs in IPPS that apply to
LTCHs, as the LTC-DRGs are based on the IPPS DRGs. CMS created
twenty new DRGs and modified 32 others, including LTC-DRGs.
Prior to the August 2006 final rule, certain HIHs that were in
existence on or before September 30, 1995, and certain
satellite facilities that were in existence on or before
September 30, 1999, referred to as grandfathered HIHs or
satellites, were not subject to certain HIH separateness
and control requirements as long as the
grandfathered HIHs or satellites continued to
operate under the same terms and conditions, including the
number of beds and square footage, in effect on
September 30, 2003 (for grandfathered HIHs) or
September 30, 1999 (for grandfathered satellites). These
grandfathered HIHs were also not subject to the payment
adjustments for discharged Medicare patients admitted from their
host hospitals in excess of the specified percentage threshold,
as discussed in the August 2004 rule above. The August 2006
final rule revised the regulations to provide grandfathered HIHs
and satellites more flexibility in adjusting square footage
upward or downward, or decreasing the number of beds without
being subject to the separateness and control
requirements and payment adjustment provisions. As of
March 31, 2008, we operated two grandfathered HIHs.
May 2007 Final Rule. On May 1, 2007, CMS
published its annual payment rate update for RY 2008 (affecting
discharges and cost reporting periods beginning on or after
July 1, 2007 and before July 1, 2008). The May 2007
final rule makes several changes to LTCH-PPS payment
methodologies and amounts during RY 2008 although, as described
below, many of these changes have been postponed for a three
year period by the SCHIP Extension Act.
For cost reporting periods beginning on or after July 1,
2007, the May 2007 final rule expands the current Medicare HIH
admissions threshold to apply to Medicare patients admitted from
any individual hospital. Previously, the admissions threshold
was applicable only to Medicare HIH admissions from hospitals
co-located with an LTCH or satellite of an LTCH. Under the May
2007 final rule, free-standing LTCHs and grandfathered
87
HIHs are subject to the Medicare admission thresholds, as well
as HIHs and satellites that admit Medicare patients from
non-co-located hospitals. To the extent that any LTCHs or
LTCH satellite facilitys discharges that are admitted from
an individual hospital (regardless of whether the referring
hospital is co-located with the LTCH or LTCH satellite) exceed
the applicable percentage threshold during a particular cost
reporting period, the payment rate for those discharges would be
subject to a downward payment adjustment. Cases admitted in
excess of the applicable threshold will be reimbursed at a rate
comparable to that under general acute care IPPS, which is
generally lower than LTCH-PPS rates. Cases that reach outlier
status in the discharging hospital would not count toward the
limit and would be paid under LTCH-PPS. CMS estimates the impact
of the expansion of the Medicare admission thresholds will
result in a reduction of 2.2% of the aggregate payments to all
LTCHs in RY 2008.
The applicable percentage threshold is generally 25% after the
completion of the phase-in period described below. The
percentage threshold for LTCH discharges from a referring
hospital that is an MSA dominant hospital or a single urban
hospital is the percentage of total Medicare discharges in the
MSA that are from the referring hospital, but no less than 25%
nor more than 50%. For Medicare discharges from LTCHs or LTCH
satellites located in rural areas, as defined by the Office of
Management and Budget, the percentage threshold is 50% from any
individual referring hospital. The expanded 25% rule is being
phased in over a three year period. The three year transition
period starts with cost reporting periods beginning on or after
July 1, 2007 and before July 1, 2008, when the
threshold is the lesser of 75% or the percentage of the
LTCHs or LTCH satellites admissions discharged from
the referring hospital during its cost reporting period
beginning on or after RY 2005. For cost reporting periods
beginning on or after July 1, 2008 and before July 1,
2009, the threshold will be the lesser of 50% or the percentage
of the LTCHs or LTCH satellites admissions from the
referring hospital, during its RY 2005 cost reporting period.
For cost reporting periods beginning on or after July 1,
2009, all LTCHs will be subject to the 25% threshold (or
applicable threshold for rural, urban-single, or MSA dominant
hospitals). The SCHIP Extension Act postpones the application of
the percentage threshold to all free-standing and grandfathered
HIHs for a three year period commencing on an LTCHs first
cost reporting period on or after December 29, 2007.
However, the SCHIP Extension Act does not postpone the
application of the percentage threshold, or the transition
period stated above, to those Medicare patients discharged from
an LTCH HIH or HIH satellite that were admitted from a
non-co-located hospital. The SCHIP Extension Act only postpones
the expansion of the admission threshold in the May 2007 final
rule to free-standing LTCHs and grandfathered HIHs.
The May 2007 final rule further revised the payment adjustment
for SSO cases. Beginning with discharges on or after
July 1, 2007, for cases with a length of stay that is less
than the IPPS comparable threshold, the rule effectively lowers
the LTCH payment to a rate based on the general acute care
hospital IPPS. SSO cases with covered lengths of stay that
exceed the IPPS comparable threshold would continue to be paid
under the SSO payment policy described above under the May 2006
final rule. Cases with a covered length of stay less than or
equal to the IPPS comparable threshold and less than five-sixths
of the geometric average length of stay for that LTC-DRG will be
paid at an amount comparable to the IPPS per diem. The SCHIP
Extension Act also postpones, for the three year period
beginning on December 29, 2007, the SSO policy changes made
in the May 2007 final rule.
The May 2007 final rule updated the standard federal rate by
0.71% for RY 2008. As a result, the federal rate for RY 2008 is
equal to $38,356.45, compared to $38,086.04 for RY 2007.
Subsequently, the SCHIP Extension Act eliminated the update to
the standard federal rate that occurred for RY 2008 effective
April 1, 2008. This adjustment to the standard federal rate
was applied prospectively on April 1, 2008 and reduced the
federal rate back to $38,086.04. In a technical correction to
the May 2007 final rule, CMS increased the fixed-loss amount for
high cost outlier in RY 2008 to $20,738, compared to $14,887 in
RY 2007. CMS projected an estimated 0.4% decrease in LTCH
payments in RY 2008 due to this change in the fixed-loss amount
and the overall impact of the May 2007 final rule to be a 1.2%
decrease in total estimated LTCH PPS payments for RY 2008.
The May 2007 final rule provides that beginning with the annual
payment rate updates to the LTC-DRG classifications and relative
weights for FY 2008 (affecting discharges beginning on or after
October 1, 2007 and before September 30, 2008), annual
updates to the LTC-DRG classification and relative weights are
to have a budget neutral impact. Under the May 2007 final rule,
future LTC-DRG reclassification and recalibrations, by
themselves, should neither increase nor decrease the estimated
aggregated LTCH PPS payments.
88
The May 2007 final rules are complex and the SCHIP Extension Act
has postponed the implementation of certain of the May 2007
final rules. While we cannot predict the ultimate long term
impact of LTCH PPS because the payment system remains subject to
significant change, if the May 2007 final rules become effective
as currently written, after the expiration of the SCHIP
Extension Act, our future net operating revenues and
profitability will be adversely affected.
August 2007 Final Rule. On August 1,
2007, CMS published the IPPS final rule for FY 2008, which
creates a new patient classification system with categories
referred to as MS-DRGs and MS-LTC-DRGs, respectively, for
hospitals reimbursed under IPPS and LTCH PPS. Beginning with
discharges on or after October 1, 2007, the new
classification categories take into account the severity of the
patients condition. CMS assigned proposed relative weights
to each MS-DRG and MS-LTC-DRG to reflect their relative use of
medical care resources. We believe that, because of the proposed
relative weights and length of stay assigned to the MS-LTC-DRGs
for the patient populations served by our hospitals, our long
term acute care hospital payments may be adversely affected.
The August 2007 final rule published a budget neutral update to
the MS-LTC-DRG classification and relative weights. In the
preamble to the IPPS final rule for FY 2008 CMS restated that it
intends to continue to update the LTC-DRG weights annually in
the IPPS rulemaking and those weights would be modified by a
budget neutrality adjustment factor to ensure that estimated
aggregate LTCH payments after reweighting are equal to estimated
aggregate LTCH payments before reweighting.
Medicare, Medicaid and SCHIP Extension Act of
2007. On December 29, 2007, the President
signed into law the SCHIP Extension Act. Among other changes in
the federal health care programs, the SCHIP Extension Act makes
significant changes to Medicare policy for LTCHs including a new
statutory definition of an LTCH, a report to Congress on new
LTCH patient criteria, relief from certain LTCH-PPS payment
policies for three years, a three year moratorium on the
development of new LTCHs and LTCH beds, elimination of the
payment update for the last quarter of RY 2008 and new medical
necessity reviews by Medicare contractors through at least
October 1, 2010.
Previously, the statutory definition of an LTCH focused on the
facility having an average length of stay of greater than
25 days. The SCHIP Extension Act adds to the statutory
requirements by defining an LTCH as a hospital primarily engaged
in providing inpatient services to Medicare beneficiaries with
medically complex conditions that require a long hospital stay.
In addition, by definition, LTCHs must meet certain facility
criteria, including (1) instituting a review process that
screens patients for appropriateness of an admission and
validates the patient criteria within 48 hours of each
patients subsequent admission, evaluates regularly their
patients for continuation of care and assesses the available
discharge options; (2) having active physician involvement
with patient care that includes a physician available
on-site
daily and additional consulting physicians on call; and
(3) having an interdisciplinary team of health care
professionals to prepare and carry out an individualized
treatment plan for each patient. We do not expect that
these changes will have any impact on the designation of our
hospitals as LTCHs.
The SCHIP Extension Act requires the Secretary of the Department
of Health and Human Services to conduct a study on the
establishment of national LTCH facility and patient criteria for
the purpose of determining medical necessity, appropriateness of
admissions and continued stay at, and discharge from, LTCHs. The
Secretary must submit a report on the results of this study to
Congress within eighteen months following enactment of the SCHIP
Extension Act. Both the study and the report are required to
consider recommendations on LTCH-specific facility and patient
criteria contained in a June 2004 report to Congress by MedPAC.
As described above, the SCHIP Extension Act precludes the
Secretary from implementing, during the three year moratorium
period, the provisions added by the May 2007 final rule that
extended the 25% rule to free-standing LTCHs, including
grandfathered LTCHs. The SCHIP Extension Act also modifies,
during the moratorium, the effect of the 25% rule for LTCHs that
are co-located with other hospitals. For HIHs and satellite
facilities, the applicable percentage threshold is set at 50%.
For HIHs and satellite facilities located in rural areas and
those which receive referrals from MSA dominant hospitals or
single urban hospitals, the percentage threshold is set at no
more than 75%. These moratoria relating to LTCH admission
thresholds extend for an LTCHs three cost reporting
periods beginning on or after December 29, 2007.
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The SCHIP Extension Act also precludes the Secretary from
implementing, for the three year period beginning on
December 29, 2007, a one-time adjustment to the LTCH
standard federal rate. This rule, established in the original
LTCH-PPS regulations, permits CMS to restate the standard
federal rate to reflect the effect of changes in coding since
the LTCH-PPS base year. In the preamble to the May 2007 final
rule, CMS discussed making a one-time prospective adjustment to
the LTCH-PPS rates for the 2009 rate year. In addition, the
SCHIP Extension Act reduces the Medicare payment update for the
portion of RY 2008 from April 1, 2008 to June 30, 2008
to the same base rate applied to LTCH discharges during RY 2007.
For the three years following December 29, 2007, the
Secretary must impose a moratorium on the establishment and
classification of new LTCHs, LTCH satellite facilities, and LTCH
beds in existing LTCH or satellite facilities. This moratorium
does not apply to LTCHs that, before the date of enactment,
(1) began the qualifying period for payment under the
LTCH-PPS, (2) have a written agreement with an unrelated
party for the construction, renovation, lease or demolition for
a LTCH and have expended at least 10% of the estimated cost of
the project or $2,500,000, or (3) have obtained an approved
certificate of need. Additionally, an LTCH located in a state
with only two LTCHs, may request an increase in licensed beds
following the closure or decrease in the number of licensed beds
at the other LTCH located within the state. As a result of the
SCHIP Extension Acts three year moratorium on the
development of new LTCHs, we have stopped all LTCH development,
except for five LTCHs currently under construction that are
excluded from the moratorium.
Beginning with LTCH discharges on or after October 1, 2007
and through September 30, 2010 (unless extended by the
Secretary), the SCHIP Extension Act also requires the Secretary
to significantly expand medical necessity review for patients
admitted to LTCHs by instituting a review of the medical
necessity of continued stays of patients admitted to LTCHs. The
medical necessity reviews must include a representative sample
that results in a 95% confidence interval and guarantees that at
least 75% of overpayments received by LTCHs for medically
unnecessary admissions and continued stays are recovered and not
counted toward an LTCHs Medicare average length of stay.
The Secretary may use up to 40% of the recouped overpayments to
compensate the fiscal intermediaries and Medicare administrative
contractors for the costs of conducting medical necessity
reviews.
April 2008 Proposed Rule. On April 30,
2008, CMS published the IPPS proposed rule for FY 2009
(affecting discharges and cost reports beginning on or after
October 1, 2008 and before October 1, 2009), which
made limited revisions to the classifications of cases in
MS-LTC-DRGs. The proposed rule also includes a number of
hospital ownership and physician referral provisions, including
a proposal to expand a hospitals disclosure obligations by
requiring physician-owned hospitals to disclose ownership or
investment interests held by immediate family members of a
referring physician. The proposed rule would require a hospital
to compel its medical staff to agree to disclose their ownership
interest in the hospital in writing to all patients referred to
the hospital. Under the proposed rule, failure to comply with
the disclosure requirements permits CMS to terminate a
hospitals Medicare provider agreement. CMS solicits public
comments on a proposed mandatory Disclosure of Financial
Relationships Report that will be used to collect information
regarding financial relationships between hospitals and
physicians.
May 6, 2008 Interim Final Rule. On
May 6, 2008, CMS published an interim final rule with
comment period, which implements portions of the SCHIP Extension
Act. The interim final rule addresses: (1) the payment
adjustment for very short-stay outliers, (2) the standard
federal rate for the last three months of RY 2008,
(3) adjustment of the high cost outlier fixed-loss amount
for the last three months of RY 2008, and (4) references
the SCHIP Extension Act in the discussion of the basis and scope
of the LTCH-PPS rules.
As provided in the SCHIP Extension Act, for discharges beginning
on or after December 29, 2007 and before December 29,
2010, the RY 2008 short-stay outlier rule based on the IPPS
comparable threshold does not apply. The RY 2008 rule required
that cases with a covered length of stay less than or equal to
the IPPS comparable threshold and less than five-sixths of the
geometric average length of stay for that DRG were paid at an
amount comparable to the IPPS per diem. IPPS comparable
threshold is defined as cases with a length of stay that is less
than the average length of stay plus one standard deviation for
the same DRG under IPPS. For discharges occurring on or after
April 1, 2008 through June 30, 2008, the revised RY
2008 standard federal rate is $38,086.04. In the only
interpretation of the SCHIP Extension Act in the interim rule,
CMS states that it is interpreting the term base
rate to be the standard federal rate because we
believe Congress meant to eliminate the 0.71% update from the RY
2008 standard federal rate. Finally, the revised high cost
outlier fixed-loss amount for discharges occurring on or after
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April 1, 2008 through June 30, 2008 is $20,707, a
decrease of $31 per discharge. CMS indicates that the other
issues addressed in the SCHIP Extension Act will be discussed in
a forthcoming regulation, including instructions concerning
(1) the moratorium on the certification of new LTCHs and
satellites and the expansion of beds in existing facilities and
(2) implementing changes to the 25% admission threshold
adjustment for LTCH patients admitted from certain referring
hospitals for a three year period.
May 9, 2008 Final Rule. On May 9,
2008, CMS published its annual payment rate update for RY 2009
(affecting discharges and cost reporting periods beginning on or
after July 1, 2008). The final rule adopts a
15-month
rate update, from July 1, 2008 through September 30,
2009 and moves LTCH-PPS from a July-June update cycle to the
same update cycle as the general acute care hospital inpatient
rule (October September). For RY 2009, the rule
establishes a 2.7% update to the standard federal rate. The rule
increases the fixed-loss amount for high cost outlier cases to
$22,960, which is $2,222 higher than the 2008 LTCH-PPS rate
year. The final rule provides that CMS may make a one-time
reduction in the LTCH-PPS rates to reflect a budget neutrality
adjustment no earlier than December 29, 2010 and no later
than October 1, 2012. CMS estimated this reduction will be
approximately 3.75%.
May 2008 Interim Final Rule. On May 22,
2008, CMS published an interim final rule with comment period,
which implements portions of the SCHIP Extension Act not
addressed in the May 6, 2008 Interim Final Rule. Among
other things, the second May 2008 Interim Final Rule establishes
a definition for free-standing LTCHs as a hospital
that: (1) has a Medicare provider agreement, (2) has
an average length of stay of greater than 25 days,
(3) does not occupy space in a building used by another
hospital, (4) does not occupy space in one or more separate
or entire buildings located on the same campus as buildings used
by another hospital; and (5) is not part of a hospital that
provides inpatient services in a building also used by another
hospital. As required by the SCHIP Extension Act, CMS made
certain changes to the payment adjustment policy in the May 2008
Interim Final Rule. Effective for cost reporting periods
beginning on or after December 29, 2007 and before
December 29, 2010, CMS delayed the extension of the 25%
threshold payment adjustment to grandfathered HIHs and
free-standing LTCHs. Furthermore, CMS increased the patient
percentage thresholds from 25% to 50% for certain LTCH HIH and
satellite discharges admitted from a co-located hospital, and
from 50% to 75% for certain LTCH HIH and satellite discharges at
rural HIHs or admitted from a co-located MSA dominant or urban
single hospital.
The May 2008 Interim Final Rule is effective December 29,
2007 as required by the SCHIP Extension Act; however, CMS
previously extended the percentage threshold rule for cost
reporting periods beginning on or after July 1, 2007.
Accordingly, grandfathered LTCH HIHs and free-standing LTCHs
with cost reporting periods beginning on or after July 1,
2007 but before December 29, 2007 remain subject to the
percentage threshold requirements until the start of the next
cost reporting year. These particular LTCHs are subject to, for
one cost reporting period, a percentage threshold equal to the
lesser of 75% or the percentage of the grandfathered HIHs
or free-standing LTCHs admissions discharged from the
referring hospital during its cost reporting period beginning on
or after July 1, 2004 and before July 1, 2005. CMS
will continue to apply the percentage threshold to grandfathered
satellites for patients admitted from any individual hospital
with which they are not co-located. In addition, LTCH HIHs and
LTCH satellites that are not grandfathered remain subject to the
percentage threshold for patients admitted from non-co-located
hospitals. The SCHIP Extension Act did not delay or exclude
these facilities from the percentage threshold applicable for
cost reporting periods beginning on or after July 1, 2007.
For LTCHs subject to the expanded percentage threshold a three
year transition period starts with cost reporting periods
beginning on or after July 1, 2007 and before July 1,
2008, when the threshold is the lesser of 75% or the percentage
of the LTCHs or LTCH satellites admissions
discharged from the referring hospital during its cost reporting
period beginning on or after July 1, 2004 and before
July 1, 2005 (RY 2005). For cost reporting
periods beginning on or after July 1, 2008 and before
July 1, 2009, the threshold will be the lesser of 50% or
the percentage of the LTCHs or LTCH satellites
admissions from the referring hospital, during its RY 2005 cost
reporting period. For cost reporting periods beginning on or
after July 1, 2009, LTCHs subject to the expanded
percentage threshold will be subject to the 25% threshold (or
applicable threshold for rural, urban-single, or MSA dominant
hospitals).
In accordance with the SCHIP Extension Act, the May 2008 Interim
Final Rule provides an exception for new LTCHs that, on or
before December 29, 2007, (1) began the qualifying
period for payment under the LTCH PPS, (2) have a binding
written agreement with an unrelated party for the construction,
renovation, lease or demolition for a LTCH and have expended at
least 10% of the estimated cost of the project or $2,500,000, or
(3) have obtained
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an approved certificate of need. The May 2008 Interim Final Rule
implements a moratorium on any increase of LTCH beds in existing
LTCHs or LTCH satellites beginning on December 29, 2007 and
continuing through December 28, 2010. CMS interprets the
moratorium on new beds to apply only to the number of
Medicare-certified beds at the hospital at the beginning of the
moratorium period. The May 2008 Interim Final Rule also
implements a narrow exception for new beds. LTCHs located in a
state with only two LTCHs may request an increase in
Medicare-certified beds following the closure or decrease in the
number of beds at the other LTCH located within the state. CMS
noted that the exception for an increase in beds does not apply
to the limit on the number of beds in grandfathered LTCH HIHs or
grandfathered LTCH satellites. A grandfathered facility would
not be allowed to maintain its grandfathered status if it
increases its number of beds under the exception.
Because the LTCH-PPS rules are complex and are based, in part,
on the volume of Medicare admissions from our host hospitals and
free-standing hospitals as a percent of our overall Medicare
admissions, we cannot predict with any certainty the impact on
our future net operating revenues of compliance with these
regulations. However, we expect the financial impact to increase
as the Medicare admissions thresholds decline during the
phase-in of the regulations.
Medicare Reimbursement of Outpatient Rehabilitation
Services. Beginning on January 1, 1999, the
Balanced Budget Act of 1997 subjected certain outpatient therapy
providers reimbursed under the Medicare physician fee schedule
to annual limits for therapy expenses. Effective January 1,
2008, the annual limit on outpatient therapy services is $1,810
for combined physical and speech language pathology services and
$1,810 for occupational therapy services. 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
SCHIP Extension Act extended the cap exceptions process through
June 30, 2008. The Medicare Improvements for Patients and
Providers Act of 2008 further extended the cap exceptions
process through December 31, 2009. Prior to implementing
the exceptions process to the therapy caps, only hospitals could
bill for outpatient rehabilitation services that exceeded the
annual caps. Elimination of the therapy cap exceptions may
reduce our future net operating revenues and profitability.
Historically, outpatient rehabilitation services have been
subject to scrutiny by the Medicare program for, among other
things, medical necessity for services, appropriate
documentation for services, supervision of therapy aides and
students and billing for group therapy. CMS has issued guidance
to clarify that services performed by a student are not
reimbursed even if provided under line of sight
supervision of the therapist. Likewise, CMS has reiterated that
Medicare does not pay for services provided by aides regardless
of the level of supervision. CMS also has issued instructions
that outpatient physical and occupational therapy services
provided simultaneously to two or more individuals by a
practitioner should be billed as group therapy services.
Medicare Reimbursement of Inpatient Rehabilitation Facility
Services. Inpatient rehabilitation facilities are
paid under a prospective payment system specifically applicable
to this provider type, which is referred to as
IRF-PPS.
Under the IRF-PPS, each patient discharged from an inpatient
rehabilitation facility is assigned to a case mix group or
IRF-CMG containing patients with similar clinical
problems that are expected to require similar amounts of
resources. An inpatient rehabilitation facility is generally
paid a pre-determined fixed amount applicable to the assigned
IRF-CMG (subject to applicable case adjustments related to
length of stay and facility level adjustments for location and
low income patients). The payment amount for each IRF-CMG is
intended to reflect the average cost of treating a Medicare
patients condition in an inpatient rehabilitation facility
relative to patients with conditions described by other
IRF-CMGs. The IRF-PPS also includes special payment policies
that adjust the payments for some patients based on the
patients length of stay, the facilitys costs,
whether the patient was discharged and readmitted and other
factors. As required by Congress, IRF-CMG payments rates have
been set to maintain budget neutrality with total expenditures
that would have been made under the previous reasonable cost
based system. The IRF-PPS was phased in over a transition period
in 2002. For cost reporting periods beginning on or after
October 1, 2002, inpatient rehabilitation facilities are
paid solely on the basis of the IRF-PPS payment rate.
Although the initial IRF-PPS regulations did not change the
criteria that must be met in order for a hospital to be
certified as an inpatient rehabilitation facility, CMS adopted a
separate final rule on May 7, 2004 that made
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significant changes to those criteria. The new inpatient
rehabilitation facility certification criteria became effective
for cost reporting periods beginning on or after July 1,
2004. Under the historic IRF certification criteria that had
been in effect since 1983, in order to qualify as an IRF, a
hospital was required to satisfy certain operational criteria as
well as demonstrate that, during its most recent
12-month
cost reporting period, it served an inpatient population of whom
at least 75% required intensive rehabilitation services for one
or more of ten conditions specified in the regulation. In 2002,
CMS became aware that its various contractors were using
inconsistent methods to assess compliance with the 75% test and
that the percentage of inpatient rehabilitation facilities in
compliance with the 75% test might be low. In response, in June
2002, CMS suspended enforcement of the 75% test and, on
September 9, 2003, proposed modifications to the regulatory
standards for certification as an inpatient rehabilitation
facility. In addition, during 2003, several CMS contractors,
promulgated draft local medical review policies that would
change the guidelines used to determine the medical necessity
for inpatient rehabilitation care.
CMS adopted four major changes to the 75% test in its
May 7, 2004 final rule. First, CMS temporarily lowered the
75% compliance threshold, as follows: (1) 50% for cost
reporting periods beginning on or after July 1, 2004 and
before July 1, 2005; (2) 60% for cost reporting
periods beginning on or after July 1, 2005 and before
July 1, 2006; (3) 65% for cost reporting periods
beginning on or after July 1, 2006 and before July 1,
2007; and (4) 75% for cost reporting periods beginning on
or after July 1, 2007. Second, CMS modified and expanded
from ten to thirteen the medical conditions used to determine
whether a hospital qualifies as an inpatient rehabilitation
facility. Third, the agency finalized the conditions under which
comorbidities can be used to verify compliance with the 75%
test. Fourth, CMS changed the timeframe used to determine
compliance with the 75% test from the most recent
12-month
cost reporting period to the most recent,
consecutive, and appropriate
12-month
period, with the result that a determination of
non-compliance with the applicable compliance threshold will
affect the facilitys certification for its cost reporting
period that begins immediately after the
12-month
review period.
Congress temporarily suspended CMS enforcement of the 75% test
under the Consolidated Appropriations Act, 2005, enacted on
December 8, 2004. The Act required the Secretary to respond
within 60 days to a study by the Government Accountability
Office, or GAO, on the standards for defining inpatient
rehabilitation services before the Secretary may use funds
appropriated under the Act to redesignate as a general acute
care hospital any hospital that was certified as an inpatient
rehabilitation facility on or before June 30, 2004 as a
result of the hospitals failure to meet the 75% test. The
GAO issued its study on April 22, 2005 and recommended that
CMS, based on further research, refine the 75% test to describe
more thoroughly the subgroups of patients within the qualifying
conditions that are appropriate for care in an inpatient
rehabilitation facility. The Secretary issued a formal response
to the GAO study on June 24, 2005 in which it concluded
that the revised inpatient rehabilitation facility certification
standards, including the 75% test, were not inconsistent with
the recommendations in the GAO report. In light of this
determination, the Secretary announced that CMS would
immediately begin enforcement of the revised certification
standards.
Subsequently, under the Deficit Reduction Act of 2005, enacted
on February 8, 2006, Congress extended the phase-in period
for the 75% test by maintaining the compliance threshold at 60%
(rather than increasing it to 65%) during the
12-month
period beginning on July 1, 2006. The compliance threshold
then increases to 65% for cost reporting periods beginning on or
after July 1, 2007 and again to 75% for cost reporting
periods beginning on or after July 1, 2008. The regulatory
text was revised accordingly in the final rule updating the
prospective payment rates for fiscal year 2007, as published by
CMS on August 18, 2006. In the August 2006 final rule
updating
IRF-PPS, CMS
also reduced the standard payment amount by 2.6% and updated the
outlier threshold for fiscal year 2007 to $5,534. In the August
2007 final rule updating IRF-PPS, the compliance threshold
increased to 65% for cost reporting periods beginning on or
after July 1, 2007 and again to 75% for cost reporting
periods beginning on or after July 1, 2008. As stipulated
in the August 2007 final rule, for cost reporting periods
beginning on or after July 1, 2008 comorbidities would not
be used to determine whether an IRF meets the 75% test.
The SCHIP Extension Act includes a permanent freeze in the
patient classification criteria compliance threshold at 60%
(with comorbidities counting toward this threshold) and a
payment freeze from April 1, 2008 through
September 30, 2009. In order to comply with Medicare
inpatient rehabilitation facility certification criteria, it may
be necessary for our IRFs to implement restrictive admissions
policies and not admit patients whose diagnoses fall outside the
thirteen specified conditions. Such policies may result in
reduced patient volumes, which could have a negative effect on
financial performance.
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In addition to meeting the compliance threshold, a hospital must
meet other facility criteria to be classified as an IRF,
including: (1) a provider agreement to participate as a
hospital in Medicare; (2) a preadmission screening
procedure; (3) ensuring that patients receive close medical
supervision and furnish, through the use of qualified personnel,
rehabilitation nursing, physical therapy, and occupational
therapy, plus, as needed, speech therapy, social or
psychological services, and orthotic and prosthetic services;
(4) a full-time, qualified director of rehabilitation;
(5) a plan of treatment for each inpatient that is
established, reviewed, and revised as needed by a physician in
consultation with other professional personnel who provide
services to the patient; (6) a coordinated
multidisciplinary team approach in the rehabilitation of each
inpatient, as documented by periodic clinical entries made in
the patients medical record to note the patients
status in relationship to goal attainment, and that team
conferences are held at least every two weeks to determine the
appropriateness of treatment. Failure to comply with any of the
classification criteria, including the compliance threshold, may
cause a hospital to lose its exclusion from the prospective
payment system that applies to general acute care hospitals and,
as a result, no longer be eligible for payment at a higher rate.
The SCHIP Extension Act requires the Secretary, in consultation
with providers, trade organizations and MedPAC, to prepare an
analysis of the compliance threshold for the Committee on Ways
and Means of the House of Representatives and the Committee on
Finance of the Senate. Among other things, the analysis must
include the potential effect of the 75% rule on access to care,
alternatives to the 75% rule policy for certifying inpatient
rehabilitation hospitals, and the appropriate setting of care
for conditions of patients commonly admitted to IRFs that are
not one of the 13 specified conditions. In requiring the
Secretary to produce a recommendation for classifying IRFs,
Congress used the term 75% rule for the first time
to describe the compliance threshold requirement, while at the
same time freezing the threshold at 60%. The results of this
analysis may impact future policies, regulations and statutes
governing IRF-PPS.
April 2008 Proposed Rule. On April 25,
2008, CMS published the proposed rule for the IRF-PPS for FY
2009. The proposed rule includes changes to the IRF-PPS
regulations designed to implement portions of the SCHIP
Extension Act. In particular, the patient classification
criteria compliance threshold is established at 60% (with
comorbidities counting toward this threshold). In the preamble
discussion to the proposed rule, CMS notes that the
Presidents FY 2009 budget proposes to repeal of that
portion of the SCHIP Extension Act that requires the compliance
rate to be set no higher than 60% for cost reporting periods
beginning on or after July 1, 2006. For this reason and
others, CMS proposes to set the compliance rate at the highest
level possible within current statutory authority. In addition
to updating the various values that compose the IRF-PPS, the
proposed rule would update the outlier threshold amount to
$9,191. CMS has also proposed to update the CMG relative weights
and average length of stay values.
Specialty Hospital Medicaid Reimbursement. The
Medicaid program is designed to provide medical assistance to
individuals unable to afford care. The program is governed by
the Social Security Act of 1965 and administered and funded
jointly by each individual state government and CMS. Medicaid
payments are made under a number of different systems, which
include cost based reimbursement, prospective payment systems or
programs that negotiate payment levels with individual
hospitals. In addition, Medicaid programs are subject to
statutory and regulatory changes, administrative rulings,
interpretations of policy by the state agencies and certain
government funding limitations, all of which may increase or
decrease the level of program payments to our hospitals. Net
operating revenues generated directly from the Medicaid program
represented approximately 3.0% of our specialty hospital net
operating revenues for the year ended December 31, 2007 and
approximately 2.8% for three months ended March 31, 2008.
Workers Compensation. Net operating
revenues generated directly from Workers compensation
programs represented approximately 21.6% of our net operating
revenue from outpatient rehabilitation services for the year
ended December 31, 2007 and 20.7% for the three months
ended March 31, 2008. Workers compensation is a state
mandated, comprehensive insurance program that requires
employers to fund or insure medical expenses, lost wages and
other costs resulting from work related injuries and illnesses.
Workers compensation benefits and arrangements vary on a
state-by-state
basis and are often highly complex. In some states, payment for
services covered by workers compensation programs are
subject to cost containment features, such as requirements that
all workers compensation injuries be treated through a
managed care program, or the imposition of payment caps. In
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addition, these workers compensation programs may impose
requirements that affect the operations of our outpatient
rehabilitation services.
Other
Healthcare Regulations
Fraud and Abuse Enforcement. Various federal
and state laws prohibit the submission of false or fraudulent
claims, including claims to obtain payment under Medicare,
Medicaid and other government healthcare programs. Penalties for
violation of these laws include civil and criminal fines,
imprisonment and exclusion from participation in federal and
state healthcare programs. In recent years, federal and state
government agencies have increased the level of enforcement
resources and activities targeted at the healthcare industry. In
addition, the federal False Claims Act and similar state
statutes allow individuals to bring lawsuits on behalf of the
government, in what are known as qui tam or
whistleblower actions, alleging false or fraudulent
Medicare or Medicaid claims or other violations of the statute.
The use of these private enforcement actions against healthcare
providers has increased dramatically in recent years, in part
because the individual filing the initial complaint is entitled
to share in a portion of any settlement or judgment. See
Legal Proceedings.
From time to time, various federal and state agencies, such as
the Office of the Inspector General of the Department of Health
and Human Services, issue a variety of pronouncements, including
fraud alerts, the Office of Inspector Generals Annual Work
Plan and other reports, identifying practices that may be
subject to heightened scrutiny. These pronouncements can
identify issues relating to long term acute care hospitals,
inpatient rehabilitation facilities or outpatient rehabilitation
services or providers. For example, the Office of Inspector
Generals 2005 Work Plan describes plans to study whether
patients in long term acute care hospitals are receiving
acute-level services or could be cared for in skilled nursing
facilities. The 2006 and 2007 Work Plans describe plans:
(1) to study the accuracy of Medicare payment for inpatient
rehabilitation stays when patient assessments are entered later
than the required deadlines, (2) to study both inpatient
rehabilitation facility and long term acute care hospital
payments in order to determine whether they were made in
accordance with applicable regulations, including policies on
outlier payments and interrupted stays, and (3) to study
physical and occupational therapy claims in order to determine
whether the services were medically necessary, adequately
documented and certified. The 2007 Work Plan describes plans to
study the extent to which long term acute care hospitals admit
patients from a sole general acute care hospital and whether
hospitals currently reimbursed under LTCH-PPS are in compliance
with the average length of stay criteria. We monitor government
publications applicable to us and focus a portion of our
compliance efforts towards these areas targeted for enforcement.
We endeavor to conduct our operations in compliance with
applicable laws, including healthcare fraud and abuse laws. If
we identify any practices as being potentially contrary to
applicable law, we will take appropriate action to address the
matter, including, where appropriate, disclosure to the proper
authorities, which may result in a voluntary refund of monies to
Medicare, Medicaid or other governmental health care programs.
Remuneration and Fraud Measures. The federal
anti-kickback statute prohibits some business
practices and relationships under Medicare, Medicaid and other
federal healthcare programs. These practices include the
payment, receipt, offer or solicitation of remuneration in
connection with, to induce, or to arrange for, the referral of
patients covered by a federal or state healthcare program.
Violations of the anti-kickback law may be punished by a
criminal fine of up to $50,000 or imprisonment for each
violation, or both, civil monetary penalties of $50,000 and
damages of up to three times the total amount of remuneration,
and exclusion from participation in federal or state healthcare
programs.
Section 1877 of the Social Security Act, commonly known as
the Stark Law, prohibits referrals for designated
health services by physicians under the Medicare and Medicaid
programs to other healthcare providers in which the physicians
have an ownership or compensation arrangement unless an
exception applies. Sanctions for violating the Stark Law include
civil monetary penalties of up to $15,000 per prohibited service
provided, assessments equal to three times the dollar value of
each such service provided and exclusion from the Medicare and
Medicaid programs and other federal and state healthcare
programs. The statute also provides a penalty of up to $100,000
for a circumvention scheme. In addition, many states have
adopted or may adopt similar anti-kickback or anti-self-referral
statutes. Some of these statutes prohibit the payment or receipt
of remuneration for the referral of patients, regardless of the
source of the payment for the care. While we do not believe our
arrangements are in
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violation of these prohibitions, we cannot assure you that
governmental officials charged with the responsibility for
enforcing the provisions of these prohibitions will not assert
that one or more of our arrangements are in violation of the
provisions of such laws and regulations.
Provider-Based Status. The designation
provider-based refers to circumstances in which a
subordinate facility (e.g., a separately certified Medicare
provider, a department of a provider or a satellite facility) is
treated as part of a provider for Medicare payment purposes. In
these cases, the services of the subordinate facility are
included on the main providers cost report and
overhead costs of the main provider can be allocated to the
subordinate facility, to the extent that they are shared. We
operate 12 specialty hospitals that are treated as
provider-based satellites of certain of our other facilities,
certain of our outpatient rehabilitation services are operated
as departments of our inpatient rehabilitation facilities, and
we provide rehabilitation management and staffing services to
hospital rehabilitation departments that may be treated as
provider-based. These facilities are required to satisfy certain
operational standards in order to retain their provider-based
status.
Health Information Practices. In addition to
broadening the scope of the fraud and abuse laws, the Health
Insurance Portability and Accountability Act of 1996, commonly
known as HIPAA, also mandates, among other things, the adoption
of standards for the exchange of electronic health information
in an effort to encourage overall administrative simplification
and enhance the effectiveness and efficiency of the healthcare
industry. If we fail to comply with the standards, we could be
subject to criminal penalties and civil sanctions. Among the
standards that the Department of Health and Human Services has
adopted or will adopt pursuant to HIPAA are standards for
electronic transactions and code sets, unique identifiers for
providers (referred to as National Provider Identifier or NPI),
employers, health plans and individuals, security and electronic
signatures, privacy and enforcement.
The Department of Health and Human Services has adopted
standards in three areas that most affect our operations.
Standards relating to the privacy of individually identifiable
health information govern our use and disclosure of protected
health information and require us to impose those rules, by
contract, on any business associate to whom such information is
disclosed. We were required to comply with these standards by
April 14, 2003.
Standards relating to electronic transactions and code sets
require the use of uniform standards for common healthcare
transactions, including healthcare claims information, plan
eligibility, referral certification and authorization, claims
status, plan enrollment and disenrollment, payment and
remittance advice, plan premium payments and coordination of
benefits. We were required to comply with these requirements by
October 16, 2003.
Standards for the security of electronic health information
require us to implement various administrative, physical and
technical safeguards to ensure the integrity and confidentiality
of electronic protected health information. We were required to
comply with these security standards by April 20, 2005.
The NPI will replace health care provider identifiers that are
in use today in standard transactions. Implementation of the NPI
will eliminate the need for health care providers to use
different identification numbers to identify themselves when
conducting standard transactions with multiple health plans. We
were required to comply with the use of NPIs in standard
transactions by May 23, 2007.
We maintain a HIPAA committee that is charged with evaluating
and monitoring our compliance with HIPAA. The HIPAA committee
monitors HIPAAs regulations as they have been adopted to
date and as additional standards and modifications are adopted.
Although health information standards have had a significant
effect on the manner in which we handle health data and
communicate with payors, the cost of our compliance has not had
a material adverse effect on our business, financial condition
or results of operations. We cannot estimate the cost of
compliance with standards that have not been issued or finalized
by the Department of Health and Human Services.
Compliance
Program
Our
Compliance Program
In late 1998, we voluntarily adopted our code of conduct. The
code is reviewed and amended as necessary and is the basis for
our company-wide compliance program. Our written code of conduct
provides guidelines for principles and regulatory rules that are
applicable to our patient care and business activities. These
guidelines are
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implemented by a compliance officer, a compliance committee, and
employee education and training. We also have established a
reporting system, auditing and monitoring programs, and a
disciplinary system as a means for enforcing the codes
policies.
Operating
Our Compliance Program
We focus on integrating compliance responsibilities with
operational functions. We recognize that our compliance with
applicable laws and regulations depends upon individual employee
actions as well as company operations. As a result, we have
adopted an operations team approach to compliance. Our corporate
executives, with the assistance of corporate experts, designed
the programs of the compliance committee. We utilize facility
leaders for employee-level implementation of our code of
conduct. This approach is intended to reinforce our company-wide
commitment to operate in accordance with the laws and
regulations that govern our business.
Compliance
Committee
Our compliance committee is made up of members of our senior
management and in-house counsel. The compliance committee meets
on a quarterly basis and reviews the activities, reports and
operation of our compliance program. In addition, the HIPAA
committee meets on a regular basis to review compliance with
HIPAA regulations and provides reports to the compliance
committee.
Compliance
Issue Reporting
In order to facilitate our employees ability to report
known, suspected or potential violations of our code of conduct,
we have developed a system of anonymous reporting. This
anonymous reporting may be accomplished through our toll free
compliance hotline, compliance
e-mail
address or our compliance post office box. The compliance
officer and the compliance committee are responsible for
reviewing and investigating each compliance incident in
accordance with the compliance departments investigation
policy.
Compliance
Monitoring and Auditing / Comprehensive Training and
Education
Monitoring reports and the results of compliance for each of our
business segments are reported to the compliance committee on a
quarterly basis. We train and educate our employees regarding
the code of conduct, as well as the legal and regulatory
requirements relevant to each employees work environment.
New and current employees are required to sign a compliance
certification form certifying that the employee has read,
understood and has agreed to abide by the code of conduct.
Additionally, all employees are required to re-certify
compliance with the code on an annual basis.
Policies
and Procedures Reflecting Compliance Focus Areas
We review our policies and procedures for our compliance program
from time to time in order to improve operations and to ensure
compliance with requirements of standards, laws and regulations
and to reflect the ongoing compliance focus areas which have
been identified by the compliance committee.
Internal
Audit
In addition to and in support of the efforts of our compliance
department, during 2001 we established an internal audit
function. The compliance officer manages the combined Compliance
and Audit Department and meets with the audit committee of the
board of directors on a quarterly basis to discuss audit results.
Corporate
Information
We are a corporation organized under the laws of the State of
Delaware. Our principal executive offices are located at 4714
Gettysburg Road, Mechanicsburg, Pennsylvania 17055. Our
telephone number at our principal executive offices is
(717) 972-1100.
Our companys website can be located at
www.selectmedicalcorp.com. The information on our companys
website is not part of this prospectus.
97
MANAGEMENT
Executive
Officers and Directors
The following table sets forth certain information with respect
to our executive officers and directors as
of ,
2008.
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|
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Name
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Age
|
|
Position
|
|
Rocco A. Ortenzio
|
|
75
|
|
Director and Executive Chairman
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Robert A. Ortenzio
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|
51
|
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Director and Chief Executive Officer
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Russell L. Carson
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|
64
|
|
Director
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David S. Chernow
|
|
51
|
|
Director
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Bryan C. Cressey
|
|
58
|
|
Director
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James E. Dalton, Jr.
|
|
65
|
|
Director
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Thomas A. Scully
|
|
50
|
|
Director
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Leopold Swergold
|
|
68
|
|
Director
|
Sean M. Traynor
|
|
39
|
|
Director
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Patricia A. Rice
|
|
61
|
|
President and Chief Operating Officer
|
David W. Cross
|
|
61
|
|
Executive Vice President and Chief Development Officer
|
S. Frank Fritsch
|
|
56
|
|
Executive Vice President and Chief Human Resources Officer
|
Martin F. Jackson
|
|
54
|
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Executive Vice President and Chief Financial Officer
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James J. Talalai
|
|
46
|
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Executive Vice President and Chief Information Officer
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Michael E. Tarvin
|
|
48
|
|
Executive Vice President, General Counsel and Secretary
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Scott A. Romberger
|
|
48
|
|
Senior Vice President, Controller and Chief Accounting Officer
|
Robert G. Breighner, Jr.
|
|
39
|
|
Vice President, Compliance and Audit Services and Corporate
Compliance Officer
|
Set forth below is a brief description of the business
experience of each of our directors and executive officers:
Rocco A. Ortenzio co-founded our company and has served
as Executive Chairman since September 2001. He became a director
of ours upon consummation of the Merger Transactions. He served
as Chairman and Chief Executive Officer from February 1997 until
September 2001. In 1986, he co-founded Continental Medical
Systems, Inc., and served as its Chairman and Chief Executive
Officer until July 1995. In 1979, Mr. Ortenzio founded
Rehab Hospital Services Corporation, and served as its Chairman
and Chief Executive Officer until June 1986. In 1969,
Mr. Ortenzio founded Rehab Corporation and served as its
Chairman and Chief Executive Officer until 1974.
Mr. Ortenzio is the father of Robert A. Ortenzio, our Chief
Executive Officer.
Robert A. Ortenzio co-founded our company and has served
as a director since February 1997. He became a director of ours
upon consummation of the Merger Transactions. Mr. Ortenzio
has served as our Chief Executive Officer since January 1,
2005 and as our President and Chief Executive Officer from
September 2001 to January 1, 2005. Mr. Ortenzio also
served as our President and Chief Operating Officer from
February 1997 to September 2001. He was an Executive Vice
President and a director of Horizon/CMS Healthcare Corporation
from July 1995 until July 1996. In 1986, Mr. Ortenzio
co-founded Continental Medical Systems, Inc., and served in a
number of different capacities, including as a Senior Vice
President from February 1986 until April 1988, as Chief
Operating Officer from April 1988 until July 1995, as President
from May 1989 until August 1996 and as Chief
98
Executive Officer from July 1995 until August 1996. Before
co-founding Continental Medical Systems, Inc., he was a Vice
President of Rehab Hospital Services Corporation. He currently
serves on the board of directors of Odyssey Healthcare, Inc., a
hospice health care company, and U.S. Oncology, Inc.
Mr. Ortenzio is the son of Rocco A. Ortenzio, our Executive
Chairman.
Russell L. Carson has served as a director since February
1997, and became a director of ours upon consummation of the
Merger Transactions. He co-founded Welsh, Carson,
Anderson & Stowe in 1978 and has focused on healthcare
investments. Mr. Carson has been a general partner of
Welsh, Carson, Anderson & Stowe since 1979. Welsh,
Carson, Anderson & Stowe has created fifteen
institutionally funded limited partnerships with total capital
of more than $18 billion and has invested in more than
200 companies. Before co-founding Welsh, Carson,
Anderson & Stowe, Mr. Carson was employed by
Citicorp Venture Capital Ltd., a subsidiary of Citigroup, Inc.,
and served as its Chairman and Chief Executive Officer from 1974
to 1978. He currently serves on the board of directors of
U.S. Oncology, Inc.
David S. Chernow served as a director from January 2002
until the consummation of the Merger Transactions on
February 24, 2005, and became a director of our company on
August 10, 2005. Mr. Chernow is the President and
Chief Executive Officer of OnCURE Medical Corp., one of the
largest providers of free-standing radiation oncology care in
the United States. From January 2004 to June 2007,
Mr. Chernow served as the President and Chief Executive
Officer of JA Worldwide, a nonprofit organization dedicated to
the education of young people about business. From July 2001 to
January 2004, he served as the President and Chief Executive
Officer of Junior Achievement, Inc., a predecessor of JA
Worldwide. From 1999 to 2001, he was the President of the
Physician Services Group at US Oncology, Inc. Mr. Chernow
co-founded American Oncology Resources in 1992 and served as its
Chief Development Officer until the time of the merger with
Physician Reliance Network, Inc., which created US Oncology,
Inc. in 1999.
Bryan C. Cressey has served as a director since February
1997, and became a director of ours upon consummation of the
Merger Transactions. He is a partner of Cressey &
Company, which he founded in 2007. He is a managing partner of
Thoma Cressey Bravo, which he co-founded in June 1998. Prior to
that time he was a principal, partner and co-founder of Golder,
Thoma, Cressey and Rauner, the predecessor of GTCR Golder
Rauner, LLC, since 1980. Mr. Cressey also serves as a
director and chairman of Belden Inc., Jazz Pharmaceuticals, Inc.
and several private companies.
James E. Dalton, Jr. served as a director since
December 2000 until the consummation of the Merger Transactions
on February 24, 2005, and became a director of our company
on August 10, 2005. Since January 1, 2006,
Mr. Dalton has been Chairman of Signature Hospital
Corporation. From 2001 to 2007, Mr. Dalton served as
President of Edinburgh Associates, Inc. Mr. Dalton served
as President, Chief Executive Officer and as a director of
Quorum Health Group, Inc. from May 1, 1990 until it was
acquired by Triad Hospitals, Inc. in April 2001. Prior to
joining Quorum, he served as Regional Vice President, Southwest
Region for HealthTrust, Inc., as division Vice President of
HCA, and as Regional Vice President of HCA Management Company.
Mr. Dalton also serves on the board of directors of
U.S. Oncology, Inc. He serves as a Trustee for the
Universal Health Services Realty Income Trust. Mr. Dalton
is a Life Fellow of the American College of Healthcare
Executives.
Thomas A. Scully has served as a director since February
2004, and became a director of ours upon consummation of the
Merger Transactions. Since January 1, 2004, he has served
as Senior Counsel to the law firm of Alston & Bird and
as a General Partner with Welsh, Carson Anderson &
Stowe. From May 2001 to December 2003, Mr. Scully served as
Administrator of the Centers for Medicare & Medicaid
Services, or CMS. CMS is responsible for the management of
Medicare, Medicaid, SCHIP and other national healthcare
initiatives. Before joining CMS, Mr. Scully served as
President and Chief Executive Officer of the Federation of
American Hospitals from January 1995 to May 2001.
Mr. Scully also serves as a director of American Financial
Corp.
Leopold Swergold served as a director from May 2001 until
the consummation of the Merger Transactions on February 24,
2005, and became a director of our company on August 10,
2005. In 1983, Mr. Swergold formed Swergold,
Chefitz & Company, a healthcare investment banking
firm. In 1989, Swergold, Chefitz & Company merged into
Furman Selz, an investment banking firm, where Mr. Swergold
served as Head of Healthcare Investment Banking and as a member
of the board of directors. In 1997, Furman Selz was acquired by
ING Groep N.V. of the Netherlands. From 1997 until 2004,
Mr. Swergold was a Managing Director of ING Furman Selz
Asset
99
Management LLC, where he managed several healthcare investment
funds. Mr. Swergold serves as a director of Financial
Federal Corp., a New York Stock Exchange listed company, and is
a trustee of the Freer and Sackler Galleries at the Smithsonian
Institution.
Sean M. Traynor joined our board of directors following
the consummation of the Merger Transactions, and has been a
director of ours since October 2004. Mr. Traynor is a
general partner of Welsh, Carson, Anderson & Stowe,
where he focuses on investments in healthcare. Prior to joining
Welsh Carson in April 1999, Mr. Traynor worked in the
healthcare and financial services investment banking groups at
BT Alex Brown after spending three years with
Coopers & Lybrand. Mr. Traynor serves as a
director of Renal Advantage Inc., AGA Medical Corporation,
Ameripath, Inc., Amerisafe, Inc. and Universal American
Corporation.
Patricia A. Rice has served as our President and Chief
Operating Officer since January 1, 2005. Prior to this, she
served as our Executive Vice President and Chief Operating
Officer since January 2002 and as our Executive Vice President
of Operations from November 1999 to January 2002. She served as
Senior Vice President of Hospital Operations from December 1997
to November 1999. She was Executive Vice President of the
Hospital Operations Division for Continental Medical Systems,
Inc. from August 1996 until December 1997. Prior to that time,
she served in various management positions at Continental
Medical Systems, Inc. from 1987 to 1996.
David W. Cross has served as our Executive Vice President
and Chief Development Officer since February 2007. He
served as our Senior Vice President and Chief Development
Officer from December 1998 to February 2007. Before joining us,
he was President and Chief Executive Officer of Intensiva
Healthcare Corporation from 1994 until we acquired it.
Mr. Cross was a founder, the President and Chief Executive
Officer, and a director of Advanced Rehabilitation Resources,
Inc., and served in each of these capacities from 1990 to 1993.
From 1987 to 1990, he was Senior Vice President of Business
Development for RehabCare Group, Inc., a publicly traded
rehabilitation care company, and in 1993 and 1994 served as
Executive Vice President and Chief Development Officer of
RehabCare Group, Inc. Mr. Cross currently serves on the
board of directors of Odyssey Healthcare, Inc., a hospice health
care company.
S. Frank Fritsch has served as our Executive Vice
President and Chief Human Resources Officer since February 2007.
He served as our Senior Vice President of Human Resources from
November 1999 to February 2007. He served as our Vice
President of Human Resources from June 1997 to November 1999.
Prior to June 1997, he was Senior Vice President
Human Resources for Integrated Health Services from May 1996
until June 1997. Prior to that time, Mr. Fritsch was Senior
Vice President Human Resources for Continental
Medical Systems, Inc. from August 1992 to April 1996. From 1980
to 1992, Mr. Fritsch held senior human resources positions
with Mercy Health Systems, Rorer Pharmaceuticals, ARA Mark and
American Hospital Supply Corporation.
Martin F. Jackson has served as our Executive Vice
President and Chief Financial Officer since February 2007. He
served as our Senior Vice President and Chief Financial Officer
from May 1999 to February 2007. Mr. Jackson previously
served as a Managing Director in the Health Care Investment
Banking Group for CIBC Oppenheimer from January 1997 to May
1999. Prior to that time, he served as Senior Vice President,
Health Care Finance with McDonald & Company
Securities, Inc. from January 1994 to January 1997. Prior to
1994, Mr. Jackson held senior financial positions with Van
Kampen Merritt, Touche Ross, Honeywell and LNard
Associates. Mr. Jackson also serves as a director of
several private companies.
James J. Talalai has served as our Executive Vice
President and Chief Information Officer since
February 2007. He served as our Senior Vice President and
Chief Information Officer from August 2001 to February 2007. He
joined our company in May 1997 and served in various leadership
capacities within Information Services. Before joining us,
Mr. Talalai was Director of Information Technology for
Horizon/ CMS Healthcare Corporation from 1995 to 1997. He also
served as Data Center Manager at Continental Medical Systems,
Inc. in the mid-1990s. During his career, Mr. Talalai has
held development positions with PHICO Insurance Company and with
Harrisburg HealthCare.
Michael E. Tarvin has served as our Executive Vice
President, General Counsel and Secretary since
February 2007. He served as our Senior Vice President,
General Counsel and Secretary from November 1999 to February
2007. He served as our Vice President, General Counsel and
Secretary from February 1997 to
100
November 1999. He was Vice President Senior Counsel
of Continental Medical Systems from February 1993 until February
1997. Prior to that time, he was Associate Counsel of
Continental Medical Systems from March 1992.
Mr. Tarvin was an associate at the Philadelphia law firm of
Drinker Biddle & Reath, LLP from September 1985 until
March 1992.
Scott A. Romberger has served as our Senior Vice
President and Controller since February 2007. He served as our
Vice President and Controller from February 1997 to February
2007. In addition, he has served as our Chief Accounting Officer
since December 2000. Prior to February 1997, he was Vice
President Controller of Continental Medical Systems
from January 1991 until January 1997. Prior to that time, he
served as Acting Corporate Controller and Assistant Controller
of Continental Medical Systems from June 1990 and
December 1988, respectively. Mr. Romberger is a
certified public accountant and was employed by a national
accounting firm from April 1985 until December 1988.
Robert G. Breighner, Jr. has served as Vice
President, Compliance and Audit Services since August 2003. He
served as our Director of Internal Audit from November 2001 to
August 2003. Previously, Mr. Breighner was Director of
Internal Audit for Susquehanna Pfaltzgraff Co. from June 1997
until November 2001. Mr. Breighner held other positions
with Susquehanna Pfaltzgraff Co. from May 1991 until June 1997.
Director
Independence
Our board of directors currently consists of nine directors,
Messrs. Rocco Ortenzio, Robert Ortenzio, Carson, Chernow,
Cressey, Dalton, Scully, Swergold and Traynor. No later than
twelve months after we list our common stock on the New York
Stock Exchange, a majority of our directors will be required to
meet standards of independence. In 2008, our board of directors
undertook a review of the independence of our directors and
considered whether any director has a material relationship with
us that could compromise his ability to exercise independent
judgment in carrying out his responsibilities. We believe that
Messrs. Chernow, Dalton and Swergold currently meet these
independence standards and that Mr. Cressey will meet these
independence standards beginning on January 1, 2009.
Board
Committees
Our board of directors will establish various committees to
assist it with its responsibilities. Those committees are
described below.
Audit
Committee
The current audit committee members are Messrs. Cressey,
Dalton, Swergold and Traynor. Upon the date our common stock is
listed on the New York Stock Exchange, our board of directors
will reconstitute our audit committee to consist of at least
three directors. The committee members will be
Messrs. Cressey, Dalton, and Swergold. The composition of
the audit committee will satisfy the independence and financial
literacy requirements of the New York Stock Exchange and the
SEC. The independence standards require that the audit committee
have at least one independent director on the date of listing, a
majority of independent directors within 90 days after the
date our registration statement is declared effective and fully
independent audit committee within one year after that date. The
financial literacy standards require that each member of our
audit committee be able to read and understand fundamental
financial statements. In addition, at least one member of our
audit committee must qualify as a financial expert, as defined
by the SEC rules, and have financial sophistication in
accordance with New York Stock Exchange rules. Our board of
directors has determined that each of our audit committee
members qualify as an audit committee financial expert.
The primary function of the audit committee is to assist the
board of directors in the oversight of the integrity of our
financial statements, our compliance with legal and regulatory
requirements, the independent accountants qualifications
and independence and the performance of our internal audit
function and independent accountants. The audit committee also
prepares an audit committee report required by the SEC to be
included in our proxy statements.
101
The audit committee fulfills its oversight responsibilities by
reviewing the following: (1) the financial reports and
other financial information provided by us to our stockholders
and others; (2) our systems of internal controls regarding
finance, accounting, legal and regulatory compliance and
business conduct established by management and the board; and
(3) our auditing, accounting and financial processes
generally. The audit committees primary duties and
responsibilities are to:
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serve as an independent and objective party to monitor our
financial reporting process and internal control systems;
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review and appraise the audit efforts of our independent
accountants and exercise ultimate authority over the
relationship between us and our independent accountants; and
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provide an open avenue of communication among the independent
accountants, financial and senior management and the board of
directors.
|
To fulfill these duties responsibilities, the audit committee
will:
Documents/Reports
Review
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discuss with management and the independent accountants our
annual and interim financial statements, earnings press
releases, earnings guidance and any reports or other financial
information submitted to the stockholders, the SEC, analysts,
rating agencies and others, including any certification, report,
opinion or review rendered by the independent accountants;
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review the regular internal reports to management prepared by
the internal auditors and managements response;
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discuss with management and the independent accountants the
Quarterly Reports on
Form 10-Q,
the Annual Reports on
Form 10-K,
including our disclosures under Managements
Discussion and Analysis of Financial Conditions and Results of
Operations, and any related public disclosure prior to its
filing;
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Independent
Accountants
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have sole authority for the appointment, compensation,
retention, oversight, termination and replacement of our
independent accountants (subject, if applicable, to stockholder
ratification) and the independent accountants will report
directly to the audit committee;
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pre-approve all auditing services and all non-audit services to
be provided by the independent accountants;
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review the performance of the independent accountants with both
management and the independent accountants;
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periodically meet with the independent accountants separately
and privately to hear their views on the adequacy of our
internal controls, any special audit steps adopted in light of
material control deficiencies and the qualitative aspects of our
financial reporting, including the quality and consistency of
both accounting policies and the underlying judgments, or any
other matters raised by them;
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obtain and review a report from the independent accountants at
least annually regarding (1) the independent
accountants internal quality-control procedures,
(2) any material issues raised by the most recent
quality-control review, or peer review, of the firm, or by any
inquiry or investigation by governmental or professional
authorities within the preceding five years respecting one or
more independent audits carried out by the firm, (3) any
steps taken to deal with any such issues, and (4) all
relationships between the independent accountants and their
related entities and us and our related entities;
|
Financial
Reporting Processes
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review with financial management and the independent accountants
the quality and consistency, not just the acceptability, of the
judgments and appropriateness of the accounting principles and
financial disclosure
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102
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practices used by us, including an analysis of the effects of
any alternative GAAP methods on the financial statements;
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approve any significant changes to our auditing and accounting
principles and practices after considering the advice of the
independent accountants and management;
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focus on the reasonableness of control processes for identifying
and managing key business, financial and regulatory reporting
risks;
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discuss with management our major financial risk exposures and
the steps management has taken to monitor and control such
exposures, including our risk assessment and risk management
policies;
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periodically meet with appropriate representatives of management
and the internal auditors separately and privately to consider
any matters raised by them, including any audit problems or
difficulties and managements response;
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periodically review the effect of regulatory and accounting
initiatives, as well as any off-balance sheet structures, on our
financial statements;
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Process
Improvement
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following the completion of the annual audit, review separately
with management and the independent accountants any difficulties
encountered during the course of the audit, including any
restrictions on the scope of work or access to required
information;
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periodically review any processes and policies for communicating
with investors and analysts;
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review and resolve any disagreement between management and the
independent accountants in connection with the annual audit or
the preparation of the financial statements;
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review with the independent accountants and management the
extent to which changes or improvements in financial or
accounting practices, as approved by the audit committee, have
been implemented;
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Business
Conduct and Legal Compliance
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review our code of conduct and review managements
processes for communicating and enforcing this code of conduct;
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review managements monitoring of our compliance with our
code of conduct and ensure that management has the proper review
system in place to ensure that our financial statements,
reports, and other financial information disseminated to
governmental organizations and to the public satisfy legal
requirements;
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review, with our counsel, any legal matter that could have a
significant impact on our financial statements and any legal
compliance matters;
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review and approve all related-party transactions;
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Other
Responsibilities
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establish and review periodically procedures for (1) the
receipt, retention and treatment of complaints received by us
regarding accounting, internal accounting controls or auditing
matters and (2) the confidential, anonymous submission by
our employees of concerns regarding questionable accounting or
auditing matters;
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review and reassess the audit committees charter at least
annually and submit any recommended changes to the board of
directors for its consideration;
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provide the report for inclusion in our Annual Proxy Statement
that is required by Item 306 of
Regulation S-K
of the Securities and Exchange Commission;
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103
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report periodically, as deemed necessary or desirable by the
audit committee, but at least annually, to the full board of
directors regarding the audit committees actions and
recommendations, if any;
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establish policies for our hiring of employees or former
employees of the independent accountants who were engaged on our
account;
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perform any other activities consistent with the audit
committees charter, our bylaws and governing law, as the
audit committee or the board of directors deems necessary or
appropriate; and
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annually evaluate the audit committees performance and
report the results of such evaluation to the board of directors.
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The audit committee will hold regular meetings at least four
times each year. The audit committee will report to the board of
directors at each regularly scheduled meeting of the board of
directors on significant results of its activities.
Prior to the consummation of this offering, our board of
directors will amend and restate the charter for our audit
committee. PricewatehouseCoopers LLP currently serves as our
independent auditor.
Nominating
and Corporate Governance Committee
Upon the date our common stock is listed on the New York Stock
Exchange, our board of directors will designate a nominating and
corporate governance committee that will consist of at least
three directors. The committee members will
be .
The composition of the nominating and corporate governance
committee will satisfy the independence requirements of the New
York Stock Exchange that it have at least one independent
director on the listing date, a majority of independent
directors within 90 days after that date and full
compliance within one year after that date. The nominating and
corporate governance committee will:
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identify individuals qualified to serve as our directors;
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nominate qualified individuals for election to our board of
directors at annual meetings of stockholders;
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recommend to our board the directors to serve on each of our
board committees; and
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recommend to our board a set of corporate governance guidelines.
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To fulfill these responsibilities, the nominating and governance
committee will:
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review periodically the composition of our board;
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identify and recommend director candidates for our board;
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recommend to our board nominees for election as directors;
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recommend to our board the composition of the committees of the
board;
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review periodically our corporate governance guidelines and
recommend governance issues that should be considered by our
board;
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review periodically our code of conduct and obtain confirmation
from management that the policies included in the code of
conduct are understood and implemented;
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evaluate periodically the adequacy of our conflicts of interest
policy;
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review related party transactions;
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consider with management public policy issues that may affect us;
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review periodically our committee structure and operations and
the working relationship between each committee and the
board; and
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consider, discuss and recommend ways to improve our boards
effectiveness.
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104
Compensation
Committee
The current compensation committee members are Russell L.
Carson, David S. Chernow, Bryan C. Cressey, Rocco A. Ortenzio
and Robert A. Ortenzio. Upon the date our common stock is listed
on the New York Stock Exchange, our board of directors will
reconstitute our compensation committee to consist of at least
three directors. The committee members will be
Messrs. Chernow, Cressey
and .
The composition of the compensation committee will satisfy the
independence requirements of the New York Stock Exchange that it
have at least one independent director on the listing date, a
majority of independent directors within 90 days after that
date and full compliance within one year after that date. The
primary responsibility of the compensation committee is to
develop and oversee the implementation of our philosophy with
respect to the compensation of our executive officers and
directors. In that regard, the compensation committee will:
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have the sole authority to retain and terminate any compensation
consultant used to assist us, the board of directors or the
compensation committee in the evaluation of the compensation of
our executive officers and directors;
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to the extent necessary or appropriate to carry out its
responsibilities, have the authority to retain special legal,
accounting, actuarial or other advisors;
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review and approve annually corporate goals and objectives to
serve as the basis for the compensation of our executive
officers, evaluate the performance of our executive officers in
light of such goals and objectives, and determine and approve
the compensation level of our executive officers based on such
evaluation;
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interpret, implement, administer, review and approve all aspects
of remuneration to our executive officers and other key
officers, including their participation in
incentive-compensation plans and equity-based compensation plans;
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review and approve all employment agreements, consulting
agreements, severance arrangements and change in control
agreements for our executive officers;
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develop, approve, administer and recommend to the board of
directors and our stockholders for their approval (to the extent
such approval is required by any applicable law, regulation or
New York Stock Exchange rule) all of our stock ownership, stock
option and other equity-based compensation plans and all related
policies and programs;
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make individual determinations and grant any shares, stock
options, or other equity-based awards under all equity-based
compensation plans, and exercise such other power and authority
as may be required or permitted under such plans, other than
with respect to non-employee directors, which determinations are
subject to the approval of board of directors;
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have the authority to form and delegate authority to
subcommittees;
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report regularly to our board of directors, but not less
frequently than annually;
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annually review and reassess the adequacy of its charter and
recommend any proposed changes to our board of directors for its
approval; and
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annually review its own performance, and report the results of
such review to our board of directors.
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The Compensation Committee has the same authority with regard to
all aspects of director compensation as it has been granted with
regard to executive compensation, except that any ultimate
decision regarding the compensation of any director is subject
to the approval of our board of directors. The compensation
committee will hold regular meetings at least two times each
year.
Effective upon the consummation of this offering, our board of
directors will amend and restate the charter for our
compensation committee.
105
Director
Compensation
We do not pay directors fees to our employee directors; however
they are reimbursed for the expenses they incur in attending
meetings of our board of directors or board committees.
Non-employee directors other than non-employee directors
appointed by Welsh Carson and Thoma Cressey receive cash
compensation in the amount of $6,000 per quarter, and the
following for all meetings attended other than audit committee
meetings: $1,500 per board meeting, $300 per telephonic board
meeting, $500 per committee meeting held in conjunction with a
board meeting and $1,000 per committee meeting held independent
of a board meeting. For audit committee meetings attended, all
members receive the following: $2,000 per audit committee
meeting and $1,000 per telephonic audit committee meeting. All
non-employee directors are also reimbursed for the expenses they
incur in attending meetings of our board of directors or board
committees.
Code of
Ethics
We have adopted a written code of business conduct and ethics,
known as our code of conduct, which applies to all of our
directors, officers, and employees, including our chief
executive officer, our chief financial officer and our chief
accounting officer. Our code of conduct is available on our
Internet website, www.selectmedicalcorp.com. Our code of conduct
may also be obtained by contacting investor relations at
(717) 972-1100.
Any amendments to our code of conduct or waivers from the
provisions of the code for our chief executive officer, our
chief financial officer and our chief accounting officer will be
disclosed on our Internet website promptly following the date of
such amendment or waiver. The inclusion of our web address in
this prospectus does not include or incorporate by reference the
information on our web site into this prospectus.
106
COMPENSATION
DISCUSSION AND ANALYSIS
Introduction. This Compensation Discussion and
Analysis (CD&A) provides an overview of our
executive compensation program together with a description of
the material factors underlying the decisions which resulted in
the compensation provided for 2007 to our Executive Chairman,
Chief Executive Officer, Chief Financial Officer and the other
executive officers who were the highest paid during 2007
(collectively, the named executive officers), as
presented in the tables which follow this CD&A. This
CD&A contains statements regarding our performance targets
and goals. These targets and goals are disclosed in the limited
context of our compensation program and should not be understood
to be statements of managements expectations or estimates
of financial results or other guidance. We specifically caution
investors not to apply these statements to other contexts.
Compensation Philosophy. Our compensation
philosophy for named executive officers is designed with the
primary goals of rewarding the contributions of named executive
officers to our financial performance and providing overall
compensation sufficient to attract and retain highly skilled
named executive officers who are properly motivated to
contribute to our financial performance. We seek to achieve our
goals with respect to named executive officers
compensation by implementing and maintaining incentive plans for
such executive officers that tie a substantial portion of each
executives overall compensation to pre-determined
financial goals relating to our return on equity and earnings
per share.
Committee Process. The compensation committee
meets as often as necessary to perform its duties and
responsibilities. During 2007, the committee met four times. The
compensation committees meeting agenda is normally
established by our Chief Executive Officer in consultation with
other members of the committee. Committee members receive the
agenda and related materials in advance of each meeting.
Depending on the meetings agenda, such materials may
include: financial reports regarding our performance, reports on
achievement of individual and company objectives and information
regarding our compensation programs.
The compensation committee periodically reviews overall
compensation levels to ensure that performance-based
compensation represents a sufficient portion of total
compensation to promote and reward executive officers
contributions to our performance. With respect to our named
executive officers, the committee has determined to place
increasing emphasis on performance-based compensation in lieu of
paying higher base salaries. The members of the compensation
committee have significant experience with the compensation
arrangements for executives in the health care industry.
Accordingly, the committee has not utilized a formal
benchmarking process or the services of a compensation
consultant to set the compensation levels of our named executive
officers.
Role of Chief Executive Officer in Compensation
Decisions. Our Chief Executive Officer recommends
levels of compensation for the other named executive officers.
However the compensation committee makes the final determination
regarding the compensation of the named executive officers.
Elements
of Compensation
Executive compensation consists of the following elements, each
of which is discussed in further detail in the sections that
follow:
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Base Salary
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Annual Performance-Based Bonuses
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Annual Discretionary Bonuses
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Long Term Cash Incentive Plan
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Equity Compensation
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Perquisites and Personal Benefits
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General Benefits
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We have entered into employment contracts with certain of our
named executive officers. In addition to the compensation
components listed above, these contracts provide for
post-employment severance payments and
107
benefits in the event of employment termination under certain
circumstances. The named executive officers who do not have
employment contracts are party to change in control agreements
with Select.
Base
Salary
Base salaries are provided to our named executive officers to
compensate them for services rendered during the year.
Consistent with our philosophy of placing increasing emphasis on
performance-based compensation, the compensation committee sets
the base salaries for our named executive officers at levels
which it believes are competitive for the health care industry
when combined with our incentive programs. The compensation
committee periodically reviews base salaries for the named
executive officers. For 2007, the compensation committee
determined that the base salaries of our named executive
officers when combined with the bonus opportunities available
under our incentive programs were at competitive levels and that
no adjustments were required. The base salary for Ms. Rice,
Mr. Jackson and Mr. Fritsch have been adjusted,
effective January 1, 2008, to $750,000, $400,000 and
$350,000 per year, respectively. Our board of director
determined that the adjustment in salary for these named
executive officers was appropriate as each officer had not
received a salary increase in a number of years.
2007
Annual Performance-Based Bonuses
Annual cash bonuses are included as part of the executive
compensation program because the compensation committee believes
that a significant portion of each named executive
officers compensation should be contingent on our
financial performance. Accordingly, we maintain a bonus plan
under which named executive officers are eligible to receive
annual cash bonuses based upon the achievement of specific
performance measures.
The compensation committee determines the range of bonus
opportunities based on our philosophy that performance-based
bonuses should represent a significant portion of overall
compensation for the named executive officers. In order to
further our philosophy that compensation should reward such
executive officers contribution to our financial
performance, the bonus plan for such executives is designed to
determine bonuses based on measures directly related to our
financial performance and the increase in stockholder value.
In 2007, the compensation committee established financial
performance targets for the bonus plan for the named executive
officers based on our return on equity and earnings per share,
the achievement of which would have entitled the named executive
officers to receive annual bonuses from 0% to 250% of a target
bonus percentage multiplied by the named executive
officers base salary. If both of the performance goals
were met, the participants would have received cash bonuses
equal to their target bonus percentage listed below times the
participants base salary. If one or both of the
performance goals are exceeded, the participants may receive
bonuses greater than their target bonus percentage, up to a
maximum of 250% of such target bonus percentage multiplied by
such participants base salary, depending upon the extent
to which the performance goals were exceeded. For example, a
participant whose target bonus percentage is 50% is eligible to
receive a bonus equal to 125% of the participants base
salary if the maximum cash award of 250% is achieved (i.e., 250%
times 50% equals 125%).
108
For the 2007 fiscal year, the compensation committee established
the following goals, both of which needed to be attained to
entitle the executive to receive a cash payment equal to the
stated bonus percentage times the executives base salary:
return on equity of at least 10.6% and earnings per share of at
least $0.15. The targets were determined based on our annual
budget, which our compensation committee determined was a
desirable level of annual performance for our company. For 2007,
the target bonus percentage for each of the named executive
officers eligible to participate in the bonus plan is set forth
in the table below. The target bonus percentage for
Messrs. Rocco and Robert Ortenzio exceeds the target bonus
percentages for the other named executive officers due to a
higher level of responsibility.
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Target Bonus
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Named Executive
Officer
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(% of Base Salary)
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Rocco A. Ortenzio
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80
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%
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Robert A. Ortenzio
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80
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%
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Patricia A. Rice
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50
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%
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Martin F. Jackson
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50
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%
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S. Frank Fritsch
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50
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%
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Our financial performance goals for 2007 for return on equity
and earnings per share were not attained. Accordingly, none of
the named executive officers listed in the table above received
bonuses for fiscal year 2007 under the bonus plan.
Discretionary
Annual Bonus
The compensation committee has the authority to award bonuses to
our executives on a purely discretionary basis. For 2007 the
compensation committee determined that as a result of our 2007
financial results and other performance factors, a group of
eight senior executives (including our named executive officers)
should receive an aggregate bonus of $1.0 million dollars
to be allocated among such executives pro rata based upon 2007
base salaries. Therefore, the compensation committee granted
discretionary bonuses of $229,000 to Mr. Rocco Ortenzio,
$229,000 to Mr. Robert Ortenzio, $164,645 to Ms. Rice,
$103,225 to Mr. Jackson and $76,780 to Mr. Fritsch.
This amount was paid in 2008, even though each of the named
executive officers are participants in the bonus plan described
above, and no bonuses were awarded under that plan for 2007 as
we failed to meet our performance goals. However, the
compensation committee believed that our failure to meet such
performance goals was, in part, based on changes in regulatory
reimbursement rates that were beyond the control of our named
executive officers.
Long
Term Cash Incentive Plan
All of our named executive officers are eligible to participate
in our Long Term Cash Incentive Plan, which we refer to as the
Cash Plan. The Cash Plan was adopted to promote our long term
financial interests and to enhance long term stockholder value.
The Cash Plan achieves these goals by aligning the interests of
the named executive officers with those of our stockholders
through grants of notional units which are held in a bookkeeping
account for each applicable participant until paid to such
participant, generally upon the occurrence of certain liquidity
events described below. Prior to payment, except in the event of
death or disability, as discussed below, no participant has any
right to receive any amount with respect to his or her account
and the units held therein and any such amount her or she may
receive is unvested. Through the Cash Plan, we seek to provide
an incentive to such officers and to motivate them to assist our
current stockholders in achieving their long term goal, which is
a liquidity event.
The Cash Plan originally provided a bonus pool of
$100.0 million, to be paid on a pro rata basis to all
participants according to the number of units held in their
accounts. Fifty percent of the bonus pool may be allocated to
participants accounts and paid upon the earlier to occur
of a change in control of our company or an initial public
offering of our company. The remaining 50% of the bonus pool may
be allocated and paid upon a redemption of our preferred stock,
when special dividends are paid on our preferred stock or upon a
sale of our outstanding preferred stock within the twelve-month
period following an initial public offering. In order for any
portion of the bonus pool to be allocated and paid upon a change
in control or an initial public offering, the value of one share
of our preferred stock and 6.75 shares of our common stock,
or a Strip of Securities, must be in excess of the
greater of (1) $67.25
109
and (2) the value required for a Strip of Securities to
yield a 25% average annual percentage return, compounded
annually, from the adoption of the Cash Plan through the date of
the initial public offering or change in control, as applicable.
On September 29, 2005, we made a payment of
$14.2 million, in the aggregate, to participants in the
Cash Plan as a result of a special dividend paid to holders of
our preferred stock with the proceeds of our $175.0 million
senior floating rate notes. Following this payment,
$85.8 million remained to be allocated to
participants accounts. No other payments have been made
under the Cash Plan.
The term change in control generally means
(1) the disposition of all or substantially all of our
assets, (2) the acquisition by any person of beneficial
ownership of more than 40% of the voting power of our company or
(3) a change in the majority of the members of our board of
directors. The term initial public offering
generally means an initial public offering in which we receive
proceeds, which when combined with the proceeds received by our
company in all prior public offerings, exceed $250,000,000. This
offering will be considered an initial public offering as that
term is defined in the Cash Plan.
Under the terms of the Cash Plan, all units held in a
participants account will be forfeited by the participant
in the event of his or her termination of employment other than
by reason of death or disability. However, in the event of a
participants termination of employment by reason of death
or disability, 50% of the units his or her account will be
forfeited and the remaining units will remain in the account and
be payable to the participant on
January 31st of
the second year following his or her disability or death.
Until the occurrence of an event that would trigger the payment
of cash on any outstanding units held in participants
accounts is deemed probable by us, no expense for any award
under the Cash Plan will be reflected in our financial
statements. Because we have not altered the allocation of units
previously established and disclosed, and because no event
entitling named executive officers to payment under the Cash
Plan occurred in 2007, there is no amount reported in the
Summary Compensation Table below regarding the Cash Plan.
The number of units allocated to the account of each of the
named executive officers is set forth in the table below. The
number of units allocated to the accounts of Messrs. Rocco
and Robert Ortenzio exceeds the number of units allocated to the
other named executive officers due to a higher level of
responsibility.
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Named Executive
Officer
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Cash Plan Units
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Robert A. Ortenzio
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35,000
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Rocco A. Ortenzio
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25,000
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Patricia A. Rice
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15,000
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Martin F. Jackson
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7,000
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S. Frank Fritsch
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5,000
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As described more fully in the Section below entitled
Potential Payments upon Termination or Change in
Control it is expected that the named executive officers
will be entitled to
approximately
under the Cash Plan upon completion of our initial public
offering. Upon consummation of this offering, none of the
participants will have any further rights under the terms of the
Cash Plan.
Equity
Compensation
In connection with us becoming a privately owned corporation in
2005, described in Business The Merger
Transactions, we sought to encourage meaningful long term
contribution to our future financial success by our named
executive officers. Accordingly, we established the 2005 Equity
Incentive Plan, or Equity Plan, to provide certain of our
employees, including our named executive officers, and employees
of our subsidiaries with incentives to help align those
employees interests with the interests of our
stockholders. Awards under the Equity Plan vest over a period of
time based on the applicable employees continued
employment.
Awards under the Equity Plan may be in the form of restricted
stock, non-qualified stock options and incentive stock options.
As of the end of our last completed fiscal year, the named
executive officers have been granted only awards of restricted
stock under the Equity Plan. The terms of each award granted
under the Equity Plan are
110
governed by Equity Plan and the applicable award agreement
between us and the recipient. Under the terms of the award
agreements with each of our named executive officers, upon the
occurrence of (1) a change in control, all unvested shares
of restricted stock will immediately vest in full and
(2) an initial public offering, 50% of the then unvested
shares of restricted stock will immediately vest. The terms
change in control and initial public
offering have the same meanings described in Long
Term Cash Incentive Plan, above.
Except with respect to Ms. Rice, all of the unvested shares
of restricted stock granted to a named executive officer will be
forfeited in the event of his or her termination of employment
with us and all of our subsidiaries for any reason.
Ms. Rices award agreement was amended on
February 13, 2008 to provide that in the event that her
employment is terminated by us without cause, or if she dies or
becomes disabled while employed by us, all of her then unvested
shares of restricted stock will immediately vest in full.
No grants were made to our named executive officers under the
Equity Plan in 2007 based on the compensation committees
determination that the named executive officers possess a
sufficient ownership interest in us and are sufficiently
motivated by our bonus compensation programs to continue to
contribute to our financial performance.
Perquisites
and Other Personal Benefits
We provide named executive officers with perquisites and other
personal benefits that we and the compensation committee believe
are reasonable and consistent with our overall compensation
program to better enable us to attract and retain highly skilled
named executive officers. The compensation committee
periodically reviews the levels of perquisites and other
personal benefits provided to named executive officers.
The primary perquisite and personal benefit the named executive
officers are provided is the personal use of our aircraft at our
expense. In recognition of their contributions to us,
Messrs. Rocco and Robert Ortenzio and Ms. Rice are
entitled to use our aircraft for personal reasons and may be
accompanied by friends and family members. Messrs. Rocco
and Robert Ortenzio and Ms. Rice must recognize taxable
compensation for the value of the personal use of our aircraft
by themselves and their friends and family members.
Messrs. Jackson and Fritsch, along with other executive
officers, may use our aircraft in connection with a personal
emergency or bereavement matter with the prior approval of our
Executive Chairman or Chief Executive Officer.
We offer full reimbursement for the costs associated with an
annual comprehensive physical exam for certain executive
officers, including travel and accommodations, so that an
executive officer who makes use of our physical exam benefit can
be evaluated and receive diagnostic and preventive medical care.
If Ms. Rice retires prior to age 65, we have agreed to
provide continued health and dental insurance benefits to
Ms. Rice and her eligible dependents following her
retirement until she attains age 65. Ms. Rice would be
required, during the period that we provide such health and
dental insurance benefits, to make contributions toward the cost
of such coverage at the same level required for employees who
participate in our health and dental coverage.
Attributed costs of the perquisites and personal benefits
described above for the named executive officers for the fiscal
year ended December 31, 2007, are included in the
Summary Compensation Table.
General
Benefits
Our named executive officers are also eligible to participate in
our group health and dental plans, including short term and long
term disability, life insurance (at an amount up to 100% of base
salary), and our 401(k) plan on the same terms and conditions as
those plans are available to our employees generally.
Employment
Agreements
It is our general philosophy that all our employees should be
at will employees, thereby allowing both us and the
employee to terminate the employment relationship at any time
and without restriction or financial obligation. However, in
certain cases, we have determined that as a retention device and
as a means to obtain non-compete arrangements, employment
agreements and change in control agreements are appropriate.
Messrs. Rocco and Robert Ortenzio and Ms. Rice each
entered into an employment agreement with Select on
March 1, 2000. Each of these employment agreements provides
for a three year term which is automatically
111
extended for an additional year on each anniversary of the
effective date of the employment agreements unless a written
notice of non-renewal is provided by either party at least three
months prior to the applicable anniversary date. This automatic
renewal provision has the effect of causing these employment
agreements to have a continuous three year term. In addition to
the compensation and benefits described above, these contracts
provide for certain post-employment severance payments in the
event of employment termination under certain circumstances.
Each agreement provides for severance upon termination of
employment following a change in control, as described under the
Section titled Potential Payments upon Termination or
Change in Control below. In addition, such agreements
require us to pay each such executive base salary and a
pro-rated bonus for the remainder of the then-current term upon
termination without cause or for good reason, provided that such
executive adheres to the restrictive covenants contained in such
agreement. Such payments and terms are also described under the
section titled Potential Payments upon Termination or
Change in Control below.
Messrs. Jackson and Fritsch are
employees-at-will,
and accordingly, elements of their annual compensation are
subject to review and adjustment by the compensation committee.
However, Messrs. Jackson and Fritsch are each a party to
change in control agreements with Select which provide for
severance upon the termination of employment following a change
in control, as described under the section titled
Potential Payments Upon Termination or Change in
Control below.
Rocco
A. Ortenzio
Select and Mr. Rocco A. Ortenzio, our co-founder, are
parties to an employment agreement, dated as of March 1,
2000, as subsequently amended, which is currently effective.
Pursuant to the terms of his employment agreement,
Mr. Rocco A. Ortenzio is entitled to an annual base salary
of $800,000, subject to adjustment by our board of directors.
Mr. Rocco A. Ortenzios base salary was upwardly
adjusted by the board of directors until 2003 and has not been
increased since.
Mr. Rocco A. Ortenzio is also eligible for bonus
compensation under his employment agreement, however our bonus
plan for certain executive officers, described in the
Compensation Discussion and Analysis section above, is the
primary mechanism for determining bonus compensation from us for
Mr. Rocco A. Ortenzio.
Mr. Rocco A. Ortenzios employment agreement also
provides that if he is terminated due to his disability, we must
make salary continuation payments to him equal to 100% of his
annual base salary for ten years after his date of termination
or until he is physically able to become gainfully employed in
an occupation consistent with his education, training and
experience.
Mr. Rocco A. Ortenzio is entitled to up to six weeks paid
vacation per year under the terms of his employment agreement.
Robert
A. Ortenzio
Select and Mr. Robert A. Ortenzio, our co-founder, are
parties to an employment agreement, dated as of March 1,
2000, as subsequently amended, which is currently effective.
Pursuant to the terms of his employment agreement,
Mr. Robert A. Ortenzio is entitled to an annual base salary
of $800,000, subject to adjustment by our board of directors.
Mr. Robert A. Ortenzios base salary was upwardly
adjusted by the board of directors until 2003 and has not been
increased since.
Mr. Robert A. Ortenzio is also eligible for bonus
compensation under his employment agreement, however our bonus
plan for certain executive officers, described in the
Compensation Discussion and Analysis section above, is the
primary mechanism for determining bonus compensation from us for
Mr. Robert A. Ortenzio.
Mr. Robert A. Ortenzios employment agreement also
provides that if he is terminated due to his disability, we must
make salary continuation payments to him equal to 50% of his
annual base salary for ten years after his date of termination
or until he is physically able to become gainfully employed in
an occupation consistent with his education, training and
experience.
Mr. Robert A. Ortenzio is entitled to up to six weeks paid
vacation per year under the terms of his employment agreement.
112
Patricia
A. Rice
Select and Ms. Rice are parties to an employment agreement,
effective as of March 1, 2000, as subsequently amended,
which is currently effective. Pursuant to the terms of her
employment agreement, Ms. Rice serves as our President and
Chief Operating Officer. Effective January 1, 2008,
Ms. Rices annual base salary was increased from
$500,000 to $750,000.
On February 13, 2008, Select entered into Amendment
No. 6 to the Employment Agreement between Select and
Ms. Rice. The amendment provides as follows:
(1) Ms. Rice, in carrying out her duties, may use her
office in Mechanicsburg, Pennsylvania
and/or her
home offices in Nicholasville or Lexington, Kentucky and St.
Petersburg, Florida, (2) Ms. Rices base salary
was increased to $750,000 per year, (3) Ms. Rice will
receive benefits under the Selects Paid Time Off (PTO)
& Extended Illness Days (EID) policy in effect from time to
time, and (4) Ms. Rice, following a change of control
of Select, will be entitled to receive the change of control
benefits provided for under the Employment Agreement if, within
the one-year period immediately following such change of
control, Ms. Rices employment with Select (1) is
terminated by Select without cause, or (2) is terminated by
Ms. Rice for any reason. Also on February 13, 2008, we
entered into Amendment No. 1 to Restricted Stock Award
Agreement with Ms. Rice. The Award Agreement Amendment
provides that if during the course of Ms. Rices
employment with Select, Ms. Rice shall die, become disabled
or be terminated by Select without cause, then all restricted
periods shall terminate, all restricted stock shall be vested in
full and all limitations on the restricted stock shall
automatically lapse.
Ms. Rice is also eligible for bonus compensation under her
employment agreement, however our bonus plan for certain
executive officers, described in the Compensation Discussion and
Analysis section above, is the primary mechanism for determining
bonus compensation from us for Ms. Rice.
Ms. Rices employment agreement also provides that if
she is terminated due to her disability, we must make salary
continuation payments to her equal to 50% of her annual base
salary for ten years after her date of termination or until she
is physically able to become gainfully employed in an occupation
consistent with her education, training and experience.
Finally, as described in the Compensation Discussion and
Analysis section, above, if Ms. Rice retires before the age
of 65, she is entitled to our health and dental insurance
coverage for herself and her eligible dependents, following her
retirement until she attains age 65. Ms. Rice would be
required to contribute to the cost of such coverage at the same
level required for employees who participate in our health and
dental coverage.
113
Summary
Compensation Table
This Summary Compensation Table summarizes the total
compensation paid or earned by each named executive officer for
the 2007 and 2006 fiscal year.
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Non-Equity
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Change in
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Stock
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Option
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Incentive Plan
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Pension
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All Other
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Total
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Salary
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Bonus
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Awards
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Awards
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Compensation
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Value
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Compensation
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Compensation
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Name & Principal Position
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Year
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($)
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($)
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($)(1)
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($)
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($)
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($)
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($)(2)
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($)
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Rocco A. Ortenzio
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2007
|
|
|
|
824,000
|
|
|
|
229,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,451
|
|
|
|
1,185,451
|
|
Executive Chairman
|
|
|
2006
|
|
|
|
824,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,605
|
|
|
|
961,605
|
|
Robert A. Ortenzio
|
|
|
2007
|
|
|
|
824,000
|
|
|
|
229,000
|
|
|
|
2,604,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,077
|
|
|
|
3,765,110
|
|
Chief Executive Officer
|
|
|
2006
|
|
|
|
824,000
|
|
|
|
|
|
|
|
2,604,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,040
|
|
|
|
3,578,072
|
|
Patricia A. Rice
|
|
|
2007
|
|
|
|
592,250
|
|
|
|
164,645
|
|
|
|
444,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,555
|
|
|
|
1,436,068
|
|
President and Chief
Operating Officer
|
|
|
2006
|
|
|
|
592,250
|
|
|
|
|
|
|
|
444,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,230
|
|
|
|
1,195,097
|
|
Martin F. Jackson
|
|
|
2007
|
|
|
|
371,315
|
|
|
|
103,225
|
|
|
|
222,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,216
|
|
|
|
725,065
|
|
Executive Vice President and Chief Financial Officer
|
|
|
2006
|
|
|
|
371,315
|
|
|
|
50,000
|
|
|
|
222,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,600
|
|
|
|
650,224
|
|
S. Frank Fritsch
|
|
|
2007
|
|
|
|
275,834
|
|
|
|
76,680
|
|
|
|
77,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,625
|
|
|
|
435,206
|
|
Executive Vice President and
Chief Human Resources Officer
|
|
|
2006
|
|
|
|
275,834
|
|
|
|
50,000
|
|
|
|
77,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
|
|
408,401
|
|
|
|
|
(1)
|
|
The dollar amounts reported in this
column represent the expense recognized by us in accordance with
Statements of Financial Accounting Standards No. 123R,
Share-Based Payment on outstanding restricted stock
awards granted pursuant to the 2005 Equity Incentive Plan. No
such expense was recorded for Mr. Rocco Ortenzios
award because the restricted stock award was fully vested prior
to 2006. See Note 10 to the Consolidated Financial
Statements included in this prospectus for a discussion of the
relevant assumptions used in calculating value pursuant to
FAS 123R. See also the Option Exercises and Stock
Vested Table, which shows the corresponding number of
shares vesting under each such restricted stock award with
respect to which we recognized an expense under FAS 123R.
|
(2)
|
|
Mr. Robert A. Ortenzio,
Ms. Rice and Mr. Jackson each received an employer
matching contribution to our 401(k) plan in the amount of $6,750
in 2007 and $6,600 in 2006. Mr. Fritsch received a matching
contribution of $5,625 in 2007 and $5,500 in 2006. The other
items reported in this column include the value of personal use
of our aircraft and the incremental cost to us of the
executives participation in our executive physical exam
program, each in the amounts set forth in the Personal
Benefits table below. The incremental cost to us of each
of the personal benefits for Mr. Jackson in 2006 and for
Mr. Fritsch in both 2006 and 2007 did not exceed $10,000,
and accordingly, are not described below.
|
Personal
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
|
|
|
Executive
|
|
Name
|
|
|
|
|
Usage ($)
|
|
|
Physical ($)
|
|
|
Rocco A. Ortenzio
|
|
|
2007
|
|
|
|
132,451
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
137,605
|
|
|
|
|
|
Robert A. Ortenzio
|
|
|
2007
|
|
|
|
94,071
|
|
|
|
7,256
|
|
|
|
|
2006
|
|
|
|
143,440
|
|
|
|
|
|
Patricia A. Rice
|
|
|
2007
|
|
|
|
227,805
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
149,023
|
|
|
|
2,607
|
|
Martin F. Jackson
|
|
|
2007
|
|
|
|
12,734
|
|
|
|
8,732
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
114
Outstanding
Equity Awards at Fiscal Year End Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
Equity Incentive
|
|
|
Awards:
|
|
|
|
|
|
|
Market Value
|
|
|
Plan Awards:
|
|
|
Market or
|
|
|
|
|
|
|
of Shares or
|
|
|
Number of
|
|
|
Payout Value of
|
|
|
|
Number of
|
|
|
Units of
|
|
|
Unearned Shares,
|
|
|
Unearned
|
|
|
|
Shares or Units
|
|
|
Stock
|
|
|
Units or Other
|
|
|
Shares, Units or
|
|
|
|
of Stock That
|
|
|
That Have
|
|
|
Rights That Have
|
|
|
Other Rights
|
|
|
|
Have Not Vested
|
|
|
Not Vested
|
|
|
Not Vested
|
|
|
That Have Not
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
(#)
|
|
|
Vested (#)
|
|
|
Rocco A. Ortenzio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert A. Ortenzio
|
|
|
751,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,495,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patricia A. Rice
|
|
|
2,808,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin F. Jackson
|
|
|
1,404,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S. Frank Fritsch
|
|
|
486,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The values shown in this column are
equal to the assumed initial public offering price of
$ per
share (the midpoint of the price range set forth on the cover
page of this prospectus) multiplied by the number of shares of
stock held by our named executive officers that had not vested
as December 31, 2007.
|
Option
Exercises and Stock Vested Table
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Number of Shares
|
|
|
Value Realized
|
|
|
|
Acquired on Vesting
|
|
|
on Vesting
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
Rocco A. Ortenzio
|
|
|
|
|
|
|
|
|
Robert A. Ortenzio
|
|
|
6,835,390
|
|
|
|
|
|
Patricia A. Rice
|
|
|
1,307,699
|
|
|
|
|
|
Martin F. Jackson
|
|
|
653,849
|
|
|
|
|
|
S. Frank Fritsch
|
|
|
226,668
|
|
|
|
|
|
|
|
|
(1)
|
|
Values shown in this column are
equal to the assumed initial public offering price of
$ per
share (the midpoint of the price range set forth on the cover
page of this prospectus) multiplied by the number of shares
vested during the year ended December 31, 2007.
|
Potential
Payments upon Termination or Change in Control
Named executives who are party to an employment agreement or a
change in control agreement with Select may be entitled to
certain payments upon termination of employment or a change in
control, as described below. In addition, pursuant to the terms
of the Cash Plan, upon an initial public offering of our company
(as well as upon certain other events), each of our named
executive officers who participates in the Cash Plan is entitled
to payment of a portion of the value of his or her units, as
described below.
115
Termination
of Employment
Pursuant to the employment agreements between Select and
Messrs. Robert and Rocco Ortenzio and Ms. Rice, upon a
termination of employment by us without cause or by the
executive officer for good reason, each such officer is entitled
to receive his or her base salary for the remainder of the
then-current term of employment plus a pro rated bonus for the
year of termination, and any unvested and unexercised stock
options will vest immediately. As a condition to receiving such
payments, however, each executive has agreed that for the term
of the agreement and for two years thereafter, the executive may
not participate in any business that competes with us within a
twenty-five mile radius of any of our hospitals or outpatient
rehabilitation clinics. The executive also may not solicit any
of our employees for one year after the termination of the
executives employment.
The employment agreements also entitle the executive officers to
receive salary continuation in the event of termination of
employment by reason of disability, at the rate of 100% of base
salary for Mr. Rocco Ortenzio, and 50% of base salary for
each of Mr. Robert Ortenzio and Ms. Rice. Such salary
continuation is payable for a period of up to ten years, subject
to earlier termination if the executive becomes physically able
to resume employment in an occupation consistent with his or her
education, training and experience. In addition, in the event of
death or disability, the named executive officers are also
entitled to retain 50% of the units in their accounts under the
Cash Plan. However, we are not required to make any payments
following such death or disability until January 31st of the
second year following such death or disability. Upon
consummation of this offering, none of the participants will
have any further rights under the terms of the Cash Plan.
In addition, each named executive officer who has been granted
restricted stock that, if not fully vested as of such
termination, is entitled to accelerated vesting of his or her
restricted stock upon termination by us without cause or by the
executive for good reason. In addition, if during the course of
her employment, Ms. Rice dies, becomes disabled or is
terminated by us without cause, then all restricted periods
shall terminate and her restricted stock shall be vested in full.
In addition to the payments described above, in the event of
Ms. Rices retirement prior to age 65, she is
entitled to continued health and dental benefits for herself and
her eligible dependents until she attains age 65.
Set forth in the table below are the amounts that would be
payable to each of the named executive officers who is party to
an employment contract upon termination of employment for the
reasons specified therein, assuming that such termination
occurred on December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause/Good Reason
|
|
|
Disability
|
|
|
Death
|
|
|
Retirement
|
|
|
|
Base
|
|
|
Equity
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Health and
|
|
|
|
Salary and
|
|
|
Vesting
|
|
|
Base Salary
|
|
|
Vesting
|
|
|
|
|
|
Vesting
|
|
|
|
|
|
Dental
|
|
|
|
Bonus
|
|
|
Value(1)
|
|
|
Continuation(2)
|
|
|
Value(1)
|
|
|
Other(3)
|
|
|
Value(1)
|
|
|
Other(3)
|
|
|
Benefits(4)
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Rocco A. Ortenzio
|
|
|
2,838,334
|
|
|
|
|
|
|
|
8,240,001
|
|
|
|
|
|
|
|
10,719,140
|
|
|
|
|
|
|
|
10,719,140
|
|
|
|
|
|
Robert A. Ortenzio
|
|
|
2,838,334
|
|
|
|
9,135,995
|
|
|
|
4,120,000
|
|
|
|
9,193,995
|
|
|
|
15,006,795
|
|
|
|
9,193,995
|
|
|
|
15,006,795
|
|
|
|
|
|
Patricia A. Rice
|
|
|
2,040,104
|
|
|
|
10,624,837
|
|
|
|
2,961,251
|
|
|
|
10,624,837
|
|
|
|
6,431,484
|
|
|
|
10,624,837
|
|
|
|
6,431,484
|
|
|
|
9,703
|
|
|
|
|
(1)
|
|
Valuation is based on an assumed
initial public offering price of
$
per share (the midpoint of the price range set forth on the
cover page of this prospectus).
|
(2)
|
|
The amount reported in this column
represents the amount of salary continuation payable each year
for ten years following the date of termination of employment
for disability, subject to termination if the named executive
officer becomes physically able to resume employment.
|
(3)
|
|
Represents the value of 50% of the
units in such named executive officers account under the Cash
Plan as of the date of death or disability. Such payments will
be due on January 31st of the second year following such death
or disability only in the event of an initial public offering,
change of control, or preferred stock liquidity event as defined
under the Cash Plan.
|
(4)
|
|
The value reported in this column
reflects our current cost of providing health and dental
coverage to Ms. Rice and her eligible dependents for one
year. We are responsible for paying the costs of health and
dental coverage for Ms. Rice and her eligible dependents
(less her portion of the premiums) each year until Ms. Rice
reaches the age of 65 in the event she retires before
age 65. The actual cost to us of providing such benefits
following Ms. Rices retirement will depend on the
rates of the carrier selected and accordingly, may be more or
less than the amount reported.
|
116
Change
in Control
Pursuant to Messrs. Rocco and Robert Ortenzio and
Ms. Rices employment agreements, if (1) within
the one-year period immediately following a change in control of
our company, Messrs. Rocco or Robert Ortenzio or
Ms. Rice is terminated by us without cause or any such
executive officer terminates his or her employment for any
reason or (2) within the one-year period immediately
preceding a change in control of our company, Messrs. Rocco
or Robert Ortenzio or Ms. Rice is terminated by us without
cause and the terminated officer reasonably demonstrates that
their termination was at the request of a third party who took
steps to effect the change in control, we are obligated to pay
the terminated officer a lump sum cash payment equal to their
base salary plus bonus for the previous three completed calendar
years and to fully vest the terminated officers unvested
and unexercised stock options. In the event of a termination
pursuant to clause (2), any payments of base salary and bonus
owed to the terminated officer will be reduced by any severance
payments already received.
We have entered into change of control agreements with Martin F.
Jackson and S. Frank Fritsch. These agreements provide that if
(1) within a five year period immediately following a
change in control of our company, we terminate Mr. Jackson
or Mr. Fritsch without cause, reduce either of their
compensation from that in effect prior to the change in control
or relocate Mr. Jacksons or Mr. Fritschs
principal place of employment to a location more than
25 miles from Mechanicsburg, Pennsylvania or
(2) within the six month period immediately preceding the
change in control of our company, Mr. Jackson or
Mr. Fritsch terminates his employment for good reason or we
terminate Mr. Jacksons or Mr. Fritschs
employment without cause and the terminated officer reasonably
demonstrates that his termination by us was at the request of a
third party who took steps to effect the change in control, we
are obligated to pay the terminated officer a lump sum cash
payment equal to his base salary plus bonus for the previous
three completed calendar years and to fully vest the terminated
officers stock options.
For purposes of the agreements described above, a change in
control, following a public offering, is generally defined to
include: (1) the acquisition by a person or group, other
than our current stockholders who own 12% or more of the common
stock, of more than 50% of our total voting shares; (2) a
business combination following which there is an increase in
share ownership by any person or group, other than the executive
or any group of which the executive is a part, by an amount
equal to or greater than 33% of our total voting shares;
(3) our current directors, or any director elected after
the date of the respective agreement whose election was approved
by a majority of the then current directors, cease to constitute
at least a majority of our board; (4) a business
combination following which our stockholders cease to own shares
representing more than 50% of the voting power of the surviving
corporation; or (5) a sale of all or substantially all of
our assets other than to an entity controlled by our
stockholders prior to the sale. Notwithstanding the foregoing,
no change in control will be deemed to have occurred unless the
transaction provides our stockholders with a specified level of
consideration.
Each named executive officer who has been granted restricted
stock that is not fully vested as of a change in control or
qualified public offering is also entitled to accelerated
vesting. In the event of a qualified public offering, 50% of the
then-unvested restricted stock would vest and, in the event of a
change in control, 100% of the then-unvested restricted stock
would vest. Under Ms. Rices restricted stock award
agreement, all of her unvested shares of restricted stock would
immediately and fully vest in the event she dies or becomes
disabled while employed by us, or if her employment is
terminated by us without cause.
Pursuant to the terms of the Cash Plan, upon the earlier to
occur of a change in control or an initial public offering in
which the proceeds received by us exceed $250.0 million,
each named executive officer will receive a payment of $500 with
respect to each of the units held in his or her account. In
order to receive such payment, the value of a Strip of
Securities must be in excess of certain pre-determined levels,
as described above in Long Term Cash Incentive Plan.
If payment under the Cash Plan is made by reason of a change in
control or an initial public offering, the named executive
officers will continue to hold the units in their accounts and
will be entitled to receive additional payments with respect to
such units under the terms of the Cash Plan in the event that
our preferred stock is redeemed, a special dividend is paid with
respect to our preferred stock or upon the sale of our
outstanding preferred stock within the 12-month period following
an initial public offering. Such remaining amounts that may be
payable under the Cash Plan are reported in the table above.
However, upon consummation of this offering, none of the
participants will have any further rights under the Cash Plan.
117
In addition to the benefits described above, each named
executive officer is entitled to receive a tax
gross-up
payment in the event that any change in control payments which
they are entitled to receive constitute excess parachute
payments within the meaning of Section 280G of the
Internal Revenue Code. The tax
gross-up
payment will equal the amount necessary to place the named
executive officer in the same position as if no penalty under
Section 4999 of the Internal Revenue Code had been imposed
on any of the change in control payments, including on the tax
gross-up
payment.
Set forth in the table below are the amounts that would be
payable to each of the named executive officers upon a change in
control, assuming that such change in control occurred on
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Base Salary
|
|
|
Vesting
|
|
|
Cash Plan
|
|
|
Tax
|
|
|
|
and Bonus
|
|
|
(100%)(1)
|
|
|
Payout
|
|
|
Gross-
Up(1)
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Rocco A. Ortenzio
|
|
|
4,439,000
|
|
|
|
|
|
|
|
21,438,279
|
|
|
|
|
|
Robert A. Ortenzio
|
|
|
4,439,000
|
|
|
|
|
|
|
|
30,013,591
|
|
|
|
|
|
Patricia A. Rice
|
|
|
2,681,395
|
|
|
|
|
|
|
|
12,862,968
|
|
|
|
|
|
Martin F. Jackson
|
|
|
1,731,170
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6,002,718
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S. Frank Fritsch
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1,230,182
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4,287,656
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(1)
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Market value is based on an assumed
initial public offering price of
$
per share (the midpoint of the price range set forth on the
cover page of this prospectus).
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Director
Compensation Table
The following table shows information concerning the
compensation that our non-employee directors earned during the
fiscal year ended December 31, 2007.
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Change
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in Pension
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Value and
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Nonqualified
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Non-Equity
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Deferred
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All
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Fees Earned or
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Stock
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Option
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Incentive Plan
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Compensation
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Other
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Paid in Cash
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Awards
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Awards
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Compensation
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Earnings
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Compensation
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Name
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($)
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($)(1)
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($)(2)
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($)
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($)
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($)
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Total ($)
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Russell L. Carson
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David S. Chernow
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34,000
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160
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34,160
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Bryan C. Cressey
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James E. Dalton, Jr.
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54,800
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160
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54,960
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Thomas A. Scully
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6,817
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6,817
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Leopold Swergold
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54,500
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160
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54,660
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Sean M. Traynor
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(1)
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Represents vesting of restricted
shares granted in connection with the Merger Transactions.
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(2)
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The dollar amounts reported in this
column represents the FAS 123R expense recognized by us on
outstanding option awards granted to non-employee directors
pursuant to the Director Plan. See Note 10 to the
Consolidated Financial Statements included in this prospectus
for a
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118
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discussion of the relevant
assumptions used in calculating value pursuant to FAS 123R.
As of December 31, 2007, the total number of outstanding
stock and option awards for each director listed in the table
above are set forth below:
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Shares Outstanding
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Shares Outstanding
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Subject to Stock
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Subject to Option
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Name
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Awards (#)
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Awards (#)
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Russell L. Carson
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David S. Chernow
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40,000
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Bryan C. Cressey
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James E. Dalton, Jr.
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40,000
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Thomas A. Scully
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43,066
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Leopold Swergold
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40,000
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Sean M. Traynor
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We do not pay directors fees to our employee directors; however
they are reimbursed for the expenses they incur in attending
meetings of the board of directors or board committees.
Non-employee directors other than non-employee directors
appointed by Welsh Carson and Thoma Cressey receive cash
compensation in the amount of $6,000 per quarter, and the
following for all meetings attended other than audit committee
meetings: $1,500 per board meeting, $300 per telephonic board
meeting, $500 per committee meeting held in conjunction with a
board meeting and $1,000 per committee meeting held independent
of a board meeting. For audit committee meetings attended, all
members receive the following: $2,000 per audit committee
meeting and $1,000 per telephonic audit committee meeting. All
non-employee directors are also reimbursed for the expenses they
incur in attending meetings of the board of directors or board
committees.
Option
Awards
On August 10, 2005, our board of directors authorized a
director stock option plan, which we refer to as the Director
Plan, for non-employee directors, which was formally approved on
November 8, 2005. 250,000 shares of our common stock
were initially reserved for awards under the Director Plan.
In 2007, we made discretionary grants of options to acquire
10,000 shares of common stock to each of
Messrs. Chernow, Dalton and Swergold pursuant to the
Director Plan. Such options vest in equal increments on each
anniversary of the grant date for five years.
Compensation
Committee Interlocks and Insider Participation
Prior
to ,
2008, our compensation committee consisted of
Messrs. Carson, Chernow, Cressey, Rocco Ortenzio and
Robert Ortenzio. Messrs. Rocco Ortenzio and Robert Ortenzio
resigned from our compensation committee
in ,
2008. Mr. Carson is affiliated with Welsh Carson and
Mr. Cressey is affiliated with Thoma Cressey, both of whom
are principal and selling stockholders. See Certain
Relationships and Related Transactions for a description
of our relationships with Welsh Carson and Thoma Cressey.
None of the members of the compensation committee who will
continue to serve on the compensation committee after our common
stock has been listed on the New York Stock Exchange is
currently or has been at any time one of our officers or
employees. None of our executive officers currently serves, or
has served during the last completed fiscal year, as a member of
the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of
our board of directors or compensation committee. None of our
executive officers was a director of another entity where one of
that entitys executive officers served on our compensation
committee, and none of our executive officers served on the
compensation committee or the board of directors of another
entity where one of that entitys executive officers served
as a director on our board of directors.
119
Equity
Compensation Plan Information
Set forth in the table below is a list of all of our equity
compensation plans and the number of securities to be issued on
exercise of equity rights, average exercise price, and number of
securities that would remain available under each plan if
outstanding equity rights were exercised as of March 31,
2008.
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Number of
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Securities
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Number of
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Remaining
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Securities to be
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Available
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Issued Upon
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Weighted-Average
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for Future
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Exercise of
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Exercise Price of
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Issuance Under
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Outstanding
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Outstanding
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Equity
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Options, Warrants
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Options, Warrants
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Compensation
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Plan Category
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and Rights
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and Rights
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Plans
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Equity compensation plans approved by security holders:
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Select Medical Holdings Corporation 2005 Equity Incentive Plan
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4,584,175
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$
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1.92
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18,055,239
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Director stock option plan
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120,000
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$
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1.75
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130,000
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Amended
and Restated 2005 Equity Incentive Plan
In 2005, our board of directors, or the Board,
adopted the Select Medical Holdings Corporation 2005 Equity
Incentive Plan, or the Plan. Our Board and
stockholders have approved an amendment and restatement of the
Plan (which is described below) that will become effective
immediately prior to the consummation of this offering. The
purpose of the Plan is to assist us and our subsidiaries in
attracting and retaining qualified employees, directors and
consultants and to align their interests with those of our other
stockholders, thereby promoting our long-term financial
interests. The Plan accomplishes these goals through the grant
of awards of restricted stock and options.
Summary
of the Plan
General. The Plan authorizes the grant of
options and restricted stock (collectively, Awards).
Options granted under the Plan may be either incentive
stock options as defined in section 422 of the
Internal Revenue Code of 1986, as amended (the
Code), or nonqualified stock options, as determined
by the committee appointed by the Board to administer the Plan
(the Committee).
Number of Shares Authorized. Subject to
adjustment as described below, the maximum number of shares
available for Awards under the Plan
is ,
provided that the maximum number of shares that may be issued
under the Plan through the grant of incentive stock options
is .
A participant in the Plan may not receive Awards covering in
excess
of shares
during any calendar year.
If any shares subject to an Award are forfeited or if such Award
otherwise terminates or is settled for any reason whatsoever
without an actual distribution of shares to the participant, any
shares counted against the number of shares available for
issuance pursuant to the Plan with respect to such Award will,
to the extent of any such forfeiture, settlement, or
termination, again be available for Awards under the Plan. In
addition, if there is any change in Holdings corporate
capitalization, such as a stock split, stock dividend, spinoff,
recapitalization, merger, consolidation or the like, the
Committee will equitably adjust the aggregate number and class
of shares with respect to which Awards may be made under the
Plan, as well as the terms, number and class of shares subject
to outstanding Awards, provided that no adjustment may be made
that would cause the Plan to violate Section 422 of the
Code with respect to Incentive Stock Options or that would
adversely affect the status of any Award that is
performance-based compensation under
Section 162(m) of the Code. The Committee may also make
adjustments in the terms and conditions of Awards in recognition
of unusual or nonrecurring events affecting Holdings or any of
its subsidiaries or affiliates, or in response to changes in
applicable laws, regulations, or accounting principles;
provided, that no such adjustment may be made in any outstanding
Awards to the extent that such adjustment would
120
constitute a repricing of any option under the rules
of any applicable national securities exchange or would
adversely affect the status of the Award as
performance-based compensation under
Section 162(m) of the Code.
Administration. The Plan is administered by
the Committee. The Committees powers include, but are not
limited to, the power to:
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select the employees, non-employee directors and consultants who
will receive Awards pursuant to the Plan;
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determine the type or types of Awards to be granted to each
participant;
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determine the number of shares to which an Award will relate,
the terms and conditions of any Award granted under the Plan and
all other matters to be determined in connection with an Award;
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determine whether, to what extent, and under what circumstances
an Award may be canceled, forfeited, or surrendered;
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determine whether, and to certify that, performance goals to
which the settlement of an Award is subject are satisfied;
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correct any defect or supply any omission or reconcile any
inconsistency in the Plan;
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adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan;
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determine the effect, if any, of a change in control on
outstanding Awards; and
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construe and interpret the Plan and make all other
determinations as it may deem necessary or advisable for the
administration of the Plan.
|
Eligibility. Awards of incentive stock options
may be granted only to employees of Holdings and its
subsidiaries. Awards of non-qualified stock options and
restricted stock may be granted to employees and consultants of
Holdings and its subsidiaries and to Holdings non-employee
directors.
Each Award granted under the Plan will be evidenced by a written
agreement between the holder and Holdings, which will describe
the Award and state the terms and conditions applicable to such
Award. The principal terms and conditions of each particular
type of Award are described below.
Performance
Goals
The Committee may provide in an Award agreement that the Award
will be earned or vest based on the achievement of performance
goals that must be met by the end of the period specified by the
Committee (but that is substantially uncertain to be met before
the grant of the Award) based upon:
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the price of shares of Holdings stock;
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the market share of Holdings, its subsidiaries or affiliates (or
any business unit thereof);
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sales by Holdings, its subsidiaries or affiliates (or any
business unit thereof);
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earnings per share of Holdings stock;
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Holdings return on stockholder equity;
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costs of Holdings, its subsidiaries or affiliates (or any
business unit thereof);
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cash flow of Holdings, its subsidiaries or affiliates (or any
business unit thereof);
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return on total assets of Holdings, its subsidiaries or
affiliates (or any business unit thereof);
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return on invested capital of Holdings, its subsidiaries or
affiliates (or any business unit thereof);
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|
return on net assets of Holdings, its subsidiaries or affiliates
(or any business unit thereof);
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operating income of Holdings, its subsidiaries or affiliates (or
any business unit thereof);
|
121
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net income of Holdings, its subsidiaries or affiliates (or any
business unit thereof); or
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any other financial or other measurement deemed appropriate by
the Committee, as it relates to the results of operations or
other measurable progress of Holdings, its subsidiaries or
affiliates (or any business unit thereof).
|
The Committee has discretion to determine the specific targets
with respect to each of these categories of performance goals.
Restricted
Stock
In a restricted stock Award, the Committee grants to a
participant shares of stock that are subject to certain
restrictions, including forfeiture of such stock upon the
happening of certain events. Shares of stock are issued at the
time of grant, but are held by Holdings and delivered to the
grantee at the end of the restriction period specified in the
Award agreement. During the restriction period, grantees of
restricted stock have the right to vote the shares of such
stock, and except as may otherwise be provided by the Committee,
to receive dividends from such stock.
Options
Options granted under the Plan may be either incentive stock
options or non-qualified stock options. The Committee will
determine, at the time of grant, the exercise price, the type of
option, the term of the option, and the date when the option
will become exercisable. Incentive stock options may be granted
only to employees of Holdings or its subsidiaries. No Award of
incentive stock options may permit the fair market value of any
such options becoming first exercisable in any calendar year to
exceed $100,000. Non-qualified stock options may be granted to
employees and consultants of Holdings and its subsidiaries, and
to non-employee directors of Holdings.
Exercise Price. The Committee will determine
the exercise price of an option at the time the option is
granted, provided that the exercise price of an option may not
be less than 100% (or 110% in the case of an incentive stock
option granted to an individual who owns more than 10% of the
combined voting power of all classes of Holdings
outstanding stock (a 10% Stockholder)) of the fair
market value of the stock on the date of grant.
Consideration. The means of payment for shares
issued upon exercise of an option will be established by the
Committee and may be made by the holder (1) in cash,
(2) by delivery of shares of stock having an aggregate fair
market value equal to the aggregate exercise price, provided
that such shares have been outstanding for at least six months
(unless a shorter period is approved by the Committee),
(3) with respect to non-qualified stock option exercises,
by irrevocably authorizing a third party acceptable to the
Committee to sell the shares of stock acquired upon exercise of
the option and to remit a portion of such proceeds to Holdings
sufficient to pay the exercise price of such option and to
satisfy all applicable withholding taxes or (4) by any
other means (including any combination of the foregoing)
approved by the Committee.
Term of the Option. The term of an option
granted under the Plan will expire upon the earlier of
(1) the tenth anniversary of the date of grant (or the
fifth anniversary of the date of grant in the case of an
incentive stock option granted to a 10% Stockholder),
(2) the date established by the Committee at the time of
grant, (3) unless otherwise provided by the Committee, the
date that is one year after the holders termination of
employment or other service by reason of death or disability,
and only with respect to non-qualified stock options, retirement
or (4) unless otherwise provided by the Committee, the date
that is 90 days after the termination of the holders
employment or other service other than by reason of death or
disability, and only with respect to non-qualified stock
options, retirement (the Expiration Date).
General
Provisions
Issuance of Shares with Respect to
Awards. Holdings has no obligation to issue
shares of stock under the Plan unless such issuance would comply
with all applicable laws and the applicable requirements of any
securities exchange or similar entity.
Nontransferability of Awards. In general,
during a holders lifetime, his or her Awards of restricted
stock, to the extent such shares remain subject to forfeiture
restrictions, and non-qualified stock options are not
transferable
122
other than by will or by the laws of descent and distribution
or, if permitted by the Committee in the applicable Award
agreement, to the holders immediate family members and
certain entities controlled by or benefiting the holder or such
family members (Permitted Transferees). Incentive
stock options are not transferable other than by will or by the
laws of descent and distribution. Options are exercisable during
the lifetime of the holder only by the holder or, in the case of
a disabled holder, his or her guardian or legal representative.
If permitted by the Committee, non-qualified stock options may
also be exercised by the holders Permitted Transferee.
Termination of Employment or Service. All
options will be forfeited upon a holders termination of
employment or other service with Holdings and its subsidiaries
for cause, and unless the Committee provides otherwise, all
unvested options will be forfeited upon a holders
termination of employment or other service with Holdings and its
subsidiaries for any reason. Unless the Committee provides
otherwise, upon a holders termination of employment or
other service with Holdings and its subsidiaries, vested options
may be exercised until their Expiration Date. Except as may
otherwise be provided by the Committee, all unvested shares of
restricted stock will be forfeited upon a holders
termination of employment or other service with Holdings and its
subsidiaries for any reason.
Change
in Control
In the event of a change in control, the Committee
may, in its discretion, (1) fully vest any or all Awards
made under the Plan, (2) cancel any outstanding option in
exchange for a cash payment of an amount (including zero) equal
to the difference, if any, between the then fair market value of
the option less the option price of the option; provided that if
the Committee determines that the option price exceeds the fair
market value of the option, the Committee may cancel such option
with no further payment due the participant, (3) after
having given the participant a reasonable chance to exercise any
outstanding options, terminate any or all of the
participants unexercised options, (4) where Holdings
is not the surviving corporation, cause the surviving
corporation to assume all outstanding Awards or replace all
outstanding Awards with comparable awards, or (5) take such
other action as the Committee determines to be appropriate.
As defined in the Plan, the term change in control
means:
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the acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 Act (the 1934 Act))
of beneficial ownership (within the meaning of
Rule 13d-3
promulgated under the 1934 Act) of more than 50% of the
total voting power of the voting securities of Holdings entitled
to vote generally in the election of directors (the Voting
Securities); provided, however, that the following
acquisitions will not constitute a change in control:
(1) any acquisition, directly or indirectly by or from
Holdings or any subsidiary of Holdings, by any employee benefit
plan (or related trust) sponsored or maintained by Holdings or
any subsidiary of Holdings (whether directly or indirectly),
(2) any acquisition by any underwriter in connection with
any firm commitment underwriting of securities to be issued by
Holdings, or (3) any acquisition by any corporation if,
immediately following such acquisition, 50% or more of the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities
of such corporation (entitled to vote generally in the election
of directors), are beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities who,
immediately prior to such acquisition, were the beneficial
owners of the Voting Securities in substantially the same
proportions, respectively, as their ownership, immediately prior
to such acquisition of the Voting Securities;
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the consummation of (1) a complete liquidation or
substantial dissolution of Holdings, or (2) the sale or
other disposition, during any
12-month
period ending on the date of the most recent sale or
disposition, of assets of Holdings that have a total gross fair
market value equal to or more than 40% of the total gross fair
market value of all of the assets of Holdings immediately before
such sale or disposition, in each case, other than to a
subsidiary, wholly-owned, directly or indirectly, by Holdings or
to a holding company of which Holdings is a direct or indirect
wholly owned subsidiary prior to such transaction; or
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during any period of 12 consecutive months, the individuals
at the beginning of any such period who constitute the Board and
any new director (other than a director designated by a person
or entity who has entered into an agreement with Holdings or
another person or entity to effect a transaction described
above)
|
123
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whose election by the Board or nomination for election by
Holdings stockholders was approved by a vote of at least a
majority of the directors then still in office who either were
directors at the beginning of any such period or whose election
or nomination for election was previously so approved, cease for
any reason to constitute a majority of the Board.
|
Effective Date, Amendments, and Termination of the
Plan. The Plan became effective on
February 24, 2005. The amendment and restatement of the
Plan, which has been described above, was approved by the
stockholders and the Board
on ,
2008, and will become effective upon the consummation of this
offering. Unless earlier terminated by the Board, the Plan will
terminate on the earlier of the tenth anniversary of
(1) the Plans adoption by the Board or (2) the
Plans approval by Holdings stockholders. The Board
may amend the Plan without the consent of the stockholders or
participants, except that any such amendment will be subject to
the approval of Holdings stockholders if (1) such
action would increase the number of shares of stock subject to
the Plan, (2) such action would result in the
repricing of any option or (3) such stockholder
approval is required by any federal or state law or regulation
or the rules of any stock exchange or automated quotation system
on which Holdings stock is then listed or quoted. In
addition, without the consent of an affected participant, no
amendment or termination of the Plan may materially and
adversely affect the rights of such participant under any Award
theretofore granted and any Award agreement relating thereto.
Executive Officers. Members of our management,
including some of those who participated in the Merger
Transactions as continuing investors, received awards under the
Plan. On November 8, 2005 we awarded Rocco A. Ortenzio and
Robert A. Ortenzio with restricted stock Awards in the amount of
3,750,000 and 5,250,000 shares of our common stock,
respectively. The restricted stock Award granted to Rocco A.
Ortenzio is not subject to vesting, and the restricted stock
Award granted to Robert A. Ortenzio is subject to ratable
monthly vesting over a three year period from the date of grant.
See Management Compensation Discussion and
Analysis Elements of Compensation Equity
Compensation and Management Compensation
Discussion and Analysis Equity Compensation Plan
Information.
2005
Equity Incentive Plan for Non-Employee Directors
On August 10, 2005, our board of directors (the
Board) adopted the Select Medical Holdings
Corporation 2005 Equity Incentive Plan for Non-Employee
Directors (the Plan). Our Board has approved an
amendment and restatement of the Plan (which is described below)
that will become effective immediately prior to the consummation
of this offering. The purpose of the Plan is to assist us and
our subsidiaries in attracting and retaining qualified
individuals to serve as non-employee members of the Board or the
board of directors of our subsidiaries (each, a Subsidiary
Board), and to align such individuals interests with
those of our other stockholders, thereby promoting our long-term
financial interests. The Plan accomplishes these goals through
the grant of awards of options.
Summary
of the Plan
General. The Plan authorizes the grant of
options (Awards). Options granted under the Plan are
non-qualified stock options that are not intended to qualify as
incentive stock options within the meaning of section 422
of the Internal Revenue Code of 1986, as amended (the
Code).
Number of Shares Authorized. Subject to
adjustment as described below, the maximum number of shares
available for Awards under the Plan
is .
If any shares subject to an Award are forfeited or if such Award
otherwise terminates or is settled for any reason whatsoever
without an actual distribution of shares to the participant, any
shares counted against the number of shares available for
issuance pursuant to the Plan with respect to such Award will,
to the extent of any such forfeiture, settlement, or
termination, again be available for Awards under the Plan. In
addition, if there is any change in Holdings corporate
capitalization, such as a stock split, stock dividend, spinoff,
recapitalization, merger, consolidation or the like, the
committee selected by the Board to administer the Plan (the
Committee) will equitably adjust the aggregate
number and class of shares with respect to which Awards may be
made under the Plan, as well as the terms, number and class of
shares subject to outstanding Awards. The Committee may also
make adjustments in the terms and conditions of Awards in
recognition of unusual or nonrecurring events affecting
124
Holdings or any of its subsidiaries or affiliates, or in
response to changes in applicable laws, regulations, or
accounting principles; provided, that no such adjustment may be
made in any outstanding Awards to the extent that such
adjustment would constitute a repricing of any
option under the rules of any applicable national securities
exchange.
Administration. The Plan is administered by
the Committee. The Committees powers include, but are not
limited to, the power to:
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select the non-employee directors who will receive Awards
pursuant to the Plan;
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determine the number of shares to which an Award will relate,
the terms and conditions of any Award granted under the Plan and
all other matters to be determined in connection with an Award;
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determine whether, to what extent, and under what circumstances
an Award may be canceled, forfeited, or surrendered;
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determine whether, and to certify that, performance goals to
which the settlement of an Award is subject are satisfied;
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correct any defect or supply any omission or reconcile any
inconsistency in the Plan;
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adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan;
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determine the effect, if any, of a change in control on
outstanding Awards; and
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construe and interpret the Plan and make all other
determinations as it may deem necessary or advisable for the
administration of the Plan.
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Eligibility. Only non-employee members of the
Board or a Subsidiary Board are eligible to participate in the
Plan.
Each Award granted under the Plan will be evidenced by a written
agreement between the holder and Holdings, which will describe
the Award and state the terms and conditions applicable to such
Award. The principal terms and conditions of the Awards that may
be granted under the Plan are described below.
Performance
Goals
The Committee may provide in an Award agreement that the Award
will be earned or vest based on the achievement of performance
goals that must be met by the end of the period specified by the
Committee (but that is substantially uncertain to be met before
the grant of the Award) based upon:
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the price of shares of Holdings stock;
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the market share of Holdings, its subsidiaries or affiliates (or
any business unit thereof);
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sales by Holdings, its subsidiaries or affiliates (or any
business unit thereof);
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earnings per share of Holdings stock;
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Holdings return on stockholder equity;
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costs of Holdings, its subsidiaries or affiliates (or any
business unit thereof);
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cash flow of Holdings, its subsidiaries or affiliates (or any
business unit thereof);
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return on total assets of Holdings, its subsidiaries or
affiliates (or any business unit thereof);
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return on invested capital of Holdings, its subsidiaries or
affiliates (or any business unit thereof);
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return on net assets of Holdings, its subsidiaries or affiliates
(or any business unit thereof);
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operating income of Holdings, its subsidiaries or affiliates (or
any business unit thereof);
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net income of Holdings, its subsidiaries or affiliates (or any
business unit thereof); or
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125
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any other financial or other measurement deemed appropriate by
the Committee, as it relates to the results of operations or
other measurable progress of Holdings, its subsidiaries or
affiliates (or any business unit thereof).
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The Committee has discretion to determine the specific targets
with respect to each of these categories of performance goals.
Options
Options granted under the Plan are non-qualified stock options
that are not intended to qualify as incentive stock options
within the meaning of section 422 of the Code. The
Committee will determine, at the time of grant, the exercise
price of the option, the term of the option, and the date when
the option will become exercisable.
Exercise Price. The Committee will determine
the exercise price of an option at the time the option is
granted, provided that the exercise price of an option may not
be less than 100% of the fair market value of the stock on the
date of grant.
Consideration. The means of payment for shares
issued upon exercise of an option will be established by the
Committee and may be made by the holder (1) in cash,
(2) by delivery of shares of stock having an aggregate fair
market value equal to the aggregate exercise price, provided
that such shares have been outstanding for at least six months
(unless a shorter period is approved by the Committee),
(3) by irrevocably authorizing a third party acceptable to
the Committee to sell the shares of stock acquired upon exercise
of the option and to remit a portion of such proceeds to
Holdings sufficient to pay the exercise price of such option and
to satisfy all applicable withholding taxes or (4) by any
other means (including any combination of the foregoing)
approved by the Committee.
Term of the Option. The term of an option
granted under the Plan will expire upon the earlier of
(1) the tenth anniversary of the date of grant,
(2) the date established by the Committee at the time of
grant, (3) unless otherwise provided by the Committee, the
date that is one year after the holders termination of
service by reason of death or disability or (4) unless
otherwise provided by the Committee, the date that is
90 days after the holders termination of service
other than by reason of death or disability (the
Expiration Date).
General
Provisions
Issuance of Shares with Respect to
Awards. Holdings has no obligation to issue
shares of stock under the Plan unless such issuance would comply
with all applicable laws and the applicable requirements of any
securities exchange or similar entity.
Nontransferability of Awards. In general,
during a holders lifetime, his or her Awards are not
transferable other than by will or by the laws of descent and
distribution or, if permitted by the Committee in the applicable
Award agreement, to the holders immediate family members
and certain entities controlled by or benefiting the holder or
such family members (Permitted Transferees). Options
are exercisable during the lifetime of the holder only by the
holder or, in the case of a disabled holder, his or her guardian
or legal representative. If permitted by the Committee, options
may also be exercised by the holders Permitted Transferee.
Termination of Service. All options will be
forfeited upon a holders termination of service with
Holdings and its subsidiaries for cause, and unless the
Committee provides otherwise, all unvested options will be
forfeited upon a holders termination of service with
Holdings and its subsidiaries for any reason. Unless the
Committee provides otherwise, upon a holders termination
of service with Holdings and its subsidiaries, vested options
may be exercised until their Expiration Date.
Change
in Control
In the event of a change in control, the Committee
may, in its discretion, (1) fully vest any or all options
granted under the Plan, (2) cancel any outstanding option
in exchange for a cash payment of an amount (including zero)
equal to the difference, if any, between the then fair market
value of the option less the option price of the option;
provided that if the Committee determines that the option price
exceeds the fair market value of the option,
126
the Committee may cancel such option with no further payment due
the participant, (3) after having given the participant a
reasonable chance to exercise any outstanding options, terminate
any or all of the participants unexercised options,
(4) where Holdings is not the surviving corporation, cause
the surviving corporation to assume all outstanding options or
replace all outstanding options with comparable awards, or
(5) take such other action as the Committee determines to
be appropriate.
As defined in the Plan, the term change in control
means:
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the acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934 Act (the 1934 Act))
of beneficial ownership (within the meaning of
Rule 13d-3
promulgated under the 1934 Act) of more than 50% of the
total voting power of the voting securities of Holdings entitled
to vote generally in the election of directors (the Voting
Securities); provided, however, that the following
acquisitions will not constitute a change in control:
(1) any acquisition, directly or indirectly by or from
Holdings or any subsidiary of Holdings, by any employee benefit
plan (or related trust) sponsored or maintained by Holdings or
any subsidiary of Holdings (whether directly or indirectly),
(2) any acquisition by any underwriter in connection with
any firm commitment underwriting of securities to be issued by
Holdings, or (3) any acquisition by any corporation if,
immediately following such acquisition, 50% or more of the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities
of such corporation (entitled to vote generally in the election
of directors), are beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities who,
immediately prior to such acquisition, were the beneficial
owners of the Voting Securities in substantially the same
proportions, respectively, as their ownership, immediately prior
to such acquisition of the Voting Securities;
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the consummation of (1) a complete liquidation or
substantial dissolution of Holdings, or (2) the sale or
other disposition, during any
12-month
period ending on the date of the most recent sale or
disposition, of assets of Holdings that have a total gross fair
market value equal to or more than 40% of the total gross fair
market value of all of the assets of Holdings immediately before
such sale or disposition, in each case, other than to a
subsidiary, wholly-owned, directly or indirectly, by Holdings or
to a holding company of which Holdings is a direct or indirect
wholly owned subsidiary prior to such transaction; or
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during any period of twelve (12) consecutive months, the
individuals at the beginning of any such period who constitute
the Board and any new director (other than a director designated
by a person or entity who has entered into an agreement with
Holdings or another person or entity to effect a transaction
described above) whose election by the Board or nomination for
election by Holdings stockholders was approved by a vote
of at least a majority of the directors then still in office who
either were directors at the beginning of any such period or
whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority of the
Board.
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Effective Date, Amendments, and Termination of the
Plan. The Plan became effective on
August 10, 2005. The amendment and restatement of the Plan
will become effective upon the consummation of this offering.
Unless earlier terminated by the Board, the Plan will terminate
on tenth anniversary of its effective date. The Board may amend
the Plan without the consent of the stockholders or
participants, except that any such amendment will be subject to
the approval of Holdings stockholders if (1) such
action would increase the number of shares of stock subject to
the Plan, (2) such action would result in the
repricing of any option or (3) such stockholder
approval is required by any federal or state law or regulation
or the rules of any stock exchange or automated quotation system
on which Holdings stock is then listed or quoted. In
addition, without the consent of an affected participant, no
amendment or termination of the Plan may materially and
adversely affect the rights of a participant under any Award
granted under the Plan or any Award agreement relating thereto.
Employee
Stock Purchase Plan
In 2005, we adopted an employee stock purchase plan (the
ESPP) whereby specified employees (other than
members of our senior management team), directors and
consultants of Holdings and its subsidiaries were given the
opportunity, through a special offering (the
Offering), to purchase shares of our common and
preferred stock. Pursuant to the terms of the ESPP,
599,975 shares of Holdings common stock and
89,216 shares of Holdings
127
preferred stock were authorized to be issued in connection with
the Offering. All shares authorized to be issued pursuant to the
Offering have been issued and, pursuant to the terms of the
ESPP, the Offering was terminated. In addition, it is
anticipated that in connection with this offering, the
restrictions applicable to all such shares will lapse.
2008
Annual Performance-Based Bonuses
On February 14, 2008, the compensation committee
established financial performance targets for the bonus plan for
the named executive officers based on our return on equity and
earnings per share, the achievement of which may entitle the
named executive officers to receive annual bonuses from 0% to
250% of a target bonus percentage multiplied by the named
executive officers base salary. If both of the performance
goals are met, the participants will receive cash bonuses equal
to their target bonus percentage listed below times the
participants base salary. If one or both of the
performance goals are exceeded, the participants may receive
bonuses greater than their target bonus percentage, up to a
maximum of 250% of such target bonus percentage multiplied by
such participants base salary, depending upon the extent
to which the performance goals are exceeded. For example, a
participant whose target bonus percentage is 50% is eligible to
receive a bonus equal to 125% of the participants base
salary if the maximum cash award of 250% is achieved (i.e., 250%
times 50% equals 125%).
For the 2008 fiscal year, the compensation committee established
goals for our return on equity and earnings per share, both of
which need to be attained to entitle the executive to receive a
cash payment equal to the stated bonus percentage times the
executives base salary. For 2008, the target bonus
percentage for each of the named executive officers eligible to
participate in the bonus plan is set forth in the table below.
The target bonus percentages for Messrs. Rocco and Robert
Ortenzio exceeds the target bonus percentages for the other
named executive officers due to a higher level of responsibility.
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Target Bonus
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Named Executive
Officer
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(% of Base Salary)
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Rocco A. Ortenzio
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80
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%
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Robert A. Ortenzio
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80
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%
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Patricia A. Rice
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50
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%
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Martin F. Jackson
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50
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%
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S. Frank Fritsch
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50
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%
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128
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as
of , 2008 by:
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each person known to us to beneficially own more than 5% of the
outstanding shares of common stock;
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each of the named executive officers;
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each of our directors; and
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all directors and executive officers as a group.
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The table also sets forth such persons beneficial
ownership of common stock immediately after the offering.
We have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the
persons and entities named in the tables below have sole voting
and investment power with respect to all shares of common stock
that they beneficially own, subject to applicable community
property laws. We have based our calculation of the percentage
of beneficial ownership
on shares of
common stock
and shares of
participating preferred stock outstanding on June 30, 2008
and shares
of common stock outstanding upon completion of this offering.
In computing the number of shares of common stock beneficially
owned by a person or group and the percentage ownership of that
person or group, we deemed to be outstanding any shares of
common stock subject to options held by that person or group
that are currently exercisable or exercisable within
60 days after June 30, 2008. We did not deem these
shares outstanding, however, for the purpose of computing the
percentage ownership of any other person.
Unless otherwise noted below, the address of each beneficial
owner listed in the table is
c/o Select
Medical Holdings Corporation, 4714 Gettysburg Road,
Mechanicsburg, Pennsylvania 17055 and our telephone number is
(717) 972-1100.
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Number of
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Before Offering
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Number of
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Additional
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After
Offering(2)
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Number of
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Shares of
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Shares of
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Number of
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Shares
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Percent of
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Common
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Common
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Shares of
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Percent of
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of Common
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Common
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Stock to be
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Stock to be
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Common
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Common
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Stock
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Stock
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Sold
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Sold at
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Stock
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Stock
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Beneficially
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Beneficially
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in This
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Underwriters
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Beneficially
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Beneficially
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Name of Beneficial
Owner(1)
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Owned
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Owned
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Offering
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Option
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Owned
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Owned
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Welsh, Carson, Anderson &
Stowe(3)
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Thoma Cressey
Bravo(4)
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Rocco A.
Ortenzio(5)
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Robert A.
Ortenzio(6)
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Russell L. Carson
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Bryan C.
Cressey(7)
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David S.
Chernow(8)
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James E. Dalton, Jr.
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Thomas A.
Scully(9)
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Leopold Swergold
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Sean M. Traynor
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Patricia A.
Rice(10)
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S. Frank
Fritsch(11)
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Martin F.
Jackson(12)
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All directors and executive officers as a
group(13)
(seventeen persons)
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*
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Less than 1%
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(1)
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Unless otherwise indicated, the
address of each of the beneficial owners identified is
c/o Select
Medical Holdings Corporation, 4714 Gettysburg Road,
P.O. Box 2034, Mechanicsburg, Pennsylvania 17055.
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(2)
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Immediately prior to the
consummation of the offering, all shares of our issued and
outstanding preferred stock will convert into shares of common
stock. Therefore, no shares of participating preferred stock
will be outstanding after the offering.
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(3)
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Represents
(i)
common shares held by Welsh, Carson, Anderson & Stowe
IX, L.P., or WCAS IX, over which WCAS IX has sole voting and
investment power,
(ii)
common shares held by WCAS Management Corporation, over which
WCAS Management Corporation has sole voting and investment
power,
(iii)
common shares held by WCAS Capital Partners IV, L.P., over which
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129
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WCAS Capital Partners IV, L.P. has
sole voting and investment power, (iv) an aggregate
of
common shares held by individuals who are general partners of
WCAS IX Associates LLC, the sole general partner of WCAS IX
and/or otherwise employed by an affiliate of Welsh, Carson,
Anderson & Stowe, and (v) an
aggregate
common shares held by other co-investors, over which WCAS IX has
sole voting power. Each of the following individuals are
managing members of WCAS IX Associates, LLC, the sole general
partner of WCAS IX, and WCAS CP IV Associates, LLC, the sole
general partner of WCAS Capital Partners IV, L.P.: Patrick J.
Welsh, Russell L. Carson, Bruce K. Anderson, Thomas E.
Mclnerney, Robert A. Minicucci, Anthony J. de Nicola, Paul B.
Queally, D. Scott Mackesy, Sanjay Swani, John D. Clark, James R.
Matthews, Sean M. Traynor, John Almeida and Jonathan M. Rather.
In addition, Thomas A. Scully is also a managing member of WCAS
CP IV Associates, LLC. Each of the following individuals are
shareholders of WCAS Management Corporation: Patrick J. Welsh,
Russell L. Carson, Bruce K. Anderson, Thomas E. Mclnerney and
Robert A. Minicucci. The principal executive offices of Welsh,
Carson, Anderson & Stowe are located at 320 Park
Avenue, Suite 2500, New York, New York 10022.
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(4)
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Represents
(i)
common shares held by Thoma Cressey Fund VI, L.P. over
which Thoma Cressey Fund VI, L.P. has shared voting and
investment power,
(ii)
common shares held by Thoma Cressey Friends Fund VI, L.P.,
over which Thoma Cressey Friends Fund VI, L.P. has shared
voting and investment power,
(iii)
common shares held by Thoma Cressey Fund VII, L.P., over which
Thoma Cressey Fund VII, L.P. has shared voting and
investment power, and
(iv)
common shares held by Thoma Cressey Friends Fund VII, L.P.,
over which Thoma Cressey Friends Fund VII, L.P. has shared
voting and investment power. The sole general partner of each of
Thoma Cressey Fund VII, L.P. and Thoma Cressey Friends
Fund VII, L.P. , or collectively, Thoma Cressey
Fund VII, is TC Partners VII, L.P., or the
Fund VII GP. The sole general partner of
Fund VII GP is Thoma Cressey Equity Partners Inc., or the
Ultimate GP. The sole general partner of each of
Thoma Cressey Fund VI, L.P. and Thoma Cressey Friends
Fund VI, L.P., or collectively, Thoma Cressey
Fund VI, is TC Partners VI, L.P., or the
Fund VI GP. The sole general partner of
Fund VI GP is the Ultimate GP. The sole shareholder of the
Ultimate GP is Carl D. Thoma. The officers of the Ultimate GP
are Carl D. Thoma, Bryan C. Cressey and Lee M. Mitchell. The
principal executive offices of the Ultimate GP are located at
233 South Wacker, Chicago, IL 60606.
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(5)
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Includes
common shares owned by the Rocco A. Ortenzio Revocable Trust for
which Mr. Rocco Ortenzio acts as sole trustee,
and
common shares held by the Rocco A. Ortenzio Descendants Trust,
for which Mr. Rocco Ortenzio is the investment advisor.
Mr. Rocco Ortenzio disclaims beneficial ownership of shares
held by the Rocco A. Ortenzio Descendants Trust except in his
capacity as a fiduciary of such trust.
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(6)
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Includes
common shares owned by the Robert A. Ortenzio Descendants Trust
for which Mr. Robert Ortenzio is the investment trustee.
Mr. Robert Ortenzio disclaims beneficial ownership of
shares held by the Robert A. Ortenzio Descendants Trust
except in his capacity as a fiduciary of such trust.
Includes
common shares which are subject to restrictions on transfer set
forth in a restricted stock award agreement entered into at the
time of the consummation of the Merger Transactions.
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(7)
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In addition to shares owned by
Bryan C. Cressey in his individual capacity, includes
(i)
common shares held by Thoma Cressey Fund VI, L.P.,
(ii)
common shares held by Thoma Cressey Friends Fund VI, L.P.,
(iii)
common shares held by Thoma Cressey Fund VII, L.P., and
(iv)
common shares held by Thoma Cressey Friends Fund VII, L.P.
Mr. Cressey is a principal of Thoma Cressey Equity Partners
Inc. Mr. Cressey may be deemed to beneficially own the
shares beneficially owned by Thoma Cressey Fund VI, L.P.,
Thoma Cressey Friends Fund VI, L.P., Thoma Cressey Fund
VII, L.P. and Thoma Cressey Friends Fund VII, L.P.
Mr. Cressey disclaims beneficial ownership of such shares.
The principal address of Mr. Cressey is 9200 Sears Tower,
233 South Wacker Drive, Chicago, IL 60606.
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(8)
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Represents
common shares held by David S. Chernow and Elizabeth A. Chernow
as tenants in common.
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(9)
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|
Includes
common shares which are subject to restrictions on transfer set
forth in a restricted stock award agreement entered into at the
time of the consummation of the Merger Transactions.
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(10)
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Includes
common shares which are subject to restrictions on transfer set
forth in a restricted stock award agreement entered into at the
time of the consummation of the Merger Transactions. In addition
to shares held by Patricia A. Rice in her individual capacity,
includes
common shares owned by The Patricia Ann Rice Living Trust for
which Ms. Rice acts as a trustee,
and
common shares owned by the 2005 Rice Family Trust for which
Ms. Rice acts as investment trustee.
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(11)
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Includes
common shares which are subject to restrictions on transfer set
forth in a restricted stock award agreement entered into at the
time of the consummation of the Merger Transactions
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(12)
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Includes
common shares which are subject to restrictions on transfer set
forth in a restricted stock award agreement entered into at the
time of the consummation of the Merger Transactions. In addition
to shares held by Martin F. Jackson in his individual capacity,
includes an
aggregate
common shares owned by Mr. Jacksons children who live
in his household and over which Mr. Jackson acts as
custodian.
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(13)
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Includes an
aggregate
common shares which are subject to restrictions on transfer set
forth in restricted stock award agreements entered into at the
time of the consummation of the Merger Transactions.
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130
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Arrangements
with Our Investors
In connection with the consummation of the Merger Transactions,
Welsh Carson, Thoma Cressey and their co-investors and our
continuing investors, including Rocco A. Ortenzio, Robert A.
Ortenzio, Russell L. Carson and other individuals affiliated
with Welsh Carson, Bryan C. Cressey, Patricia A. Rice, Martin F.
Jackson, S. Frank Fritsch, Michael E. Tarvin, James J. Talalai
and Scott A. Romberger, entered into agreements with us as
described below.
Stock
Subscription and Exchange Agreement
Pursuant to a stock subscription and exchange agreement, in
connection with the Merger Transactions the investors purchased
shares of our preferred stock and common stock for an aggregate
purchase price of $570.0 million in cash plus rollover
shares of Select common stock (with such rollover shares being
valued at $152.0 million in the aggregate, or $18.00 per
share, for such purposes). Our continuing investors purchased
shares of our stock at the same price and on the same terms as
our sponsors and their co-investors. Upon consummation of the
Merger, all rollover shares were cancelled without payment of
any merger consideration.
In July 2005, Mr. Chernow purchased 2,973.98 shares of
our preferred stock and 20,000 shares of our common stock
for an aggregate of $100,000; Mr. Dalton purchased
7,434.94 shares of our preferred stock and
50,000 shares of our common stock for an aggregate of
$250,000; and Mr. Swergold purchased 29,739.78 shares
of our preferred stock and 200,000 shares of our common
stock for an aggregate of $1.0 million.
On September 29, 2005, we incurred $14.5 million of
expense in connection with a payment of $14.2 million to
certain members of management under the Cash Plan as a result of
a special dividend paid to holders of our preferred stock with
the proceeds of the $175.0 million senior floating rate
notes issued by us. The balance of the $14.5 million
expense resulted from the employers portion of the payroll
taxes associated with the payment to management.
Stockholders
Agreement and Equity Registration Rights Agreement
The stockholders agreement entered into by our investors in
connection with the Merger Transactions contains certain
restrictions on the transfer of our equity securities and
provides certain stockholders with certain preemptive and
information rights. Pursuant to the registration rights
agreement, we granted certain of our investors rights to
require us to register shares of common stock under the
Securities Act.
Securities
Purchase Agreement and Debt Registration Rights
Agreement
In connection with the Merger Transactions, Holdings, WCAS
Capital Partners IV, L.P., Rocco A. Ortenzio, Robert A. Ortenzio
and certain other investors who are members of or affiliated
with the Ortenzio family entered into a securities purchase
agreement pursuant to which they purchased senior subordinated
notes and shares of preferred and common stock from us for an
aggregate $150.0 million purchase price. In connection with
such investment, these investors entered into the stockholders
and registration rights agreements referred to under
Stockholders Agreement and Equity Registration Rights
Agreement with respect to our equity securities acquired
by them and a separate registration rights agreement with us
that granted these investors rights to require us to register
the senior subordinated notes acquired by them under the
Securities Act under certain circumstances.
Transaction
Fee
In connection with the Merger Transactions, an aggregate
$24.6 million in financing fees was paid to our sponsors
(or affiliates thereof) and to certain of our other continuing
investors in connection with the Merger Transactions and we
reimbursed Welsh Carson and its affiliates for their
out-of-pocket expenses in connection with the Merger
Transactions.
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Underwriting
Discount Reimbursement
We have agreed to reimburse the selling stockholders for the
underwriting discount on the shares sold by them. The amount of
this reimbursement is approximately
$ million.
This is a one-time payment that will occur following the
consummation of this offering. For a description of the selling
stockholder holdings being sold, see Principal and Selling
Stockholders.
Restricted
Stock Award Agreement
On June 2, 2005, Rocco A. Ortenzio and Holdings entered
into a Restricted Stock Award Agreement, pursuant to which a
warrant previously granted to Mr. Ortenzio was cancelled
and Mr. Ortenzio was awarded shares of our common stock.
Other
Arrangements with Directors and Executive Officers
Lease
of Office Space
We lease our corporate office space at 4714, 4716, 4718 and 4720
Gettysburg Road in Mechanicsburg, Pennsylvania, from Old
Gettysburg Associates, Old Gettysburg Associates II, Old
Gettysburg Associates III and Old Gettysburg Associates IV.
Old Gettysburg Associates is a general partnership that is owned
by Rocco A. Ortenzio, Robert A. Ortenzio and John M. Ortenzio.
Old Gettysburg Associates II, Old Gettysburg Associates III
and Old Gettysburg Associates IV are limited partnerships
each owned by Rocco A. Ortenzio, Robert A. Ortenzio and John M.
Ortenzio, as limited partners, and Select Capital Commercial
Properties, Inc., as the general partner. Select Capital
Commercial Properties, Inc. is a Pennsylvania corporation whose
principal offices are located in Mechanicsburg, Pennsylvania.
Rocco A. Ortenzio, Robert A. Ortenzio and John M. Ortenzio each
own one-third of Select Capital Commercial Properties, Inc. We
obtained independent appraisals at the time we executed leases
with these partnerships which support the amount of rent we pay
for this space. In the year ended December 31, 2007, we
paid to these partnerships an aggregate amount of
$2.3 million, for office rent, for various improvements to
our office space and miscellaneous expenses. Our current lease
for 43,919 square feet of office space at 4716 Old
Gettysburg Road will expire on January 31, 2023. Our lease
for 7,590 square feet of office space at 4718 Old
Gettysburg Road will expire on December 31, 2014. Our lease
for 4,635 square feet of office space at 4718 Old Gettysburg
Road will expire on January 31, 2023.
On May 15, 2001, we entered into a lease for
7,214 square feet of additional office space at 4720
Gettysburg Road in Mechanicsburg, Pennsylvania which expires on
December 31, 2014. We amended this lease on
February 26, 2002 to add a net of 4,200 square feet of
office space. On October 29, 2003, we entered into leases
for an additional 3,008 square feet of office space at 4718
Gettysburg Road for a five year initial term at $17.40 per
square foot, and an additional 8,644 square feet of office
space at 4720 Gettysburg Road for a five year initial term at
$18.01 per square foot. On October 5, 2006, we entered into
a lease for 1,606 square feet of additional space at
4718 Gettysburg Road at $18.64 per square foot. Such lease
will expire on February 28, 2012.
We currently pay approximately $3.2 million per year in
rent for the office space leased from these four partnerships.
We amended our lease for office space at 4718 Gettysburg Road on
February 19, 2004 to relinquish a net of 695 square
feet of office space. On March 19, 2004, we entered into
leases for an additional 2,436 square feet of office space
at 4718 Gettysburg Road from Old Gettysburg Associates for a
three year initial term at $19.31 per square foot, and an
additional 2,579 square feet of office space at 4720
Gettysburg Road from Old Gettysburg Associates II for a
five year initial term at $18.85 per square foot. On
February 28, 2007, we renewed a lease at 4718 Gettysburg
Road for an additional three year term at $21.10 per square foot
for 2,562 square feet.
On August 10, 2005, we entered into a lease for
approximately 8,615 square feet of additional office space
at 4720 Gettysburg Road in Mechanicsburg, Pennsylvania with Old
Gettysburg Associates II. Such lease will expire on
July 31, 2010. On August 25, 2006, we entered into a
lease for 47,864 square feet of office space at 4714
Gettysburg Road in Mechanicsburg, Pennsylvania for a fifteen
year term at $23.53 per square, subject to an annual base rent
increase of 4% on a cumulative basis, plus expense allocations.
Such lease will expire on February 15, 2023.
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Approval
of Related Party Transactions
We do not have a formal written policy for review and approval
of transactions required to be disclosed pursuant to
Item 404(a) of
Regulation S-K.
However, our practice is that any such transaction must receive
the prior approval of both the audit committee and a majority of
the non-interested members of the board of directors. In
addition, it is our practice that, prior to any related party
transaction of the type described under Other
Arrangements with Directors and Executive Officers
Lease of Office Space, an independent third-party
appraisal is obtained that supports the amount of rent that we
are obligated to pay for such leased space.
133
DESCRIPTION
OF CAPITAL STOCK
The following descriptions are summaries of the material terms
of our amended and restated certificate of incorporation and
amended and restated by-laws as will be in effect immediately
prior to the closing of this offering and relevant sections of
the Delaware General Corporate Law, or the DGCL.
Reference is made to the more detailed provisions of, and the
descriptions are qualified in their entirety by reference to,
our amended and restated certificate of incorporation and
amended and restated by-laws, copies of which are filed with the
SEC as exhibits to the registration statement of which this
prospectus is a part, and applicable law.
General
Our authorized capital stock as set forth in our Amended and
Restated Certificate of Incorporation consists
of shares
of common stock, par value $0.001 per share
and shares
of preferred stock, par value of $0.001 per share. As of
March 31, 2008, there were 205,086,152 shares of
common stock issued and outstanding.
All of our existing stock is, and the shares of common stock
being offered by us in this offering will be, upon payment
therefore, validly issued, fully paid and nonassessable. This
discussion set forth below describes the material terms of our
capital stock, certificate of incorporation and bylaws that will
be in effect upon completion of this offering.
Common
Stock
The holders of our common stock are entitled to dividends as our
board of directors may declare from funds legally available
therefore, subject to the preferential rights of the holders of
our preferred stock, if any, and any contractual limitations on
our ability to declare and pay dividends. The holders of our
common stock are entitled to one vote per share on any matter to
be voted upon by stockholders. Our certificate of incorporation
does not provide for cumulative voting in connection with the
election of directors, and accordingly, holders of more than 50%
of the shares voting will be able to elect all of the directors.
No holder of our common stock will have any preemptive right to
subscribe for any shares of capital stock issued in the future.
Upon any voluntary or involuntary liquidation, dissolution, or
winding up of our affairs, the holders of our common stock are
entitled to share ratably in all assets remaining after payment
of creditors and subject to prior distribution rights of our
preferred stock, if any. All of the outstanding shares of common
stock are, and the shares offered by us will be, fully paid and
non-assessable.
Preferred
Stock
As of the closing of this offering, no shares of our preferred
stock will be outstanding. Our certificate of incorporation
provides that our board of directors may by resolution establish
one or more classes or series of preferred stock having the
number of shares and relative voting rights, designation,
dividend rates, liquidation, and other rights, preferences, and
limitations as may be fixed by them without further stockholder
approval. The holders of our preferred stock may be entitled to
preferences over common stockholders with respect to dividends,
liquidation, dissolution, or our winding up in such amounts as
are established by our board of directors resolutions
issuing such shares.
The issuance of our preferred stock may have the effect of
delaying, deferring or preventing a change in control of us
without further action by the holders and may adversely affect
voting and other rights of holders of our common stock. In
addition, issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third
party to acquire a majority of the outstanding shares of voting
stock. At present, we have no plans to issue any shares of
preferred stock.
Registration
Rights
Welsh Carson, Thoma Cressey, Rocco A. Ortenzio, Robert A.
Ortenzio and certain other stockholders possess registration
rights with respect to our common stock. These stockholders who
are currently the holders
of shares
of our common stock after the completion of this offering have
the right to demand that we
134
register the resale of their shares under the Securities Act. We
are not obligated to register any shares held by these
stockholders upon their request for 180 days from the date
of this prospectus. Subject to the terms of
lock-up
agreements between these stockholders and the underwriters,
however, if we file a registration statement to register sales
of our common stock (other than under our employee benefit
plans) during that time, these stockholders will be entitled to
register any portion or all of their shares to be included in
that offering. After the expiration of this 180 day period,
these stockholders may demand that we register any portion or
all of their shares at any time. At any time, if we propose to
register any of our securities under the Securities Act, these
stockholders are entitled to notice of the registration and,
subject to customary conditions and limitations, are entitled to
include their shares in our registration. These stockholders may
request up to four registrations on
Form S-1
or any similar long form registration in which we shall pay all
registration expenses. These stockholders may also request at
their own expense an unlimited number of additional long form
registrations, as well as registrations on
Forms S-2
or S-3 or
any similar short-form registrations, if we are able to register
securities on those forms at that time. We are required to use
our best efforts to effect these registrations, subject to
customary conditions and limitations. Welsh Carson, on behalf of
itself and all other investors that possess such rights, has
waived any and all registration rights and notice requirements
in connection with this prospectus.
Anti-Takeover
Effects of Our Certificate of Incorporation and Bylaws and
Delaware Law
The following is a description of certain provisions of the
DGCL, and our certificate of incorporation and bylaws. This
summary does not purport to be complete and is qualified in its
entirety by reference to the DGCL, and our certificate of
incorporation and bylaws.
Section 203
of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the
DGCL. Section 203 of the DGCL prohibits a publicly held
Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years after the date of the transaction in
which the person became an interested stockholder,
unless the business combination is approved by our board of
directors or our stockholders in a prescribed manner, or unless
the interested stockholder owns at least 85% of our voting stock
(excluding for this purpose shares held by our directors and
officers). A business combination includes certain
mergers, asset sales, and other transactions resulting in a
financial benefit to the interested stockholder.
Subject to certain exceptions, an interested
stockholder is a person who, together with affiliates and
associates, owns 15% or more of our voting stock, or who is an
affiliate or an associate of us who, within the three years
prior to the date the determination is to be made, did own 15%
or more of our voting stock.
Certificate
of Incorporation and Bylaws
Certain provisions of our certificate of incorporation and
bylaws could have anti-takeover effects. These provisions are
intended to enhance the likelihood of continuity and stability
in the composition of our corporate policies formulated by our
board of directors. In addition, these provisions also are
intended to ensure that our board of directors will have
sufficient time to act in what our board of directors believes
to be in the best interests of us and our stockholders. These
provisions also are designed to reduce our vulnerability to an
unsolicited proposal for our takeover that does not contemplate
the acquisition of all of our outstanding shares or an
unsolicited proposal for the restructuring or sale of all or
part of us. The provisions are also intended to discourage
certain tactics that may be used in proxy fights.
However, these provisions could delay or frustrate the removal
of incumbent directors or the assumption of control of us by the
holder of a large block of common stock, and could also
discourage or make more difficult a merger, tender offer, or
proxy contest, even if such event would be favorable to the
interest of our stockholders.
Classified Board of Directors. Our certificate
of incorporation provides for our board of directors to be
divided into three classes of directors, with each class as
nearly equal in number as possible, serving staggered three year
terms (other than directors which may be elected by holders of
preferred stock, if any). As a result, approximately one-third
of our board of directors will be elected each year. The
classified board provision will help to assure the continuity
and stability of our board of directors and our business
strategies and policies as
135
determined by our board of directors. The classified board
provision could have the effect of discouraging a third party
from making an unsolicited tender offer or otherwise attempting
to obtain control of us without the approval of our board of
directors. In addition, the classified board provision could
delay stockholders who do not like the policies of our board of
directors from electing a majority of our board of directors for
two years.
No Stockholder Action by Written Consent; Special
Meetings. Our certificate of incorporation
provides that stockholder action can only be taken at an annual
or special meeting of stockholders and prohibits stockholder
action by written consent in lieu of a meeting. Our bylaws
provide that special meetings of stockholders may be called only
by our board of directors or our Chief Executive Officer. Our
stockholders are not permitted to call a special meeting of
stockholders or to require that our board of directors call a
special meeting.
Advance Notice Requirements for Stockholder Proposals and
Director Nominees. Our bylaws establish an
advance notice procedure for our stockholders to make
nominations of candidates for election as directors or to bring
other business before an annual meeting of our stockholders. The
stockholder notice procedure provides that only persons who are
nominated by, or at the direction of, our board of directors or
its Chairman, or by a stockholder who has given timely written
notice to our Secretary or any Assistant Secretary prior to the
meeting at which directors are to be elected, will be eligible
for election as our directors. The stockholder notice procedure
also provides that at an annual meeting, only such business may
be conducted as has been brought before the meeting by, or at
the direction of, our board of directors or its Chairman or by a
stockholder who has given timely written notice to our Secretary
of such stockholders intention to bring such business
before such meeting. Under the stockholder notice procedure, if
a stockholder desires to submit a proposal or nominate persons
for election as directors at an annual meeting, the stockholder
must submit written notice to us not less than 90 days nor
more than 120 days prior to the first anniversary of the
previous years annual meeting. In addition, under the
stockholder notice procedure, a stockholders notice to us
proposing to nominate a person for election as a director or
relating to the conduct of business other than the nomination of
directors must contain certain specified information. If the
chairman of a meeting determines that business was not properly
brought before the meeting in accordance with the stockholder
notice procedure, such business shall not be discussed or
transacted.
Number of Directors; Removal; Filling
Vacancies. Our bylaws provide that our board of
directors will consist of not less than five or more than nine
directors, the exact number to be fixed from time to time by
resolution adopted by our directors. Further, subject to the
rights of the holders of any series of our preferred stock, if
any, our bylaws authorize our board of directors to fill any
vacancies that occur in our board of directors by reason of
death, resignation, removal, or otherwise. A director so elected
by our board of directors to fill a vacancy or a newly created
directorship holds office until the next election of the class
for which such director has been chosen and until his successor
is elected and qualified. Subject to the rights of the holders
of any series of our preferred stock, if any, our bylaws also
provide that directors may be removed only for cause and only by
the affirmative vote of holders of a majority of the combined
voting power of our then outstanding stock. The effect of these
provisions is to preclude a stockholder from removing incumbent
directors without cause and simultaneously gaining control of
our board of directors by filling the vacancies created by such
removal with its own nominees.
Indemnification. We have included in our
certificate of incorporation and bylaws provisions to
(1) eliminate the personal liability of our directors for
monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by the DGCL and (2) indemnify our
directors and officers to the fullest extent permitted by
Section 145 of the DGCL. We believe that these provisions
are necessary to attract and retain qualified persons as
directors and officers.
Amendments to Certificate of
Incorporation. The provisions of our certificate
of incorporation that could have anti-takeover effects as
described above are subject to amendment, alteration, repeal, or
rescission either by (1) our board of directors without the
assent or vote of our stockholders or (2) the affirmative
vote of the holder of not less than two-thirds
(662/3%)
of the outstanding shares of voting securities, depending on the
subject provision. This requirement makes it more difficult for
stockholders to make changes to the provisions in our
certificate of incorporation which could have anti-takeover
effects by allowing the holders of a minority of the voting
securities to prevent the holders of a majority of voting
securities from amending these provisions of our certificate of
incorporation.
136
Amendments to Bylaws. Our certificate of
incorporation provides that our bylaws are subject to adoption,
amendment, alteration, repeal, or rescission either by
(1) our board of directors without the assent or vote of
our stockholders or (2) the affirmative vote of the holders
of not less than two-thirds
(662/3%)
of the outstanding shares of voting securities. This provision
makes it more difficult for stockholders to make changes in our
bylaws by allowing the holders of a minority of the voting
securities to prevent the holders of a majority of voting
securities from amending our bylaws.
New York
Stock Exchange Trading
We have applied to have our common stock approved for quotation
on New York Stock Exchange under the symbol SLC.
Transfer
Agent and Registrar
We intend to appoint a transfer agent and registrar for our
common stock prior to the completion of this offering.
137
DESCRIPTION
OF INDEBTEDNESS
We summarize below the principal terms of the agreements that
govern our senior secured credit facility, Selects
75/8% senior
subordinated notes, our 10% senior subordinated notes and
our senior floating notes. This summary is not a complete
description of all the terms of such agreements.
Senior
Secured Credit Facility
General
On February 24, 2005, we entered into a senior secured
credit facility with a syndicate of financial institutions and
institutional lenders. Set forth below is a summary of the terms
of our senior secured credit facility, as amended to date.
On March 19, 2007, we entered into Amendment No. 2,
and on March 28, 2007, we entered into an Incremental
Facility Amendment with a group of lenders and JPMorgan Chase
Bank, N.A. as administrative agent. Amendment No. 2
increased the general exception to the prohibition on asset
sales under our senior secured credit facility from
$100.0 million to $200.0 million, relaxed certain
financial covenants starting March 31, 2007 and waived we
requirement to prepay certain term loan borrowings following the
year ended December 31, 2006. The Incremental Facility
Amendment provided to our company an incremental term loan of
$100.0 million, the proceeds of which we used to pay a
portion of the purchase price for the HealthSouth transaction.
After giving effect to the Incremental Facility Amendment, our
senior secured credit facility provides for senior secured
financing of up to $980.0 million, consisting of:
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a $300.0 million revolving loan facility that will
terminate on February 24, 2011, including both a letter of
credit sub-facility and a swingline loan sub-facility, and
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a $680.0 million term loan facility that matures on
February 24, 2012.
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In addition, we may request additional tranches of term loans or
increases to the revolving credit facility in an aggregate
amount not exceeding $100.0 million, subject to certain
conditions, receipt of commitments by existing or additional
financial institutions or institutional lenders and restrictions
in the indentures governing Selects
75/8% notes
and our senior floating rate notes.
All borrowings under our senior secured credit facility are
subject to the satisfaction of required conditions, including
the absence of a default at the time of and after giving effect
to such borrowing and the accuracy of the representations and
warranties of the borrowers.
Interest
and Fees
The interest rate applicable to loans, other than swingline
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 9 or 12 month period if available, in each case, plus an
applicable margin. The alternate base rate is the greater of
(1) JPMorgan Chase Bank, N.A.s prime rate or
(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 the lenders are subject.
The applicable margin percentage for borrowings under our
revolving loans is subject to change based upon the ratio of
Selects total indebtedness to our consolidated EBITDA (as
defined in the credit agreement). The applicable margin
percentage for revolving loans is currently (1) 1.50% for
alternate base rate loans and (2) 2.50% for adjusted LIBOR
loans. The applicable margin percentages for the term loans are
(1) 1.00% for alternative base rate loans and
(2) 2.00% for adjusted LIBOR loans.
Swingline loans will bear interest at the interest rate
applicable to alternate base rate revolving loans.
138
On the last day of each calendar quarter we are is required to
pay each lender a commitment fee in respect of any unused
commitments under the revolving credit facility, which is
currently 0.50% per annum subject to adjustment based upon the
ratio of Selects total indebtedness to its consolidated
EBITDA.
Prepayments
Subject to exceptions, our senior secured credit facility
requires mandatory prepayments of term loans in amounts equal to:
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50% (as may be reduced based on Selects ratio of total
indebtedness to its consolidated EBITDA) of Selects annual
excess cash flow (as defined in the credit agreement);
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100% of the net cash proceeds from asset sales and casualty and
condemnation events, subject to reinvestment rights and certain
other exceptions;
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50% (as may be reduced based on Selects ratio of total
indebtedness to its consolidated EBITDA) of the net cash
proceeds from specified issuances of equity securities; and
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100% of the net cash proceeds from certain incurrences of debt.
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Voluntary prepayments and commitment reductions are permitted,
in whole or in part, in minimum amounts without premium or
penalty, other than breakage costs with respect to adjusted
LIBOR rate loans in an amount equal to the difference between
the amount of interest that would have accrued on such principal
amount through the last day of the applicable interest period
had the prepayment or commitment reduction not occurred over the
amount of interest that would accrue on such principal amount
for such period at the interest rate the lender would bid, were
the lender to bid, at the beginning of such period for dollar
deposits of a comparable amount from other banks in the
eurodollar market.
Amortization
of Principal
Our senior secured credit facility required scheduled quarterly
payments on the term loans each equal to 0.25%, or
$1.45 million, of the original principal amount of the term
loans. On March 28, 2007, Select entered into an
Incremental Facility Amendment which provided an additional
$100.0 million in term loans and therefore increased the
quarterly repayments on the term loans required the first six
years to $1.7 million with the balance paid in four equal
quarterly installments of $160.7 million thereafter.
Collateral
and Guarantors
Our senior secured credit facility is guaranteed by us and
substantially all of our current subsidiaries, and will be
guaranteed by substantially all of our future subsidiaries and
secured by substantially all of our existing and future property
and assets and by a pledge of its capital stock and the capital
stock of its subsidiaries.
Restrictive
Covenants and Other Matters
Our senior secured credit facility requires that Select comply
on a quarterly basis with certain financial covenants, including
a minimum interest coverage ratio test and a maximum leverage
ratio test, which financial covenants become more restrictive
over time. For the four consecutive fiscal quarters ended
March 31, 2008, Select was required to maintain an interest
expense coverage ratio (its ratio of consolidated EBITDA to cash
interest expense) for the prior four consecutive quarters of at
least 1.75 to 1.00. Selects interest expense coverage
ratio was 1.88 to 1.00 for such period. As of March 31,
2008, Select was required to maintain its leverage ratio (its
ratio of total indebtedness to consolidated EBITDA for the prior
four consecutive fiscal quarters) at less than 6.00 to 1.00.
Selects leverage ratio was 5.85 to 1.00 as of
March 31, 2008. On a pro forma as adjusted basis, for the
four quarters ended March 31, 2008, Selects interest
expense coverage ratio was to 1.00 and
Selects leverage ratio was to 1.00
based upon an assumed public offering price of
$
per share, the midpoint of the range set forth on the cover page
of this prospectus. In addition, our senior secured credit
facility includes negative covenants, subject
139
to significant exceptions, restricting or limiting our ability
and the ability of Select and its restricted subsidiaries, to,
among other things:
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incur, assume, permit to exist or guarantee additional debt and
issue or sell or permit any subsidiary to issue or sell
preferred stock;
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amend, modify or waiver any rights under the certificate of
indebtedness, credit agreements, certificate of incorporation,
bylaws or other organizational documents which would be
materially adverse to the creditors;
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pay dividends or other distributions on, redeem, repurchase,
retire or cancel capital stock;
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purchase or acquire any debt or equity securities of, make any
loans or advances to, guarantee any obligation of, or make any
other investment in, any other company;
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incur or permit to exist certain liens on property or assets
owned or accrued or assign or sell any income or revenues with
respect to such property or assets;
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sell or otherwise transfer property or assets to, purchase or
otherwise receive property or assets from, or otherwise enter
into transactions with affiliates;
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merge, consolidate or amalgamate with another company or permit
any subsidiary to merge, consolidate or amalgamate with another
company;
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sell, transfer, lease or otherwise dispose of assets, including
any equity interests;
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repay, redeem, repurchase, retire or cancel any subordinated
debt;
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incur capital expenditures;
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engage to any material extent in any business other than
business of the type currently conducted by Select or reasonably
related businesses; and
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incur obligations that restrict the ability of its subsidiaries
to incur or permit to exist any liens on its property or assets
or to make dividends or other payments to us.
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Our senior secured credit facility also contains certain
representations and warranties, affirmative covenants and events
of default. The events of default payment defaults, breaches of
representations and warranties, covenant defaults,
cross-defaults to certain indebtedness, certain events of
bankruptcy, certain events under ERISA, material judgments,
actual or asserted failure of any guaranty or security document
supporting our senior secured credit facility to be in full
force and effect and any change of control. If such an event of
default occurs, the lenders under our senior secured credit
facility will be entitled to take various actions, including the
acceleration of amounts due under our senior secured credit
facility and all actions permitted to be taken by a secured
creditor.
Selects
75/8% Senior
Subordinated Notes
On February 24, 2005, Select issued $660.0 million of
senior subordinated notes due 2015. Selects
75/8% senior
subordinated notes bear interest at a stated rate of
75/8%.
Selects
75/8% senior
subordinated notes are unsecured senior subordinated obligations
and are subordinated in right of payment to all of our senior
indebtedness, including obligations under our senior secured
credit facility. All of Selects subsidiaries that
guarantee its senior secured credit facility and, as required by
the indenture governing Selects
75/8% senior
subordinated notes, specified future subsidiaries will guarantee
Selects
75/8% senior
subordinated notes on an unsecured senior subordinated basis.
Select may redeem some or all of Selects
75/8% senior
subordinated notes prior to February 1, 2010 at a price
equal to 100% of the principal amount plus accrued and unpaid
interest and a make-whole premium. Thereafter,
Select
140
may redeem some or all of Selects
75/8% senior
subordinated notes at the following percentages of principal
amount plus accrued and unpaid interest:
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Redemption Price
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February 1, 2010 to January 31, 2011
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103.813
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%
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February 1, 2011 to January 31, 2012
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102.542
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%
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February 1, 2012 to January 31, 2013
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101.271
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%
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Beginning on February 1, 2013 and thereafter
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100.000
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%
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If a change in control as defined in the indenture occurs,
Select must offer to repurchase Selects
75/8% senior
subordinated notes at 101% of the principal amount of the notes,
plus accrued and unpaid interest. Selects
75/8% senior
subordinated notes are subject to customary negative covenants
and restrictions on actions by Select and its subsidiaries
including, without limitation, restrictions on additional
indebtedness, investments, asset dispositions outside the
ordinary course of business, liens, the declaration or payment
of dividends and transactions with affiliates, among other
restrictions.
Holdings
Senior Floating Rate Notes
On September 29, 2005, we sold $175.0 million of the
senior floating rate notes, 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 ours and are not
guaranteed by us or any of our subsidiaries. In connection with
the issuance of the senior floating rate notes, Select entered
into an interest rate swap transaction. The notional amount of
the interest rate swap is $175.0 million. The variable
interest rate of the debt was 8.4% and the fixed rate after the
swap was 10.2% at March 31, 2008. We may redeem some or all
of the senior floating rate notes prior to September 15,
2009 at a price equal to 100% of the principal amount plus
accrued and unpaid interest and a make-whole
premium. Thereafter, we may redeem some or all of notes at the
following percentages of principal amount plus accrued and
unpaid interest:
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Redemption Price
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September 15, 2009 to January 31, 2010
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102.000
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%
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February 1, 2010 to January 31, 2011
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101.000
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%
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Beginning on February 1, 2011 and thereafter
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100.000
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%
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At any time before September 15, 2008, we may redeem either
all remaining outstanding senior floating rate notes or up to
35% of the aggregate principal amount of the senior floating
rate notes at 100% of the aggregate principal amount so redeemed
plus a premium equal to the interest rate per annum of the
senior floating rate notes applicable on the date on which the
notice of redemption is given, plus accrued and unpaid interest,
with the proceeds of one or more equity offerings or equity
contributions to our equity capital from the net proceeds of one
or more equity offerings by any direct or indirect parent of
ours, provided that either no senior floating rate notes remain
outstanding immediately following such redemption or at least
65% of the originally issued aggregate principal amount of the
senior floating rate notes remains outstanding after such
redemption and the redemption occurs within 90 days of the
date of the closing of such equity offering or equity
contribution. Upon the occurrence of certain change of control
events, we will be required to offer to repurchase all or a
portion of the senior floating rate notes at a purchase price
equal to 101% of the principal amount of the notes, plus accrued
and unpaid interest. The senior floating rate notes are subject
to customary negative covenants and restrictions on actions by
us and our subsidiaries including, without limitation,
restrictions on additional indebtedness, investments, asset
dispositions outside the ordinary course of business, liens, the
declaration or payment of dividends and transactions with
affiliates, among other restrictions.
The Indenture governing the senior floating rate notes, or the
Holdings Indenture, requires us, so long as any of the senior
floating rate notes are outstanding, to furnish to the trustee
and the holders of the senior floating rate notes (1) all
quarterly and annual financial information that would be
required to be contained in a filing with the SEC on
Forms 10-Q
and 10-K if
we were required to file such forms, including
Managements Discussion and Analysis of
141
Financial Condition and Results of Operations that
describes our consolidated financial condition and results of
operations and, with respect to annual information only, a
report thereon by our independent registered public accountants,
and (2) all current reports that would be required to be
filed with the SEC on
Form 8-K
if we were required to file such reports. These obligations can
be satisfied either by filing such forms with either the SEC or
directly to the trustee under the Holdings Indenture. The
Holdings Indenture also provides that so long as any of the
senior floating rate notes remain outstanding, we will furnish
upon request to any beneficial owner of the senior floating rate
notes or any prospective purchaser of the senior floating rate
notes the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act. The Holdings
Indenture further provides that so long as the senior floating
rate notes are outstanding and prior to an initial public
offering of our common stock, we will host, with the
participation of management, quarterly and annual earnings
conference calls within five business days after such quarterly
or annual financial information is required to be furnished
under the Holdings Indenture. The conference calls must be
reasonably accessible to all holders of the senior floating rate
notes and should cover such matters as would customarily be
covered in quarterly or annual earnings conference calls by an
issuer with securities registered under the Exchange Act. The
Indenture governing Selects
75/8% senior
subordinated notes contains the same reporting requirements,
except there is no requirement to hold quarterly conference
calls.
Holdings
10% Senior Subordinated Notes
Concurrently with the consummation of the Merger Transactions,
we issued to WCAS Capital Partners IV, L.P., an investment fund
affiliated with Welsh Carson, and Rocco A. Ortenzio, Robert A.
Ortenzio and certain other investors who are members of or
affiliated with the Ortenzio family, $150.0 million in
aggregate principal amount of our 10% senior subordinated
notes. The proceeds from this issuance of our 10% senior
subordinated notes was contributed by Holdings to Select as
equity. Our 10% senior subordinated notes will mature on
December 31, 2015.
Our senior secured credit facility and the indenture governing
our 10% senior subordinated notes contain certain
restrictions on Selects ability to pay dividends to
Holdings for the purpose of paying cash interest on our
10% senior subordinated notes. See Senior
Secured Credit Facility. Our 10% senior subordinated
notes bear interest at a rate of 10% per annum, except that if
any interest payment is not paid in cash, such unpaid amount
will be multiplied by 1.2 and added to the outstanding principal
amount of the holding company notes (with the result that such
unpaid interest will have accrued at an effective rate of 12%
instead of 10%). Interest on our 10% senior subordinated
notes is payable semi-annually in arrears on February 1 and
August 1 of each year.
Our 10% senior subordinated notes may be prepaid, in whole
or in part, without premium or penalty. In addition, our
10% senior subordinated notes are subject to mandatory
prepayment in the event of any change of control, initial public
offering or sale of all or substantially all our assets,
however, the holders of our 10% senior subordinated notes have
waived their right to prepayment in connection with this
offering. Our senior secured credit facility and the indenture
governing our 10% senior subordinated notes contain certain
restrictions on Selects ability to pay dividends to us for
the purpose of making principal payments on our 10% senior
subordinated notes. Our 10% senior subordinated notes are
subordinate in right of payment to Holdings guaranty of
the Select senior secured credit facility on the terms set forth
in our 10% senior subordinated notes.
142
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for shares of
our Common Stock. We cannot predict the effect, if any, future
sales of shares of our Common Stock, or the availability for
future sale of shares of our Common Stock, will have on the
market price of shares of our Common Stock prevailing from time
to time. The sale of substantial amounts of shares of our Common
Stock in the market, or the perception that such sales could
occur, could harm the prevailing market price of shares of the
Common Stock.
Sale of
Restricted Shares
Upon completion of this offering, we will
have shares
of common stock outstanding, based on 205,086,152 shares of
common stock outstanding as of March 31, 2008. Of these
shares, the shares sold in this offering, plus any shares sold
upon exercise of the underwriters over-allotment option,
will be freely tradable without restriction under the Securities
Act, except for any shares purchased by our
affiliates as that term is defined in Rule 144
under the Securities Act. In general, affiliates include
executive officers, directors, and 10% stockholders. Shares
purchased by affiliates will remain subject to the resale
limitations of Rule 144.
Upon completion of this
offering, shares
of common stock will be restricted securities, as
that term is defined in rule 144 under the Securities Act.
These restricted securities are eligible for public sale only if
they are registered under the Securities Act or if they qualify
for an exemption from registration under rules 144 or 701
under the Securities Act, which are summarized below.
As a result of the
lock-up
agreements described below and the provisions of Rule 144
and Rule 701 of the Securities Act, the shares of our
common stock (excluding the shares sold in this offering) will
be available for sale in the public market as follows:
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no shares will be eligible for sale on the date of this
prospectus;
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shares
will be eligible for sale upon the expiration of the
lock-up
agreements, as more particularly described below, beginning
180 days after the date of this prospectus; and
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shares
will be eligible for sale, upon the exercise of vested options,
upon the expiration of the
lock-up
agreements, as more particularly described below, beginning
180 days after the date of this prospectus.
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Lock-Up
Agreements
Our directors, executive officers, the selling stockholders and
certain other stockholders will enter into
lock-up
agreements in connection with this offering, generally providing
that they will not offer, sell, contract to sell, or grant any
option to purchase or otherwise dispose of our common stock or
any securities exercisable for or convertible into our common
stock owned by them for a period of at least 180 days after
the date of this prospectus without the prior written consent of
the underwriters. Despite possible earlier eligibility for sale
under the provisions of Rules 144 and 701, shares subject
to lock-up
agreements will not be salable until these agreements expire or
are waived by the underwriters.
Approximately % of our outstanding
shares of common stock, or % of our
issuable shares of common stock, will be subject to such
lock-up
agreements. These agreements are more fully described in
Underwriting.
We have been advised by the underwriters
that
may
at
discretion waive the
lock-up
agreements;
however,
have no current intention of releasing any shares subject to a
lock-up
agreement. The release of any
lock-up
would be considered on a
case-by-case
basis. In considering any request to release shares covered by a
lock-up
agreement,
would consider circumstances of emergency and hardship. No
agreement has been made between the underwriters and us or any
of our stockholders pursuant to
which
will waive the
lock-up
restrictions.
143
Rule 144
Generally, Rule 144 (as amended effective February 15,
2008) provides that an affiliate who has beneficially owned
restricted shares of our common stock for at least
six months will be entitled to sell on the open market in
brokers transactions, within any three-month period, a
number of shares that does not exceed the greater of:
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1% of the number of shares of common stock then outstanding,
which will
equal shares
immediately after this offering; or
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the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to such sale.
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In addition, sales under Rule 144 are subject to
requirements with respect to manner of sale, notice, and the
availability of current public information about us.
In the event that any person who is deemed to be our affiliate
purchases shares of our common stock in this offering or
acquires shares of our common stock pursuant to one of our
employee benefits plans, sales under Rule 144 of the shares
held by that person are subject to the volume limitations and
other restrictions described in the preceding two paragraphs.
The volume limitation, manner of sale and notice provisions
described above will not apply to sales by non-affiliates. For
purposes of Rule 144, a non-affiliate is any person or
entity who is not our affiliate at the time of sale and has not
been our affiliate during the preceding three months. Once we
have been a reporting company for 90 days, a non-affiliate
who has beneficially owned restricted shares of our common stock
for six months may rely on Rule 144 provided that certain
public information regarding us is available. The six month
holding period increases to one year in the event we have not
been a reporting company for at least 90 days. However, a
non-affiliate who has beneficially owned the restricted shares
proposed to be sold for at least one year will not be subject to
any restrictions under Rule 144 regardless of how long we
have been a reporting company.
Rule 701
Under Rule 701, each of our employees, officers, directors,
and consultants who purchased shares pursuant to a written
compensatory plan or contract is eligible to resell these shares
90 days after the effective date of this offering in
reliance upon Rule 144, but without compliance with
specific restrictions. Rule 701 provides that affiliates
may sell their Rule 701 shares under Rule 144
without complying with the holding period requirement and that
non-affiliates may sell their shares in reliance on
Rule 144 without complying with the holding period, public
information, volume limitation, or notice provisions of
Rule 144.
Form S-8
Registration Statements
We intend to file one or more registration statements on
Form S-8
under the Securities Act as soon as practicable after the
completion of this offering for shares issued upon the exercise
of options and shares to be issued under our employee benefit
plans. As a result, any such options or shares will be freely
tradable in the public market. We have granted options to
purchase shares
of our common
stock,
of which have vested and are exercisable. However, such shares
held by affiliates will still be subject to the volume
limitation, manner of sale, notice, and public information
requirements of Rule 144 unless otherwise resalable under
Rule 701.
144
MATERIAL
U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED
STATES HOLDERS
The following discussion is a general summary of the material
U.S. federal tax consequences of the ownership and
disposition of our common stock applicable to
non-U.S. holders.
As used herein, a
non-U.S. holder
means a beneficial owner of our common stock that is not a
U.S. person or a partnership for U.S. federal income
tax purposes, and that will hold shares of our common stock as
capital assets (i.e., generally, for investment). For
U.S. federal income tax purposes, a U.S. person
includes:
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an individual who is a citizen or resident of the United States;
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a corporation (or other business entity treated as a
corporation) created or organized in the United States or under
the laws of the United States, any state thereof or the District
of Columbia;
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an estate the income of which is subject to United States
federal income taxation; or
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a trust that (1) is subject to the primary supervision of a
court within the United States and the control of one or more
U.S. persons, or (2) otherwise has elected to be
treated as a U.S. domestic trust.
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This summary does not consider specific facts and circumstances
that may be relevant to a particular
non-U.S. holders
tax position and does not consider U.S. state and local or
non-U.S. tax
consequences. It also does not consider
non-U.S. holders
subject to special tax treatment under the U.S. federal
income tax laws (including partnerships or other pass-through
entities, banks and insurance companies, regulated investment
companies, real estate investment trusts, dealers in securities,
holders of our common stock held as part of a
straddle, hedge, conversion
transaction or other risk-reduction transaction,
controlled foreign corporations, passive foreign investment
companies, companies that accumulate earnings to avoid
U.S. federal income tax, foreign tax-exempt organizations,
former U.S. citizens or residents and persons who hold or
receive common stock as compensation). This summary is based on
provisions of the U.S. Internal Revenue Code of 1986, as
amended, or the Code, applicable Treasury
regulations, administrative pronouncements of the
U.S. Internal Revenue Service, or IRS, and
judicial decisions, all as in effect on the date hereof, and all
of which are subject to change, possibly on a retroactive basis,
and different interpretations.
Each prospective
non-U.S. holder
should consult its tax advisor with respect to the
U.S. federal, state, local and
non-U.S. income,
estate and other tax consequences of holding and disposing of
our common stock.
U.S.
Trade or Business Income
For purposes of this discussion, dividend income, and gain on
the sale or other taxable disposition of our common stock, will
be considered to be U.S. trade or business
income if such dividend income or gain is
(1) effectively connected with the conduct by a
non-U.S. holder
of a trade or business within the United States and (2) in
the case of a
non-U.S. holder
that is eligible for the benefits of an income tax treaty with
the United States, attributable to a permanent establishment
(or, for an individual, a fixed base) maintained by the
non-U.S. holder
in the United States. Generally, U.S. trade or business
income is not subject to U.S. federal withholding tax
(provided the
non-U.S. holder
complies with applicable certification and disclosure
requirements); instead, U.S. trade or business income is
subject to U.S. federal income tax on a net income basis at
regular U.S. federal income tax rates in the same manner as
a U.S. person. Any U.S. trade or business income
received by a
non-U.S. holder
that is a corporation also may be subject to a branch
profits tax at a 30% rate, or at a lower rate prescribed
by an applicable income tax treaty, under specific circumstances.
Dividends
Distributions of cash or property that we pay on our common
stock will be taxable as dividends for U.S. federal income
tax purposes to the extent paid from our current or accumulated
earnings and profits (as determined under U.S. federal
income tax principles). A
non-U.S. holder
generally will be subject to U.S. federal withholding tax
at a 30% rate, or at a reduced rate prescribed by an applicable
income tax treaty, on any dividends received in respect of our
common stock. If the amount of a distribution exceeds our
current and accumulated earnings and profits, such excess first
will be treated as a tax-free return of capital to the extent of
the
non-U.S. holders
tax basis in our
145
common stock, and thereafter will be treated as capital gain.
See Dispositions of Our Common Stock below. In order
to obtain a reduced rate of U.S. federal withholding tax
under an applicable income tax treaty, a
non-U.S. holder
will be required to provide a properly executed IRS
Form W-8BEN
(or appropriate substitute or successor form) certifying its
entitlement to benefits under the treaty. A
non-U.S. holder
of our common stock that is eligible for a reduced rate of
U.S. federal withholding tax under an income tax treaty may
obtain a refund or credit of any excess amounts withheld by
filing an appropriate claim for a refund with the IRS. A
non-U.S. holder
should consult its own tax advisor regarding its possible
entitlement to benefits under an income tax treaty.
The U.S. federal withholding tax does not apply to
dividends that are U.S. trade or business income, as
described above, of a
non-U.S. holder
who provides a properly executed IRS
Form W-8ECI
(or appropriate substitute or successor form), certifying that
the dividends are effectively connected with the
non-U.S. holders
conduct of a trade or business within the United States.
Dispositions
of Our Common Stock
A
non-U.S. holder
generally will not be subject to U.S. federal income or
withholding tax in respect of any gain on a sale or other
disposition of our common stock unless:
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the gain is U.S. trade or business income, as described
above;
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the
non-U.S. holder
is an individual who is present in the United States for 183 or
more days in the taxable year of the disposition and meets other
conditions; or
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we are or have been a U.S. real property holding
corporation, which we refer to as USRPHC,
under section 897 of the Code at any time during the
shorter of the five year period ending on the date of
disposition and the
non-U.S. holders
holding period for our common stock.
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In general, a corporation is a USRPHC if the fair market value
of its U.S. real property interests equals or
exceeds 50% of the sum of the fair market value of its worldwide
(domestic and foreign) real property interests and its other
assets used or held for use in a trade or business. For this
purpose, real property interests include land, improvements, and
associated personal property. We believe that we currently are
not a USRPHC. In addition, based on our financial statements and
current expectations regarding the value and nature of our
assets and other relevant data, we do not anticipate becoming a
USRPHC, although there can be no assurance these conclusions are
correct or might not change in the future based on changed
circumstances. If we are found to be a USRPHC, a
non-U.S. holder,
nevertheless, will not be subject to U.S. federal income or
withholding tax in respect of any gain on a sale or other
disposition of our common stock so long as our common stock is
regularly traded on an established securities market
as defined under applicable Treasury regulations and a
non-U.S. holder
owns, actually and constructively, 5% or less of our common
stock during the shorter of the five year period ending on the
date of disposition and such
non-U.S. holders
holding period for our common stock. Prospective investors
should be aware that no assurance can be given that our common
stock will be so regularly traded when a
non-U.S. holder
sells its shares of our common stock.
Information
Reporting and Backup Withholding Requirements
We must annually report to the IRS and to each
non-U.S. holder
any dividend income that is subject to U.S. federal
withholding tax, or that is exempt from such withholding tax
pursuant to an income tax treaty. Copies of these information
returns also may be made available under the provisions of a
specific treaty or agreement to the tax authorities of the
country in which the
non-U.S. holder
resides. Under certain circumstances, the Code imposes a backup
withholding obligation (currently at a rate of 28%) on certain
reportable payments. Dividends paid to a
non-U.S. holder
of our common stock generally will be exempt from backup
withholding if the
non-U.S. holder
provides a properly executed IRS
Form W-8BEN
(or appropriate substitute or successor form) or otherwise
establishes an exemption.
The payment of the proceeds from the disposition of our common
stock to or through the U.S. office of any broker,
U.S. or foreign, will be subject to information reporting
and possible backup withholding unless the owner certifies as to
its
non-U.S. status
under penalties of perjury or otherwise establishes an
exemption, provided that the broker does not have actual
knowledge or reason to know that the holder is a
U.S. person or that the conditions of
146
any other exemption are not, in fact, satisfied. The payment of
the proceeds from the disposition of common stock to or through
a
non-U.S. office
of a
non-U.S. broker
will not be subject to information reporting or backup
withholding unless the
non-U.S. broker
has certain types of relationships with the United States, or a
U.S. related person as defined under applicable
Treasury regulations. In the case of the payment of the proceeds
from the disposition of our common stock to or through a
non-U.S. office
of a broker that is either a U.S. person or a
U.S. related person, the Treasury regulations require
information reporting (but not the backup withholding) on the
payment unless the broker has documentary evidence in its files
that the owner is a
non-U.S. holder
and the broker has no knowledge to the contrary.
Non-U.S. holders
should consult their own tax advisors on the application of
information reporting and backup withholding to them in their
particular circumstances (including upon their disposition of
our common stock).
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
non-U.S. holder
will be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, if the
non-U.S. holder
provides the required information to the IRS.
Federal
Estate Tax
Individual
Non-U.S. holders
and entities the property of which is potentially includible in
such an individuals gross estate for U.S. federal
estate tax purposes (for example, a trust funded by such an
individual and with respect to which the individual has retained
certain interests or powers), should note that, absent an
applicable treaty benefit, the common stock will be treated as
U.S. situs property subject to U.S. federal estate tax.
147
UNDERWRITERS
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom Morgan Stanley &
Co. Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Goldman, Sachs & Co. are acting
as representatives, have severally agreed to purchase, and we
have agreed to sell to them, the number of shares indicated
below:
|
|
|
|
|
Name
|
|
Number of Shares
|
|
|
Morgan Stanley & Co. Incorporated
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
Goldman, Sachs & Co.
|
|
|
|
|
J.P. Morgan Securities Inc.
|
|
|
|
|
Wachovia Capital Markets, LLC
|
|
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
|
|
Jefferies & Company, Inc.
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriters are offering the shares of common stock subject
to their acceptance of the shares from us and subject to prior
sale. The underwriting agreement provides that the obligations
of the several underwriters to pay for and accept delivery of
the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock
offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for
the shares covered by the underwriters over-allotment
option described below.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the public offering
price listed on the cover page of this prospectus and part to
certain dealers at a price that represents a concession not in
excess of $ a share under the
public offering price. Any underwriter may allow, and such
dealers may reallow, a concession not in excess of
$ a share to other underwriters or
to certain dealers. After the initial offering of the shares of
common stock, the offering price and other selling terms may
from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
an aggregate
of
additional shares of common stock at the public offering price
listed on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase about the same
percentage of the additional shares of common stock as the
number listed next to the underwriters name in the
preceding table bears to the total number of shares of common
stock listed next to the names of all underwriters in the
preceding table. If the underwriters option is exercised
in full, the total price to the public would be
$ , the total underwriters
discounts and commissions would be
$ , total proceeds to us would be
$ and total proceeds to the
selling stockholders would be $ .
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
shares of common stock offered by them.
We intend to apply to have the common stock approved for
quotation on the New York Stock Exchange under the symbol
SLC.
148
The following table shows the per share and total underwriting
discounts and commissions that we and the selling stockholders
are to pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full
exercise of the underwriters option to purchase additional
shares of our common stock.
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid by Us
|
|
|
Paid by Selling Stockholders
|
|
|
Total
|
|
|
|
No Exercise
|
|
|
Full Exercise
|
|
|
No Exercise
|
|
|
Full Exercise
|
|
|
No Exercise
|
|
|
Full Exercise
|
|
|
Per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
We will pay all of the expenses of the offering, including those
of the selling stockholders from this offering or if the
underwriters exercise their overallotment option (including
underwriting discounts and commissions relating to the shares
sold by the selling stockholders). We estimate that the expenses
of this offering other than underwriting discounts and
commissions payable by us will be
$ .
We, our directors, our executive officers, the selling
stockholders and certain of our other stockholders have agreed
that, without the prior written consent
of ,
on behalf of the underwriters, we and they will not, during the
period ending 180 days after the date of this prospectus:
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|
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|
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of directly or indirectly, any
shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock;
|
|
|
|
file any registration statement with the SEC relating to the
offering of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common
stock; or
|
|
|
|
enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock;
|
whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not
apply to:
|
|
|
|
|
the sale of shares to the underwriters;
|
|
|
|
the issuance by us of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the
underwriters have been advised in writing;
|
|
|
|
the issuance by us of options to purchase our common stock under
stock option or similar plans as in effect on the date of the
underwriting agreement and as described in this prospectus;
|
|
|
|
sales of shares of common stock underlying employee stock
options that are scheduled to expire during such 180 day
period in connection with cashless exercises of those stock
options by former employees of the Company; provided that no
filing under Section 16(a) of the Exchange Act shall be
required or shall be voluntarily made in connection with such
transaction other than a filing on Form 5 after the
expiration of such 180 day period;
|
|
|
|
the filing by us of any registration statement on From
S-8 relating
to the offering of securities pursuant to the terms of a stock
option or similar plan in effect on the date of the underwriting
agreement and described in this prospectus;
|
|
|
|
transfers of common stock or any security convertible into
common stock as a bona fide gift (including for estate planning
purposes), by will or intestacy, or transfers to any trust for
the direct or indirect benefit of the transferor or the
immediate family of the transferor; provided that no filing
under Section 16(a) of the Exchange Act shall be required
or shall be voluntarily made in connection with such transaction
other than a filing on Form 5 after the expiration of such
180 day period; and provided further that the transferee
agrees with the underwriters to be bound by such restrictions
for the remainder of such 180 day period;
|
149
|
|
|
|
|
the establishment of a trading plan pursuant to Rule 10b5-1
under the Exchange Act for the transfer of shares of common
stock, provided that such plan does not provide for the transfer
of common stock during the restricted periods;
|
|
|
|
distributions by a stockholder who is subject to a
lock-up of
common stock or any security convertible into common stock to
limited partners, limited liability company members, affiliates
or stockholders of such stockholder; provided that no filing
under Section 16(a) of the Exchange Act shall be required
or shall be voluntarily made in connection with such transaction
other than a filing on Form 5 after the expiration of such
180 day period; and provided further that the transferee
agrees with the underwriters to be bound by such restrictions
for the remainder of such 180 day period; or
|
|
|
|
transactions by any person other than us relating to common
stock or other securities acquired in open market transactions
after the completion of the offering of the shares hereby;
provided that no filing under Section 16(a) of the Exchange
Act shall be required or shall be voluntarily made in connection
with such transaction.
|
The 180-day
restricted period described above is subject to extension such
that, in the event that either (1) during the last
seventeen days of the restricted period, we issue an earnings
release or material news or a material event relating to us
occurs or (2) prior to the expiration of the restricted
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the applicable restricted
period, the
lock-up
restrictions described above will, subject to limited
exceptions, continue to apply until the expiration of the
18-day
period beginning on the earnings release or the occurrence of
the material news or material event
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over allotment option. The underwriters
can close out a covered short sale by exercising the over
allotment option or purchasing shares in the open market. In
determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over allotment option. The underwriters may also sell
shares in excess of the over allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. As an
additional means of facilitating the offering, the underwriters
may bid for, and purchase, shares of common stock in the open
market to stabilize the price of the common stock. The
underwriting syndicate may also reclaim selling concessions
allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases
previously distributed common stock to cover syndicate short
positions or to stabilize the price of the common stock. These
activities may raise or maintain the market price of the common
stock above independent market levels or prevent or slow a
decline in the market price of the common stock. The
underwriters are not required to engage in these activities, and
may end any of these activities at any time.
From time to time, certain of the underwriters
and/or their
respective affiliates have directly and indirectly engaged in
various financial advisory, investment banking and commercial
banking services for us and our affiliates, for which they
received customary compensation, fees and expense reimbursement.
In particular, affiliates of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, J.P. Morgan
Securities Inc. and Wachovia Capital Markets, LLC, underwriters
in this offering, are parties to our senior secured credit
facility. We will use a portion of the proceeds from this
offering to repay amounts outstanding under this credit
facility. As a result of these repayments, Merrill Lynch, Pierce
Fenner & Smith Incorporated, J.P. Morgan
Securities Inc. and Wachovia Capital Markets, LLC may receive
more than 10% of the entire net proceeds of this offering.
Accordingly, this offering will be conducted in compliance with
the applicable provisions of FINRA Conduct Rules 2720 and
2710(h), which require that, in such circumstances, the initial
public offering price can be no higher than that recommended by
a qualified independent underwriter meeting certain
standards.
is assuming the responsibilities of acting
150
as the qualified independent underwriter in pricing the offering
and conducting due diligence. The initial public offering price
of the shares of common stock will be no higher than the price
recommended
by .
We, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including
liabilities under the Securities Act.
Directed
Share Program
At our request, the underwriters have reserved for sale, at the
initial public offering price, up
to shares
offered in this prospectus for our directors, officers,
employees, business associates and related persons. The number
of shares of common stock available for sale to the general
public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the
same basis as the other shares offered in this prospectus.
Pricing
of the Offering
Prior to this offering, there has been no public market for the
shares of common stock. The initial public offering price will
be determined by negotiations among us and the representatives
of the underwriters. Among the factors to be considered in
determining the initial public offering price will be the future
prospects of us and our industry in general and our sales,
earnings and certain other financial operating information in
recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar
to us. The estimated initial public offering price range set
forth on the cover page of this preliminary prospectus is
subject to change as a result of market conditions and other
factors.
151
LEGAL
MATTERS
The validity of the shares offered hereby will be passed upon
for us by Dechert LLP, Philadelphia, Pennsylvania. Certain legal
matters in connection with this offering will be passed upon for
the underwriters by Davis Polk & Wardwell, New York,
New York.
EXPERTS
The consolidated financial statements as of December 31,
2006 and 2007 and for the period from January 1 through
February 24, 2005 (Predecessor Period) and for the period
from February 25 through December 31, 2005 and for the
years ended December 31, 2006 and 2007 (Successor Period)
included in this prospectus have been so included in reliance on
the reports of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of
said firm as experts in auditing and accounting.
INDUSTRY
DATA
This prospectus includes industry data that we derived from
internal company records, publicly available information and
industry publications and surveys. Industry publications and
surveys generally state that the information contained therein
has been obtained from sources believed to be reliable.
WHERE YOU
CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on
Form S-1
that we have filed with the Securities and Exchange Commission
under the Securities Act of 1933 covering the common stock we
are offering. As permitted by the rules and regulations of the
SEC, this prospectus omits certain information contained in the
registration statement. For further information with respect to
us and our common stock, you should refer to the registration
statement and to its exhibits and schedules. We make reference
in this prospectus to certain of our contracts, agreements and
other documents that are filed as exhibits to the registration
statement. For additional information regarding those contracts,
agreements and other documents, please see the exhibits attached
to this registration statement.
You can read the registration statement and the exhibits and
schedules filed with the registration statement or any reports,
statements or other information we have filed or file, at the
public reference facilities maintained by the SEC at the public
reference room (Room 1580), 100 F Street, N.E.,
Washington, D.C. 20549. You may also obtain copies of the
documents from such offices upon payment of the prescribed fees.
You may call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
room. You may also request copies of the documents upon payment
of a duplicating fee, by writing to the SEC. In addition, the
SEC maintains a web site that contains reports and other
information regarding registrants (including us) that file
electronically with the SEC, which you can access at
http://www.sec.gov.
In addition, you may request copies of this filing and such
other reports as we may determine or as the law requires at no
cost, by telephone at
(717) 972-1100,
or by mail to Select Medical Holdings Corporation, 4714
Gettysburg Road, Mechanicsburg, Pennsylvania 17055, Attention:
Investor Relations.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Exchange
Act, and, in accordance with such requirements, will file
periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the
public reference facilities and website of the SEC referred to
above.
152
SELECT
MEDICAL HOLDINGS CORPORATION
INDEX TO
FINANCIAL
STATEMENTS
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|
Page
|
|
Select Medical Holdings Corporation Audited Financial
Statements as of December 31, 2006 and 2007 and for the
period from January 1 through February 24, 2005
(Predecessor), the period from February 25 through
December 31, 2005 and for the years ended December 31,
2006 and 2007 (Successor)
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Balance Sheets
|
|
|
F-4
|
|
Consolidated Statements of Operations
|
|
|
F-5
|
|
Consolidated Statements of Changes in Stockholders Equity
and Comprehensive Income (Loss)
|
|
|
F-6
|
|
Consolidated Statements of Cash Flows
|
|
|
F-7
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
Financial Statement Schedule II Valuation and
qualifying accounts
|
|
|
F-44
|
|
|
|
|
|
|
Select Medical Holdings Corporation Unaudited Interim
Financial Statements as of March 31, 2008 and for the three
months ended March 31, 2008 and 2007
|
|
|
|
|
Unaudited Consolidated Balance Sheets
|
|
|
F-45
|
|
Unaudited Consolidated Statements of Operations
|
|
|
F-46
|
|
Unaudited Consolidated Statement of Changes in Stockholders
Equity and Comprehensive Income (Loss)
|
|
|
F-47
|
|
Unaudited Consolidated Statements of Cash Flows
|
|
|
F-48
|
|
Notes to Unaudited Consolidated Financial Statements
|
|
|
F-49
|
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Select Medical Holdings Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Select Medical Holdings Corporation
and its subsidiaries at December 31, 2007 and 2006, and the
results of their operations and their cash flows for the years
ended December 31, 2007 and 2006, and for the period from
February 25, 2005 through December 31, 2005
(Successor as described in Note 1 to the
consolidated financial statements) in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, PA
March 24, 2008, except as it relates to Note 14
and Note 17 Commitments and
Contingencies - Litigation as to
which the date is July 15, 2008
F-2
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Select Medical Holdings Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the results of operations and cash flows of Select Medical
Holdings Corporation and its subsidiaries for the period from
January 1, 2005 through February 24, 2005
(Predecessor as defined in Note 1 to the
consolidated financial statements) in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, PA
March 17, 2006
F-3
SELECT
MEDICAL HOLDINGS CORPORATION
|
|
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|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
81,600
|
|
|
$
|
4,529
|
|
Restricted cash
|
|
|
4,335
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$55,306 and $55,856 in 2006 and 2007, respectively
|
|
|
199,927
|
|
|
|
271,406
|
|
Current deferred tax asset
|
|
|
42,613
|
|
|
|
48,988
|
|
Prepaid income taxes
|
|
|
|
|
|
|
8,162
|
|
Other current assets
|
|
|
16,762
|
|
|
|
22,507
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
345,237
|
|
|
|
355,592
|
|
Property and equipment, net
|
|
|
356,336
|
|
|
|
487,026
|
|
Goodwill
|
|
|
1,323,572
|
|
|
|
1,499,485
|
|
Other identifiable intangibles
|
|
|
79,230
|
|
|
|
79,172
|
|
Assets held for sale
|
|
|
4,855
|
|
|
|
14,607
|
|
Other assets
|
|
|
73,294
|
|
|
|
59,164
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,182,524
|
|
|
$
|
2,495,046
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
$
|
12,213
|
|
|
$
|
21,124
|
|
Current portion of long term debt and notes payable
|
|
|
6,209
|
|
|
|
7,749
|
|
Accounts payable
|
|
|
72,597
|
|
|
|
73,847
|
|
Accrued payroll
|
|
|
55,084
|
|
|
|
59,483
|
|
Accrued vacation
|
|
|
27,360
|
|
|
|
33,080
|
|
Accrued interest
|
|
|
36,759
|
|
|
|
36,781
|
|
Accrued restructuring
|
|
|
225
|
|
|
|
15,484
|
|
Accrued other
|
|
|
60,499
|
|
|
|
78,242
|
|
Income taxes payable
|
|
|
1,937
|
|
|
|
|
|
Due to third party payors
|
|
|
12,886
|
|
|
|
15,072
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
285,769
|
|
|
|
340,862
|
|
Long term debt, net of current portion
|
|
|
1,532,294
|
|
|
|
1,747,886
|
|
Non-current deferred tax liability
|
|
|
32,075
|
|
|
|
22,966
|
|
Other non-current liabilities
|
|
|
31,564
|
|
|
|
52,266
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,881,702
|
|
|
|
2,163,980
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary companies
|
|
|
2,566
|
|
|
|
5,761
|
|
Preferred stock Authorized shares (liquidation
preference is $467,395 and $491,194 in 2006 and 2007,
respectively)
|
|
|
467,395
|
|
|
|
491,194
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 250,000,000 shares
authorized, 204,904,000 shares and 205,166,000 shares
issued and outstanding in 2006 and 2007, respectively
|
|
|
205
|
|
|
|
205
|
|
Capital in excess of par
|
|
|
(295,256
|
)
|
|
|
(291,247
|
)
|
Retained earnings
|
|
|
121,024
|
|
|
|
130,716
|
|
Accumulated other comprehensive income (loss)
|
|
|
4,888
|
|
|
|
(5,563
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
(169,139
|
)
|
|
|
(165,889
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
2,182,524
|
|
|
$
|
2,495,046
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SELECT
MEDICAL HOLDINGS CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
Select
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
|
Successor Period
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
For the Year Ended
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands,
|
|
|
|
(in thousands, except per share data)
|
|
|
|
except per share
|
|
|
|
|
|
|
|
data)
|
|
|
|
|
|
Net operating revenues
|
|
$
|
277,736
|
|
|
|
$
|
1,580,706
|
|
|
$
|
1,851,498
|
|
|
$
|
1,991,666
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
244,321
|
|
|
|
|
1,244,361
|
|
|
|
1,484,632
|
|
|
|
1,660,049
|
|
General and administrative
|
|
|
122,509
|
|
|
|
|
59,494
|
|
|
|
43,514
|
|
|
|
42,863
|
|
Bad debt expense
|
|
|
6,588
|
|
|
|
|
18,213
|
|
|
|
18,810
|
|
|
|
37,572
|
|
Depreciation and amortization
|
|
|
5,933
|
|
|
|
|
37,922
|
|
|
|
46,668
|
|
|
|
57,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
379,351
|
|
|
|
|
1,359,990
|
|
|
|
1,593,624
|
|
|
|
1,797,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(101,615
|
)
|
|
|
|
220,716
|
|
|
|
257,874
|
|
|
|
193,885
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on early retirement of debt
|
|
|
(42,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger related charges
|
|
|
(12,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
267
|
|
|
|
|
1,092
|
|
|
|
|
|
|
|
(167
|
)
|
Interest income
|
|
|
523
|
|
|
|
|
767
|
|
|
|
1,293
|
|
|
|
2,103
|
|
Interest expense
|
|
|
(4,651
|
)
|
|
|
|
(102,208
|
)
|
|
|
(131,831
|
)
|
|
|
(140,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before minority
interests and income taxes
|
|
|
(160,237
|
)
|
|
|
|
120,367
|
|
|
|
127,336
|
|
|
|
55,666
|
|
Minority interest in consolidated subsidiary companies
|
|
|
330
|
|
|
|
|
1,776
|
|
|
|
1,414
|
|
|
|
1,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(160,567
|
)
|
|
|
|
118,591
|
|
|
|
125,922
|
|
|
|
54,129
|
|
Income tax expense (benefit)
|
|
|
(59,794
|
)
|
|
|
|
49,336
|
|
|
|
43,521
|
|
|
|
18,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(100,773
|
)
|
|
|
|
69,255
|
|
|
|
82,401
|
|
|
|
35,430
|
|
Income from discontinued operations, net of tax (includes
pre-tax gain of $13,950 in 2006)
|
|
|
522
|
|
|
|
|
3,072
|
|
|
|
12,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(100,251
|
)
|
|
|
|
72,327
|
|
|
|
94,879
|
|
|
|
35,430
|
|
Less: Preferred dividends
|
|
|
|
|
|
|
|
23,519
|
|
|
|
22,663
|
|
|
|
23,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common and preferred stockholders
|
|
$
|
(100,251
|
)
|
|
|
$
|
48,808
|
|
|
$
|
72,216
|
|
|
$
|
11,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.23
|
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
Discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.25
|
|
|
$
|
0.36
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.05
|
|
Discontinued operations, net of tax
|
|
|
0.01
|
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.24
|
|
|
$
|
0.34
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma income per common share basic and
diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SELECT
MEDICAL HOLDINGS CORPORATION
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Stock Par
|
|
|
Capital in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Stock Issued
|
|
|
Value
|
|
|
Excess of Par
|
|
|
Earnings
|
|
|
Income
|
|
|
Loss
|
|
|
|
(in thousands)
|
|
|
Predecessor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2005
|
|
|
101,954
|
|
|
$
|
1,020
|
|
|
$
|
275,281
|
|
|
$
|
230,535
|
|
|
$
|
9,107
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,251
|
)
|
|
|
|
|
|
$
|
(100,251
|
)
|
Changes in foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,019
|
)
|
|
|
(1,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(101,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
267
|
|
|
|
3
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of non-employee options
|
|
|
|
|
|
|
|
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock option exercises
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 24, 2005
|
|
|
102,221
|
|
|
$
|
1,023
|
|
|
$
|
276,191
|
|
|
$
|
130,284
|
|
|
$
|
8,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Stock Par
|
|
|
Capital in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Stock Issued
|
|
|
Value
|
|
|
Excess of Par
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Income
|
|
|
Successor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of Successor Company at February 25, 2005
|
|
|
148,253
|
|
|
$
|
148
|
|
|
$
|
(310,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,327
|
|
|
|
|
|
|
$
|
72,327
|
|
Unrealized gain on interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,539
|
|
|
|
3,539
|
|
Changes in foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,818
|
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
808
|
|
|
|
1
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance and vesting of restricted stock
|
|
|
56,347
|
|
|
|
56
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
205,408
|
|
|
|
205
|
|
|
|
(299,028
|
)
|
|
|
48,808
|
|
|
|
5,357
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,879
|
|
|
|
|
|
|
$
|
94,879
|
|
Unrealized gain on interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,438
|
|
|
|
1,438
|
|
Changes in foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
924
|
|
|
|
924
|
|
Sale of foreign subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,831
|
)
|
|
|
(2,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance and vesting of restricted stock
|
|
|
200
|
|
|
|
1
|
|
|
|
3,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock awards
|
|
|
(680
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(24
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
204,904
|
|
|
|
205
|
|
|
|
(295,256
|
)
|
|
|
121,024
|
|
|
|
4,888
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,430
|
|
|
|
|
|
|
$
|
35,430
|
|
Unrealized loss on interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,451
|
)
|
|
|
(10,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative impact of change in accounting for uncertainties in
income taxes (FIN No. 48 Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
Issuance and vesting of restricted stock
|
|
|
200
|
|
|
|
|
|
|
|
3,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
65
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
205,166
|
|
|
$
|
205
|
|
|
$
|
(291,247
|
)
|
|
$
|
130,716
|
|
|
$
|
(5,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
SELECT
MEDICAL HOLDINGS CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
Select Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
|
Successor Period
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(100,251
|
)
|
|
|
$
|
72,327
|
|
|
$
|
94,879
|
|
|
$
|
35,430
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,177
|
|
|
|
|
39,060
|
|
|
|
46,844
|
|
|
|
57,297
|
|
Provision for bad debts
|
|
|
6,661
|
|
|
|
|
18,600
|
|
|
|
18,897
|
|
|
|
37,572
|
|
Loss (gain) from disposal of assets and sale of business units
|
|
|
|
|
|
|
|
810
|
|
|
|
(11,507
|
)
|
|
|
2,424
|
|
Loss on early retirement of debt (non-cash)
|
|
|
7,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock compensation expense
|
|
|
|
|
|
|
|
10,312
|
|
|
|
3,782
|
|
|
|
3,746
|
|
Amortization of debt discount
|
|
|
|
|
|
|
|
881
|
|
|
|
1,176
|
|
|
|
1,325
|
|
Deferred income taxes
|
|
|
(63,863
|
)
|
|
|
|
19,822
|
|
|
|
13,327
|
|
|
|
2,460
|
|
Minority interests
|
|
|
469
|
|
|
|
|
3,018
|
|
|
|
1,754
|
|
|
|
1,537
|
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(48,976
|
)
|
|
|
|
(2,908
|
)
|
|
|
30,804
|
|
|
|
(75,540
|
)
|
Other current assets
|
|
|
1,816
|
|
|
|
|
312
|
|
|
|
2,015
|
|
|
|
1,406
|
|
Other assets
|
|
|
(622
|
)
|
|
|
|
4,887
|
|
|
|
6,441
|
|
|
|
6,251
|
|
Accounts payable
|
|
|
5,250
|
|
|
|
|
1,879
|
|
|
|
12,081
|
|
|
|
(112
|
)
|
Due to third-party payors
|
|
|
667
|
|
|
|
|
(1,757
|
)
|
|
|
711
|
|
|
|
2,186
|
|
Accrued expenses
|
|
|
203,751
|
|
|
|
|
(129,088
|
)
|
|
|
6,447
|
|
|
|
10,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
19,056
|
|
|
|
|
38,155
|
|
|
|
227,651
|
|
|
|
86,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,586
|
)
|
|
|
|
(107,360
|
)
|
|
|
(155,096
|
)
|
|
|
(166,074
|
)
|
Proceeds from sale of business units
|
|
|
|
|
|
|
|
|
|
|
|
74,966
|
|
|
|
9,605
|
|
Proceeds from sale of property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,438
|
|
Changes in restricted cash
|
|
|
108
|
|
|
|
|
578
|
|
|
|
2,010
|
|
|
|
4,335
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(108,279
|
)
|
|
|
|
(3,272
|
)
|
|
|
(3,361
|
)
|
|
|
(236,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(110,757
|
)
|
|
|
|
(110,054
|
)
|
|
|
(81,481
|
)
|
|
|
(382,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
|
|
|
|
|
281,000
|
|
|
|
215,000
|
|
|
|
449,000
|
|
Payments on revolving credit facility
|
|
|
|
|
|
|
|
(196,000
|
)
|
|
|
(300,000
|
)
|
|
|
(329,000
|
)
|
Proceeds from senior floating rate notes
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
Credit facility term loan borrowings
|
|
|
|
|
|
|
|
580,000
|
|
|
|
|
|
|
|
100,000
|
|
Payments on credit facility term loan
|
|
|
|
|
|
|
|
(4,350
|
)
|
|
|
(5,800
|
)
|
|
|
(6,550
|
)
|
Proceeds from senior subordinated notes
|
|
|
|
|
|
|
|
660,000
|
|
|
|
|
|
|
|
|
|
Repayment of senior subordinated notes
|
|
|
|
|
|
|
|
(350,000
|
)
|
|
|
|
|
|
|
|
|
Payment of deferred financing costs
|
|
|
|
|
|
|
|
(60,269
|
)
|
|
|
|
|
|
|
|
|
Principal payments on seller and other debt
|
|
|
(528
|
)
|
|
|
|
(4,161
|
)
|
|
|
(721
|
)
|
|
|
(1,323
|
)
|
Proceeds from (repayment of) bank overdrafts
|
|
|
|
|
|
|
|
19,355
|
|
|
|
(7,142
|
)
|
|
|
8,911
|
|
Repurchase of common and preferred stock
|
|
|
|
|
|
|
|
(1,687,994
|
)
|
|
|
(41
|
)
|
|
|
(14
|
)
|
Proceeds from issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Proceeds from issuance of common stock
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Payment of preferred stock dividends
|
|
|
|
|
|
|
|
(175,000
|
)
|
|
|
|
|
|
|
|
|
Equity investment
|
|
|
|
|
|
|
|
724,042
|
|
|
|
|
|
|
|
|
|
Costs associated with equity investment of Holdings
|
|
|
|
|
|
|
|
(8,686
|
)
|
|
|
|
|
|
|
|
|
Distributions to minority interests
|
|
|
(401
|
)
|
|
|
|
(1,541
|
)
|
|
|
(1,762
|
)
|
|
|
(1,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
94
|
|
|
|
|
(48,604
|
)
|
|
|
(100,466
|
)
|
|
|
219,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(149
|
)
|
|
|
|
644
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(91,756
|
)
|
|
|
|
(119,859
|
)
|
|
|
45,739
|
|
|
|
(77,071
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
247,476
|
|
|
|
|
155,720
|
|
|
|
35,861
|
|
|
|
81,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
155,720
|
|
|
|
$
|
35,861
|
|
|
$
|
81,600
|
|
|
$
|
4,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10,630
|
|
|
|
$
|
59,725
|
|
|
$
|
124,251
|
|
|
$
|
134,527
|
|
Cash paid for taxes
|
|
$
|
1,502
|
|
|
|
$
|
10,712
|
|
|
$
|
22,572
|
|
|
$
|
9,009
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
SELECT
MEDICAL HOLDINGS CORPORATION
|
|
1.
|
Organization
and Significant Accounting Policies
|
Business
Description
Select Medical Corporation (Select) was formed in
December 1996 and commenced operations during February 1997 upon
the completion of its first acquisition. Select Medical Holdings
Corporation (Holdings) was formed in October 2004.
On February 24, 2005, Select merged with a subsidiary of
Holdings which resulted in Select becoming a wholly-owned
subsidiary of Holdings (the Merger). Holdings,
Select and its subsidiaries are referred to herein as the
Company. The Companys financial position,
results of operations and cash flows prior to the Merger are
presented separately in the consolidated financial statements as
Predecessor financial statements, while the
Companys financial position, results of operations and
cash flows following the Merger are presented as
Successor financial statements. Due to the
revaluation of assets resulting from the purchase accounting
associated with the Merger, the Pre-Merger financial statements
are not comparable with those after the Merger in certain
respects.
The Company provides long term acute care hospital services and
inpatient acute rehabilitative hospital care through its
Specialty Hospital segment and provides physical, occupational,
and speech rehabilitation services through its Outpatient
Rehabilitation segment. The Companys Specialty Hospital
segment consists of hospitals designed to serve the needs of
acute patients and hospitals designed to serve patients that
require intensive medical rehabilitation care. Patients in the
Companys long term acute care hospitals typically suffer
from serious and often complex medical conditions that require a
high degree of care. Patients in the Companys acute
medical rehabilitation hospitals typically suffer from
debilitating injuries including traumatic brain and spinal cord
injuries, and require rehabilitation care in the form of
physical, psychological, social and vocational rehabilitation
services. The Companys outpatient rehabilitation business
consists of clinics and contract services that provide physical,
occupational and speech rehabilitation services. The
Companys outpatient rehabilitation patients are typically
diagnosed with musculoskeletal impairments that restrict their
ability to perform normal activities of daily living. The
Company operated 101, 96 and 87 specialty hospitals at
December 31, 2005, 2006 and 2007, respectively. At
December 31, 2005, 2006 and 2007, the Company operated 717,
544 and 999 outpatient clinics, respectively. At
December 31, 2005, 2006 and 2007, the Company had
operations in the District of Columbia and 35, 32 and
37 states, respectively. Also, at December 31, 2005
the Company had operations in Canada through its wholly-owned
subsidiary, Canadian Back Institute Limited (CBIL),
which was sold on March 1, 2006 (Note 3).
Merger
and Related Transactions
On February 24, 2005, the Merger transaction was
consummated and Select became a wholly-owned subsidiary of
Holdings. Holdings is owned by an investor group that includes
Welsh, Carson, Anderson, & Stowe, IX, LP (Welsh
Carson), Thoma Cressey Bravo (Thoma Cressey)
and members of the Companys senior management. In the
transaction, all of the former stockholders (except for certain
members of management and other rollover investors) of Select
received $18.00 per share in cash for common stock of Select.
Holders of stock options issued by Select received cash equal to
(a) $18.00 minus the exercise price of the option
multiplied by (b) the number of shares subject to the
options. After the Merger, Selects common stock was
delisted from the New York Stock Exchange. The Merger and
related transactions are referred to in this report as the
Merger.
The funds necessary to consummate the Merger were approximately
$2,291.1 million, including approximately
$1,827.7 million to pay the then current stockholders and
option holders of Select, approximately $344.2 million to
repay existing indebtedness and approximately
$119.2 million to pay related fees and expenses.
The Merger transactions were financed by:
|
|
|
|
|
a cash common and preferred equity investment in Holdings by
Welsh Carson and other equity investors of $570.0 million;
|
F-8
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
a senior subordinated notes offering by Holdings of
$150.0 million;
|
|
|
|
borrowing by Select of $580.0 million in term loans and
$200.0 million on the revolving loan facility under a new
senior secured credit facility;
|
|
|
|
the issuance by Select of $660.0 million in aggregate
principle amount of
75/8% senior
subordinated notes; and
|
|
|
|
$131.1 million of cash on hand at Select at the closing
date.
|
The Merger transactions were accounted for under the purchase
method of accounting prescribed in Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations,
(SFAS No. 141). As a result of a 26%
continuing ownership interest in Holdings by certain
stockholders (Continuing Stockholders), 74% of the
purchase price was allocated to the assets and liabilities
acquired at their respective fair values with the remaining 26%
recorded at the Continuing Stockholders historical book
values as of the date of the acquisition in accordance with
Emerging Issues Task Force Issue
No. 88-16
Basis in Leveraged Buyout Transactions
(EITF 88-16).
As a result of the carryover of the Continuing
Stockholders historical basis, stockholders equity
of Holdings and Select have been reduced by $449.5 million.
The purchase price, including transaction-related fees, was
allocated to the Companys tangible and identifiable
intangible assets and liabilities based upon estimates of fair
value, with the remainder allocated to goodwill. In accordance
with the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets
(SFAS No. 142), no amortization of
indefinite-lived intangible assets or goodwill has been
recorded. The factors that were considered when determining the
purchase price and that resulted in goodwill included the long
term growth and earnings prospects for Select. Holdings believed
that as a private company, the management of Select would be
better able to concentrate on the regulatory changes affecting
its business and make long term investment and operational
decisions that would be harder to execute as a public company,
where there is greater focus on quarter-to-quarter performance.
F-9
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Merger transactions is presented below (in
thousands):
|
|
|
|
|
Equity Contribution
|
|
$
|
570,000
|
|
Exchange of shares of Select for equity of Holdings at $18.00
per share
|
|
|
151,992
|
|
|
|
|
|
|
Aggregate equity contribution
|
|
|
721,992
|
|
Continuing shareholders basis adjustment
|
|
|
(449,510
|
)
|
|
|
|
|
|
Equity contribution, net
|
|
|
272,482
|
|
Merger expenses paid
|
|
|
(8,686
|
)
|
Proceeds from borrowings
|
|
|
1,590,000
|
|
|
|
|
|
|
Purchase price allocated
|
|
$
|
1,853,796
|
|
|
|
|
|
|
Fair value of net tangible assets acquired:
|
|
|
|
|
Cash
|
|
$
|
34,484
|
|
Accounts receivable
|
|
|
280,891
|
|
Current deferred tax asset
|
|
|
69,858
|
|
Other current assets
|
|
|
20,955
|
|
Property and equipment
|
|
|
177,634
|
|
Non-current deferred tax asset
|
|
|
31,879
|
|
Other assets
|
|
|
12,970
|
|
Current liabilities
|
|
|
(267,831
|
)
|
Long term debt
|
|
|
(7,052
|
)
|
Minority interest in consolidated subsidiary companies
|
|
|
(6,661
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
347,127
|
|
Capitalized debt issuance costs
|
|
|
55,392
|
|
Intangible assets acquired
|
|
|
92,988
|
|
Goodwill
|
|
|
1,358,289
|
|
|
|
|
|
|
|
|
$
|
1,853,796
|
|
|
|
|
|
|
An unaudited pro forma statement of operations for the year
ended December 31, 2005 as if the Merger occurred as of
January 1, 2005 is as follows (in thousands):
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
2005
|
|
|
(unaudited)
|
|
Net revenue
|
|
$
|
1,858,442
|
|
Net loss
|
|
|
(39,044
|
)
|
In connection with the Merger, Merger related charges of
$152.5 million related to stock compensation expense which
were comprised of $142.2 million related to the
cancellation of all Selects vested and unvested
outstanding stock options in connection with the Merger in the
Predecessor period of January 1, 2005 through
February 24, 2005 and an additional $10.3 million of
stock compensation cost related to Holdings restricted stock and
stock options that were issued in the Successor period
February 25, 2005 through December 31, 2005. Also
incurred were costs of $42.7 million related to the early
extinguishment of Selects
91/2%
and
71/2% senior
subordinated notes which consisted of a tender premium cost of
$34.8 million and the remaining unamortized
F-10
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferred financing costs of $7.9 million. In addition,
$12.0 million of other Merger related charges were
incurred. These charges consisted of the fees of the investment
advisor hired by the Special Committee of Selects Board of
Directors to evaluate the Merger, legal and accounting fees,
costs associated with the
Hart-Scott-Rodino
filing and costs associated with purchasing a six year extended
reporting period under Selects directors and officers
liability insurance policy.
Goodwill was allocated to each of the Companys reporting
units based on their fair values at the date of the Merger. The
Company performs impairment tests at least annually, or more
frequently with respect to assets for which there are any
impairment indicators. If the expected future cash flows
(undiscounted) are less than the carrying amount of such assets,
the Company recognizes an impairment loss for the difference
between the carrying amount of the assets and their estimated
fair value.
Unaudited
Pro Forma Income Per Common Share
In July 2008, the Board of Directors authorized management
to file a registration statement with the Securities and
Exchange Commission for the Company to sell shares of its common
stock to the public. If the initial public offering is
completed
shares of the Companys preferred stock will convert
into
shares of common stock as of the closing of the offering.
Unaudited pro forma income per common share basic
and diluted, as adjusted for the assumed conversion of the
preferred stock to common stock, is set forth in the
accompanying consolidated statement of operations.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries, limited liability
companies and limited partnerships the Company and its
subsidiaries control through ownership of general and limited
partnership or membership interests. All significant
intercompany balances and transactions are eliminated in
consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications to amounts previously reported have
been made to conform with the current period presentation.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. Cash equivalents are stated at cost which
approximates market value.
Restricted
Cash
Restricted cash consists of cash used to establish a trust fund,
as required by the Companys insurance program, for the
purpose of paying professional and general liability losses and
expenses incurred by the Company.
Accounts
Receivable and Allowance for Doubtful Accounts
Substantially all of the Companys accounts receivable are
related to providing healthcare services to patients. Collection
of these accounts receivable is the Companys primary
source of cash and is critical to its operating performance. The
Companys primary collection risks relate to
non-governmental payors who insure these patients
F-11
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and deductibles, co-payments and self-insured amounts owed by
the patient. Deductible, co-payments and self-insured amounts
are an immaterial portion of the Companys net accounts
receivable balance and accounted for approximately 0.9% and 0.3%
of the net accounts receivable balance before doubtful accounts
at December 31, 2006 and December 31, 2007,
respectively. The Companys general policy is to verify
insurance coverage prior to the date of admission for a patient
admitted to the Companys hospitals or in the case of the
Companys outpatient rehabilitation clinics, the Company
verifies insurance coverage prior to their first therapy visit.
The Companys estimate for the allowance for doubtful
accounts is calculated by generally reserving as uncollectible
all governmental accounts over 365 days and
non-governmental accounts over 180 days from discharge.
This method is monitored based on historical cash collections
experience. Collections are impacted by the effectiveness of the
Companys collection efforts with non-governmental payors
and regulatory or administrative disruptions with the fiscal
intermediaries that pay the Companys governmental
receivables.
The Company has historically collected substantially all of its
third-party insured receivables (net of contractual allowances)
which include receivables from governmental agencies. The
Company reviews its overall reserve adequacy by monitoring
historical cash collections as a percentage of net revenue less
the provision for bad debts.
Uncollected accounts are written off the balance sheet when they
are turned over to an outside collection agency, or when
management determines that the balance is uncollectible,
whichever occurs first.
Property
and Equipment
Property and equipment are stated at cost net of accumulated
depreciation. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the
assets or the term of the lease, as appropriate. The general
range of useful lives is as follows:
|
|
|
Leasehold improvements
|
|
5 years
|
Furniture and equipment
|
|
3 - 20 years
|
Buildings
|
|
40 years
|
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), the Company reviews the
realizability of long-lived assets whenever events or
circumstances occur which indicate recorded costs may not be
recoverable.
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of cash balances
and trade receivables. The Company invests its excess cash with
large financial institutions. The Company grants unsecured
credit to its patients, most of whom reside in the service area
of the Companys facilities and are insured under
third-party payor agreements. Because of the geographic
diversity of the Companys facilities and non-governmental
third-party payors, Medicare represents the Companys only
concentration of credit risk.
Income
Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Management provides a valuation
allowance for net deferred tax assets when it is more likely
than not that such net deferred tax assets will not be recovered.
On January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation
No. 48 (FIN No. 48), Accounting
for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109. FIN No. 48
clarifies the recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure
F-12
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and transition. See Note 11 for information concerning the
Companys unrecognized tax benefits, interest and penalties.
Intangible
Assets
Effective January 1, 2002, the Company adopted
SFAS No. 142. Under SFAS No. 142, goodwill
and other intangible assets with indefinite lives are no longer
subject to periodic amortization but are instead reviewed
annually, or more frequently if impairment indicators arise.
These reviews require the Company to estimate the fair value of
its identified reporting units and compare those estimates
against the related carrying values. For each of the reporting
units, the estimated fair value is determined utilizing the
expected present value of the future cash flows of the units.
Identifiable assets and liabilities acquired in connection with
business combinations accounted for under the purchase method
are recorded at their respective fair values. Deferred income
taxes have been recorded to the extent of differences between
the fair value and the tax basis of the assets acquired and
liabilities assumed. Company management has allocated the
intangible assets between identifiable intangibles and goodwill.
Intangible assets other than goodwill primarily consist of the
values assigned to trademarks, non-compete agreements,
certificates of need, accreditation and contract therapy
relationships. Management believes that the estimated useful
lives established are reasonable based on the economic factors
applicable to each of the intangible assets.
The approximate useful life of each class of intangible assets
is as follows:
|
|
|
Goodwill
|
|
Indefinite
|
Trademarks
|
|
Indefinite
|
Certificates of need
|
|
Indefinite
|
Accreditation
|
|
Indefinite
|
Non-compete agreements
|
|
6 - 7 years
|
Contract therapy relationships
|
|
5 years
|
In accordance with SFAS No. 144, the Company reviews
the realizability of long-lived assets and certain definite
lived intangible assets whenever events or circumstances occur
which indicate recorded costs may not be recoverable.
If the expected future cash flows (undiscounted) are less than
the carrying amount of such assets, the Company recognizes an
impairment loss for the difference between the carrying amount
of the assets and their estimated fair value.
Due to
Third-Party Payors
Due to third-party payors represents the difference between
amounts received under interim payment plans from third-party
payors, principally Medicare and Medicaid, for services rendered
and amounts estimated to be reimbursed by those third-party
payors upon settlement of cost reports.
Insurance
Risk Programs
Under a number of the Companys insurance programs, which
include the Companys employee health insurance program,
its workers compensation, professional liability insurance
programs and certain components under its property and casualty
insurance program, the Company is liable for a portion of its
losses. In these cases the Company accrues for its losses under
an occurrence-based principle whereby the Company estimates the
losses that will be incurred in a respective accounting period
and accrues that estimated liability. Where the Company has
substantial exposure, actuarial methods are utilized in
estimating the losses. In cases where the Company has minimal
exposure, losses are estimated by analyzing historical trends.
These programs are monitored quarterly and
F-13
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimates are revised as necessary to take into account
additional information. At December 31, 2006 and 2007
respectively, the Company had recorded a liability of
$60.0 million and $58.9 million related to these
programs.
Minority
Interests
The interests held by other parties in subsidiaries, limited
liability companies and limited partnerships owned and
controlled by the Company are reported in the consolidated
balance sheets as minority interests. Minority interests
reported in the consolidated statements of operations reflect
the respective interests in the income or loss of the
subsidiaries, limited liability companies and limited
partnerships attributable to the other parties, the effect of
which is removed from the Companys consolidated results of
operations.
Stock
Options
The Company adopted SFAS No. 123R, Share-Based
Payment (SFAS No. 123R) in the
Successor period beginning on February 25, 2005. As
permitted by SFAS No. 123R under the Modified
Prospective Application transition method, the Company has
chosen to apply APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25)
and related interpretations in accounting for its stock option
plans in the Predecessor period from January 1, 2005
through February 24, 2005, and accordingly, no compensation
cost has been recognized for options granted under the
Predecessor stock option plans.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options
vesting period. The Companys pro forma net earnings were
as follows:
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Period from January 1
|
|
|
|
through February 24,
2005
|
|
|
|
(in thousands)
|
|
|
Net loss available to common stockholders as reported
|
|
$
|
(100,251
|
)
|
Add: Stock-based employee compensation, net of related tax
effects, included in the determination of net loss as reported
|
|
|
87,927
|
|
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
14,931
|
|
|
|
|
|
|
Net loss available to common stockholders pro forma
|
|
$
|
(27,255
|
)
|
|
|
|
|
|
Weighted average grant-date fair
value(1)
|
|
|
|
|
|
|
|
(1)
|
|
No stock options were granted in
the period from January 1, 2005 through February 24,
2005.
|
Refer to Note 10 Stock Option and
Restricted Stock Plans for information on the
Companys Successor stock option and restricted stock plans.
Revenue
Recognition
Net operating revenues consists primarily of patient and
contract therapy revenues and are recognized as services are
rendered.
Patient service revenue is reported net of provisions for
contractual allowances from third-party payors and patients. The
Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its
established billing rates. The differences between the estimated
program reimbursement rates and the standard billing rates are
accounted for as contractual adjustments, which are deducted
from gross revenues to arrive at net operating revenues. Payment
arrangements include prospectively determined rates per
F-14
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discharge, reimbursed costs, discounted charges, per diem and
per visit payments. Retroactive adjustments are accrued on an
estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are
determined. Accounts receivable resulting from such payment
arrangements are recorded net of contractual allowances.
A significant portion of the Companys net operating
revenues are generated directly from the Medicare program. Net
operating revenues generated directly from the Medicare program
represented approximately 52% of the Companys consolidated
net operating revenues for the period January 1 through
February 24, 2005 (Predecessor), 57% for the period
February 25 through December 31, 2005 (Successor), 53% for
the year ended December 31, 2006, and 48% for the year
ended December 31, 2007. Approximately 38% and 36% of the
Companys gross accounts receivable at December 31,
2006 and 2007, respectively, are from this payor source. As a
provider of services to the Medicare program, the Company is
subject to extensive regulations. The inability of any of the
Companys specialty hospitals or clinics to comply with
regulations can result in changes in that specialty
hospitals or clinics net operating revenues
generated from the Medicare program.
Contract therapy revenues are comprised primarily of billings
for services rendered to nursing homes, hospitals, schools and
other third parties under the terms of contractual arrangements
with these entities.
Other
Comprehensive Income (Loss)
The Company used the local currency as the functional currency
for its Canadian operations. Income statement items were
translated at average exchange rates prevailing during the year.
The resulting translation adjustments impacting other
comprehensive income (loss) were recorded as a separate
component of stockholders equity. The cumulative
translation adjustment was included in accumulated other
comprehensive income (loss) and was a gain of $1.8 million
at December 31, 2005. The Company sold its Canadian
operations on March 1, 2006 and removed the accumulated
other comprehensive income (loss) related to the cumulative
translation adjustment. This component of other comprehensive
income (loss) was included in the calculation of the gain on the
sale of the Companys Canadian operations.
Included in other comprehensive income (loss) at
December 31, 2006 and 2007 were a gain of $4.9 million
(net of tax) and a loss of $5.6 million (net of tax),
respectively, on interest rate swaps accounted for as cash flow
hedges.
Financial
Instruments and Hedging
Effective January 1, 2001, the Company adopted
SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities
(SFAS No. 133). The Company has in the
past entered into derivatives to manage interest rate and
foreign exchange risks. Derivatives are limited in use and not
entered into for speculative purposes. The Company has entered
into interest rate swaps to manage interest rate risk on a
portion of its long term borrowings. All derivatives are
recognized at fair value on the balance sheet. The effective
portion of gains or losses on interest rate swaps designated as
hedges is initially deferred in stockholders equity as a
component of other comprehensive income (loss). These deferred
gains or losses are subsequently reclassified into earnings as
an adjustment to interest expense over the same period in which
the related interest payments being hedged are recognized in
expense. The ineffective portion of changes in fair value of the
interest rate swaps are immediately recognized in the
consolidated statement of operations.
Refer to Note 14 for information regarding interest rate
swaps the Company entered into during 2005 and 2007.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations
(SFAS No. 141R) which replaces
SFAS No. 141. SFAS No. 141R retains the
purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities
assumed arising from
F-15
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contingencies, requires the capitalization of in-process
research and development at fair value and requires the
expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective for business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. This statement will be applied
prospectively and will not result in any changes to the
Companys historical financial statements.
In December 2007, FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51
(SFAS No. 160).
SFAS No. 160 changes the accounting and reporting for
minority interests. Minority interests will be recharacterized
as noncontrolling interests and will be reported as a component
of equity separate from the parents equity, and purchases
or sales of equity interests that do not result in a change in
control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the
income statement and upon a loss of control, the interest sold,
as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings.
SFAS No. 160 is effective for financial statements
issued for years beginning after December 15, 2008, except
for the presentation and disclosure requirements, which will
apply retrospectively. Adoption of this statement by the Company
will result in changes related to presentation and disclosure of
the Companys minority interest and will not affect the
Companys results of operations.
In February 2007, the FASB Issued SFAS No. 159,
Establishing the Fair Value Option for Financial Assets
and Liabilities (SFAS No. 159).
SFAS No. 159 was to permit all entities to choose to
elect, at specified election dates, to measure eligible
financial instruments at fair value. An entity shall report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date, and recognize upfront costs and fees related to those
items in earnings as incurred and not deferred.
SFAS No. 159 applies to years beginning after
November 15, 2007, with early adoption permitted for an
entity that has also elected to apply the provisions of
SFAS No. 157, Fair Value Measurements
(SFAS No. 157). An entity is
prohibited from retrospectively applying SFAS No. 159,
unless it chooses early adoption. SFAS No. 159 also
applies to eligible items existing at November 15, 2007 (or
early adoption date). The Company does not believe that the
adoption of SFAS No. 159 will materially impact its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157.
SFAS No. 157 establishes a framework for measuring
fair value and expands disclosures about fair value
measurements. The changes to current practice resulting from the
application of this Statement relate to the definition of fair
value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements.
SFAS No. 157 is effective for years beginning after
November 15, 2007 and interim periods within those years. In
February 2008, the FASB issued FASB Staff Position (FSP)
157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1)
and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-1
amends SFAS No. 157 to remove certain leasing
transactions from its scope.
FSP 157-2
delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal 2009. The
Company does not believe that the adoption of
SFAS No. 157 will materially impact its consolidated
financial statements.
For
the Period from January 1 through February 24, 2005
(Predecessor) and the Period from February 25 through
December 31, 2005 (Successor)
Effective as of January 1, 2005, the Company acquired
SemperCare, Inc. for approximately $100.0 million in cash.
The acquisition consisted of 17 long term acute care hospitals
in 11 states. The factors that were considered when
determining the purchase price that resulted in goodwill
included the earnings growth potential for these long term acute
care hospitals, general and administrative cost saving
opportunities that could be achieved by utilizing
F-16
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Companys infrastructure and additional development
opportunities in states with Certificate of Need regulations.
Information with respect to the purchase transaction is as
follows (in thousands):
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
105,085
|
|
|
|
|
|
|
Fair value of net tangible assets acquired:
|
|
|
|
|
Accounts receivable
|
|
|
22,143
|
|
Other current assets
|
|
|
4,718
|
|
Property and equipment
|
|
|
9,265
|
|
Other assets
|
|
|
242
|
|
Current liabilities
|
|
|
(14,150
|
)
|
Long term debt
|
|
|
(1,203
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
21,015
|
|
Intangible assets acquired
|
|
|
2,000
|
|
Goodwill
|
|
|
82,070
|
|
|
|
|
|
|
|
|
$
|
105,085
|
|
|
|
|
|
|
The Company also acquired interests in three outpatient therapy
businesses. Additionally, the Company repurchased minority
interests of certain subsidiaries. Total consideration for these
transactions totaled $6.5 million in cash.
For
the Year Ended December 31, 2006
The Company repurchased minority interests of certain
subsidiaries in the Outpatient Rehabilitation segment. Total
consideration for these transactions totaled $3.3 million
in cash.
For
the Year Ended December 31, 2007
On May 1, 2007, Select completed the acquisition of
substantially all of the outpatient rehabilitation division (the
Division) of HealthSouth Corporation. At the
closing, Select acquired 539 outpatient rehabilitation clinics.
On June 30, 2007, one additional outpatient facility located in
Washington, D.C. was acquired upon the receipt of regulatory
approval. The closing of the purchase of 29 additional
outpatient rehabilitation clinics that was deferred pending
certain state regulatory approvals was completed as of
October 31, 2007 and resulted in the release of an
additional $23.4 million of the purchase price. The
aggregate purchase price of $245.0 million was reduced by
approximately $7.0 million at closing for assumed
indebtedness and other matters. The amount of the consideration
was derived through arms length negotiations. Select
funded the acquisition through borrowings under its senior
secured credit facility and cash on hand.
The results of operations of the Division have been included in
the Companys consolidated financial statements since
May 1, 2007. The Company has included the operations of the
Division in its Outpatient Rehabilitation segment.
The purchase price was allocated to tangible and identifiable
intangible assets and liabilities based upon estimates of fair
value, with the remainder allocated to goodwill. In accordance
with the provisions of SFAS No. 142, no amortization
of goodwill has been recorded.
F-17
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price allocation is as follows (in thousands):
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
236,899
|
|
|
|
|
|
|
Fair value of net tangible assets acquired:
|
|
|
|
|
Accounts receivable
|
|
|
35,743
|
|
Other current assets
|
|
|
12,596
|
|
Property and equipment
|
|
|
39,347
|
|
Other assets
|
|
|
808
|
|
Current liabilities
|
|
|
(14,104
|
)
|
Long term debt
|
|
|
(2,381
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
72,009
|
|
Non-compete,
5-year
|
|
|
5,100
|
|
Restructuring reserve
|
|
|
(18,700
|
)
|
Goodwill
|
|
|
178,490
|
|
|
|
|
|
|
|
|
$
|
236,899
|
|
|
|
|
|
|
The Company also acquired an interest in a rehabilitation
hospital and purchased the assets of two outpatient
rehabilitation clinics. Consideration for these transactions
totaled approximately $0.1 million in cash.
Information with respect to all businesses acquired in purchase
transactions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25,
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
For the Year Ended
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Cash paid (net of cash acquired)
|
|
$
|
108,279
|
|
|
|
$
|
3,276
|
|
|
$
|
3,261
|
|
|
$
|
236,980
|
|
Notes issued
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,279
|
|
|
|
|
3,336
|
|
|
|
3,261
|
|
|
|
236,980
|
|
Liabilities assumed
|
|
|
19,924
|
|
|
|
|
148
|
|
|
|
|
|
|
|
36,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,203
|
|
|
|
|
3,484
|
|
|
|
3,261
|
|
|
|
273,438
|
|
Fair value of assets acquired, principally accounts receivable
and property and equipment
|
|
|
41,295
|
|
|
|
|
165
|
|
|
|
|
|
|
|
88,625
|
|
Non-compete agreement
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
5,100
|
|
Trademark
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800
|
|
Minority interest relieved
|
|
|
|
|
|
|
|
666
|
|
|
|
1,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost in excess of fair value of net assets acquired (goodwill)
|
|
$
|
84,908
|
|
|
|
$
|
2,653
|
|
|
$
|
1,680
|
|
|
$
|
178,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following pro forma unaudited results of operations have
been prepared assuming the acquisition of the Division occurred
at the beginning of the periods presented. The acquisitions of
the other businesses acquired are not reflected in this pro
forma as their impact is not material. These results are not
necessarily indicative of results of future operations nor of
the results that would have actually occurred had the
acquisition been consummated as of the beginning of the period
presented. Unaudited pro forma net revenue and net income for
the years ended December 31, 2006 and 2007 as if the
acquisition occurred as of January 1, 2006 and
January 1, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Net revenue
|
|
$
|
2,162,162
|
|
|
$
|
2,092,114
|
|
Net income
|
|
|
100,657
|
|
|
|
36,046
|
|
|
|
3.
|
Discontinued
Operations and Assets and Liabilities Held For Sale
|
On December 23, 2005, the Company agreed to sell all of the
issued and outstanding shares of its wholly-owned subsidiary,
CBIL, for approximately C$89.8 million
(US$79.0 million). The sale was completed on March 1,
2006. CBIL operated 109 outpatient rehabilitation clinics in
seven Canadian provinces. The Company operated all of its
Canadian activity through CBIL. CBILs operating results
have been classified as discontinued operations and cash flows
have been included with continuing operations for the period
from January 1, 2005 through February 24, 2005
(Predecessor), for the period from February 25, 2005
through December 31, 2005 (Successor) and the year ended
December 31, 2006. Previously, the operating results of
this subsidiary were included in the Companys Outpatient
Rehabilitation segment.
Summarized income statement information relating to discontinued
operations of CBIL is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
For the Year
|
|
|
|
through
|
|
|
|
through
|
|
|
Ended
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Net revenue
|
|
$
|
10,051
|
|
|
|
$
|
60,161
|
|
|
$
|
12,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income tax
expense(1)
|
|
|
950
|
|
|
|
|
8,130
|
|
|
|
15,547
|
|
Income tax
expense(2)
|
|
|
428
|
|
|
|
|
5,058
|
|
|
|
3,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
$
|
522
|
|
|
|
$
|
3,072
|
|
|
$
|
12,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Income from discontinued operations
before income tax expense for the 12 months ended
December 31, 2006 includes a gain on sale of approximately
$14.0 million.
|
(2)
|
|
The period from February 25 through
December 31, 2005 (Successor) includes income tax of
$1.4 million related to undistributed earnings of the
Companys foreign subsidiary that were previously
permanently reinvested.
|
F-19
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2006, the Company sold a group of legal entities
that operated outpatient rehabilitation clinics. The Company
recorded a note receivable in the amount of $8.4 million
related to this sale. These legal entities were sold at an
amount that approximated their carrying value. These legal
entities were originally acquired as part of the Companys
acquisition of the NovaCare Physical Rehabilitation and
Occupational Health Group in 1999.
At December 31, 2006, the asset held for sale relates to a
building that the Company acquired in connection with its
acquisition of Kessler Rehabilitation Corporation in 2003. The
building was sold in June 2007 for approximately
$4.5 million and a loss on the sale of $0.5 million
was recognized. Also during the year ended December 31,
2007, the Company sold land for approximately $1.9 million.
No gain or loss was recognized on this sale. At
December 31, 2007, the assets held for sale totaling
$14.6 million relate to three properties the Company
expects to sell with in the next year. The Company adjusted the
carrying values of these properties to fair market value by
recording an impairment loss of $2.7 million during the
year ended December 31, 2007.
During the year ended December 31, 2007, the Company sold
its interest in four business units for aggregate consideration
of $12.2 million. The Company received cash of
$9.6 million and recorded notes receivable of
$2.6 million related to these transactions.
|
|
4.
|
Property
and Equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
24,263
|
|
|
|
$
|
40,582
|
|
Leasehold improvements
|
|
|
56,777
|
|
|
|
|
72,010
|
|
Buildings
|
|
|
106,126
|
|
|
|
|
171,736
|
|
Furniture and equipment
|
|
|
116,881
|
|
|
|
|
175,964
|
|
Construction-in-progress
|
|
|
100,478
|
|
|
|
|
104,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404,525
|
|
|
|
|
565,154
|
|
Less: accumulated depreciation and amortization
|
|
|
48,189
|
|
|
|
|
78,128
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
356,336
|
|
|
|
$
|
487,026
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $5.3 million for the period from
January 1, 2005 through February 24, 2005
(Predecessor), $30.4 million for the period from
February 25, 2005 through December 31, 2005
(Successor), $38.7 million for the year ended
December 31, 2006, and $48.6 million for the year
ended December 31, 2007.
Goodwill and certain other indefinite-lived intangible assets
are no longer amortized, but instead are subject to periodic
impairment evaluations under SFAS No. 142,
Goodwill and Other Intangible Assets. The
Companys most recent impairment assessment was completed
during the fourth quarter of 2007, which indicated that there
was no impairment with respect to goodwill or other recorded
intangible assets. The majority of the Companys goodwill
resides in its specialty hospital reporting unit. In performing
periodic impairment tests, the fair value of the reporting unit
is compared to the carrying value, including goodwill and other
intangible assets. If the carrying value exceeds the fair value,
an impairment condition exists, which results in an impairment
loss equal to the excess carrying value. Impairment tests are
required to be conducted at least annually, or when events or
conditions occur that might suggest a possible impairment. These
events or conditions include, but are not limited to, a
significant adverse change in the business environment,
regulatory environment or legal factors; a current period
operating or
F-20
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cash flow loss combined with a history of such losses or a
projection of continuing losses; or a sale or disposition of a
significant portion of a reporting unit. The occurrence of one
of these events or conditions could significantly impact an
impairment assessment, necessitating an impairment charge. For
purposes of goodwill impairment assessment, the Company has
defined its reporting units as specialty hospitals, outpatient
rehabilitation clinics and contract therapy with goodwill having
been allocated among reporting units based on the relative fair
value of those divisions when the Merger occurred in 2005 and
based on subsequent acquisitions.
To determine the fair value of its reporting units, the Company
used a discounted cash flow approach. Included in this analysis
are assumptions regarding revenue growth rates, internal
development of specialty hospitals and outpatient rehabilitation
clinics, future EBITDA margin estimates, future selling, general
and administrative expense rates and the industrys
weighted average cost of capital. The Company also must estimate
residual values at the end of the forecast period and future
capital expenditure requirements. Each of these assumptions
requires the Company to use its knowledge of (1) its
industry, (2) its recent transactions, and
(3) reasonable performance expectations for its operations.
If any one of the above assumptions changes or fails to
materialize, the resulting decline in the Companys
estimated fair value could result in a material impairment
charge to the goodwill associated with any one of the reporting
units.
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(in thousands)
|
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
Contract therapy relationships
|
|
$
|
20,456
|
|
|
$
|
(7,501
|
)
|
Non-compete agreements
|
|
|
20,809
|
|
|
|
(6,819
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,265
|
|
|
$
|
(14,320
|
)
|
|
|
|
|
|
|
|
|
|
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,323,572
|
|
|
|
|
|
Trademarks
|
|
|
47,058
|
|
|
|
|
|
Certificates of need
|
|
|
3,523
|
|
|
|
|
|
Accreditations
|
|
|
1,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,375,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(in thousands)
|
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
Contract therapy relationships
|
|
$
|
20,456
|
|
|
$
|
(11,592
|
)
|
Non-compete agreements
|
|
|
25,909
|
|
|
|
(11,219
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,365
|
|
|
$
|
(22,811
|
)
|
|
|
|
|
|
|
|
|
|
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,499,485
|
|
|
|
|
|
Trademarks
|
|
|
47,858
|
|
|
|
|
|
Certificates of need
|
|
|
6,421
|
|
|
|
|
|
Accreditations
|
|
|
1,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,555,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets with finite lives
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
January 1
|
|
|
February 25
|
|
|
|
|
|
|
through
|
|
|
through
|
|
For the Year Ended
|
|
|
February 24,
|
|
|
December 31,
|
|
December 31,
|
|
|
2005
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
(in thousands)
|
|
|
(in thousands)
|
Amortization expense
|
|
$
|
576
|
|
|
|
$
|
6,509
|
|
|
$
|
7,811
|
|
|
$
|
8,491
|
|
Amortization expense for the Companys intangible assets
primarily relates to the amortization of the value associated
with the non-compete agreements entered into in connection with
the acquisitions of the Division, Kessler Rehabilitation
Corporation and SemperCare Inc. and the value assigned to the
Companys contract therapy relationships. The useful lives
of the Divisions non-compete, Kessler non-compete,
SemperCare non-compete and the Companys contract therapy
relationships are approximately five, six, seven and five years,
respectively. Amortization expense related to these intangible
assets for each of the next five years commencing
January 1, 2008 is approximately as follows (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
8,831
|
|
2009
|
|
|
8,831
|
|
2010
|
|
|
4,247
|
|
2011
|
|
|
1,306
|
|
2012
|
|
|
339
|
|
F-22
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The changes in the carrying amount of goodwill for the
Companys reportable segments for the years ended
December 31, 2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
Total
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
$
|
1,221,776
|
|
|
$
|
83,434
|
|
|
$
|
1,305,210
|
|
Tax adjustments related to
Merger(1)
|
|
|
5,359
|
|
|
|
10,800
|
|
|
|
16,159
|
|
Goodwill acquired during year
|
|
|
398
|
|
|
|
1,282
|
|
|
|
1,680
|
|
Earnout payments
|
|
|
|
|
|
|
100
|
|
|
|
100
|
|
Other
|
|
|
|
|
|
|
423
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
1,227,533
|
|
|
|
96,039
|
|
|
|
1,323,572
|
|
Goodwill acquired during year
|
|
|
423
|
|
|
|
178,490
|
|
|
|
178,913
|
|
Goodwill related to sale of business
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
1,227,956
|
|
|
$
|
271,529
|
|
|
$
|
1,499,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In conjunction with recording the
gain on sale of CBIL (Note 3), the Company determined that
deferred taxes should have been recorded as of the date of the
Merger related to differences between the Companys book
and tax investment basis in CBIL. Also during 2006, the Company
determined that additional deferred taxes should have been
recorded as of the date of the Merger related to a
step-up in
fair value of a fixed asset and a difference in timing related
to the deductibility of an accrued expense. These adjustments
are not considered to be material on a qualitative or
quantitative basis.
|
|
|
6.
|
Restructuring
Reserves
|
In 2003, the Company recorded a restructuring reserve in
connection with the acquisition of Kessler Rehabilitation
Corporation which was accounted for as additional purchase
price. The remaining amount of this reserve was
$0.2 million at both December 31, 2006 and 2007 and
related to lease termination costs.
In connection with the acquisition of the Division
(Note 2), the Company recorded an estimated liability of
$18.7 million in 2007 for business restructuring which was
accounted for as additional purchase price. This reserve
primarily included costs associated with workforce reductions
and lease termination costs in accordance with the
Companys restructuring plan.
F-23
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the Companys restructuring
activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
January 1, 2005 Predecessor
|
|
$
|
3,225
|
|
|
$
|
1,699
|
|
|
|
|
|
|
$
|
4,924
|
|
Amounts paid during the period from January 1 through
February 24, 2005
|
|
|
(197
|
)
|
|
|
(392
|
)
|
|
|
|
|
|
|
(589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 24, 2005 Predecessor
|
|
|
3,028
|
|
|
|
1,307
|
|
|
|
|
|
|
|
4,335
|
|
Amounts paid during the period from February 25 through
December 31, 2005
|
|
|
(2,638
|
)
|
|
|
(1,307
|
)
|
|
|
|
|
|
|
(3,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 Successor
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
390
|
|
Amounts paid in 2006
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 Successor
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
2007 acquisition restructuring reserve
|
|
|
12,063
|
|
|
|
5,775
|
|
|
$
|
862
|
|
|
|
18,700
|
|
Amounts paid in 2007
|
|
|
(1,611
|
)
|
|
|
(1,830
|
)
|
|
|
|
|
|
|
(3,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 Successor
|
|
$
|
10,677
|
|
|
$
|
3,945
|
|
|
$
|
862
|
|
|
$
|
15,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to pay out the remaining lease termination
costs through 2017 and severance costs through 2008.
|
|
7.
|
Long term
Debt and Notes Payable
|
The components of long term debt and notes payable are shown in
the following tables:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
75/8% senior
subordinated notes
|
|
$
|
660,000
|
|
|
$
|
660,000
|
|
Senior secured credit facility
|
|
|
569,850
|
|
|
|
783,300
|
|
10% senior subordinated notes
|
|
|
132,785
|
|
|
|
134,110
|
|
Senior floating rate notes
|
|
|
175,000
|
|
|
|
175,000
|
|
Seller notes
|
|
|
413
|
|
|
|
633
|
|
Other
|
|
|
455
|
|
|
|
2,592
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,538,503
|
|
|
|
1,755,635
|
|
Less: current maturities
|
|
|
6,209
|
|
|
|
7,749
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
$
|
1,532,294
|
|
|
$
|
1,747,886
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Credit Facility
On March 19, 2007, Select entered into an Amendment
No. 2 and Waiver to its senior secured credit facility
(Amendment No. 2), and on March 28, 2007,
Select entered into an Incremental Facility Amendment with a
group of lenders and JPMorgan Chase Bank, N.A. as administrative
agent. Amendment No. 2 increased the general
F-24
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exception to the prohibition on asset sales under Selects
senior secured credit facility from $100.0 million to
$200.0 million, relaxed certain financial covenants
starting March 31, 2007 and waived Selects
requirement to prepay certain term loan borrowings following its
fiscal year ended December 31, 2006. The Incremental
Facility Amendment provided to Select an incremental term loan
of $100.0 million, the proceeds of which was used to pay a
portion of the purchase price for the HealthSouth transaction.
After giving effect to the Incremental Facility Amendment,
Selects senior secured credit facility provides for senior
secured financing of up to $980.0 million, consisting of:
|
|
|
|
|
a $300.0 million revolving loan facility that will
terminate on February 24, 2011, including both a letter of
credit sub-facility and a swingline loan sub-facility, and
|
|
|
|
a $680.0 million term loan facility that matures on
February 24, 2012.
|
The interest rates per annum applicable to loans, other than
swingline loans, under Selects senior secured credit
facility are, at its 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 9 or 12 month period if
available, in each case, plus an applicable margin percentage.
The alternate base rate is the greater of (1) JPMorgan
Chase Bank, N.A.s prime rate and (2) one-half of 1%
over the weighted average of rates on overnight Federal funds as
published by the Federal Reserve Bank of New York. The
adjusted LIBOR rate is determined by reference to settlement
rates established for deposits in dollars in the London
interbank market for a period equal to the interest period of
the loan and the maximum reserve percentages established by the
Board of Governors of the United States Federal Reserve to which
Selects lenders are subject. The applicable margin
percentage for borrowings under Selects revolving loans is
subject to change based upon the ratio of Selects total
indebtedness to Selects consolidated EBITDA (as defined in
the credit agreement). The applicable margin percentage for
revolving loans is currently (1) 1.50% for alternate base
rate loans and (2) 2.50% for adjusted LIBOR loans. The
applicable margin percentages for the term loans are
(1) 1.00% for alternate base rate loans and (2) 2.00%
for adjusted LIBOR loans. The average interest rate for the year
ended December 31, 2007 was 6.9%.
On the last business day of each calendar quarter Select is
required to pay a commitment fee in respect of any unused
commitment under the revolving credit facility. The annual
commitment fee is currently 0.50% and is subject to adjustment
based upon the ratio of Selects total indebtedness to its
consolidated EBITDA (as defined in the credit agreement).
Availability under the revolving credit facility at
December 31, 2007 was approximately $150.3 million.
Select is authorized to issue up to $50.0 million in
letters of credit. Letters of credit reduce the capacity under
the revolving credit facility and bear interest at applicable
margins based on financial ratio tests. Approximately
$29.7 million in letters of credit were outstanding at
December 31, 2007.
The senior secured credit facility requires scheduled quarterly
payments on the term loans each equal to $1.7 million per
quarter through December 31, 2010, with the balance of the
term loans paid in four equal quarterly installments thereafter.
The senior secured credit facility requires Select to comply on
a quarterly basis with certain financial covenants, including an
interest coverage ratio test and a maximum leverage ratio test,
which financial covenants will become more restrictive over time
except as modified by Amendment No. 2. In addition, the
senior secured credit facility includes various negative
covenants, including with respect to indebtedness, liens,
investments, permitted businesses and transactions and other
matters, as well as certain customary representations and
warranties, affirmative covenants and events of default
including payment defaults, breach of representations and
warranties, covenant defaults, cross defaults to certain
indebtedness, certain events of bankruptcy, certain events under
ERISA, material judgments, actual or asserted failure of any
guaranty or security document supporting the senior secured
credit facility to be in full force and effect and change of
control. If such an event of default occurs, the lenders under
the senior secured credit facility are entitled to take various
actions, including the acceleration of amounts due under the
senior secured credit facility and all actions permitted to be
taken by a
F-25
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
secured creditor. As of December 31, 2007, Select is in
compliance with all debt covenants related to the senior secured
credit facility.
Selects senior secured credit facility is guaranteed by
Holdings and substantially all of Selects current
subsidiaries and will be guaranteed by substantially all of
Selects future subsidiaries and secured by substantially
all of its existing and future property and assets and by a
pledge of its capital stock and the capital stock of its
subsidiaries.
Senior
Subordinated Notes
On February 24, 2005, EGL Acquisition Corp. sold
$660.0 million of
75/8% Senior
Subordinated Notes (the Notes) due 2015 which Select
assumed in the Merger. The net proceeds of the offering were
used to finance a portion of the Merger consideration as
discussed in Note 1, refinance certain of Selects
existing indebtedness, and pay related fees and expenses. The
Notes are unconditionally guaranteed on a senior subordinated
basis by all of Selects wholly-owned subsidiaries (the
Subsidiary Guarantors). Certain of Selects
subsidiaries that were not wholly-owned by Select did not
guarantee the Notes (the Non-Guarantor
Subsidiaries). The guarantees of the Notes are
subordinated in right of payment to all existing and future
senior indebtedness of the Subsidiary Guarantors, including any
borrowings or guarantees by those subsidiaries under the senior
secured credit facility. The Notes rank equally in right of
payment with all of Selects existing and future senior
subordinated indebtedness and senior to all of Selects
existing and future subordinated indebtedness. The notes were
not guaranteed by Holdings.
Prior to February 1, 2010, Select may redeem all or a
portion of the Notes at a price equal to 100% of the principal
amount plus accrued and unpaid interest to the redemption date
and a make whole premium. Thereafter, Select will be
entitled at its option to redeem all or a portion of the Notes
at the following redemption prices (expressed in percentages of
principal amount on the redemption date), plus accrued interest
to the redemption date, if redeemed during the
12-month
period commencing on February 1st of the years set
forth below:
|
|
|
|
|
Year
|
|
Redemption Price
|
|
|
2010
|
|
|
103.813
|
%
|
2011
|
|
|
102.542
|
%
|
2012
|
|
|
101.271
|
%
|
2013 and thereafter
|
|
|
100.000
|
%
|
Select is not required to make any mandatory redemption or
sinking fund payments with respect to the Notes. However, upon
the occurrence of any change of control of Select, each holder
of the Notes shall have the right to require Select to
repurchase such holders notes at a purchase price in cash
equal to 101% of the principal amount thereof on the date of
purchase plus accrued and unpaid interest, if any, to the date
of purchase.
The indenture governing the Notes contains customary events of
default and affirmative and negative covenants that, among other
things, limit Selects ability and the ability of its
restricted subsidiaries to incur or guarantee additional
indebtedness, pay dividends or make other equity distributions,
purchase or redeem capital stock, make certain investments,
enter into arrangements that restrict dividends from
subsidiaries, transfer and sell assets, engage in certain
transactions with affiliates and effect a consolidation or
merger. As of December 31, 2007, Select is in compliance
with all debt covenants related to the senior subordinated notes.
Senior
Floating Rate Notes
On September 29, 2005, Holdings, whose primary asset is its
investment in Select, issued $175.0 million of Senior
Floating Rate Notes, due 2015 (the Holdings Notes).
The Holdings Notes are senior unsecured obligations of Holdings
and bear interest at a floating rate, reset semi-annually, equal
to 6-month
LIBOR plus 5.75%.
F-26
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Simultaneously with the financing, the Company entered into an
interest rate swap arrangement, effectively fixing the interest
rate of the notes. The Holdings Notes are not guaranteed by
Select or any of its subsidiaries.
Payment of interest expense on the Holdings Notes is expected to
be funded through periodic dividends from Select. The terms of
Selects existing senior secured credit facility, as well
as the indenture governing the
75/8% Senior
Subordinated Notes, and certain other agreements, restrict
Select and certain of its subsidiaries from making payments or
transferring assets to Holdings, including dividends, loans or
other distributions. Such restrictions include prohibition of
dividends in an event of default and limitations on the total
amount of dividends paid to Holdings. In the event these
agreements do not permit such subsidiaries to provide Holdings
with sufficient distributions to fund interest and principal
payments on the Holdings Notes when due, Holdings may default on
its notes unless other sources of funding are available.
Proceeds from the offering were used to pay a special dividend
of $175.0 million to stockholders of Holdings in September
2005. The payment of the special dividend triggered a payment
obligation of $14.5 million under Holdings long term
incentive compensation plan, which was paid in September 2005
(Note 9).
Prior to September 15, 2009, Holdings may redeem all or a
portion of the Holdings Notes at a price equal to 100% of the
principal amount plus accrued and unpaid interest to the
redemption date and a make-whole premium.
Thereafter, Holdings may redeem some or all of the Holdings
Notes at the redemption prices set forth below:
|
|
|
|
|
Year
|
|
Redemption Price
|
|
|
2009
|
|
|
102.00
|
%
|
2010
|
|
|
101.00
|
%
|
2011
|
|
|
100.00
|
%
|
Prior to September 15, 2008, Holdings may redeem either all
of the outstanding Holdings Notes or up to 35% of the aggregate
principal amount of the Holdings Notes with the proceeds of one
or more equity offerings at a redemption price equal to par plus
the coupon on the Holdings Notes at the time notice of
redemption is given.
Holdings is not required to make any mandatory redemption or
sinking fund payments with respect to the Holdings Notes.
However, upon the occurrence of any change of control of
Holdings, each holder of the Holdings Notes shall have the right
to require Holdings to repurchase such notes at a purchase price
in cash equal to 101% of the principal amount thereof on the
date of purchase plus accrued and unpaid interest, if any, to
the date of purchase.
The indenture governing the Holdings Notes contains customary
events of default and affirmative and negative covenants that,
among other things, limit Holdings ability and the ability
of its restricted subsidiaries, including Select, to: incur
additional indebtedness and issue or sell preferred stock; pay
dividends on, redeem or repurchase capital stock; make certain
investments; create certain liens; sell certain assets; incur
obligations that restrict the ability of its subsidiaries to
make dividends or other payments; guarantee indebtedness; engage
in transactions with affiliates; create or designate
unrestricted subsidiaries; and consolidate, merge or transfer
all or substantially all of its assets and the assets of its
subsidiaries on a consolidated basis. As of December 31,
2007, Holdings is in compliance with all debt covenants related
to the senior floating rate notes.
10%
Senior Subordinated Notes
On February 24, 2005, Holdings issued 10% senior
subordinated notes to WCAS Capital Partners IV, L.P., an
investment fund affiliated with Welsh Carson, Rocco A. Ortenzio,
Robert A. Ortenzio and certain other investors who are members
of or affiliated with the Ortenzio family, for an aggregate
purchase price of $150.0 million. The senior subordinated
notes had preferred and common shares attached which were
recorded at the estimated fair market value on the date of
issuance. These shares were recorded as a discount to the senior
subordinated notes and are amortized using the interest method.
F-27
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Maturities of the Companys long term debt for the years
after 2007 are approximately as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
7,749
|
|
2009
|
|
|
8,897
|
|
2010
|
|
|
6,912
|
|
2011
|
|
|
602,242
|
|
2012
|
|
|
160,725
|
|
2013 and beyond
|
|
|
969,110
|
|
Preferred
Stock
Holdings is authorized to issue 25,000,000 shares of
participating preferred stock and had 22,163,769.18 shares
and 22,163,323.08 shares outstanding at December 31,
2006 and 2007, respectively. Holdings repurchased
1,487 shares of participating preferred stock during the
year ended December 31, 2006, and 446 shares of
participating preferred stock during the year ended
December 31, 2007. The participating preferred stock
accrues dividends at an annual dividend rate of 5%, compounded
quarterly on March 31, June 30, September 30 and
December 31 of each year. Dividends earned during the year ended
December 31, 2006 and the year ended December 31, 2007
amounted to $22.7 million and $23.8 million,
respectively and were charged against retained earnings. Each
share of participating preferred stock is entitled to one vote
on all matters submitted to stockholders of Holdings. The
participating preferred stock ranks senior to the common stock
with respect to dividend rights and rights upon liquidation. The
liquidation preference is equal to the original cost of a share
of the preferred stock ($26.90 per share) plus all accrued and
unpaid dividends thereon less the amount of any previously
declared and paid special dividends.
In connection with Holdings issuance of the Holdings
Notes, Holdings paid in September 2005 a special dividend of
$175.0 million, which included $17.9 million of
accreted dividends, on the preferred stock (Note 7).
Upon the redemption of the participating preferred stock
occurring due to a change of control or liquidation, or the
conversion and redemption of the participating preferred stock
occurring due to a sale of common stock of Holdings through a
public offering, each holder of participating preferred stock
will receive cash equal to the original cost of a share of the
preferred stock ($26.90 per share) plus all accrued and unpaid
dividends thereon less the amount of any previously declared and
paid special dividends and a number of shares of common stock
equal to the number of participating preferred shares owned.
Common
Stock
As part of the Merger, common stock of the Predecessor was
retired. Holdings is authorized to issue 250,000,000 shares
of $0.001 par value common stock. During the year ended
December 31, 2006, Holdings repurchased 24,384 shares
of common stock, rescinded 679,990 shares of common stock
that were related to a restricted stock grant and issued
200,000 shares of common stock that were related to
restricted stock grants. During the year ended December 31,
2007, Holdings repurchased 3,000 shares of common stock and
issued 265,106 shares of common stock of which 200,000 were
restricted stock issuances.
|
|
9.
|
Long term
Incentive Compensation
|
On June 2, 2005, Holdings adopted a Long term Cash
Incentive Plan (cash plan). The total number of
units available under the cash plan for awards may not exceed
100,000. If any awards are terminated, forfeited or cancelled,
units granted under such awards are available for award again
under the cash plan. The purposes of the cash plan are to
attract and retain key employees, motivate participating key
employees to achieve the long-range
F-28
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
goals of the Company, provide competitive incentive compensation
opportunities and further align the interests of participating
key employees with Holdings stockholders.
Payment of cash benefits is based upon (i) the value of the
Company upon a change of control of Holdings or upon a qualified
initial public offering of Holdings or (ii) a redemption of
Holdings preferred stock or special dividends paid on
Holdings preferred stock. Until the occurrence of an event
that would trigger the payment of cash on any outstanding units
is deemed probable by the Company, no expense for any award is
reflected in the Companys financial statements.
As a result of the special dividend of $175.0 million paid
to Holdings preferred stockholders on September 29,
2005, certain provisions of the Holdings long term
incentive compensation plan were met and resulted in a payment
of $14.5 million to certain members of senior management of
the Company. The expense of $14.5 million in long term
compensation was included in general and administrative expense
in the period from February 25, 2005 through
December 31, 2005 (Successor).
|
|
10.
|
Stock
Option and Restricted Stock Plans
|
Predecessor
Stock Option Plans
All stock options related to the Predecessor stock incentive
plans (Select Medical Corporation Second Amended and Restated
1997 Stock Option Plan and the 2002 Non-Employee Directors
Plan) were canceled in connection with the Merger. Stock option
holders received as consideration a cash payment equal to
(i) $18.00 minus the exercise price of the option
multiplied by (ii) the number of unexercised shares subject
to the option (whether vested or not). Select paid a total of
$142.2 million in cash to stock option holders to cancel
these options. Of this amount $115.0 million was paid to
individuals that are classified as general and administrative
positions and $27.2 million to individuals classified as
cost of services positions.
Successor
Stock Option and Restricted Stock Plans
The Company adopted SFAS No. 123R, Share-Based
Payment in the Successor period beginning on
February 25, 2005. Holdings adopted the Select Medical
Holdings Corporation 2005 Equity Incentive Plan (the
Plan). The equity incentive plan provides for grants
of restricted stock and stock options of Holdings. In addition,
on August 10, 2005 the Board of Directors of Holdings
authorized a director stock option plan (Director
Plan) for non-employee directors. On November 8, 2005
the Board of Directors of Holdings formally approved the
previously authorized stock option plan for non-employee
directors, under which Holdings can issue options to purchase up
to 250,000 shares of Holdings common stock.
The options generally vest over five years and have an option
term not to exceed ten years. The fair value of the options
granted was estimated using the Black-Scholes option pricing
model assuming an expected volatility of 28%, no dividend yield,
an expected life of five years and a risk free rate of 4.8% in
2006 and expected volatility of 34%, no dividend yield, an
expected life of five years and a risk free rate of 4.5% in 2007.
Holdings granted 200,000 shares of common stock of Holdings
as restricted stock awards during both the years ended
December 31, 2006 and December 31, 2007. In addition,
during the year ended December 31, 2006, Holdings cancelled
679,990 shares of common stock related to restricted stock
awards. These awards range in value from $0.08 to $0.50 per
share and generally vest over five years with a term not to
exceed ten years. The fair value of the restricted stock awards
were determined by using the price exchanged for common stock of
Holdings that occurred in close proximity to the issuance of
restricted stock awards and then applying an estimated discount
for the lack of control and lack of marketability attributes of
the restricted stock. Both the discount for lack of control and
the discount for lack of marketability were estimated by using
two methodologies to yield a range of results. The estimated
range of discount for lack of control is 10% to 20% and the
range of discount for lack of marketability is
F-29
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
35% to 40%. Stock compensation expense for each of the next five
years, based on restricted stock awards granted as of
December 31, 2007, is estimated to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(in thousands)
|
|
|
Stock compensation expense
|
|
$
|
2,101
|
|
|
$
|
1,097
|
|
|
$
|
183
|
|
|
$
|
3
|
|
|
$
|
0
|
|
Stock option transactions and other information related to the
Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
|
|
|
|
|
|
Weighted Average
|
|
|
|
Share
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Balance, January 1, 2006
|
|
$
|
1.00
|
|
|
|
1,984
|
|
|
$
|
1.00
|
|
Granted
|
|
|
1.00 - 2.50
|
|
|
|
1,913
|
|
|
|
2.42
|
|
Canceled
|
|
|
1.00 - 2.50
|
|
|
|
(124
|
)
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
1.00 - 2.50
|
|
|
|
3,773
|
|
|
|
1.71
|
|
Granted
|
|
|
2.50
|
|
|
|
1,219
|
|
|
|
2.50
|
|
Exercised
|
|
|
1.00 - 2.50
|
|
|
|
(65
|
)
|
|
|
1.02
|
|
Canceled
|
|
|
1.00 - 2.50
|
|
|
|
(371
|
)
|
|
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
1.00 - 2.50
|
|
|
|
4,556
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information with respect to the outstanding options
as of December 31, 2007 for the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Number
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercisable
|
|
(in thousands, except per share amounts)
|
|
|
$
|
1.00
|
|
|
|
1,794
|
|
|
|
7.14
|
|
|
|
707
|
|
|
2.50
|
|
|
|
2,762
|
|
|
|
8.60
|
|
|
|
371
|
|
Transactions and other information related to the
Directors Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
|
|
|
|
|
|
Weighted Average
|
|
|
|
Share
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Balance, January 1, 2006
|
|
$
|
1.00
|
|
|
|
60
|
|
|
$
|
1.00
|
|
Granted
|
|
|
2.50
|
|
|
|
30
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
1.00 - 2.50
|
|
|
|
90
|
|
|
|
1.50
|
|
Granted
|
|
|
2.50
|
|
|
|
30
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
1.00 - 2.50
|
|
|
|
120
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional information with respect to the outstanding options
as of December 31, 2007 for the Directors Plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Number
|
|
Exercise Price
|
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercisable
|
|
(in thousands, except per share amounts)
|
|
|
$
|
1.00
|
|
|
|
60
|
|
|
|
7.61
|
|
|
|
24
|
|
|
2.50
|
|
|
|
60
|
|
|
|
9.24
|
|
|
|
6
|
|
The Company recognized the following stock compensation expense
related to restricted stock and stock option awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Stock compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in general and administrative
|
|
|
$
|
115,025
|
|
|
|
$
|
10,134
|
|
|
$
|
3,551
|
|
|
$
|
3,555
|
|
Included in cost of services
|
|
|
|
27,188
|
|
|
|
|
178
|
|
|
|
231
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
142,213
|
|
|
|
$
|
10,312
|
|
|
$
|
3,782
|
|
|
$
|
3,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys tax provision from
continuing operations for the period from January 1 through
February 24, 2005 (Predecessor), the period from February
25 through December 31, 2005 (Successor), the years ended
December 31, 2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
|
|
|
|
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
$
|
3,632
|
|
|
|
$
|
26,585
|
|
|
$
|
24,706
|
|
|
$
|
11,004
|
|
State and local
|
|
|
|
437
|
|
|
|
|
2,929
|
|
|
|
5,488
|
|
|
|
5,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
|
4,069
|
|
|
|
|
29,514
|
|
|
|
30,194
|
|
|
|
16,239
|
|
Deferred
|
|
|
|
(63,863
|
)
|
|
|
|
19,822
|
|
|
|
13,327
|
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
|
$
|
(59,794
|
)
|
|
|
$
|
49,336
|
|
|
$
|
43,521
|
|
|
$
|
18,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The differences between the expected income tax provision from
continuing operations and income taxes computed at the federal
statutory rate of 35% were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
|
|
|
|
|
|
|
through
|
|
|
|
through
|
|
|
For the Year Ended
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Expected federal tax rate
|
|
|
35.0
|
%
|
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of federal benefit
|
|
|
4.6
|
|
|
|
|
5.7
|
|
|
|
3.0
|
|
|
|
0.7
|
|
Other permanent differences
|
|
|
|
|
|
|
|
3.4
|
|
|
|
0.9
|
|
|
|
1.5
|
|
Valuation allowance
|
|
|
(1.5
|
)
|
|
|
|
(1.4
|
)
|
|
|
2.7
|
|
|
|
3.8
|
|
Tax loss on sale of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
(6.9
|
)
|
|
|
(6.5
|
)
|
Other
|
|
|
(0.9
|
)
|
|
|
|
(1.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
37.2
|
%
|
|
|
|
41.6
|
%
|
|
|
34.6
|
%
|
|
|
34.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of deferred tax assets and liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Deferred tax assets current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
14,555
|
|
|
$
|
7,440
|
|
Compensation and benefit related accruals
|
|
|
18,743
|
|
|
|
26,746
|
|
Malpractice insurance
|
|
|
10,856
|
|
|
|
10,867
|
|
Restructuring reserve
|
|
|
90
|
|
|
|
6,216
|
|
Other accruals, net
|
|
|
2,769
|
|
|
|
2,899
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset current
|
|
|
47,013
|
|
|
|
54,168
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) non-current
|
|
|
|
|
|
|
|
|
Expenses not currently deductible for tax
|
|
|
101
|
|
|
|
101
|
|
Net operating loss carry forwards
|
|
|
20,886
|
|
|
|
24,693
|
|
Restricted stock
|
|
|
(2,918
|
)
|
|
|
(1,426
|
)
|
Interest rate swaps
|
|
|
(3,397
|
)
|
|
|
3,708
|
|
Depreciation and amortization
|
|
|
(36,719
|
)
|
|
|
(41,595
|
)
|
Other
|
|
|
|
|
|
|
3,134
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability non-current
|
|
|
(22,047
|
)
|
|
|
(11,385
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
24,966
|
|
|
|
42,783
|
|
Valuation allowance
|
|
|
(14,428
|
)
|
|
|
(16,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,538
|
|
|
$
|
26,022
|
|
|
|
|
|
|
|
|
|
|
F-32
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The valuation allowance is primarily attributable to the
uncertainty regarding the realization of state net operating
losses and other net deferred tax assets of loss entities. The
net deferred tax assets at December 31, 2007 of
approximately $26.0 million, consists of items which have
been recognized for financial reporting purposes, but will
reduce tax on returns to be filed in the future and include the
use of net operating loss carryforwards. The Company has
performed the required assessment of positive and negative
evidence regarding the realization of the net deferred tax
assets in accordance with SFAS No. 109,
Accounting for Income Taxes. This assessment
included a review of legal entities with three years of
cumulative losses, estimates of projected future taxable income
and the impact of tax-planning strategies that management plans
to implement. Although realization is not assured, based on the
Companys assessment, it has concluded that it is more
likely than not that such assets, net of the existing valuation
allowance, will be realized.
Federal net operating loss carry forwards totaling
$2.6 million will expire in 2021 and thereafter. As a
result of the acquisition of Kessler Rehabilitation Corporation
and SemperCare, Inc., the Company is subject to the provisions
of Section 382 of the Internal Revenue Code which provide
for annual limitations on the deductibility of acquired net
operating losses and certain tax deductions. These limitations
apply until the earlier of utilization or expiration of the net
operating losses. Additionally, if certain substantial changes
in the Companys ownership should occur, there would be an
annual limitation on the amount of the carryforwards that can be
utilized.
The total state net operating losses are approximately
$470.0 million with various expirations.
Reserves
for Uncertain Tax Positions:
The Company adopted FIN No. 48 on January 1,
2007. Upon adoption, the Company recognized a $6.0 million
increase to reserves for uncertain tax positions and a
$4.1 million increase to deferred tax assets with a net
adjustment to the beginning balance of retained earnings of
$1.9 million. Including the cumulative effect of the
increases in reserves and deferred tax assets, at the beginning
of 2007, the Company had approximately $18.3 million of
unrecognized tax benefits.
The Company and its subsidiaries are subject to
U.S. federal income tax as well as income tax of multiple
state jurisdictions. The Company was subject to Canadian income
tax prior to the disposition of its Canadian operations on
March 1, 2006. Significant judgment is required in
evaluating the Companys tax positions and determining its
provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which
the ultimate tax determination is uncertain. The Company
establishes reserves for tax-related uncertainties based on
estimates of whether, and the extent to which, additional taxes
will be due. These reserves are established when it is believed
that certain positions might be challenged despite the
Companys belief that its tax return positions are fully
supportable. The Company adjusts these reserves in light of
changing facts and circumstances, such as the outcome of a tax
audit. The provision for income taxes includes the impact of
reserve provisions and changes to reserves that are considered
appropriate. Accruals for uncertain tax positions are provided
for in accordance with the requirements of FIN No. 48.
The reconciliation of the Companys unrecognized tax
benefits is as follows (in thousands):
|
|
|
|
|
Gross tax contingencies January 1, 2007
|
|
$
|
21,305
|
|
Reductions for tax positions taken in prior periods
|
|
|
(2,249
|
)
|
Additions for current period tax positions taken
|
|
|
2,357
|
|
|
|
|
|
|
Gross tax contingencies December 31, 2007
|
|
$
|
21,413
|
|
|
|
|
|
|
As of December 31, 2007, the Company had $21.4 million
of unrecognized tax benefits of which $7.1 million, if
fully recognized, would affect the Companys effective
income tax rate. The remaining amount would not affect the
effective income tax rate and would be accounted for as a
reduction in goodwill if recognized.
F-33
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, changes to the Companys
gross unrecognized tax benefits that are reasonably possible in
the next 12 months are not material. The Companys
policy is to include interest and penalties related to income
taxes in income tax expense. As of December 31, 2007, the
Company had accrued interest and penalties related to income
taxes of $1.4 million, net of federal income tax benefits,
on the balance sheet. Interest and penalties recognized for the
year ended December 31, 2007 was $0.5 million net of
federal income tax benefits.
The Company has substantially concluded all U.S. federal
income tax matters for years through 2004. Substantially all
material state, local and foreign income tax matters have been
concluded for years through 2001. The federal income tax return
for 2005 is currently under examination.
|
|
12.
|
Retirement
Savings Plan
|
The Company sponsors a defined contribution retirement savings
plan for substantially all of its employees. Employees who are
not classified as HCEs (highly compensated employees) may
contribute up to 30% of their salary; HCEs may contribute
up to 6% of their salary. The Company matches 50% of the first
6% of compensation employees contribute to the plan. The
employees vest in the employer contributions over a three-year
period beginning on the employees hire date. The expense
incurred by the Company related to this plan was
$1.2 million for the period from January 1 through
February 24, 2005 (Predecessor), $7.0 million for the
period from February 25 through December 31, 2005
(Successor), $9.0 million during the year ended
December 31, 2006, and $5.7 million during the year
ended December 31, 2007.
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments and related
disclosures about products and services, geographic areas and
major customers.
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 (loss) before
interest, income taxes, stock compensation expense, long term
incentive compensation, depreciation and amortization, income
from discontinued operations, loss on early retirement of debt,
Merger related charges, other income (expense) and minority
interest.
The following table summarizes selected financial data for the
Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Period from January 1 through February 24, 2005
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net revenue
|
|
$
|
202,781
|
|
|
$
|
73,344
|
|
|
$
|
1,611
|
|
|
$
|
277,736
|
|
Adjusted EBITDA
|
|
|
44,384
|
|
|
|
9,848
|
|
|
|
(7,701
|
)
|
|
|
46,531
|
|
Total assets
|
|
|
904,754
|
|
|
|
239,019
|
|
|
|
87,640
|
|
|
|
1,231,413
|
|
Capital expenditures
|
|
|
1,165
|
|
|
|
408
|
|
|
|
1,013
|
|
|
|
2,586
|
|
F-34
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Period from February 25 through December 31,
2005
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net revenue
|
|
$
|
1,169,702
|
|
|
$
|
407,367
|
|
|
$
|
3,637
|
|
|
$
|
1,580,706
|
|
Adjusted EBITDA
|
|
|
263,760
|
|
|
|
56,109
|
|
|
|
(36,466
|
)
|
|
|
283,403
|
|
Total
assets(1):
|
|
|
1,656,224
|
|
|
|
293,720
|
|
|
|
218,441
|
|
|
|
2,168,385
|
|
Capital expenditures
|
|
|
101,158
|
|
|
|
3,342
|
|
|
|
2,860
|
|
|
|
107,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net revenue
|
|
$
|
1,378,543
|
|
|
$
|
470,339
|
|
|
$
|
2,616
|
|
|
$
|
1,851,498
|
|
Adjusted EBITDA
|
|
|
283,270
|
|
|
|
64,823
|
|
|
|
(39,769
|
)
|
|
|
308,324
|
|
Total assets:
|
|
|
1,742,803
|
|
|
|
258,773
|
|
|
|
180,948
|
|
|
|
2,182,524
|
|
Capital expenditures
|
|
|
146,291
|
|
|
|
6,527
|
|
|
|
2,278
|
|
|
|
155,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net revenue
|
|
$
|
1,386,410
|
|
|
$
|
603,413
|
|
|
$
|
1,843
|
|
|
$
|
1,991,666
|
|
Adjusted EBITDA
|
|
|
217,175
|
|
|
|
75,437
|
|
|
|
(37,684
|
)
|
|
|
254,928
|
|
Total
assets(2):
|
|
|
1,882,476
|
|
|
|
513,397
|
|
|
|
99,173
|
|
|
|
2,495,046
|
|
Capital expenditures
|
|
|
146,901
|
|
|
|
14,737
|
|
|
|
4,436
|
|
|
|
166,074
|
|
|
|
|
(1)
|
|
The Outpatient Rehabilitation
segment includes $75.3 million in assets held for sale
related to the sale of CBIL (Note 3).
|
(2)
|
|
The Specialty Hospital segment
includes $14.6 million in real estate assets held for sale
(Note 3).
|
F-35
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of Adjusted EBITDA to income (loss) from
continuing operations before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Period from January 1, through February 24, 2005
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Adjusted EBITDA
|
|
$
|
44,384
|
|
|
$
|
9,848
|
|
|
$
|
(7,701
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(3,934
|
)
|
|
|
(1,460
|
)
|
|
|
(539
|
)
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
(142,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
40,450
|
|
|
$
|
8,388
|
|
|
$
|
(150,453
|
)
|
|
$
|
(101,615
|
)
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,736
|
)
|
Merger related charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,025
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,128
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(160,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Period from February 25 through December 31,
2005
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Adjusted EBITDA
|
|
$
|
263,760
|
|
|
$
|
56,109
|
|
|
$
|
(36,466
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(23,421
|
)
|
|
|
(8,445
|
)
|
|
|
(6,056
|
)
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
(10,312
|
)
|
|
|
|
|
Long term incentive
compensation(1)
|
|
|
|
|
|
|
|
|
|
|
(14,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
240,339
|
|
|
$
|
47,664
|
|
|
$
|
(67,287
|
)
|
|
$
|
220,716
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,092
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,441
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Adjusted EBITDA
|
|
$
|
283,270
|
|
|
$
|
64,823
|
|
|
$
|
(39,769
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(30,731
|
)
|
|
|
(12,964
|
)
|
|
|
(2,973
|
)
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
(3,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
252,539
|
|
|
$
|
51,859
|
|
|
$
|
(46,524
|
)
|
|
$
|
257,874
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,538
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Adjusted EBITDA
|
|
$
|
217,175
|
|
|
$
|
75,437
|
|
|
$
|
(37,684
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(37,085
|
)
|
|
|
(17,458
|
)
|
|
|
(2,754
|
)
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
(3,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
180,090
|
|
|
$
|
57,979
|
|
|
$
|
(44,184
|
)
|
|
$
|
193,885
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(138,052
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in general and
administrative expenses on the Companys consolidated
statement of operations.
|
F-37
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Income
(Loss) per Share
|
The Company applies the two-class method for calculating and
presenting income (loss) per common share. As noted in Statement
of Financial Accounting Standards No. 128, Earnings
per Share (as amended), the two-class method is an
earnings allocation formula that determines earnings per share
for each class of stock participation rights in undistributed
earnings. Under that method:
|
|
|
|
(a)
|
Income (loss) from continuing operations is reduced by the
contractual amount of dividends in the current period for each
class of stock.
|
|
|
|
|
(b)
|
The remaining income (loss) is allocated to common stock and
preferred stock to the extent that each security may share in
income (loss), as if all of the income (loss) for the period had
been distributed. The total income (loss) allocated to each
security is determined by adding together the amount allocated
for dividends and the amount allocated for participation
features.
|
|
|
|
|
(c)
|
The income (loss) allocated to common stock is then divided by
the weighted average number of outstanding shares to which the
earnings are allocated to determine the income (loss) per share
for common stock.
|
In applying the two-class method, the Company determined that
undistributed earnings should be allocated equally on a per
share basis between the common stock and preferred stock due to
the equal participation rights of the common stock and preferred
stock (i.e., the voting conversion rights).
The following table sets forth for the periods indicated the
calculation of income (loss) per share in the Companys
Consolidated Statement of Operations and the differences between
basic weighted average shares outstanding and diluted weighted
average shares outstanding used to compute basic and diluted
earnings per share, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
For the Year
|
|
|
|
|
through
|
|
|
|
through
|
|
|
Ended
|
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(in thousands,
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
except per
|
|
|
|
|
|
|
|
|
share data)
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
$
|
(100,773
|
)
|
|
|
$
|
69,255
|
|
|
$
|
82,401
|
|
|
$
|
35,430
|
|
Less: Preferred dividends
|
|
|
|
|
|
|
|
|
23,519
|
|
|
|
22,663
|
|
|
|
23,807
|
|
Less: Earnings allocated to preferred stockholders
|
|
|
|
|
|
|
|
|
5,230
|
|
|
|
6,543
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common
stockholders continuing operations
|
|
|
$
|
(100,773
|
)
|
|
|
$
|
40,506
|
|
|
$
|
53,195
|
|
|
$
|
10,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
$
|
552
|
|
|
|
$
|
3,072
|
|
|
$
|
12,478
|
|
|
$
|
|
|
Less: Earnings allocated to preferred stockholders
|
|
|
|
|
|
|
|
|
351
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders discontinued operations
|
|
|
$
|
552
|
|
|
|
$
|
2,721
|
|
|
$
|
11,111
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
For the Year
|
|
|
|
|
through
|
|
|
|
through
|
|
|
Ended
|
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(in thousands,
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
except per
|
|
|
|
|
|
|
|
|
share data)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
|
102,026
|
|
|
|
|
171,330
|
|
|
|
180,183
|
|
|
|
190,286
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
|
|
9,740
|
|
|
|
8,104
|
|
|
|
2,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
|
102,026
|
|
|
|
|
181,070
|
|
|
|
188,287
|
|
|
|
192,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.23
|
|
|
$
|
0.30
|
|
|
$
|
0.05
|
|
Discontinued operations, net of tax
|
|
|
|
0.01
|
|
|
|
|
0.02
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.25
|
|
|
$
|
0.36
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
$
|
(0.99
|
)
|
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.05
|
|
Discontinued operations, net of tax
|
|
|
|
0.01
|
|
|
|
$
|
0.02
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share
|
|
|
$
|
(0.98
|
)
|
|
|
$
|
0.24
|
|
|
$
|
0.34
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts are shown here for informational and
comparative purposes only since their inclusion would be
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
January 1
|
|
|
February 25
|
|
For the Year
|
|
|
|
through
|
|
|
through
|
|
Ended
|
|
|
|
February 24,
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
Stock options
|
|
|
|
5,009
|
|
|
|
|
2,012
|
|
|
|
2,589
|
|
|
|
4,005
|
|
Holdings also has participating preferred stock that is
convertible upon a qualifying public offering, as defined in
Holdings amended and restated certificate of
incorporation. No conversion has been assumed in the computation
of earnings per share. See Note 8
Stockholders Equity for further information on the terms
of Holdings preferred stock.
|
|
15.
|
Fair
Value of Financial Instruments
|
Financial instruments include cash and cash equivalents, notes
payable and long term debt. The carrying amount of cash and cash
equivalents approximates fair value because of the short-term
maturity of these instruments.
The Company is exposed to the impact of interest rate changes.
The Companys objective is to manage the impact of the
interest rate changes on earnings and cash flows. On
June 13, 2005, Select entered into an 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
August 22, 2005. 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
F-39
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$200.0 million, and the underlying variable rate debt is
associated with Selects senior secured credit facility.
The variable interest rate of the debt was 7.0% and the fixed
rate of the swap was 6.3% at December 31, 2007. The swap is
for a period of five years, with quarterly resets on
February 22, May 22, August 22 and November 22 of each
year.
On September 19, 2005, Select entered into an additional
interest rate swap agreement to hedge Holdings interest
rate risk for its senior floating rate notes. The effective date
of the swap transaction was September 29, 2005. 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 $175.0 million, and the underlying
variable rate debt is associated with Holdings
$175.0 million senior floating rate notes due 2015. The
variable interest rate of the debt was 11.3% and the fixed rate
of the swap was 10.2% at December 31, 2007. The swap is for
a period of four years, with semi-annual resets on March 15 and
September 15 of each year.
On March 8, 2007, Select entered into an additional
interest rate swap agreement to hedge Selects interest
rate risk for a portion of its term loans under its senior
secured credit facility. The effective date of the swap
transaction was May 22, 2007. The swap is designated as a
cash flow hedge of forecasted LIBOR based variable rate interest
payments. The notional amount of the interest rate swap is
$200.0 million, and the underlying variable rate debt is
associated with Selects senior secured credit facility.
The variable interest rate of the debt was 7.0% and the fixed
rate of the swap was 6.8% at December 31, 2007. The swap is
for a period of three years, with quarterly resets on
February 22, May 22, August 22 and November 22 of each
year.
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 variable interest rate of the debt was 7.0% and the fixed
rate of the swap was 6.3% at December 31, 2007. The swap is
for a period of three years, with quarterly resets on
February 22, May 22, August 22 and November 22 of each
year.
The interest rate swaps have been designated as hedges and
qualify under the provision of SFAS No. 133 as
effective hedges. The interest rate swaps are reflected at fair
value in the consolidated balance sheet and the related gain of
$1.4 million, net of tax, and the loss of
$10.5 million, net of tax, was recorded in
stockholders equity as a component of other comprehensive
income (loss) for the years ended December 31, 2006 and
2007, respectively. The Company will test for ineffectiveness
whenever financial statements are issued or at least every three
months using the Hypothetical Derivative Method.
Borrowings under Selects senior secured credit facility
which are not subject to the swaps have variable rates that
reflect currently available terms and conditions for similar
debt. The carrying amount of this debt is a reasonable estimate
of fair value.
The carrying value of the
75/8% Senior
Subordinated Notes was $660.0 million and the estimated
fair value was $567.6 million at December 31, 2007.
The carrying value of the senior floating rate notes was
$175.0 million and the estimated fair value was
$152.3 million at December 31, 2007.
|
|
16.
|
Related
Party Transactions
|
The Company is party to various rental and other agreements with
companies owned by related parties affiliated through common
ownership or management. The Company made rental and other
payments aggregating $0.3 million for the period from
January 1 through February 24, 2005 (Predecessor),
$1.7 million for the period from February 25 through
December 31, 2005 (Successor), $2.3 million during the
year ended December 31, 2006, and $2.3 million during
the year ended December 31, 2007 to the affiliated
companies.
F-40
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, future rental commitments under
outstanding agreements with the affiliated companies are
approximately as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
3,069
|
|
2009
|
|
|
3,096
|
|
2010
|
|
|
3,073
|
|
2011
|
|
|
3,068
|
|
2012
|
|
|
3,158
|
|
Thereafter
|
|
|
20,454
|
|
|
|
|
|
|
|
|
$
|
35,918
|
|
|
|
|
|
|
|
|
17.
|
Commitments
and Contingencies
|
Leases
The Company leases facilities and equipment from unrelated
parties under operating leases. Minimum future lease obligations
on long term non-cancelable operating leases in effect at
December 31, 2007 are approximately as follows (in
thousands):
|
|
|
|
|
2008
|
|
$
|
100,215
|
|
2009
|
|
|
77,477
|
|
2010
|
|
|
55,894
|
|
2011
|
|
|
38,165
|
|
2012
|
|
|
27,174
|
|
Thereafter
|
|
|
174,423
|
|
|
|
|
|
|
|
|
$
|
473,348
|
|
|
|
|
|
|
Total rent expense for operating leases, including cancelable
leases, for the period from January 1 through February 24,
2005 (Predecessor) was $18.0 million, for the period from
February 25 through December 31, 2005 (Successor) was
$96.7 million, for the year ended December 31, 2006
was $118.4 million, and for the year ended
December 31, 2007 was $131.9 million.
Facility rent expense for the period from January 1 through
February 24, 2005 (Predecessor) was $13.6 million, for
the period from February 25 through December 31, 2005
(Successor) was $68.0 million, for the year ended
December 31, 2006 was $84.0 million, and for the year
ended December 31, 2007 was $98.5 million.
Construction
Commitments
At December 31, 2007, the Company has outstanding
commitments under construction contracts related to new
construction, improvements and renovations at the Companys
long term acute care properties and inpatient rehabilitation
facilities totaling approximately $8.7 million.
Patient
Care Obligation
The Company acquired a long term obligation to care for an
indigent, ventilator dependent, quadriplegic individual through
its acquisition of Kessler Rehabilitation Corporation. In
September 2005, the Company recorded a one time benefit of
$3.8 million related to the termination of this liability.
F-41
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
In March 2000, the Company entered into three-year employment
agreements with three of its executive officers. Under these
agreements, the three executive officers currently receive a
combined total annual salary of $2.4 million subject to
adjustment by the Companys Board of Directors. The
employment agreements also contain a change in control provision
and provides that the three executive officers will receive long
term disability insurance. At the end of each
12-month
period beginning March 1, 2000, the term of each employment
agreement automatically extends for an additional year unless
one of the executives or the Company gives written notice to the
other not less than three months prior to the end of that
12-month
period that they do not want the term of the employment
agreement to continue.
The Company has entered into change in control agreements with
six other members of senior management.
A subsidiary of the Company has entered into a naming,
promotional and sponsorship agreement with an NFL team for the
teams headquarters complex that requires a payment of
$2.6 million in 2008. Each successive annual payment
increases by 2.3% through 2025. The naming, promotional and
sponsorship agreement is in effect until 2025.
Litigation
On August 24, 2004, Clifford C. Marsden and Ming Xu filed a
purported class action complaint in the United States District
Court for the Eastern District of Pennsylvania on behalf of the
public stockholders of Select against Martin F. Jackson, Robert
A. Ortenzio, Rocco A. Ortenzio, Patricia A. Rice and Select. The
complaint as later amended alleged, among other things, failure
to disclose adverse information regarding a potential regulatory
change affecting reimbursement for Selects services
applicable to long term acute care hospitals operated as
hospitals within hospitals. On October 25, 2007, the Court
certified a class of investors who purchased Select stock
between July 29, 2003 and May 11, 2004, inclusive. The
Court also appointed class representatives and class counsel. On
July 3, 2008, the parties reached a settlement in
principle. The settlement requires defendants to pay
$5.0 million, which will be paid entirely by our insurer.
The settlement is subject to both preliminary and final court
approval.
The Company is subject to legal proceedings and claims that
arise in the ordinary course of its business, which include
malpractice claims covered under insurance policies. In the
Companys opinion, the outcome of these actions will not
have a material adverse effect on the financial position, cash
flows or results of operations of the Company.
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.
Health care providers are subject to lawsuits under the qui tam
provisions of the federal False Claims Act. Qui tam lawsuits
typically remain under seal (hence, usually unknown to the
defendant) for some time while the government decides whether or
not to intervene on behalf of a private qui tam plaintiff (known
as a relator) and take the lead in the litigation. These
lawsuits can involve significant monetary damages and penalties
and award bounties to private plaintiffs who successfully bring
the suits. We have 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.
F-42
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Supplemental
Disclosures of Cash Flow Information
|
Non-cash investing and financing activities are comprised of the
following for the years ended December 31, 2005, 2006 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
January 1
|
|
|
|
February 25
|
|
|
For the Year
|
|
|
|
through
|
|
|
|
through
|
|
|
Ended
|
|
|
|
February 24,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
Notes issued with acquisitions (Note 2)
|
|
$
|
|
|
|
|
$
|
60
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities assumed with acquisitions (Note 2)
|
|
|
19,924
|
|
|
|
|
148
|
|
|
|
|
|
|
|
36,458
|
|
Notes recorded related to sale of business (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
8,436
|
|
|
|
2,616
|
|
Tax benefit of stock option exercises
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
Selected
Quarterly Financial Data (Unaudited)
|
The table below sets forth selected unaudited financial data for
each quarter of the last two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(in thousands)
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
479,743
|
|
|
$
|
482,141
|
|
|
$
|
443,872
|
|
|
$
|
445,742
|
|
Income from operations
|
|
|
66,451
|
|
|
|
77,993
|
|
|
|
54,313
|
|
|
|
59,117
|
|
Income from continuing operations
|
|
|
18,171
|
|
|
|
27,271
|
|
|
|
12,544
|
|
|
|
24,415
|
|
Income from discontinued operations, net of tax
|
|
|
10,018
|
|
|
|
|
|
|
|
|
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,189
|
|
|
$
|
27,271
|
|
|
$
|
12,544
|
|
|
$
|
26,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
466,829
|
|
|
$
|
506,484
|
|
|
$
|
500,385
|
|
|
$
|
517,968
|
|
Income from operations
|
|
|
60,325
|
|
|
|
60,576
|
|
|
|
31,292
|
|
|
|
41,692
|
|
Net income (loss)
|
|
$
|
17,471
|
|
|
$
|
14,315
|
|
|
$
|
(3,106
|
)
|
|
$
|
6,750
|
|
F-43
The following Financial Statement Schedule along with the
reports thereon of PricewaterhouseCoopers LLP
dated
on pages and should be read in
conjunction with the consolidated financial statements.
Financial Statement Schedules not included in this filing have
been omitted because they are not applicable or the required
information is shown in the consolidated financial statements or
notes thereto.
Schedule II
Valuation and Qualifying Accounts
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
to Cost and
|
|
|
|
|
|
|
|
|
Balance at
|
|
Description
|
|
of Year
|
|
|
Expenses
|
|
|
Acquisitions(A)
|
|
|
Deductions(B)
|
|
|
End of Year
|
|
|
Year ended December 31, 2007 allowance for doubtful accounts
|
|
$
|
55,306
|
|
|
$
|
37,572
|
|
|
$
|
9,061
|
|
|
$
|
(46,083
|
)
|
|
$
|
55,856
|
|
Year ended December 31, 2006 allowance for doubtful accounts
|
|
$
|
74,891
|
|
|
$
|
18,810
|
|
|
$
|
|
|
|
$
|
(38,395
|
)
|
|
$
|
55,306
|
|
Combined year ended December 31, 2005 allowance for
doubtful accounts
|
|
$
|
94,622
|
|
|
$
|
24,801
|
|
|
$
|
7,847
|
|
|
$
|
(52,379
|
)
|
|
$
|
74,891
|
|
Year ended December 31, 2007 income tax valuation allowance
|
|
$
|
14,428
|
|
|
$
|
2,507
|
|
|
$
|
|
|
|
$
|
(174
|
)
|
|
$
|
16,761
|
|
Year ended December 31, 2006 income tax valuation allowance
|
|
$
|
11,961
|
|
|
$
|
3,485
|
|
|
$
|
|
|
|
$
|
(1,018
|
)
|
|
$
|
14,428
|
|
Combined year ended December 31, 2005 income tax valuation
allowance
|
|
$
|
10,506
|
|
|
$
|
2,322
|
|
|
$
|
823
|
|
|
$
|
(1,690
|
)
|
|
$
|
11,961
|
|
|
|
|
(A)
|
|
Represents opening balance sheet
allowances from acquired companies.
|
|
|
|
(B)
|
|
Allowance for doubtful accounts
deductions represent write-offs against the reserve for 2006 and
2007. In 2006, allowance for doubtful accounts deductions
represents: (1) write-offs against the reserve of
$52.1 million and (2) $0.3 million reclassified
to assets held for sale resulting from the sale of the
Companys Canadian subsidiary. Income tax valuation
allowance deductions primarily represent the disposition of
certain subsidiaries.
|
F-44
SELECT
MEDICAL HOLDINGS CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
Stock and
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
|
|
|
Equity at
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except share and
|
|
|
|
per share amounts)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,529
|
|
|
$
|
8,180
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$55,856 and $56,248 in 2007 and 2008, respectively
|
|
|
271,406
|
|
|
|
330,637
|
|
|
|
|
|
Current deferred tax asset
|
|
|
48,988
|
|
|
|
43,296
|
|
|
|
|
|
Prepaid income taxes
|
|
|
8,162
|
|
|
|
7,093
|
|
|
|
|
|
Other current assets
|
|
|
22,507
|
|
|
|
28,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
355,592
|
|
|
|
418,070
|
|
|
|
|
|
Property and equipment, net
|
|
|
487,026
|
|
|
|
486,337
|
|
|
|
|
|
Goodwill
|
|
|
1,499,485
|
|
|
|
1,503,263
|
|
|
|
|
|
Other identifiable intangibles
|
|
|
79,172
|
|
|
|
78,435
|
|
|
|
|
|
Assets held for sale
|
|
|
14,607
|
|
|
|
13,696
|
|
|
|
|
|
Other assets
|
|
|
59,164
|
|
|
|
54,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,495,046
|
|
|
$
|
2,554,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdrafts
|
|
$
|
21,124
|
|
|
$
|
5,630
|
|
|
|
|
|
Current portion of long term debt and notes payable
|
|
|
7,749
|
|
|
|
9,795
|
|
|
|
|
|
Accounts payable
|
|
|
73,847
|
|
|
|
89,765
|
|
|
|
|
|
Accrued payroll
|
|
|
59,483
|
|
|
|
70,229
|
|
|
|
|
|
Accrued vacation
|
|
|
33,080
|
|
|
|
34,853
|
|
|
|
|
|
Accrued interest
|
|
|
36,781
|
|
|
|
16,565
|
|
|
|
|
|
Accrued restructuring
|
|
|
15,484
|
|
|
|
12,914
|
|
|
|
|
|
Accrued other
|
|
|
78,242
|
|
|
|
68,134
|
|
|
|
|
|
Due to third party payors
|
|
|
15,072
|
|
|
|
4,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
340,862
|
|
|
|
312,792
|
|
|
|
|
|
Long term debt, net of current portion
|
|
|
1,747,886
|
|
|
|
1,816,569
|
|
|
|
|
|
Non-current deferred tax liability
|
|
|
22,966
|
|
|
|
14,934
|
|
|
|
|
|
Other non-current liabilities
|
|
|
52,266
|
|
|
|
82,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,163,980
|
|
|
|
2,226,439
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary companies
|
|
|
5,761
|
|
|
|
5,195
|
|
|
|
|
|
Preferred stock Authorized shares (liquidation
preference is $491,194 and $496,983 in 2007 and 2008,
respectively)
|
|
|
491,194
|
|
|
|
496,983
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 250,000,000 shares
authorized, 205,166,000 shares and 205,086,000 shares
issued and outstanding in 2007 and 2008, respectively
|
|
|
205
|
|
|
|
205
|
|
|
|
|
|
Capital in excess of par
|
|
|
(291,247
|
)
|
|
|
(290,567
|
)
|
|
|
|
|
Retained earnings
|
|
|
130,716
|
|
|
|
133,332
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(5,563
|
)
|
|
|
(17,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
(165,889
|
)
|
|
|
(174,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
2,495,046
|
|
|
$
|
2,554,414
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-45
SELECT
MEDICAL HOLDING CORPORATION
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except
|
|
|
|
per share data)
|
|
|
Net operating revenues
|
|
$
|
466,829
|
|
|
$
|
548,278
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
377,627
|
|
|
|
452,271
|
|
General and administrative
|
|
|
11,584
|
|
|
|
11,651
|
|
Bad debt expense
|
|
|
5,589
|
|
|
|
12,615
|
|
Depreciation and amortization
|
|
|
11,704
|
|
|
|
17,397
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
406,504
|
|
|
|
493,934
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
60,325
|
|
|
|
54,344
|
|
Other income and expense:
|
|
|
|
|
|
|
|
|
Other income
|
|
|
1,173
|
|
|
|
|
|
Interest income
|
|
|
929
|
|
|
|
126
|
|
Interest expense
|
|
|
(32,203
|
)
|
|
|
(36,919
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations before minority interests and income taxes
|
|
|
30,224
|
|
|
|
17,551
|
|
Minority interest in consolidated subsidiary companies
|
|
|
323
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
29,901
|
|
|
|
17,242
|
|
Income tax expense
|
|
|
12,430
|
|
|
|
8,542
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17,471
|
|
|
|
8,700
|
|
Preferred dividends
|
|
|
5,759
|
|
|
|
6,084
|
|
|
|
|
|
|
|
|
|
|
Net income available to common and preferred stockholders
|
|
$
|
11,712
|
|
|
$
|
2,616
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
Unaudited pro forma net income per common share
basic and diluted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-46
SELECT
MEDICAL HOLDINGS CORPORATION
AND
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Capital in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Stock
|
|
|
Stock Par
|
|
|
Excess of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
Issued
|
|
|
Value
|
|
|
Par
|
|
|
Earnings
|
|
|
Loss
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
205,166
|
|
|
$
|
205
|
|
|
$
|
(291,247
|
)
|
|
$
|
130,716
|
|
|
$
|
(5,563
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,700
|
|
|
|
|
|
|
$
|
8,700
|
|
Unrealized loss on interest rate swap, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,610
|
)
|
|
|
(11,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
20
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
(100
|
)
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
205,086
|
|
|
$
|
205
|
|
|
$
|
(290,567
|
)
|
|
$
|
133,332
|
|
|
$
|
(17,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-47
SELECT
MEDICAL HOLDINGS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ending March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,471
|
|
|
$
|
8,700
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,704
|
|
|
|
17,397
|
|
Provision for bad debts
|
|
|
5,589
|
|
|
|
12,615
|
|
Gain from disposal of assets and sale of business
|
|
|
(868
|
)
|
|
|
(114
|
)
|
Non-cash stock compensation expense
|
|
|
927
|
|
|
|
754
|
|
Amortization of debt discount
|
|
|
315
|
|
|
|
355
|
|
Minority interests
|
|
|
323
|
|
|
|
309
|
|
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(33,210
|
)
|
|
|
(71,861
|
)
|
Other current assets
|
|
|
423
|
|
|
|
(412
|
)
|
Other assets
|
|
|
(1,013
|
)
|
|
|
4,505
|
|
Accounts payable
|
|
|
3,967
|
|
|
|
15,917
|
|
Due to third-party payors
|
|
|
(5,961
|
)
|
|
|
(10,165
|
)
|
Accrued expenses
|
|
|
(19,134
|
)
|
|
|
(10,590
|
)
|
Income and deferred taxes
|
|
|
11,982
|
|
|
|
7,725
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,485
|
)
|
|
|
(24,865
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(38,099
|
)
|
|
|
(15,056
|
)
|
Proceeds from sale of business
|
|
|
880
|
|
|
|
|
|
Changes in restricted cash
|
|
|
(53
|
)
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(81
|
)
|
|
|
(4,246
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(37,353
|
)
|
|
|
(19,302
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
|
|
|
|
196,000
|
|
Payments on revolving credit facility
|
|
|
|
|
|
|
(126,000
|
)
|
Payment on credit facility term loan
|
|
|
(1,450
|
)
|
|
|
(4,582
|
)
|
Principal payments on seller and other debt
|
|
|
(111
|
)
|
|
|
(1,322
|
)
|
Repurchase of common and preferred stock
|
|
|
(14
|
)
|
|
|
(395
|
)
|
Proceeds from sale of restricted stock
|
|
|
200
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
26
|
|
Proceeds from (repayment of) bank overdrafts
|
|
|
2,992
|
|
|
|
(15,494
|
)
|
Distributions to minority interests
|
|
|
(843
|
)
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
774
|
|
|
|
47,818
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(44,064
|
)
|
|
|
3,651
|
|
Cash and cash equivalents at beginning of period
|
|
|
81,600
|
|
|
|
4,529
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
37,536
|
|
|
$
|
8,180
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
52,001
|
|
|
$
|
55,069
|
|
Cash paid for taxes
|
|
$
|
443
|
|
|
$
|
803
|
|
The accompanying notes are an integral part of this statement.
F-48
SELECT
MEDICAL HOLDINGS CORPORATION
On February 24, 2005, Select Medical Corporation
(Select) merged with a subsidiary of Select Medical
Holdings Corporation (Holdings), formerly known as
EGL Holding Company, and became a wholly-owned subsidiary of
Holdings (Merger). Holdings and Select and their
subsidiaries are collectively referred to as the
Company. The consolidated financial statements of
Holdings include the accounts of its wholly-owned subsidiary
Select. Holdings conducts substantially all of its business
through Select and its subsidiaries.
The unaudited condensed consolidated financial statements of the
Company as of March 31, 2008 and for the three month
periods ended March 31, 2007 and 2008 have been prepared in
accordance with generally accepted accounting principles. In the
opinion of management, such information contains all adjustments
necessary for a fair statement of the financial position,
results and cash flow for such periods. All significant
intercompany transactions and balances have been eliminated. The
results of operations for the three months ended March 31,
2008 are not necessarily indicative of the results to be
expected for the full fiscal year ending December 31, 2008.
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, 2007
available on the Companys website:
www.selectmedicalcorp.com under the Investor Relations section
of the website. Please note that none of the information on the
Companys website is incorporated by reference into this
report.
Unaudited
Pro Forma Liabilities, Redeemable Convertible Preferred Stock,
Stockholders Equity and Income per Common
Share
In July 2008, the Board of Directors authorized management
to file a registration statement with the Securities and
Exchange Commission for the Company to sell shares of its common
stock to the public. If the initial public offering is
completed
shares of the Companys preferred stock will convert
into
shares of common stock as of the closing of the offering.
Unaudited pro forma liabilities, preferred stock,
stockholders equity and net income per common
share basic and diluted, as adjusted for the assumed
conversion of the preferred stock to equity, is set forth in the
accompanying consolidated balance sheet and statement of
operations, respectively.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results may differ
from those estimates.
Reclassifications
Certain reclassifications to amounts previously reported have
been made to conform with the current period presentation.
Recent
Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an
amendment
F-49
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of FASB Statement No. 133
(SFAS No. 161). This statement is intended
to improve transparency in financial reporting by requiring
enhanced disclosures of an entitys derivative instruments
and hedging activities and their effects on the entitys
financial position, financial performance, and cash flows.
SFAS No. 161 applies to all derivative instruments
within the scope of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
(SFAS No. 133) as well as related hedged
items, bifurcated derivatives, and nonderivative instruments
that are designated and qualify as hedging instruments. Entities
with instruments subject to SFAS No. 161 must provide
more robust qualitative disclosures and expanded quantitative
disclosures. SFAS No. 161 is effective prospectively
for financial statements issued for years beginning after
November 15, 2008, with early application permitted.
Adoption of this statement by the Company will result in changes
related to presentation and disclosure of the Companys
interest rate swaps but will not affect the Companys
results of operations.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations
(SFAS No. 141R) which replaces
SFAS No. 141. SFAS No. 141R retains the
purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities
assumed arising from contingencies, requires the capitalization
of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective for business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. This statement will be applied
prospectively and will not result in any changes to the
Companys historical financial statements.
In December 2007, FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51
(SFAS No. 160).
SFAS No. 160 changes the accounting and reporting for
minority interests. Minority interests will be recharacterized
as noncontrolling interests and will be reported as a component
of equity separate from the parents equity, and purchases
or sales of equity interests that do not result in a change in
control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the
income statement and upon a loss of control, the interest sold,
as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings.
SFAS No. 160 is effective for financial statements
issued for years beginning after December 15, 2008, except
for the presentation and disclosure requirements, which will
apply retrospectively. Adoption of this statement by the Company
will result in changes related to presentation and disclosure of
the Companys minority interest but will not affect the
Companys results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The changes to
current practice resulting from the application of
SFAS No. 157 relate to the definition of fair value,
the methods used to measure fair value, and the expanded
disclosures about fair value measurements. In February 2008, the
FASB issued FASB Staff Position (FSP)
157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1)
and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-1
amends SFAS No. 157 to remove certain leasing
transactions from its scope.
FSP 157-2
delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal 2009.
Effective for the first quarter 2008, the Company adopted
SFAS No. 157 except as it applies to those
nonfinancial assets and nonfinancial liabilities addressed in
FSP 157-2.
The Company is currently evaluating the effect
FSP 157-2
will have on its consolidated financial statements.
F-50
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(in thousands)
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
Contract therapy relationships
|
|
$
|
20,456
|
|
|
$
|
(12,615
|
)
|
Non-compete agreements
|
|
|
25,909
|
|
|
|
(12,404
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,365
|
|
|
$
|
(25,019
|
)
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,503,263
|
|
|
|
|
|
Trademarks
|
|
|
47,858
|
|
|
|
|
|
Certificates of need
|
|
|
7,892
|
|
|
|
|
|
Accreditations
|
|
|
1,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,560,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the Companys intangible assets
with finite lives follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Amortization expense
|
|
$
|
1,952
|
|
|
$
|
2,208
|
|
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 (the Division), Kessler
Rehabilitation Corporation and SemperCare Inc. and the value
assigned to the Companys contract therapy relationships.
The useful lives of the Divisions non-compete, Kessler
non-compete, SemperCare non-compete and the Companys
contract therapy relationships are approximately five, six,
seven and five years, respectively. Amortization expense related
to these intangible assets for each of the next five years
commencing January 1, 2007 is approximately as follows (in
thousands):
|
|
|
|
|
2008
|
|
$
|
8,831
|
|
2009
|
|
|
8,831
|
|
2010
|
|
|
4,247
|
|
2011
|
|
|
1,306
|
|
2012
|
|
|
339
|
|
F-51
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The changes in the carrying amount of goodwill for the
Companys reportable segments for the three months ended
March 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2007
|
|
$
|
1,227,956
|
|
|
$
|
271,529
|
|
|
$
|
1,499,485
|
|
Goodwill acquired during year
|
|
|
|
|
|
|
3,778
|
|
|
|
3,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008
|
|
$
|
1,227,956
|
|
|
$
|
275,307
|
|
|
$
|
1,503,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Restructuring
Reserves
|
In connection with the acquisition of the Division, the Company
recorded a 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
|
|
|
Severance
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
December 31, 2007
|
|
$
|
10,677
|
|
|
$
|
3,945
|
|
|
$
|
862
|
|
|
$
|
15,484
|
|
Amounts paid in 2008
|
|
|
(1,126
|
)
|
|
|
(1,143
|
)
|
|
|
(301
|
)
|
|
|
(2,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
$
|
9,551
|
|
|
$
|
2,802
|
|
|
$
|
561
|
|
|
$
|
12,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to pay out the remaining lease termination
costs through 2017 and severance costs in 2008.
|
|
5.
|
Accumulated
Other Comprehensive Loss
|
Included in accumulated other comprehensive loss at
December 31, 2007 and March 31, 2008 were a loss of
$5.6 million (net of tax) and a loss of $17.2 million
(net of tax), respectively, on interest rate swaps accounted for
as cash flow hedges.
|
|
6.
|
Fair
Value Measurements
|
In the first quarter of 2008, the Company adopted
SFAS No. 157, Fair Value Measurements with
the exception of the application of the statement to
non-recurring nonfinancial assets and nonfinancial liabilities,
which has been deferred until January 1, 2009. This
standard defines fair value, provides guidance for measuring
fair value and requires certain disclosures. This standard does
not require any new fair value measurements, but rather applies
to all other accounting pronouncements that require or permit
fair value measurements.
SFAS No. 157 discusses valuation techniques, such as
the market approach, the income approach and the cost approach.
The statement utilizes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value
into three broad levels as follows:
|
|
|
|
|
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or
liabilities.
|
F-52
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Level 2: 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.
|
|
|
|
Level 3: Unobservable inputs that reflect
the reporting entitys own assumptions.
|
The Company measures its interest rate swaps at fair value on a
recurring basis. The fair value of the Companys interest
rate swaps is based on quotes from various banks. The Company
considers those inputs to be Level 2 in the fair value
hierarchy. The fair value of the Companys interest rate
swaps was a liability of $28.6 million at March 31,
2008.
The Companys segments consist of (i) specialty
hospitals and (ii) outpatient rehabilitation. The
accounting policies of the segments are the same as those
described in the summary of significant accounting policies. All
other primarily includes the Companys general and
administrative services. The Company evaluates performance of
the segments based on Adjusted EBITDA. Adjusted EBITDA is
defined as net income before interest, income taxes, stock
compensation expense, depreciation and amortization, other
income (expense) and minority interest.
The following tables summarize selected financial data for the
Companys reportable segments for the three months ended
March 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net operating revenue
|
|
$
|
354,228
|
|
|
$
|
112,380
|
|
|
$
|
221
|
|
|
$
|
466,829
|
|
Adjusted EBITDA
|
|
|
66,031
|
|
|
|
17,618
|
|
|
|
(10,693
|
)
|
|
|
72,956
|
|
Total assets:
|
|
|
1,795,902
|
|
|
|
258,372
|
|
|
|
137,917
|
|
|
|
2,192,191
|
|
Capital expenditures
|
|
|
35,879
|
|
|
|
2,021
|
|
|
|
199
|
|
|
|
38,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Net operating revenue
|
|
$
|
378,604
|
|
|
$
|
169,577
|
|
|
$
|
97
|
|
|
$
|
548,278
|
|
Adjusted EBITDA
|
|
|
63,243
|
|
|
|
20,097
|
|
|
|
(10,845
|
)
|
|
|
72,495
|
|
Total assets:
|
|
|
1,922,107
|
|
|
|
520,418
|
|
|
|
111,889
|
|
|
|
2,554,414
|
|
Capital expenditures
|
|
|
9,988
|
|
|
|
3,851
|
|
|
|
1,217
|
|
|
|
15,056
|
|
F-53
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of Adjusted EBITDA to income from operations
before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
Adjusted EBITDA
|
|
$
|
66,031
|
|
|
$
|
17,618
|
|
|
$
|
(10,693
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
( 8,348
|
)
|
|
|
(2,757
|
)
|
|
|
(599
|
)
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
57,683
|
|
|
$
|
14,861
|
|
|
$
|
(12,219
|
)
|
|
$
|
60,325
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,173
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,274
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008
|
|
|
|
Specialty
|
|
|
Outpatient
|
|
|
|
|
|
|
|
|
|
Hospitals
|
|
|
Rehabilitation
|
|
|
All Other
|
|
|
Total
|
|
|
Adjusted EBITDA
|
|
$
|
63,243
|
|
|
$
|
20,097
|
|
|
$
|
(10,845
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
(10,742
|
)
|
|
|
(5,793
|
)
|
|
|
(862
|
)
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
52,501
|
|
|
$
|
14,304
|
|
|
$
|
(12,461
|
)
|
|
$
|
54,344
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,793
|
)
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands, except
|
|
|
|
per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,471
|
|
|
$
|
8,700
|
|
Preferred stock dividends
|
|
|
5,759
|
|
|
|
6,084
|
|
Earnings allocated to preferred stockholders
|
|
|
1,244
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
Income available to common and preferred
stockholders basic and diluted
|
|
$
|
10,468
|
|
|
$
|
2,351
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
186,463
|
|
|
|
196,503
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
5,494
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
186,463
|
|
|
|
201,997
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
Diluted income per common share:
|
|
$
|
0.06
|
|
|
$
|
0.01
|
|
The following amounts are shown here for informational and
comparative purposes only since their inclusion would be
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Stock options
|
|
|
3,844
|
|
|
|
4,610
|
|
Restricted stock
|
|
|
18,138
|
|
|
|
|
|
|
|
9.
|
Commitments
and Contingencies
|
Litigation
On August 24, 2004, Clifford C. Marsden and Ming Xu filed a
purported class action complaint in the United States
District Court for the Eastern District of Pennsylvania on
behalf of the public stockholders of Select against Martin F.
Jackson, Robert A. Ortenzio, Rocco A. Ortenzio, Patricia A. Rice
and Select. The complaint as later amended alleged, among other
things, failure to disclose adverse information regarding a
potential regulatory change affecting reimbursement for
Selects services applicable to long term acute care
hospitals operated as hospitals within hospitals. On
October 25, 2007, the Court certified a class of investors
who purchased Select stock between July 29, 2003 and
May 11, 2004, inclusive. The Court also appointed class
representatives and class
F-55
SELECT
MEDICAL HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
counsel. On July 3, 2008, the parties reached a settlement
in principle. The settlement requires defendants to pay
$5.0 million, which will be paid entirely by our insurer.
The settlement is subject to both preliminary and final court
approval.
The Company is subject to legal proceedings and claims that
arise in the ordinary course of its business, which include
malpractice claims covered under insurance policies. In the
Companys opinion, the outcome of these actions will not
have a material adverse effect on the financial position, cash
flows or results of operations of the Company.
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.
Health care providers are subject to lawsuits under the qui tam
provisions of the federal False Claims Act. Qui tam lawsuits
typically remain under seal (hence, usually unknown to the
defendant) for some time while the government decides whether or
not to intervene on behalf of a private qui tam plaintiff (known
as a relator) and take the lead in the litigation. These
lawsuits can involve significant monetary damages and penalties
and award bounties to private plaintiffs who successfully bring
the suits. We have 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.
Construction
Commitments
At March 31, 2008, the Company has outstanding commitments
under construction contracts related to improvements and
renovations at the Companys long term acute care
properties and inpatient rehabilitation facilities totaling
approximately $5.5 million.
F-56
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth the costs and expenses, other
than the underwriting discount, payable by the registrant in
connection with the sale of the common stock being registered.
All amounts shown are estimates, other than the SEC registration
fee, the FINRA filing fee and the New York Stock Exchange
listing fee.
|
|
|
SEC registration fee
|
|
$3,930
|
FINRA filing fee
|
|
*
|
New York Stock Exchange listing fee
|
|
*
|
Accounting fees and expenses
|
|
*
|
Legal fees and expenses
|
|
*
|
Printing and engraving expenses
|
|
*
|
Transfer agent fees
|
|
*
|
Blue sky fees and expenses
|
|
*
|
Miscellaneous
|
|
*
|
|
|
|
Total
|
|
*
|
|
|
|
|
|
|
*
|
|
To be completed by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145 of the Delaware General Corporation Law (the
DGCL) provides that a corporation may indemnify any
person who is or was a director, officer, employee or agent of a
corporation against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with any
threatened, pending or completed actions, suits or proceedings
in which such person is made a party by reason of such person
being or having been a director, officer, employee of or agent
to the corporation. The statute provides that it is not
exclusive of other rights to which those seeking indemnification
may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
As permitted by the DGCL, our amended and restated bylaws
provide that (i) we are required to indemnify our directors
and officers to the fullest extent permitted by applicable law;
(ii) we are permitted to indemnify our other employees to
the extent permitted by applicable statutory law; (iii) we
are required to advance expenses to our directors and officers
in connection with any legal proceeding, subject to the
provisions of applicable statutory law; and (iv) the rights
conferred in our bylaws are not exclusive.
Section 102(b)(7) of the DGCL enables a corporation, in its
certificate of incorporation, to eliminate or limit the personal
liability of a director to the corporation or its stockholders
for monetary damages for violations of the directors
fiduciary duty, except (i) for any breach of the
directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) pursuant to Section 174 of the DGCL
(providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which a director derived an
improper personal benefit. Our amended and restated certificate
of incorporation provides for such limitations on liability for
our directors.
Section 145 of the DGCL also authorizes a corporation to
purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the corporation
against any liability asserted against and incurred by such
person in any such capacity, or arising out of such
persons status as such. In connection with this offering,
we will obtain liability insurance for our directors and
officers. Such insurance would be available to our directors and
officers in accordance with its terms.
II-1
Reference is made to the form of underwriting agreement filed as
Exhibit 1.1 hereto for provisions providing that the
underwriters are obligated under certain circumstances, to
indemnify our directors, officers and controlling persons
against certain liabilities under the Securities Act of 1933, as
amended (the Securities Act).
Reference is made to Item 17 for our undertakings with
respect to indemnification for liabilities arising under the
Securities Act.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
Except as set forth below, in the three years preceding the
filing of this registration statement, we have not issued any
securities that were not registered under the Securities Act.
1. From February 15, 2006 through February 13,
2008, we granted to our employees and medical directors options
to purchase an aggregate of 3,331,385 shares of our common
stock under our 2005 Equity Incentive Plan at exercise prices
ranging from $1.00 to $2.50 per share. The stock options
described above were made under written compensatory plans or
agreements in reliance on the exemption from registration
pursuant to Rule 701 under the Securities Act or pursuant
to Section 4(2) of the Securities Act.
2. From August 10, 2005 through August 15, 2007,
we granted to our non-employee directors options to purchase an
aggregate of 120,000 shares of our common stock under our
2005 Equity Incentive Plan for
Non-Employee
Directors at exercise prices ranging from $1.00 to $2.50 per
share. The stock options described above were made under written
compensatory plans or agreements in reliance on the exemption
from registration pursuant to Rule 701 under the Securities
Act or pursuant to Section 4(2) of the Securities Act.
3. From May 14, 2006 through January 23, 2008, we
sold and issued to our employees an aggregate of
85,184 shares of our common stock pursuant to option
exercises under our 2005 Equity Incentive Plan at prices ranging
from $1.00 to $2.50 per share for an aggregate purchase price of
$92,384. The issuance of common stock described above was made
under written compensatory plans or agreements in reliance on
the exemption from registration pursuant to Rule 701 under
the Securities Act or pursuant to Section 4(2) of the
Securities Act.
4. From July 22, 2005 through June 5, 2008, we
awarded to our employees an aggregate of 9,556,663 shares
of our restricted common stock under our 2005 Equity Incentive
Plan. The awards of restricted common stock described above were
made under written compensatory plans or agreements in reliance
on the exemption from registration pursuant to Rule 701
under the Securities Act or pursuant to Section 4(2) of the
Securities Act.
5. On February 13, 2007, we granted to an employee
200,000 shares of our restricted common stock under our
2005 Equity Incentive Plan at a purchase price of $1.00 per
share for an aggregate purchase price of $200,000. The grant of
restricted common stock described above was made under written
compensatory plans or agreements in reliance on the exemption
from registration pursuant to Rule 701 under the Securities
Act or pursuant to Section 4(2) of the Securities Act.
6. On July 31, 2005, we issued and sold to our
directors an aggregate of 360,000 shares of common stock at
a purchase price of $1.00 per share for an aggregate purchase
price of $360,000. We also issued and sold to our directors an
aggregate of 53,531.60 shares of preferred stock at a
purchase price of $26.90 per share for an aggregate purchase
price of $1,440,000. The issuance of common and preferred stock
described above was made in reliance on the exemption from
registration pursuant to Section 4(2) of the Securities Act
and Regulation D promulgated thereunder.
None of the foregoing transactions involved any underwriters,
underwriting discounts or commissions, or any public offering.
The recipients of securities in such transactions represented
their intention to acquire the securities for investment only
and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to
the share certificates and instruments issued in such
transactions. All recipients either received adequate
information about us or had adequate access, through their
relationships with us, to such information.
II-2
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
2
|
.1
|
|
Stock Purchase Agreement, dated as of January 27, 2007,
between HealthSouth Corporation and Select Medical Corporation,
incorporated by reference to Exhibit 2.1 of Select Medical
Corporations Current Report on Form 8-K filed January 30,
2007 (Reg. No. 001-31441).
|
|
2
|
.2
|
|
Letter Agreement, dated as of May 1, 2007, between
HealthSouth Corporation and Select Medical Corporation,
incorporated by reference to Exhibit 2.2 of Select Medical
Corporations Current Report on Form 8-K filed May 7, 2007
(Reg. No. 001-31441).
|
|
2
|
.3
|
|
Acquisition Agreement, dated as of December 23, 2005,
between Select Medical Corporation, SLMC Finance Corporation and
Callisto Capital L.P., incorporated by reference to Exhibit 2.1
of Select Medical Corporations Current Report on Form 8-K
filed December 28, 2005 (Reg. No. 001-31441).
|
|
2
|
.4
|
|
Amendment to Acquisition Agreement, dated as of February 9,
2006, among Select Medical Corporation, SLMC Finance
Corporation, Callisto Capital L.P. and Canadian Back Institute
Limited, incorporated by reference to Exhibit 2.1 of Select
Medical Corporations Current Report on Form 8-K filed
February 10, 2006 (Reg. No. 001-31441).
|
|
3
|
.3*
|
|
Amended and Restated Certificate of Incorporation of Select
Medical Holdings Corporation.
|
|
3
|
.4*
|
|
Amended and Restated Bylaws of Select Medical Holdings
Corporation.
|
|
4
|
.1
|
|
Stockholders Agreement, dated as of February 24, 2005, by and
among Select Medical Holdings Corporation, Welsh, Carson,
Anderson & Stowe IX, L.P., WCAS Capital Partners IV, L.P.,
and each of the other individuals and entities from time to time
named therein, incorporated by reference to Exhibit 10.76 of
Select Medical Holdings Corporations Form S-4 filed April
13, 2006 (Reg. No. 333-133284).
|
|
4
|
.2
|
|
Registration Rights Agreement, dated as of February 24, 2005,
among Select Medical Holdings Corporation, Welsh, Carson,
Anderson & Stowe IX, L.P., WCAS Capital Partners IV, L.P.,
each of the entities and individuals listed on Schedule I
thereto and each of the other entities and individuals from time
to time listed on Schedule II thereto, incorporated by
reference to Exhibit 10.77 of Select Medical Holdings
Corporations Form S-4 filed April 13, 2006 (Reg. No.
333-133284).
|
|
4
|
.3
|
|
Registration Rights Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation, WCAS Capital
Partners IV, L.P., Rocco A. Ortenzio, Robert A. Ortenzio, John
M. Ortenzio, Martin J. Ortenzio, Martin J. Ortenzio
Descendants Trust and Ortenzio Family Foundation, incorporated
by reference to Exhibit 10.78 of Select Medical Holdings
Corporations Form S-4 filed April 13, 2006 (Reg. No.
333-133284).
|
|
4
|
.4*
|
|
Form of Common Stock Certificate.
|
|
5
|
.1*
|
|
Opinion of Dechert LLP.
|
|
10
|
.1
|
|
Credit Agreement, dated as of February 24, 2005, among Select
Medical Holdings Corporation, Select Medical Corporation, as
Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A.,
as Administrative Agent and Collateral Agent, Wachovia Bank,
National Association, as Syndication Agent and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc., as
Co-Documentation Agents, incorporated by reference to Exhibit
10.1 of Select Medical Corporations Form S-4 filed June
16, 2005 (Reg. No. 333-125846).
|
|
10
|
.2
|
|
Guarantee and Collateral Agreement, dated as of February 24,
2005, among Select Medical Holdings Corporation, Select Medical
Corporation, the Subsidiaries of Select Medical Corporation
identified therein and JPMorgan Chase Bank, N.A., as Collateral
Agent, incorporated by reference to Exhibit 10.2 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.3
|
|
Amended and Restated Senior Management Agreement, dated as of
May 7, 1997, between Select Medical Corporation, John Ortenzio,
Martin Ortenzio, Select Investments II, Select Partners, L.P.
and Rocco Ortenzio, incorporated by reference to Exhibit 10.34
of Select Medical Corporations Registration Statement on
Form S-1 filed October 27, 2000 (Reg. No. 333-48856).
|
II-3
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.4
|
|
Amendment No. 1, dated as of January 1, 2000, to Amended and
Restated Senior Management Agreement, dated as of May 7, 1997,
between Select Medical Corporation and Rocco A. Ortenzio,
incorporated by reference to Exhibit 10.35 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.5
|
|
Employment Agreement, dated as of March 1, 2000, between Select
Medical Corporation and Rocco A. Ortenzio, incorporated by
reference to Exhibit 10.16 of Select Medical Corporations
Registration Statement on Form S-1 filed October 27, 2000
(Reg. No. 333-48856).
|
|
10
|
.6
|
|
Amendment No. 1 to Employment Agreement, dated as of August
8, 2000, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.17 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.7
|
|
Amendment No. 2 to Employment Agreement, dated as of February
23, 2001, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.47 of Select
Medical Corporations Registration Statement on Form S-1
March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.8
|
|
Amendment No. 3 to Employment Agreement, dated as of April 24,
2001, between Select Medical Corporation and Rocco A. Ortenzio,
incorporated by reference to Exhibit 10.50 of Select Medical
Corporations Registration Statement on Form S-4 filed
June 26, 2001 (Reg. No. 333-63828).
|
|
10
|
.9
|
|
Amendment No. 4 to Employment Agreement, dated as of September
17, 2001, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.52 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.10
|
|
Amendment No. 5 to Employment Agreement, dated as of February
24, 2005, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.10 of Select
Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
|
10
|
.11
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Holdings Corporation and Rocco A.
Ortenzio.
|
|
10
|
.12
|
|
Restricted Stock Award Agreement, dated as of November 8,
2005, between Select Medical Holdings Corporation and Rocco A.
Ortenzio.
|
|
10
|
.13
|
|
Employment Agreement, dated as of March 1, 2000, between Select
Medical Corporation and Robert A. Ortenzio, incorporated by
reference to Exhibit 10.14 of Select Medical Corporations
Registration Statement on Form S-1 filed October 27, 2000
(Reg. No. 333-48856).
|
|
10
|
.14
|
|
Amendment No. 1 to Employment Agreement, dated as of August
8, 2000, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.15 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.15
|
|
Amendment No. 2 to Employment Agreement, dated as of February
23, 2001, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.48 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.16
|
|
Amendment No. 3 to Employment Agreement, dated as of September
17, 2001, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.53 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.17
|
|
Amendment No. 4 to Employment Agreement, dated as of December
10, 2004, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 99.3 of Select
Medical Corporations Current Report on Form 8-K filed
December 16, 2004 (Reg. No. 001-31441).
|
|
10
|
.18
|
|
Amendment No. 5 to Employment Agreement, dated as of February
24, 2005, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.16 of Select
Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
|
10
|
.19
|
|
Restricted Stock Award Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation and Robert A.
Ortenzio.
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.20
|
|
Restricted Stock Award Agreement, dated as of November 8,
2005, between Select Medical Holdings Corporation and Robert A.
Ortenzio.
|
|
10
|
.21
|
|
Employment Agreement, dated as of March 1, 2000, between Select
Medical Corporation and Patricia A. Rice, incorporated by
reference to Exhibit 10.19 of Select Medical Corporations
Registration Statement on Form S-1 filed October 27, 2000
(Reg. No. 333-48856).
|
|
10
|
.22
|
|
Amendment No. 1 to Employment Agreement, dated as of August 8,
2000, between Select Medical Corporation and Patricia A. Rice,
incorporated by reference to Exhibit 10.20 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.23
|
|
Amendment No. 2 to Employment Agreement, dated as of February
23, 2001, between Select Medical Corporation and Patricia A.
Rice, incorporated by reference to Exhibit 10.49 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.24
|
|
Amendment No. 3 to Employment Agreement, dated as of December
10, 2004, between Select Medical Corporation and Patricia A.
Rice, incorporated by reference to Exhibit 99.2 of Select
Medical Corporations Current Report on Form 8-K filed
December 16, 2004 (Reg. No. 001-31441).
|
|
10
|
.25
|
|
Amendment No. 4 to Employment Agreement, dated as of February
24, 2005, between Select Medical Corporation and Patricia A.
Rice, incorporated by reference to Exhibit 10.21 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.26
|
|
Amendment No. 5 to Employment Agreement, dated as of April 27,
2005, between Select Medical Corporation and Patricia A. Rice,
incorporated by reference to Exhibit 10.46 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.27
|
|
Amendment No. 6 to Employment Agreement, dated as of February
13, 2008, between Select Medical Corporation and Patricia A.
Rice.
|
|
10
|
.28
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Corporation and Patricia A. Rice.
|
|
10
|
.29
|
|
Amendment No. 1 to Restricted Stock Award Agreement, dated as of
February 13, 2008, between Select Medical Corporation and
Patricia A. Rice.
|
|
10
|
.30
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and Martin F. Jackson, incorporated
by reference to Exhibit 10.11 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.31
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and Martin F.
Jackson, incorporated by reference to Exhibit 10.52 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.32
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and Martin
F. Jackson, incorporated by reference to Exhibit 10.24 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.33
|
|
Restricted Stock Award Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation and Martin F.
Jackson.
|
|
10
|
.34
|
|
Employment Agreement, dated as of December 16, 1998, between
Select Medical Corporation and David W. Cross, incorporated by
reference to Exhibit 10.8 of Select Medical Corporations
Registration Statement on Form S-1 filed October 27, 2000
(Reg. No. 333-48856).
|
|
10
|
.35
|
|
First Amendment to Employment Agreement, dated as of
October 15, 2000 between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.33 of
Select Medical Corporations Registration Statement on Form
S-1 filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.36
|
|
Change of Control Agreement, dated as of November 21, 2001,
between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.61 of Select Medical
Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 (Reg. No. 000-32499).
|
II-5
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.37
|
|
Amendment to Change of Control Agreement, dated as of February
24, 2005, between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.28 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.38
|
|
Other Senior Management Agreement, dated as of June 2, 1997,
between Select Medical Corporation and S. Frank Fritsch,
incorporated by reference to Exhibit 10.9 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.39
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and S. Frank Fritsch, incorporated by
reference to Exhibit 10.10 of Select Medical Corporations
Registration Statement on Form S-1 filed October 27, 2000
(Reg. No. 333-48856).
|
|
10
|
.40
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and S. Frank
Fritsch, incorporated by reference to Exhibit 10.53 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.41
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and S.
Frank Fritsch, incorporated by reference to Exhibit 10.32 of
Select Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
|
10
|
.42
|
|
Restricted Stock Award Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation and S. Frank Fritsch.
|
|
10
|
.43
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and James J. Talalai, incorporated by
reference to Exhibit 10.58 of Select Medical Corporations
Annual Report on Form 10-K for the fiscal year ended December
31, 2001 (Reg. No. 000-32499).
|
|
10
|
.44
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and James J.
Talalai, incorporated by reference to Exhibit 10.59 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.45
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and James
J. Talalai, incorporated by reference to Exhibit 10.35 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.46
|
|
Other Senior Management Agreement, dated as of March 28, 1997,
between Select Medical Corporation and Michael E. Tarvin,
incorporated by reference to Exhibit 10.21 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.47
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and Michael E. Tarvin, incorporated
by reference to Exhibit 10.22 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.48
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and Michael E.
Tarvin, incorporated by reference to Exhibit 10.54 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.49
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and
Michael E. Tarvin, incorporated by reference to Exhibit 10.39 of
Select Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
|
10
|
.50
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and Scott A. Romberger, incorporated
by reference to Exhibit 10.56 of Select Medical
Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.51
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and Scott A.
Romberger, incorporated by reference to Exhibit 10.57 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.52
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and Scott
A. Romberger, incorporated by reference to Exhibit 10.42 of
Select Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
II-6
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.53
|
|
Fifth Amendment to Employment Agreement, dated as of April 18,
2005, between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.43 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.54
|
|
Form of Unit Award Agreement.
|
|
10
|
.55
|
|
Consulting Agreement, dated as of January 1, 2004, between
Select Medical Corporation and Thomas A. Scully, incorporated by
reference to Exhibit 10.1 of Select Medical Corporations
Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2004 (Reg. No. 001-31441).
|
|
10
|
.56
|
|
First Amendment to Consulting Agreement, dated as of April 18,
2005, between Select Medical Corporation and Thomas A. Scully,
incorporated by reference to Exhibit 10.45 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.57
|
|
Office Lease Agreement, dated as of May 18, 1999, between Select
Medical Corporation and Old Gettysburg Associates, incorporated
by reference to Exhibit 10.24 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.58
|
|
First Addendum to Lease Agreement, dated as of June 1999,
between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.25 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.59
|
|
Second Addendum to Lease Agreement, dated as of February 1,
2000, between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.26 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.60
|
|
Third Addendum to Lease Agreement, dated as of May 17, 2001,
between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.52 of Select
Medical Corporations Registration Statement on Form S-4
filed June 26, 2001 (Reg. No. 333-63828).
|
|
10
|
.61
|
|
Fourth Addendum to Lease Agreement, dated as of September 1,
2001, by and between Old Gettysburg Associates and Select
Medical Corporation, incorporated by reference to Exhibit 10.54
of Select Medical Corporations Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.62
|
|
Fifth Addendum to Lease Agreement, dated as of February 19,
2004, by and between Old Gettysburg Associates and Select
Medical Corporation, incorporated by reference to Exhibit 10.59
of Select Medical Corporations Form S-4 filed June 16,
2005 (Reg. No. 333-125846).
|
|
10
|
.63
|
|
Sixth Addendum to Lease Agreement, dated as of April 25,
2008, by and between Old Gettysburg Associates and Select
Medical Corporation.
|
|
10
|
.64
|
|
Office Lease Agreement, dated as of June 17, 1999, between
Select Medical Corporation and Old Gettysburg Associates III,
incorporated by reference to Exhibit 10.27 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.65
|
|
First Addendum to Lease Agreement, dated as of April 25,
2008, between Old Gettysburg Associates III.
|
|
10
|
.66
|
|
Office Lease Agreement, dated as of May 15, 2001, by and between
Select Medical Corporation and Old Gettysburg Associates II,
incorporated by reference to Exhibit 10.53 of Select Medical
Corporations Registration Statement on Form S-4 filed
June 26, 2001 (Reg. No. 333-63828).
|
|
10
|
.67
|
|
First Addendum to Lease Agreement, dated as of February 26,
2002, by and between Old Gettysburg Associates II and
Select Medical Corporation, incorporated by reference to Exhibit
10.2 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (Reg. No.
000-32499).
|
|
10
|
.68
|
|
Second Addendum to Lease Agreement, dated as of February 26,
2002, by and between Old Gettysburg Associates II and
Select Medical Corporation, incorporated by reference to Exhibit
10.3 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (Reg. No.
000-32499).
|
|
10
|
.69
|
|
Third Addendum to Lease Agreement, dated as of February 26,
2002, by and between Old Gettysburg Associates II and
Select Medical Corporation, incorporated by reference to Exhibit
10.4 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (Reg. No.
000-32499).
|
II-7
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.70
|
|
Office Lease Agreement, dated as of October 29, 2003, by and
between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.74 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 (Reg. No. 001-31441).
|
|
10
|
.71
|
|
Office Lease Agreement, dated as of October 29, 2003, by and
between Select Medical Corporation and Old Gettysburg Associates
II, incorporated by reference to Exhibit 10.75 of Select Medical
Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 (Reg. No. 001-31441).
|
|
10
|
.72
|
|
Office Lease Agreement, dated as of March 19, 2004, by and
between Select Medical Corporation and Old Gettysburg Associates
II, incorporated by reference to Exhibit 10.3 of Select Medical
Corporations Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2004 (Reg. No. 001-31441).
|
|
10
|
.73
|
|
Office Lease Agreement, dated as of March 19, 2004, by and
between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.4 of Select
Medical Corporations Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2004 (Reg. No. 001-31441).
|
|
10
|
.74
|
|
Office Lease Agreement, dated August 25, 2006, between Old
Gettysburg Associates IV, L.P. and Select Medical Corporation,
incorporated by reference to Exhibit 10.1 of Select Medical
Corporations Quarterly Report on Form 10-Q for the quarter
ended September 30, 2006 (Reg. No. 001-31441).
|
|
10
|
.75
|
|
Office Lease Agreement, dated August 10, 2005, among Old
Gettysburg Associates II and Select Medical Corporation,
incorporated by reference to Exhibit 10.1 of Select Medical
Corporations Current Report on Form 8-K filed August 16,
2005 (Reg. No. 001-31441).
|
|
10
|
.76
|
|
Office Lease Agreement, dated October 5, 2006, by and between
Select Medical Corporation and Old Gettysburg Associates.
|
|
10
|
.77
|
|
Naming, Promotional and Sponsorship Agreement, dated as of
October 1, 1997, between NovaCare, Inc. and the Philadelphia
Eagles Limited Partnership, assumed by Select Medical
Corporation in a Consent and Assumption Agreement dated November
19, 1999 by and among NovaCare, Inc., Select Medical Corporation
and the Philadelphia Eagles Limited Partnership, incorporated by
reference to Exhibit 10.36 of Select Medical Corporations
Registration Statement on Form S-1 filed December 7, 2000
(Reg. No. 333-48856).
|
|
10
|
.78
|
|
First Amendment to Naming, Promotional and Sponsorship
Agreement, dated as of January 1, 2004, between Select Medical
Corporation and Philadelphia Eagles, LLC, incorporated by
reference to Exhibit 10.63 of Select Medical Corporations
Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
|
|
10
|
.79
|
|
Amended and Restated Select Medical Holdings Corporation 2005
Equity Incentive Plan, incorporated by reference to Exhibit 10.1
of Select Medical Corporations Current Report on Form 8-K
filed November 14, 2005 (Reg. No. 001-31441).
|
|
10
|
.80
|
|
Select Medical Holdings Corporation 2005 Equity Incentive Plan
for Non-Employee Directors, incorporated by reference to Exhibit
10.2 of Select Medical Corporations Current Report on
Form 8-K
filed November 14, 2005 (Reg. No. 001-31441).
|
|
10
|
.81
|
|
Select Medical Holdings Corporation Long Term Cash Incentive
Plan, as amended.
|
|
10
|
.82
|
|
Amendment No. 1, dated as of September 26, 2005, to Credit
Agreement, dated as of February 24, 2005, among Select Medical
Holdings Corporation, Select Medical Corporation, as Borrower,
the Lenders party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent and Collateral Agent, Wachovia Bank,
National Association, as Syndication Agent and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc., as
Co-Documentation Agents, incorporated by reference to Exhibit
10.2 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005 (Reg.
No. 001-31441).
|
II-8
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.83
|
|
Amendment No. 2 and Waiver, dated as of March 19, 2007, to
Credit Agreement, dated as of February 24, 2005, among Select
Medical Holdings Corporation, Select Medical Corporation, as
Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A.,
as Administrative Agent and Collateral Agent, Wachovia Bank,
National Association, as Syndication Agent and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc., as
Co-Documentation Agents, incorporated by reference to Exhibit
10.1 of Select Medical Corporations Current Report on Form
8-K filed March 23, 2007 (Reg. No. 001-31441).
|
|
10
|
.84
|
|
Incremental Facility Amendment, dated as of March 28, 2007, to
Credit Agreement, dated as of February 24, 2005, among Select
Medical Holdings Corporation, Select Medical Corporation, as
Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A.,
as Administrative Agent and Collateral Agent, Wachovia Bank,
National Association, as Syndication Agent and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc., as
Co-Documentation Agents, incorporated by reference to Exhibit
10.1 of Select Medical Corporations Current Report on Form
8-K filed March 30, 2007 (Reg. No. 001-31441).
|
|
10
|
.85
|
|
Indenture governing
75/8% Senior
Subordinated Notes due 2015 among Select Medical Corporation,
the Guarantors named therein and U.S. Bank Trust National
Association, dated February 24, 2005, incorporated by reference
to Exhibit 4.4 of Select Medical Corporations Form S-4
filed June 16, 2005 (Reg. No. 333-125846).
|
|
10
|
.86
|
|
Form of
75/8% Senior
Subordinated Notes due 2015 (included in Exhibit 4.4),
incorporated by reference to Select Medical Corporations
Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
|
|
10
|
.87
|
|
Exchange and Registration Rights Agreement, dated as of February
24, 2005, by and among Select Medical Corporation, the
Guarantors named therein, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, J.P. Morgan Securities Inc., Wachovia
Capital Markets, LLC, CIBC World Markets Corp. and PNC Capital
Markets, Inc., incorporated by reference to Exhibit 4.6 of
Select Medical Corporations Form S-4 filed June 16,
2005 (Reg. No. 333-125846).
|
|
10
|
.88
|
|
Indenture governing Senior Floating Rate Notes due 2015 among
Select Medical Holdings Corporation and U.S. Bank Trust National
Association, dated September 29, 2005, incorporated by reference
to Exhibit 4.7 of Select Medical Holdings Corporations
Form S-4 filed April 13, 2006 (Reg. No. 333-133284).
|
|
10
|
.89
|
|
Form of Senior Floating Rate Notes due 2015 (included in
Exhibit 4.7), incorporated by reference to Select Medical
Holdings Corporations Form S-4 filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.90
|
|
Exchange and Registration Rights Agreement, dated as of
September 29, 2005, by and among Select Medical Holdings
Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Wachovia Capital Markets, LLC and J.P. Morgan
Securities Inc., incorporated by reference to Exhibit 4.9 of
Select Medical Holdings Corporations Form S-4 filed April
13, 2006 (Reg. No. 333-133284).
|
|
10
|
.91
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of WCAS Capital Partners IV, L.P., amended and restated as of
September 29, 2005, incorporated by reference to Exhibit 10.69
of Select Medical Holdings Corporations Form S-4 filed
April 13, 2006 (Reg. No. 333-133284).
|
|
10
|
.92
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Rocco A. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.70 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
|
10
|
.93
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Robert A. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.71 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
|
10
|
.94
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of John M. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.72 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
|
10
|
.95
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Martin J. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.73 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
II-9
|
|
|
|
|
Exhibit
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|
|
Number
|
|
Document
|
|
|
10
|
.96
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Martin J. Ortenzio Descendants Trust, amended and restated as
of September 29, 2005, incorporated by reference to Exhibit
10.74 of Select Medical Holdings Corporations Form S-4
filed April 13, 2006 (Reg. No. 333-133284).
|
|
10
|
.97
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Ortenzio Family Foundation, amended and restated as of
September 29, 2005, incorporated by reference to Exhibit 10.75
of Select Medical Holdings Corporations Form S-4 filed
April 13, 2006 (Reg. No. 333-133284).
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21
|
.1
|
|
Subsidiaries of Select Medical Holdings Corporation.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP.
|
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23
|
.2*
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|
Consent of Dechert LLP (included in Exhibit 5.1).
|
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24
|
.1
|
|
Powers of Attorney (included on the signature page).
|
|
|
|
*
|
|
To be filed by amendment.
|
(b) Financial Statement Schedule
See the Index to Financial Statements included on
page F-1
for a list of the financial statements included in this
registration statement.
All schedules not identified above have been omitted because
they are not required, are not applicable or the information is
included in the selected consolidated financial data or notes
contained in this registration statement.
a. The undersigned registrant hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
b. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
c. The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
2. For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Mechanicsburg, Commonwealth of
Pennsylvania, on July 24, 2008.
SELECT MEDICAL HOLDINGS CORPORATION
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|
|
|
By:
|
/s/ Michael
E. Tarvin
|
Michael E. Tarvin
Executive Vice President, General Counsel
and Secretary
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints each of Rocco
A. Ortenzio, Robert A. Ortenzio and Michael E. Tarvin, as
his/her true
and lawful attorney-in-fact and agent, each acting alone, with
full power of substitution and resubstitution, for him/her and
in his/her
name, place and stead, in any and all capacities, to sign any or
all amendments to this registration statement, including
post-effective amendments, and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all that said
attorneys-in-fact and agents or any of them or their substitute
or substitutes may lawfully do or cause to be done by virtue
thereof.
This power of attorney may be executed in multiple counterparts,
each of which shall be deemed an original, but which taken
together shall constitute one instrument.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
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|
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Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ ROCCO
A. ORTENZIO
Rocco
A. Ortenzio
|
|
Director and Executive Chairman
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|
July 24, 2008
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|
|
|
|
|
/s/ ROBERT
A ORTENZIO
Robert
A Ortenzio
|
|
Director and Chief Executive Officer (principal executive
officer)
|
|
July 24, 2008
|
|
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|
|
/s/ MARTIN
F. JACKSON
Martin
F. Jackson
|
|
Executive Vice President and Chief Financial Officer (principal
financial officer)
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|
July 24, 2008
|
|
|
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|
|
/s/ SCOTT
A. ROMBERGER
Scott
A. Romberger
|
|
Senior Vice President, Controller and Chief Accounting Officer
(principal accounting officer)
|
|
July 24, 2008
|
|
|
|
|
|
/s/ RUSSELL
L. CARSON
Russell
L. Carson
|
|
Director
|
|
July 24, 2008
|
II-11
|
|
|
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|
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Signature
|
|
Title
|
|
Date
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|
|
|
|
|
|
/s/ DAVID
S. CHERNOW
David
S. Chernow
|
|
Director
|
|
July 24, 2008
|
|
|
|
|
|
/s/ BRYAN
C. CRESSEY
Bryan
C. Cressey
|
|
Director
|
|
July 24, 2008
|
|
|
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|
|
/s/ JAMES
E. DALTON, JR.
James
E. Dalton, Jr.
|
|
Director
|
|
July 24, 2008
|
|
|
|
|
|
/s/ THOMAS
A. SCULLY
Thomas
A. Scully
|
|
Director
|
|
July 24, 2008
|
|
|
|
|
|
/s/ LEOPOLD
SWERGOLD
Leopold
Swergold
|
|
Director
|
|
July 24, 2008
|
|
|
|
|
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/s/ SEAN
M. TRAYNOR
Sean
M. Traynor
|
|
Director
|
|
July 24, 2008
|
II-12
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
2
|
.1
|
|
Stock Purchase Agreement, dated as of January 27, 2007,
between HealthSouth Corporation and Select Medical Corporation,
incorporated by reference to Exhibit 2.1 of Select Medical
Corporations Current Report on Form 8-K filed January 30,
2007 (Reg. No. 001-31441).
|
|
2
|
.2
|
|
Letter Agreement, dated as of May 1, 2007, between
HealthSouth Corporation and Select Medical Corporation,
incorporated by reference to Exhibit 2.2 of Select Medical
Corporations Current Report on Form 8-K filed May 7, 2007
(Reg. No. 001-31441).
|
|
2
|
.3
|
|
Acquisition Agreement, dated as of December 23, 2005,
between Select Medical Corporation, SLMC Finance Corporation and
Callisto Capital L.P., incorporated by reference to Exhibit 2.1
of Select Medical Corporations Current Report on Form 8-K
filed December 28, 2005 (Reg. No. 001-31441).
|
|
2
|
.4
|
|
Amendment to Acquisition Agreement, dated as of February 9,
2006, among Select Medical Corporation, SLMC Finance
Corporation, Callisto Capital L.P. and Canadian Back Institute
Limited, incorporated by reference to Exhibit 2.1 of Select
Medical Corporations Current Report on Form 8-K filed
February 10, 2006 (Reg. No. 001-31441).
|
|
3
|
.3*
|
|
Amended and Restated Certificate of Incorporation of Select
Medical Holdings Corporation.
|
|
3
|
.4*
|
|
Amended and Restated Bylaws of Select Medical Holdings
Corporation.
|
|
4
|
.1
|
|
Stockholders Agreement, dated as of February 24, 2005, by and
among Select Medical Holdings Corporation, Welsh, Carson,
Anderson & Stowe IX, L.P., WCAS Capital Partners IV, L.P.,
and each of the other individuals and entities from time to time
named therein, incorporated by reference to Exhibit 10.76
of Select Medical Holdings Corporations Form S-4 filed
April 13, 2006 (Reg. No. 333-133284).
|
|
4
|
.2
|
|
Registration Rights Agreement, dated as of February 24, 2005,
among Select Medical Holdings Corporation, Welsh, Carson,
Anderson & Stowe IX, L.P., WCAS Capital Partners IV, L.P.,
each of the entities and individuals listed on Schedule I
thereto and each of the other entities and individuals from time
to time listed on Schedule II thereto, incorporated by
reference to Exhibit 10.77 of Select Medical Holdings
Corporations Form S-4 filed April 13, 2006 (Reg. No.
333-133284).
|
|
4
|
.3
|
|
Registration Rights Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation, WCAS Capital
Partners IV, L.P., Rocco A. Ortenzio, Robert A. Ortenzio, John
M. Ortenzio, Martin J. Ortenzio, Martin J. Ortenzio Descendants
Trust and Ortenzio Family Foundation, incorporated by reference
to Exhibit 10.78 of Select Medical Holdings
Corporations Form S-4 filed April 13, 2006 (Reg. No.
333-133284).
|
|
4
|
.4*
|
|
Form of Common Stock Certificate.
|
|
5
|
.1*
|
|
Opinion of Dechert LLP.
|
|
10
|
.1
|
|
Credit Agreement, dated as of February 24, 2005, among Select
Medical Holdings Corporation, Select Medical Corporation, as
Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A.,
as Administrative Agent and Collateral Agent, Wachovia Bank,
National Association, as Syndication Agent and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc., as
Co-Documentation Agents, incorporated by reference to Exhibit
10.1 of Select Medical Corporations Form S-4 filed June
16, 2005 (Reg. No. 333-125846).
|
|
10
|
.2
|
|
Guarantee and Collateral Agreement, dated as of February 24,
2005, among Select Medical Holdings Corporation, Select Medical
Corporation, the Subsidiaries of Select Medical Corporation
identified therein and JPMorgan Chase Bank, N.A., as Collateral
Agent, incorporated by reference to Exhibit 10.2 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.3
|
|
Amended and Restated Senior Management Agreement, dated as of
May 7, 1997, between Select Medical Corporation, John Ortenzio,
Martin Ortenzio, Select Investments II, Select Partners, L.P.
and Rocco Ortenzio, incorporated by reference to Exhibit
10.34 of Select Medical Corporations Registration
Statement on Form S-1 filed October 27, 2000 (Reg. No.
333-48856).
|
II-13
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.4
|
|
Amendment No. 1, dated as of January 1, 2000, to Amended and
Restated Senior Management Agreement, dated as of May 7, 1997,
between Select Medical Corporation and Rocco A. Ortenzio,
incorporated by reference to Exhibit 10.35 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.5
|
|
Employment Agreement, dated as of March 1, 2000, between Select
Medical Corporation and Rocco A. Ortenzio, incorporated by
reference to Exhibit 10.16 of Select Medical Corporations
Registration Statement on Form S-1 filed October 27, 2000
(Reg. No. 333-48856).
|
|
10
|
.6
|
|
Amendment No. 1 to Employment Agreement, dated as of
August 8, 2000, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.17 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.7
|
|
Amendment No. 2 to Employment Agreement, dated as of February
23, 2001, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.47 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.8
|
|
Amendment No. 3 to Employment Agreement, dated as of April 24,
2001, between Select Medical Corporation and Rocco A. Ortenzio,
incorporated by reference to Exhibit 10.50 of Select Medical
Corporations Registration Statement on Form S-4 filed
June 26, 2001 (Reg. No. 333-63828).
|
|
10
|
.9
|
|
Amendment No. 4 to Employment Agreement, dated as of September
17, 2001, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.52 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.10
|
|
Amendment No. 5 to Employment Agreement, dated as of February
24, 2005, between Select Medical Corporation and Rocco A.
Ortenzio, incorporated by reference to Exhibit 10.10 of Select
Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
|
10
|
.11
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Holdings Corporation and
Rocco A. Ortenzio.
|
|
10
|
.12
|
|
Restricted Stock Award Agreement, dated as of November 8,
2005, between Select Medical Holdings Corporation and
Rocco A. Ortenzio.
|
|
10
|
.13
|
|
Employment Agreement, dated as of March 1, 2000, between Select
Medical Corporation and Robert A. Ortenzio, incorporated by
reference to Exhibit 10.14 of Select Medical Corporations
Registration Statement on Form S-1 filed October 27, 2000
(Reg. No. 333-48856).
|
|
10
|
.14
|
|
Amendment No. 1 to Employment Agreement, dated as of August
8, 2000, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.15 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.15
|
|
Amendment No. 2 to Employment Agreement, dated as of February
23, 2001, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.48 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.16
|
|
Amendment No. 3 to Employment Agreement, dated as of September
17, 2001, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.53 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.17
|
|
Amendment No. 4 to Employment Agreement, dated as of December
10, 2004, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 99.3 of Select
Medical Corporations Current Report on Form 8-K filed
December 16, 2004 (Reg. No. 001-31441).
|
|
10
|
.18
|
|
Amendment No. 5 to Employment Agreement, dated as of February
24, 2005, between Select Medical Corporation and Robert A.
Ortenzio, incorporated by reference to Exhibit 10.16 of Select
Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
|
10
|
.19
|
|
Restricted Stock Award Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation and Robert A.
Ortenzio.
|
II-14
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.20
|
|
Restricted Stock Award Agreement, dated as of November 8,
2005, between Select Medical Holdings Corporation and
Robert A. Ortenzio.
|
|
10
|
.21
|
|
Employment Agreement, dated as of March 1, 2000, between Select
Medical Corporation and Patricia A. Rice, incorporated
by reference to Exhibit 10.19 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.22
|
|
Amendment No. 1 to Employment Agreement, dated as of August 8,
2000, between Select Medical Corporation and Patricia A. Rice,
incorporated by reference to Exhibit 10.20 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.23
|
|
Amendment No. 2 to Employment Agreement, dated as of February
23, 2001, between Select Medical Corporation and Patricia A.
Rice, incorporated by reference to Exhibit 10.49 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.24
|
|
Amendment No. 3 to Employment Agreement, dated as of December
10, 2004, between Select Medical Corporation and Patricia A.
Rice, incorporated by reference to Exhibit 99.2 of Select
Medical Corporations Current Report on Form 8-K filed
December 16, 2004 (Reg. No. 001-31441).
|
|
10
|
.25
|
|
Amendment No. 4 to Employment Agreement, dated as of February
24, 2005, between Select Medical Corporation and Patricia A.
Rice, incorporated by reference to Exhibit 10.21 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.26
|
|
Amendment No. 5 to Employment Agreement, dated as of April 27,
2005, between Select Medical Corporation and Patricia A. Rice,
incorporated by reference to Exhibit 10.46 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.27
|
|
Amendment No. 6 to Employment Agreement, dated as of February
13, 2008, between Select Medical Corporation and Patricia A.
Rice.
|
|
10
|
.28
|
|
Restricted Stock Award Agreement, dated as of February 24,
2005, between Select Medical Corporation and Patricia A. Rice.
|
|
10
|
.29
|
|
Amendment No. 1 to Restricted Stock Award Agreement, dated as of
February 13, 2008, between Select Medical Corporation and
Patricia A. Rice.
|
|
10
|
.30
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and Martin F. Jackson, incorporated
by reference to Exhibit 10.11 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.31
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and Martin F.
Jackson, incorporated by reference to Exhibit 10.52 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.32
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and Martin
F. Jackson, incorporated by reference to Exhibit 10.24 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.33
|
|
Restricted Stock Award Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation and Martin F.
Jackson.
|
|
10
|
.34
|
|
Employment Agreement, dated as of December 16, 1998, between
Select Medical Corporation and David W. Cross, incorporated
by reference to Exhibit 10.8 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.35
|
|
First Amendment to Employment Agreement, dated as of
October 15, 2000, between Select Medical Corporation and
David W. Cross, incorporated by reference to Exhibit 10.33 of
Select Medical Corporations Registration Statement on Form
S-1 filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.36
|
|
Change of Control Agreement, dated as of November 21, 2001,
between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.61 of Select Medical
Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 (Reg. No. 000-32499).
|
II-15
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.37
|
|
Amendment to Change of Control Agreement, dated as of February
24, 2005, between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.28 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.38
|
|
Other Senior Management Agreement, dated as of June 2, 1997,
between Select Medical Corporation and S. Frank Fritsch,
incorporated by reference to Exhibit 10.9 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.39
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and S. Frank Fritsch,
incorporated by reference to Exhibit 10.10 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.40
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and S. Frank
Fritsch, incorporated by reference to Exhibit 10.53 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.41
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and S.
Frank Fritsch, incorporated by reference to Exhibit 10.32 of
Select Medical Corporations Form S-4 filed June 16,
2005 (Reg. No. 333-125846).
|
|
10
|
.42
|
|
Restricted Stock Award Agreement, dated as of February 24, 2005,
between Select Medical Holdings Corporation and S. Frank Fritsch.
|
|
10
|
.43
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and James J. Talalai,
incorporated by reference to Exhibit 10.58 of Select Medical
Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.44
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and James J.
Talalai, incorporated by reference to Exhibit 10.59 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.45
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and James
J. Talalai, incorporated by reference to Exhibit 10.35 of Select
Medical Corporations Form S-4 filed June 16, 2005 (Reg.
No. 333-125846).
|
|
10
|
.46
|
|
Other Senior Management Agreement, dated as of March 28, 1997,
between Select Medical Corporation and Michael E. Tarvin,
incorporated by reference to Exhibit 10.21 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.47
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and Michael E. Tarvin, incorporated
by reference to Exhibit 10.22 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.48
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and Michael E.
Tarvin, incorporated by reference to Exhibit 10.54 of Select
Medical Corporations Registration Statement on Form S-1
filed March 30, 2001 (Reg. No. 333-48856).
|
|
10
|
.49
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and
Michael E. Tarvin, incorporated by reference to Exhibit 10.39 of
Select Medical Corporations Form S-4 filed June 16,
2005 (Reg. No. 333-125846).
|
|
10
|
.50
|
|
Change of Control Agreement, dated as of March 1, 2000, between
Select Medical Corporation and Scott A. Romberger,
incorporated by reference to Exhibit 10.56 of Select Medical
Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.51
|
|
Amendment to Change of Control Agreement, dated as of February
23, 2001, between Select Medical Corporation and Scott A.
Romberger, incorporated by reference to Exhibit 10.57 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
II-16
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.52
|
|
Second Amendment to Change of Control Agreement, dated as of
February 24, 2005, between Select Medical Corporation and Scott
A. Romberger, incorporated by reference to Exhibit 10.42 of
Select Medical Corporations Form S-4 filed June 16, 2005
(Reg. No. 333-125846).
|
|
10
|
.53
|
|
Fifth Amendment to Employment Agreement, dated as of April 18,
2005, between Select Medical Corporation and David W. Cross,
incorporated by reference to Exhibit 10.43 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.54
|
|
Form of Unit Award Agreement.
|
|
10
|
.55
|
|
Consulting Agreement, dated as of January 1, 2004, between
Select Medical Corporation and Thomas A. Scully,
incorporated by reference to Exhibit 10.1 of Select Medical
Corporations Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2004 (Reg. No. 001-31441).
|
|
10
|
.56
|
|
First Amendment to Consulting Agreement, dated as of April 18,
2005, between Select Medical Corporation and Thomas A. Scully,
incorporated by reference to Exhibit 10.45 of Select Medical
Corporations Form S-4 filed June 16, 2005 (Reg. No.
333-125846).
|
|
10
|
.57
|
|
Office Lease Agreement, dated as of May 18, 1999, between Select
Medical Corporation and Old Gettysburg Associates, incorporated
by reference to Exhibit 10.24 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.58
|
|
First Addendum to Lease Agreement, dated as of June 1999,
between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.25 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.59
|
|
Second Addendum to Lease Agreement, dated as of February 1,
2000, between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.26 of Select
Medical Corporations Registration Statement on Form S-1
filed October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.60
|
|
Third Addendum to Lease Agreement, dated as of May 17,
2001, between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.52 of Select
Medical Corporations Registration Statement on Form S-4
filed June 26, 2001 (Reg. No. 333-63828).
|
|
10
|
.61
|
|
Fourth Addendum to Lease Agreement, dated as of September 1,
2001, by and between Old Gettysburg Associates and Select
Medical Corporation, incorporated by reference to Exhibit 10.54
of Select Medical Corporations Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 (Reg. No. 000-32499).
|
|
10
|
.62
|
|
Fifth Addendum to Lease Agreement, dated as of February 19,
2004, by and between Old Gettysburg Associates and Select
Medical Corporation, incorporated by reference to Exhibit 10.59
of Select Medical Corporations Form S-4 filed June 16,
2005 (Reg. No. 333-125846).
|
|
10
|
.63
|
|
Sixth Addendum to Lease Agreement, dated as of April 25,
2008, by and between Old Gettysburg Associates and Select
Medical Corporation.
|
|
10
|
.64
|
|
Office Lease Agreement, dated as of June 17, 1999, between
Select Medical Corporation and Old Gettysburg Associates III,
incorporated by reference to Exhibit 10.27 of Select Medical
Corporations Registration Statement on Form S-1 filed
October 27, 2000 (Reg. No. 333-48856).
|
|
10
|
.65
|
|
First Addendum to Lease Agreement, dated as of April 25,
2008, between Old Gettysburg Associates III.
|
|
10
|
.66
|
|
Office Lease Agreement, dated as of May 15, 2001, by and between
Select Medical Corporation and Old Gettysburg Associates II,
incorporated by reference to Exhibit 10.53 of Select Medical
Corporations Registration Statement on Form S-4 filed
June 26, 2001 (Reg. No. 333-63828).
|
|
10
|
.67
|
|
First Addendum to Lease Agreement, dated as of February 26,
2002, by and between Old Gettysburg Associates II and
Select Medical Corporation, incorporated by reference to Exhibit
10.2 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (Reg. No.
000-32499).
|
II-17
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.68
|
|
Second Addendum to Lease Agreement, dated as of February 26,
2002, by and between Old Gettysburg Associates II and
Select Medical Corporation, incorporated by reference to Exhibit
10.3 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (Reg. No.
000-32499).
|
|
10
|
.69
|
|
Third Addendum to Lease Agreement, dated as of February 26,
2002, by and between Old Gettysburg Associates II and
Select Medical Corporation, incorporated by reference to Exhibit
10.4 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (Reg. No.
000-32499).
|
|
10
|
.70
|
|
Office Lease Agreement, dated as of October 29, 2003, by and
between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.74 of Select
Medical Corporations Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 (Reg. No. 001-31441).
|
|
10
|
.71
|
|
Office Lease Agreement, dated as of October 29, 2003, by and
between Select Medical Corporation and Old Gettysburg Associates
II, incorporated by reference to Exhibit 10.75 of Select Medical
Corporations Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 (Reg. No. 001-31441).
|
|
10
|
.72
|
|
Office Lease Agreement, dated as of March 19, 2004, by and
between Select Medical Corporation and Old Gettysburg Associates
II, incorporated by reference to Exhibit 10.3 of Select Medical
Corporations Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2004 (Reg. No. 001-31441).
|
|
10
|
.73
|
|
Office Lease Agreement, dated as of March 19, 2004, by and
between Select Medical Corporation and Old Gettysburg
Associates, incorporated by reference to Exhibit 10.4 of Select
Medical Corporations Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2004 (Reg. No. 001-31441).
|
|
10
|
.74
|
|
Office Lease Agreement, dated August 25, 2006, between Old
Gettysburg Associates IV, L.P. and Select Medical Corporation,
incorporated by reference to Exhibit 10.1 of Select Medical
Corporations Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 (Reg. No.
001-31441).
|
|
10
|
.75
|
|
Office Lease Agreement, dated August 10, 2005, among Old
Gettysburg Associates II and Select Medical Corporation,
incorporated by reference to Exhibit 10.1 of Select Medical
Corporations Current Report on Form 8-K filed August 16,
2005 (Reg. No. 001-31441).
|
|
10
|
.76
|
|
Office Lease Agreement, dated October 5, 2006, by and between
Select Medical Corporation and Old Gettysburg Associates.
|
|
10
|
.77
|
|
Naming, Promotional and Sponsorship Agreement, dated as of
October 1, 1997, between NovaCare, Inc. and the Philadelphia
Eagles Limited Partnership, assumed by Select Medical
Corporation in a Consent and Assumption Agreement dated November
19, 1999 by and among NovaCare, Inc., Select Medical Corporation
and the Philadelphia Eagles Limited Partnership, incorporated by
reference to Exhibit 10.36 of Select Medical Corporations
Registration Statement on Form S-1 filed December 7, 2000
(Reg. No. 333-48856).
|
|
10
|
.78
|
|
First Amendment to Naming, Promotional and Sponsorship
Agreement, dated as of January 1, 2004, between Select Medical
Corporation and Philadelphia Eagles, LLC, incorporated by
reference to Exhibit 10.63 of Select Medical Corporations
Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
|
|
10
|
.79
|
|
Amended and Restated Select Medical Holdings Corporation 2005
Equity Incentive Plan, incorporated by reference to Exhibit 10.1
of Select Medical Corporations Current Report on Form 8-K
filed November 14, 2005 (Reg. No. 001-31441).
|
|
10
|
.80
|
|
Select Medical Holdings Corporation 2005 Equity Incentive Plan
for Non-Employee Directors, incorporated by reference to Exhibit
10.2 of Select Medical Corporations Current Report on Form
8-K filed November 14, 2005 (Reg. No. 001-31441).
|
|
10
|
.81
|
|
Select Medical Holdings Corporation Long Term Cash Incentive
Plan, as amended.
|
II-18
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.82
|
|
Amendment No. 1, dated as of September 26, 2005, to Credit
Agreement, dated as of February 24, 2005, among Select Medical
Holdings Corporation, Select Medical Corporation, as Borrower,
the Lenders party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent and Collateral Agent, Wachovia Bank,
National Association, as Syndication Agent and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc., as
Co-Documentation Agents, incorporated by reference to Exhibit
10.2 of Select Medical Corporations Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005 (Reg.
No. 001-31441).
|
|
10
|
.83
|
|
Amendment No. 2 and Waiver, dated as of March 19, 2007, to
Credit Agreement, dated as of February 24, 2005, among Select
Medical Holdings Corporation, Select Medical Corporation, as
Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A.,
as Administrative Agent and Collateral Agent, Wachovia Bank,
National Association, as Syndication Agent and Merrill Lynch,
Pierce, Fenner & Smith Incorporated and CIBC Inc., as
Co-Documentation Agents, incorporated by reference to Exhibit
10.1 of Select Medical Corporations Current Report on Form
8-K filed March 23, 2007 (Reg. No. 001-31441).
|
|
10
|
.84
|
|
Incremental Facility Amendment, dated as of March 28, 2007, to
Credit Agreement, dated as of February 24, 2005, among
Select Medical Holdings Corporation, Select Medical Corporation,
as Borrower, the Lenders party thereto, JPMorgan Chase Bank,
N.A., as Administrative Agent and Collateral Agent, Wachovia
Bank, National Association, as Syndication Agent and Merrill
Lynch, Pierce, Fenner & Smith Incorporated and CIBC Inc.,
as Co-Documentation Agents, incorporated by reference to Exhibit
10.1 of Select Medical Corporations Current Report on Form
8-K filed March 30, 2007 (Reg. No. 001-31441).
|
|
10
|
.85
|
|
Indenture governing
75/8% Senior
Subordinated Notes due 2015 among Select Medical Corporation,
the Guarantors named therein and U.S. Bank Trust National
Association, dated February 24, 2005, incorporated by reference
to Exhibit 4.4 of Select Medical Corporations Form S-4
filed June 16, 2005 (Reg. No. 333-125846).
|
|
10
|
.86
|
|
Form of
75/8% Senior
Subordinated Notes due 2015 (included in Exhibit 4.4),
incorporated by reference to Select Medical Corporations
Form S-4 filed June 16, 2005 (Reg. No. 333-125846).
|
|
10
|
.87
|
|
Exchange and Registration Rights Agreement, dated as of February
24, 2005, by and among Select Medical Corporation, the
Guarantors named therein, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, J.P. Morgan Securities Inc., Wachovia
Capital Markets, LLC, CIBC World Markets Corp. and PNC Capital
Markets, Inc., incorporated by reference to Exhibit 4.6 of
Select Medical Corporations Form S-4 filed June 16,
2005 (Reg. No. 333-125846).
|
|
10
|
.88
|
|
Indenture governing Senior Floating Rate Notes due 2015 among
Select Medical Holdings Corporation and U.S. Bank Trust National
Association, dated September 29, 2005, incorporated by reference
to Exhibit 4.7 of Select Medical Holdings Corporations
Form S-4 filed April 13, 2006 (Reg. No. 333-133284).
|
|
10
|
.89
|
|
Form of Senior Floating Rate Notes due 2015 (included in
Exhibit 4.7), incorporated by reference to Select Medical
Holdings Corporations Form S-4 filed April 13, 2006 (Reg.
No. 333-133284).
|
|
10
|
.90
|
|
Exchange and Registration Rights Agreement, dated as of
September 29, 2005, by and among Select Medical Holdings
Corporation, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Wachovia Capital Markets, LLC and J.P. Morgan
Securities Inc., incorporated by reference to Exhibit 4.9 of
Select Medical Holdings Corporations Form S-4 filed April
13, 2006 (Reg. No. 333-133284).
|
|
10
|
.91
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of WCAS Capital Partners IV, L.P., amended and restated as of
September 29, 2005, incorporated by reference to Exhibit 10.69
of Select Medical Holdings Corporations Form S-4 filed
April 13, 2006 (Reg. No. 333-133284).
|
|
10
|
.92
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Rocco A. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.70 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
II-19
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
10
|
.93
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Robert A. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.71 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
|
10
|
.94
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of John M. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.72 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
|
10
|
.95
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Martin J. Ortenzio, amended and restated as of September 29,
2005, incorporated by reference to Exhibit 10.73 of Select
Medical Holdings Corporations Form S-4 filed April 13,
2006 (Reg. No. 333-133284).
|
|
10
|
.96
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Martin J. Ortenzio Descendants Trust, amended and restated as
of September 29, 2005, incorporated by reference to Exhibit
10.74 of Select Medical Holdings Corporations Form S-4
filed April 13, 2006 (Reg. No. 333-133284).
|
|
10
|
.97
|
|
10% Senior Subordinated Note due December 31, 2015 in favor
of Ortenzio Family Foundation, amended and restated as of
September 29, 2005, incorporated by reference to Exhibit 10.75
of Select Medical Holdings Corporations Form S-4 filed
April 13, 2006 (Reg. No. 333-133284).
|
|
21
|
.1
|
|
Subsidiaries of Select Medical Holdings Corporation.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
23
|
.2*
|
|
Consent of Dechert LLP (included in Exhibit 5.1).
|
|
24
|
.1
|
|
Powers of Attorney (included on the signature page).
|
|
|
|
*
|
|
To be filed by amendment.
|
II-20