Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended June 30, 2013

 

o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period From              to             .

 

Commission File Number:  001 – 34465

 

SELECT MEDICAL HOLDINGS CORPORATION

(Exact name of Registrant as specified in its charter)

 

Delaware

 

20-1764048

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. employer identification
number)

 

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

(Address of principal executive offices and zip code)

 

(717) 972-1100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the Registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o   Accelerated filer x   Non-accelerated filer o

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

As of July 31, 2013, the Company had outstanding 139,625,565 shares of common stock.

 

Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly-owned operating subsidiary of Holdings.  References to the “Company,” “we,” “us,” and “our” refer collectively to Select Medical Holdings Corporation and Select Medical Corporation.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated balance sheets

3

 

 

 

 

Consolidated statements of operations

4

 

 

 

 

Consolidated statements of changes in equity and income

6

 

 

 

 

Consolidated statements of cash flows

7

 

 

 

 

Notes to consolidated financial statements

8

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

28

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

54

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

54

 

 

 

PART II

OTHER INFORMATION

55

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

55

 

 

 

ITEM 1A.

RISK FACTORS

56

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

56

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

56

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

56

 

 

 

ITEM 5.

OTHER INFORMATION

56

 

 

 

ITEM 6.

EXHIBITS

57

 

 

 

SIGNATURES

 

 

 

2



Table of Contents

 

PART I FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

December 31,

 

June 30,

 

December 31,

 

June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,144

 

$

8,768

 

$

40,144

 

$

8,768

 

Accounts receivable, net of allowance for doubtful accounts of $41,854 and $43,066 at 2012 and 2013, respectively

 

359,929

 

427,191

 

359,929

 

427,191

 

Current deferred tax asset

 

17,877

 

14,850

 

17,877

 

14,850

 

Prepaid income taxes

 

3,895

 

12,219

 

3,895

 

12,219

 

Other current assets

 

31,818

 

38,077

 

31,818

 

38,077

 

Total Current Assets

 

453,663

 

501,105

 

453,663

 

501,105

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

501,552

 

498,808

 

501,552

 

498,808

 

Goodwill

 

1,640,534

 

1,641,796

 

1,640,534

 

1,641,796

 

Other identifiable intangibles

 

71,745

 

71,713

 

71,745

 

71,713

 

Other assets

 

93,867

 

131,633

 

92,819

 

131,633

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,761,361

 

$

2,845,055

 

$

2,760,313

 

$

2,845,055

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Bank overdrafts

 

$

17,836

 

$

19,461

 

$

17,836

 

$

19,461

 

Current portion of long-term debt and notes payable

 

11,646

 

13,230

 

11,646

 

13,230

 

Accounts payable

 

89,547

 

86,914

 

89,547

 

86,914

 

Accrued payroll

 

88,586

 

76,289

 

88,586

 

76,289

 

Accrued vacation

 

55,714

 

60,304

 

55,714

 

60,304

 

Accrued interest

 

22,016

 

9,057

 

18,759

 

9,057

 

Accrued other

 

102,040

 

94,127

 

107,280

 

94,127

 

Due to third party payors

 

1,078

 

6,295

 

1,078

 

6,295

 

Total Current Liabilities

 

388,463

 

365,677

 

390,446

 

365,677

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

1,458,597

 

1,517,728

 

1,291,297

 

1,517,728

 

Non-current deferred tax liability

 

89,510

 

89,676

 

89,510

 

89,676

 

Other non-current liabilities

 

68,502

 

70,647

 

68,502

 

70,647

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

2,005,072

 

2,043,728

 

1,839,755

 

2,043,728

 

 

 

 

 

 

 

 

 

 

 

Redeemable non-controlling interests

 

10,811

 

12,520

 

10,811

 

12,520

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 140,589,256 shares and 139,625,565 shares issued and outstanding at 2012 and 2013, respectively

 

141

 

140

 

 

 

Common stock of Select, $0.01 par value, 100 shares issued and outstanding

 

 

 

0

 

0

 

Capital in excess of par

 

473,697

 

470,809

 

859,839

 

864,557

 

Retained earnings (accumulated deficit)

 

243,210

 

287,350

 

21,478

 

(106,258

)

Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity

 

717,048

 

758,299

 

881,317

 

758,299

 

Non-controlling interest

 

28,430

 

30,508

 

28,430

 

30,508

 

Total Equity

 

745,478

 

788,807

 

909,747

 

788,807

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

2,761,361

 

$

2,845,055

 

$

2,760,313

 

$

2,845,055

 

 

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

 

3



Table of Contents

 

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Three Months Ended June 30,

 

For the Three Months Ended June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

750,193

 

$

756,673

 

$

750,193

 

$

756,673

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

612,669

 

625,730

 

612,669

 

625,730

 

General and administrative

 

18,554

 

17,927

 

18,554

 

17,927

 

Bad debt expense

 

10,029

 

8,846

 

10,029

 

8,846

 

Depreciation and amortization

 

15,428

 

15,907

 

15,428

 

15,907

 

Total costs and expenses

 

656,680

 

668,410

 

656,680

 

668,410

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

93,513

 

88,263

 

93,513

 

88,263

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

 

(17,280

)

 

(17,280

)

Equity in earnings of unconsolidated subsidiaries

 

2,752

 

568

 

2,752

 

568

 

Interest expense

 

(23,798

)

(21,904

)

(20,957

)

(21,904

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

72,467

 

49,647

 

75,308

 

49,647

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

27,651

 

19,769

 

28,646

 

19,769

 

 

 

 

 

 

 

 

 

 

 

Net income

 

44,816

 

29,878

 

46,662

 

29,878

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

1,644

 

2,098

 

1,644

 

2,098

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation

 

$

43,172

 

$

27,780

 

$

45,018

 

$

27,780

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

$

0.20

 

 

 

 

 

Diluted

 

$

0.31

 

$

0.20

 

 

 

 

 

 

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

 

4



Table of Contents

 

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Six Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

1,494,214

 

$

1,506,628

 

$

1,494,214

 

$

1,506,628

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services

 

1,224,288

 

1,250,634

 

1,224,288

 

1,250,634

 

General and administrative

 

32,778

 

35,325

 

32,778

 

35,325

 

Bad debt expense

 

20,404

 

18,167

 

20,404

 

18,167

 

Depreciation and amortization

 

31,627

 

31,709

 

31,627

 

31,709

 

Total costs and expenses

 

1,309,097

 

1,335,835

 

1,309,097

 

1,335,835

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

185,117

 

170,793

 

185,117

 

170,793

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Loss on early retirement of debt

 

 

(18,747

)

 

(17,788

)

Equity in earnings of unconsolidated subsidiaries

 

5,217

 

1,626

 

5,217

 

1,626

 

Interest expense

 

(47,720

)

(45,362

)

(42,207

)

(42,952

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

142,614

 

108,310

 

148,127

 

111,679

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

55,226

 

41,630

 

57,156

 

42,809

 

 

 

 

 

 

 

 

 

 

 

Net income

 

87,388

 

66,680

 

90,971

 

68,870

 

 

 

 

 

 

 

 

 

 

 

Less: Net income attributable to non-controlling interests

 

2,674

 

4,482

 

2,674

 

4,482

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation

 

$

84,714

 

$

62,198

 

$

88,297

 

$

64,388

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.60

 

$

0.44

 

 

 

 

 

Diluted

 

$

0.59

 

$

0.44

 

 

 

 

 

 

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

 

5



Table of Contents

 

Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)

 

 

 

 

 

 

 

Select Medical Holdings Corporation Stockholders

 

 

 

 

 

Comprehensive
Income

 

Total

 

Common
Stock Issued

 

Common
Stock Par
Value

 

Capital in
Excess of Par

 

Retained
Earnings

 

Non-controlling
Interests

 

Balance at December 31, 2012

 

 

 

$

745,478

 

140,589

 

$

141

 

$

473,697

 

$

243,210

 

$

28,430

 

Net income

 

$

64,812

 

64,812

 

 

 

 

 

 

 

62,198

 

2,614

 

Net income - attributable to redeemable non-controlling interests

 

1,868

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

66,680

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid to common stockholders

 

 

 

(13,963

)

 

 

 

 

 

 

(13,963

)

 

 

Issuance and vesting of restricted stock

 

 

 

3,076

 

152

 

0

 

3,076

 

 

 

 

 

Stock option expense

 

 

 

461

 

 

 

 

 

461

 

 

 

 

 

Repurchase of common shares

 

 

 

(9,983

)

(1,115

)

(1

)

(6,425

)

(3,557

)

 

 

Acquisitions of non-controlling interests

 

 

 

261

 

 

 

 

 

 

 

 

 

261

 

Distributions to non-controlling interests

 

 

 

(797

)

 

 

 

 

 

 

 

 

(797

)

Redeemable non-controlling interests redemption value adjustment

 

 

 

(538

)

 

 

 

 

 

 

(538

)

 

 

Balance at June 30, 2013

 

 

 

$

788,807

 

139,626

 

$

140

 

$

470,809

 

$

287,350

 

$

30,508

 

 

 

 

 

 

 

 

Select Medical Corporation Stockholders

 

 

 

 

 

Comprehensive
Income

 

Total

 

Common
Stock Issued

 

Common
Stock Par
Value

 

Capital in
Excess of Par

 

Retained
Earnings
(accumulated
deficit)

 

Non-controlling
Interests

 

Balance at December 31, 2012

 

 

 

$

909,747

 

0

 

$

0

 

$

859,839

 

$

21,478

 

$

28,430

 

Net income

 

$

67,002

 

67,002

 

 

 

 

 

 

 

64,388

 

2,614

 

Net income - attributable to redeemable non-controlling interests

 

1,868

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

68,870

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal tax benefit of losses contributed by Holdings

 

 

 

1,181

 

 

 

 

 

1,181

 

 

 

 

 

Net change in dividends payable to Holdings

 

 

 

5,239

 

 

 

 

 

 

 

5,239

 

 

 

Dividends declared and paid to Holdings

 

 

 

(196,825

)

 

 

 

 

 

 

(196,825

)

 

 

Contribution related to restricted stock awards and stock option issuances by Holdings

 

 

 

3,537

 

 

 

 

 

3,537

 

 

 

 

 

Acquisitions of non-controlling interests

 

 

 

261

 

 

 

 

 

 

 

 

 

261

 

Distributions to non-controlling intersts

 

 

 

(797

)

 

 

 

 

 

 

 

 

(797

)

Redeemable non-controlling interests redemption value adjustment

 

 

 

(538

)

 

 

 

 

 

 

(538

)

 

 

Balance at June 30, 2013

 

 

 

$

788,807

 

0

 

$

0

 

$

864,557

 

$

(106,258

)

$

30,508

 

 

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

 

6



Table of Contents

 

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

Select Medical Holdings Corporation

 

Select Medical Corporation

 

 

 

For the Six Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net income

 

$

87,388

 

$

66,680

 

$

90,971

 

$

68,870

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

31,627

 

31,709

 

31,627

 

31,709

 

Provision for bad debts

 

20,404

 

18,167

 

20,404

 

18,167

 

Equity in earnings of unconsolidated subsidiaries

 

(5,217

)

(1,626

)

(5,217

)

(1,626

)

Loss on early retirement of debt

 

 

18,747

 

 

17,788

 

Loss (gain) from disposal or sale of assets

 

(3,604

)

81

 

(3,604

)

81

 

Non-cash stock compensation expense

 

2,599

 

3,537

 

2,599

 

3,537

 

Amortization of debt discount and issuance costs

 

3,511

 

4,588

 

3,325

 

4,499

 

Changes in operating assets and liabilities, net of effects from acquisition of businesses:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(30,520

)

(83,832

)

(30,520

)

(83,832

)

Other current assets

 

(1,612

)

(5,894

)

(1,612

)

(5,894

)

Other assets

 

1,675

 

144

 

1,675

 

144

 

Accounts payable

 

(5,486

)

(2,665

)

(5,486

)

(2,665

)

Due to third-party payors

 

1,738

 

5,217

 

1,738

 

5,217

 

Accrued expenses

 

6,423

 

(28,203

)

6,340

 

(24,945

)

Income and deferred taxes

 

9,879

 

(4,627

)

11,809

 

(3,448

)

Net cash provided by operating activities

 

118,805

 

22,023

 

124,049

 

27,602

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(27,934

)

(27,962

)

(27,934

)

(27,962

)

Proceeds from sale of assets

 

16,511

 

 

16,511

 

 

Investment in businesses, net of distributions

 

(10,014

)

(28,716

)

(10,014

)

(28,716

)

Acquisition of businesses, net of cash acquired

 

(206

)

(171

)

(206

)

(171

)

Net cash used in investing activities

 

(21,643

)

(56,849

)

(21,643

)

(56,849

)

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

Borrowings on revolving credit facility

 

340,000

 

455,000

 

340,000

 

455,000

 

Payments on revolving credit facility

 

(380,000

)

(480,000

)

(380,000

)

(480,000

)

Borrowings on credit facility term loans, net of discount

 

 

298,500

 

 

298,500

 

Payments on credit facility term loans

 

(4,250

)

(592,615

)

(4,250

)

(592,615

)

Issuance of 6.375% senior notes

 

 

600,000

 

 

600,000

 

Repurchase of senior floating rate notes

 

 

(167,300

)

 

 

Repurchase of 7 5/8% senior subordinated notes

 

 

(70,000

)

 

(70,000

)

Borrowings of other debt

 

5,835

 

6,909

 

5,835

 

6,909

 

Principal payments on other debt

 

(5,085

)

(4,673

)

(5,085

)

(4,673

)

Debt issuance costs

 

 

(18,583

)

 

(18,583

)

Dividends paid to common stockholders

 

 

(13,963

)

 

 

Dividends paid to Holdings

 

 

 

(52,034

)

(196,825

)

Repurchase of common stock

 

(46,790

)

(9,983

)

 

 

Proceeds from issuance of common stock

 

547

 

 

 

 

Equity investment by Holdings

 

 

 

547

 

 

Proceeds from bank overdrafts

 

3,739

 

1,625

 

3,739

 

1,625

 

Distributions to non-controlling interests

 

(1,681

)

(1,467

)

(1,681

)

(1,467

)

Net cash provided by (used in) financing activities

 

(87,685

)

3,450

 

(92,929

)

(2,129

)

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

9,477

 

(31,376

)

9,477

 

(31,376

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

12,043

 

40,144

 

12,043

 

40,144

 

Cash and cash equivalents at end of period

 

$

21,520

 

$

8,768

 

$

21,520

 

$

8,768

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

32,378

 

$

53,914

 

$

27,136

 

$

48,335

 

Cash paid for taxes

 

$

45,344

 

$

46,832

 

$

45,344

 

$

46,832

 

 

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

 

7



Table of Contents

 

SELECT MEDICAL HOLDINGS CORPORATION AND SELECT MEDICAL CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.              Basis of Presentation

 

The unaudited consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) and Select Medical Corporation (“Select”) as of June 30, 2013 and for the three and six month periods ended June 30, 2012 and 2013 have been prepared in accordance with generally accepted accounting principles (“GAAP”).  In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods.  All significant intercompany transactions and balances have been eliminated.  The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2013.  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.

 

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, 2012 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2013.

 

2.              Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

3.  Intangible Assets

 

The gross carrying amounts of the Company’s indefinite-lived intangible assets consist of the following:

 

 

 

December 31,
2012

 

June 30,
2013

 

 

 

(in thousands)

 

Goodwill

 

$

1,640,534

 

$

1,641,796

 

Trademarks

 

57,709

 

57,709

 

Certificates of need

 

11,914

 

11,921

 

Accreditations

 

2,122

 

2,083

 

Total

 

$

1,712,279

 

$

1,713,509

 

 

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Table of Contents

 

The Company’s accreditations and trademarks have renewal terms. The costs to renew these intangibles are expensed as incurred. At June 30, 2013, the accreditations and trademarks have a weighted average time until next renewal of approximately 1.5 years and 7.0 years, respectively.

 

The changes in the carrying amount of goodwill for the Company’s reportable segments for the six months ended June 30, 2013 are as follows:

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Total

 

 

 

(in thousands)

 

Balance as of December 31, 2012

 

$

1,333,220

 

$

307,314

 

$

1,640,534

 

Goodwill acquired during the period

 

1,395

 

 

1,395

 

Purchase price adjustment

 

 

 

 

(133

)

 

(133

)

Balance as of June 30, 2013

 

$

1,334,615

 

$

307,181

 

$

1,641,796

 

 

4.  Indebtedness

 

The components of long-term debt and notes payable are as follows:

 

 

 

Holdings

 

 

 

December 31,
2012

 

June 30,
2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

7 5/8% senior subordinated notes

 

$

70,000

 

$

 

6.375% senior notes

 

 

600,000

 

Senior secured credit facilities:

 

 

 

 

 

Revolving loan

 

130,000

 

105,000

 

Term loans (1) 

 

1,096,641

 

811,060

 

Senior floating rate notes

 

167,300

 

 

Other

 

6,302

 

14,898

 

Total debt

 

1,470,243

 

1,530,958

 

Less: current maturities

 

11,646

 

13,230

 

Total long-term debt

 

$

1,458,597

 

$

1,517,728

 

 

 

 

Select

 

 

 

December 31,
2012

 

June 30,
2013

 

 

 

(in thousands)

 

 

 

 

 

 

 

7 5/8% senior subordinated notes

 

$

70,000

 

$

 

6.375% senior notes

 

 

600,000

 

Senior secured credit facilities:

 

 

 

 

 

Revolving loan

 

130,000

 

105,000

 

Term loans (1) 

 

1,096,641

 

811,060

 

Other

 

6,302

 

14,898

 

Total debt

 

1,302,943

 

1,530,958

 

Less: current maturities

 

11,646

 

13,230

 

Total long-term debt

 

$

1,291,297

 

$

1,517,728

 

 

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Table of Contents

 


(1)         Presented net of unamortized discounts of $14.2 million and $7.2 million at December 31, 2012 and June 30, 2013, respectively.

 

On February 20, 2013, Select entered into an additional credit extension amendment to its senior secured credit facilities providing for a $300.0 million additional term loan tranche, (the “series B term loan”) to Select.  Select used the borrowings under the series B term loan to redeem all of its outstanding 7 5/8% senior subordinated notes due 2015 on March 22, 2013, to finance Holdings’ redemption of all of its senior floating rate notes due 2015 on March 22, 2013 and to repay a portion of the balance outstanding under Select’s revolving credit facility.

 

The Company recognized a loss on early retirement of debt of $1.5 million during the three months ended March 31, 2013 for unamortized debt issuance costs, approximately $0.5 million associated with Select’s 7 5/8% senior subordinated notes due 2015 and approximately $1.0 million associated with Holdings’ senior floating rate notes due 2015.

 

Borrowings under the series B term loan bear interest at a rate equal to Adjusted LIBO plus 3.25%, or Alternate Base Rate plus 2.25%.  The series B term loan amortizes in equal quarterly installments on the last day of each March, June, September and December in aggregate annual amounts equal to $3.0 million.  The balance of the series B term loan is payable on February 20, 2016.

 

At the time of issuing the series B term loan, Select had additional term loan tranches outstanding including an $850.0 million term loan tranche issued on June 1, 2011 (the “original term loan”) and a $275.0 million incremental term loan tranche issued August 13, 2012 (the “series A term loan”). Both the original term loan and series A term loan tranches were issued at a discount and amortize in equal quarterly installments on the last day of each March, June, September and December. The balance of both the original term loan and series A term loan are payable on June 1, 2018.

 

On May 28, 2013, Select issued and sold $600.0 million aggregate principal amount of its 6.375% senior notes due 2021. The senior notes are senior unsecured obligations of Select and are fully and unconditionally guaranteed by all of Select’s wholly owned subsidiaries.  On May 28, 2013, Select used the proceeds of the senior notes to pay a portion of the amounts outstanding on the original term loan and the series A term loan, and to pay related fees and expenses.  Select recognized a loss on early retirement of debt of $17.3 million in the three months ended June 30, 2013 in connection with the repayment of a portion of its term loans and amendment of the existing senior secured credit facility, which included the write-off of unamortized debt issuance costs.

 

Interest on the senior notes accrues at the rate of 6.375% per annum and is payable semi-annually in cash in arrears on June 1 and December 1 of each year, commencing on December 1, 2013.  The senior notes are Select’s senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness.  The senior notes are guaranteed, jointly and severally, by Select’s direct or indirect existing and future domestic restricted subsidiaries other than certain non-guarantor subsidiaries.

 

Select may redeem some or all of the senior notes prior to June 1, 2016 by paying a “make-whole” premium.  Select may redeem some or all of the senior notes on or after June 1, 2016 at specified redemption prices.  In addition, prior to June 1, 2016, Select may redeem up to 35% of the senior notes with the net proceeds of certain equity offerings at a price of 106.375% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and

 

10



Table of Contents

 

unpaid interest, if any, as a result of certain change of control events.  These restrictions and prohibitions are subject to certain qualifications and exceptions.

 

The Indenture relating to the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of its subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates.  In addition, the Indenture requires, among other things, Select to provide financial and current reports to holders of the senior notes or file such reports electronically with the U.S. Securities and Exchange Commission (the “SEC”).  These covenants are subject to a number of exceptions, limitations and qualifications set forth in the Indenture.

 

In connection with the issuance of the senior notes, Select entered into a registration rights agreement on May 28, 2013 with certain guarantors of the notes named therein and J.P. Morgan Securities LLC, on behalf of itself and the other initial purchasers named therein (the “Registration Rights Agreement”).  Pursuant to the Registration Rights Agreement, Select has agreed to file an exchange offer registration statement to exchange the senior notes for substantially identical notes registered under the Securities Act unless the exchange offer is not permitted by applicable law or the policy of the SEC.  Select has also agreed to file a shelf registration statement to cover resales of notes under certain circumstances.  Select has agreed to file the exchange offer registration statement with the SEC within 150 days of the issue date of the senior notes and use commercially reasonable efforts to have the exchange offer registration statement declared effective within 240 days of the issue date and to complete the exchange offer with respect to the senior notes within 30 days of effectiveness.  In addition, Select agreed to use commercially reasonable efforts to file the shelf registration statement on or prior to the later of (i) 120 days after a filing obligation arises and (ii) 270 days after the issue date, and to use commercially reasonable efforts to cause such shelf registration statement to be declared effective by the SEC on or prior to 210 days after such filing.  If Select fails to satisfy its registration obligations under the Registration Rights Agreement, it will be required to pay additional interest to the holders of the senior notes under certain circumstances.

 

On June 3, 2013, Select amended its existing senior secured credit facilities in order to:

 

·                  extend the maturity date on $293.3 million of its $300.0 million revolving credit facility from June 1, 2016 to March 1, 2018;

·                  convert the remaining original term loan and series A term loan to a series C term loan and lower the interest rate payable on the series C term loan from Adjusted LIBO plus 3.75%, or Alternate Base Rate plus 2.75%, to Adjusted LIBO plus 3.00%, or Alternate Base Rate plus 2.00%, and amend the provision of the series C term loan from providing that Adjusted LIBO will at no time be less than 1.75% to providing that Adjusted LIBO will at no time be less than 1.00%; and

·                  amend the restrictive covenants governing the senior secured credit facilities in order to allow for unlimited restricted payments so long as there is no event of default under the senior secured credit facilities and the total pro forma ratio of total indebtedness to Consolidated EBITDA (as defined in our senior secured credit facilities) is less than or equal to 2.75 to 1.00.

 

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Table of Contents

 

Maturities of Long-Term Debt and Notes Payable

 

Maturities of the Company’s long-term debt for the period from July 1, 2013 through December 31, 2013 and the years after 2013 are approximately as follows and are presented net of the discounts on the senior secured credit facility term loans (in thousands):

 

July 1, 2013 – December 31, 2013

 

$

8,252

 

2014

 

9,742

 

2015

 

10,536

 

2016

 

296,134

 

2017

 

4,075

 

2018 and beyond

 

1,202,219

 

 

5.  Fair Value

 

Financial instruments include cash and cash equivalents, notes payable and long-term debt.  The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

 

The carrying value of Select’s senior secured credit facility was $1,226.6 million and $916.1 million at December 31, 2012 and June 30, 2013, respectively.  The fair value of Select’s senior secured credit facility was $1,216.2 million and $907.8 million at December 31, 2012 and June 30, 2013, respectively.  The fair value of Select’s senior secured credit facility was based on quoted market prices for this debt in the syndicated loan market.

 

The carrying value of Select’s 6.375% senior notes was $600.0 million at June 30, 2013.  The fair value of Select’s 6.375% senior notes was $570.0 million June 30, 2013.  The fair value of this debt was based on quoted market prices.

 

The Company considers the inputs in the valuation process of its senior secured credit facility and 6.375% senior notes to be Level 2 in the fair value hierarchy.  Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly which includes quoted prices for identical assets or liabilities in markets that are not active.

 

6.  Segment Information

 

The Company’s reportable segments consist of (i) specialty hospitals and (ii) outpatient rehabilitation. Other activities include the Company’s corporate services and certain other non-consolidating joint ventures and minority investments in other healthcare related businesses. The outpatient rehabilitation reportable segment has two operating segments: outpatient rehabilitation clinics and contract therapy. These operating segments are aggregated for reporting purposes as they have common economic characteristics and provide a similar service to a similar patient base. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as net income before interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, equity in earnings (losses) of unconsolidated subsidiaries and other income (expense).

 

12



Table of Contents

 

The following tables summarize selected financial data for the Company’s reportable segments. The segment results of Holdings are identical to those of Select with the exception of total assets:

 

 

 

Three Months Ended June 30, 2012

 

 

 

Specialty

 

Outpatient

 

 

 

 

 

 

 

Hospitals

 

Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

Net operating revenues

 

$

557,130

 

$

193,050

 

$

13

 

$

750,193

 

Adjusted EBITDA

 

102,166

 

25,837

 

(17,724

)

110,279

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,184,743

 

437,591

 

156,080

 

2,778,414

 

Select Medical Holdings Corporation

 

2,184,743

 

437,591

 

157,303

 

2,779,637

 

Capital expenditures

 

12,631

 

2,922

 

630

 

16,183

 

 

 

 

Three Months Ended June 30, 2013

 

 

 

Specialty

 

Outpatient

 

 

 

 

 

 

 

Hospitals

 

 Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

559,386

 

$

197,080

 

$

207

 

$

756,673

 

Adjusted EBITDA

 

96,393

 

26,054

 

(16,489

)

105,958

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,229,458

 

445,411

 

170,186

 

2,845,055

 

Select Medical Holdings Corporation

 

2,229,458

 

445,411

 

170,186

 

2,845,055

 

Capital expenditures

 

10,203

 

2,999

 

761

 

13,963

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

Specialty

 

Outpatient

 

 

 

 

 

 

 

Hospitals

 

Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

Net operating revenues

 

$

1,110,168

 

$

383,949

 

$

97

 

$

1,494,214

 

Adjusted EBITDA

 

202,120

 

48,315

 

(31,092

)

219,343

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,184,743

 

437,591

 

156,080

 

2,778,414

 

Select Medical Holdings Corporation

 

2,184,743

 

437,591

 

157,303

 

2,779,637

 

Capital expenditures

 

19,682

 

6,713

 

1,539

 

27,934

 

 

13



Table of Contents

 

 

 

Six Months Ended June 30, 2013

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

1,117,137

 

$

389,181

 

$

310

 

$

1,506,628

 

Adjusted EBITDA

 

189,740

 

48,887

 

(32,588

)

206,039

 

Total assets:

 

 

 

 

 

 

 

 

 

Select Medical Corporation

 

2,229,458

 

445,411

 

170,186

 

2,845,055

 

Select Medical Holdings Corporation

 

2,229,458

 

445,411

 

170,186

 

2,845,055

 

Capital expenditures

 

21,100

 

5,844

 

1,018

 

27,962

 

 

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

 

 

 

Three Months Ended June 30, 2012

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

102,166

 

$

25,837

 

$

(17,724

)

 

 

 

 

Depreciation and amortization

 

(11,479

)

(3,232

)

(717

)

 

 

 

 

Stock compensation expense

 

 

 

(1,338

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

90,687

 

$

22,605

 

$

(19,779

)

$

93,513

 

$

93,513

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

2,752

 

2,752

 

Interest expense

 

 

 

 

 

 

 

(23,798

)

(20,957

)

Income before income taxes

 

 

 

 

 

 

 

$

72,467

 

$

75,308

 

 

14



Table of Contents

 

 

 

Three Months Ended June 30, 2013

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

96,393

 

$

26,054

 

$

(16,489

)

 

 

 

 

Depreciation and amortization

 

(11,932

)

(3,001

)

(974

)

 

 

 

 

Stock compensation expense

 

 

 

(1,788

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

84,461

 

$

23,053

 

$

(19,251

)

$

88,263

 

$

88,263

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

568

 

568

 

Loss on early retirement of debt

 

 

 

 

 

 

 

(17,280

)

(17,280

)

Interest expense

 

 

 

 

 

 

 

(21,904

)

(21,904

)

Income before income taxes

 

 

 

 

 

 

 

$

49,647

 

$

49,647

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

202,120

 

$

48,315

 

$

(31,092

)

 

 

 

 

Depreciation and amortization

 

(23,322

)

(6,882

)

(1,423

)

 

 

 

 

Stock compensation expense

 

 

 

(2,599

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

178,798

 

$

41,433

 

$

(35,114

)

$

185,117

 

$

185,117

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

5,217

 

5,217

 

Interest expense

 

 

 

 

 

 

 

(47,720

)

(42,207

)

Income before income taxes

 

 

 

 

 

 

 

$

142,614

 

$

148,127

 

 

15



Table of Contents

 

 

 

Six Months Ended June 30, 2013

 

 

 

Specialty
Hospitals

 

Outpatient
Rehabilitation

 

Other

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Adjusted EBITDA

 

$

189,740

 

$

48,887

 

$

(32,588

)

 

 

 

 

Depreciation and amortization

 

(23,794

)

(5,970

)

(1,945

)

 

 

 

 

Stock compensation expense

 

 

 

(3,537

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Select
Medical
Holdings
Corporation

 

Select
Medical
Corporation

 

Income (loss) from operations

 

$

165,946

 

$

42,917

 

$

(38,070

)

$

170,793

 

$

170,793

 

Equity in earnings of unconsolidated subsidiaries

 

 

 

 

 

 

 

1,626

 

1,626

 

Loss on early retirement of debt

 

 

 

 

 

 

 

(18,747

)

(17,788

)

Interest expense

 

 

 

 

 

 

 

(45,362

)

(42,952

)

Income before income taxes

 

 

 

 

 

 

 

$

108,310

 

$

111,679

 

 

7.  Income per Common Share

 

The Company applies the two-class method for calculating and presenting income per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of stock participation rights in undistributed earnings. The following table sets forth for the periods indicated the calculation of income per common share in the Company’s consolidated statement of operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute basic and diluted income per common share, respectively:

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Select Medical Holdings Corporation

 

$

43,172

 

$

27,780

 

$

84,714

 

$

62,198

 

Less: Earnings allocated to unvested restricted stockholders

 

707

 

593

 

1,338

 

1,304

 

Net income available to common stockholders

 

$

42,465

 

$

27,187

 

$

83,376

 

$

60,894

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares — basic

 

138,456

 

136,609

 

139,941

 

136,997

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

229

 

134

 

221

 

168

 

Weighted average shares — diluted

 

138,685

 

136,743

 

140,162

 

137,165

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

 

$

0.31

 

$

0.20

 

$

0.60

 

$

0.44

 

Diluted income per common share

 

$

0.31

 

$

0.20

 

$

0.59

 

$

0.44

 

 

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

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

(in thousands)

 

Stock options

 

1,684

 

2,165

 

1,699

 

1,554

 

 

8. Commitments and Contingencies

 

Litigation

 

The Company is a party to various legal actions, proceedings and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”) or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations and liquidity.

 

To address claims arising out of the operations of the Company’s specialty hospitals and outpatient rehabilitation facilities, the Company maintains professional malpractice liability insurance and general liability insurance, subject to self-insured retention of $2.0 million per medical incident for professional liability claims and $2.0 million per occurrence for general liability claims. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

 

Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.

 

On January 8, 2013, a federal magistrate judge unsealed an Amended Complaint in United States of America and the State of Indiana, ex rel. Doe I, Doe II and Doe III v. Select Medical Corporation, Select Specialty Hospital-Evansville, Evansville Physician Investment Corporation, Dr. Richard Sloan and Dr. Jeffrey Selby. The Amended Complaint, which was served on the Company on February 15, 2013, is a civil action filed under seal on September 28, 2012 in the United States District Court for the Southern District of Indiana by private plaintiff-relators on behalf of the United States and the state of Indiana under the federal False Claims Act and Indiana False Claims and Whistleblower Protection Act. Although the Amended Complaint identifies

 

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the relators by fictitious pseudonyms, on March 28, 2013, the relators filed a Notice identifying themselves as the former CEO at the Company’s long term acute care hospital in Evansville, Indiana (“SSH-Evansville”) and two former case managers at SSH-Evansville. The named defendants include the Company, SSH-Evansville, and two physicians who have practiced at SSH-Evansville. On March 26, 2013, the defendants, relators and the United States filed a joint motion seeking a stay of the proceedings, in which the United States notified the court that its investigation has not been completed and therefore it is not yet able to decide whether or not to intervene, and on March 29, 2013, the magistrate judge granted the motion and stayed all deadlines in the case for 90 days. On June 26, 2013, the United States filed a motion seeking to extend such stay of the proceedings for an additional 90 days, and on June 27, 2013, the defendants each filed a notice of consent to the requested stay.

 

The Amended Complaint alleges that the defendants manipulated the length of stay of patients at SSH-Evansville in order to maximize reimbursement under the Medicare prospective payment system applicable to long term acute care hospitals. It also alleges that the defendants manipulated the discharge of patients to other facilities and the timing of readmissions from those facilities in order to enable SSH-Evansville to receive two separate Medicare payments and causing the other facility to submit claims for unnecessary services. The Amended Complaint discusses the federal Stark Law and Anti-Kickback Statute and implies that the behavior of physicians referring to or providing services at SSH-Evansville was based on their financial interests. The Amended Complaint further alleges that Dr. Selby, a pulmonologist formerly on the medical staff of SSH-Evansville, performed unnecessary bronchoscopies at the hospital with the knowledge of the Company, and that Dr. Sloan, the Chief Medical Officer and an attending physician at SSH-Evansville, falsely coded the diagnoses of Medicare patients in order to increase SSH-Evansville’s reimbursement. Moreover, the Amended Complaint alleges that the practices at SSH-Evansville involved corporate policies of the Company used to maximize profit at all Select long term acute care hospitals. The Amended Complaint alleges that, through these acts, the defendants have violated the federal False Claims Act and Indiana False Claims and Whistleblower Protection Act and are liable for unspecified treble damages and penalties.

 

As previously disclosed, beginning in April 2012, the Company and SSH-Evansville have received various subpoenas and demands for documents relating to SSH-Evansville, including a request for information and subpoenas from the Office of Inspector General of the U.S. Department of Health and Human Services and subpoenas from the Office of Attorney General for the State of Indiana, and the Evansville (Indiana) Police Department has executed a search warrant at SSH-Evansville. The Company has produced and will continue to produce documents in response to, and intends to fully cooperate with, these governmental investigations. At this time, the Company is unable to predict the timing and outcome of this matter.

 

Construction Commitments

 

At June 30, 2013, the Company had outstanding commitments under construction contracts related to new construction, improvements and renovations at the Company’s long term acute care properties and inpatient rehabilitation facilities totaling approximately $18.3 million.

 

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9.              Subsequent Event

 

On August 7, 2013, Holdings’ board of directors declared a quarterly cash dividend of $0.10 per share. The dividend will be payable on or about August 30, 2013 to stockholders of record as of the close of business on August 20, 2013.

 

10.       Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries under Select’s 6.375% Senior Notes

 

Select’s 6.375% senior notes are fully and unconditionally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly-owned subsidiaries (the “Subsidiary Guarantors”) which is defined as a subsidiary where Select or a subsidiary of Select holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the “Non-Guarantor Subsidiaries”).

 

Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating financial information for Select, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at December 31, 2012 and June 30, 2013 and for the three and six months ended June 30, 2012 and 2013.