UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 1-11151
U.S. PHYSICAL THERAPY, INC.
(Name of small business issuer in its charter)
Nevada 76-0364866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3040 Post Oak Blvd., Suite 222, Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713) 297-7000
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on which
Title of each class registered
Common Stock $.01 par value Boston Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes
State issuer's revenues for its most recent fiscal year:
$ 32,207,000
State the aggregate market value of the voting stock held by
non-affiliates of the registrant:
$23,858,398 (As of March 11, 1997)
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 3,594,715
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-KSB
Portions of Definitive Proxy PART III
Statement for the 1996 Annual
Meeting to Shareholders
Transitional Small Business Disclosure Format: No
<PAGE>
PART I
Item 1. Description of Business.
General
U.S. Physical Therapy, Inc. (the "Company") is engaged in the
business of developing, owning and operating outpatient physical
therapy and occupational therapy clinics. As of December 31, 1996,
the Company was operating sixty-nine clinics, seventeen in Texas,
twelve in Michigan, six in Florida, five in Mississippi, four in
Georgia and Pennsylvania, respectively, three in Louisiana, two in
Maine, Missouri, Oklahoma and Wisconsin, respectively, and one in
Alabama, Connecticut, Illinois, Iowa, Minnesota, Montana, New
Mexico, New Jersey, South Carolina and Virginia, respectively. In
March 1995, the Company closed two clinics, which originally opened
in 1994, due to adverse clinic performance and consolidated the
operations of one of its clinics opened in 1994 with another clinic
opened in 1993. In 1995, the Company consolidated the operations
of two previously acquired clinics into one single facility and
consolidated another previously acquired clinic with one of the
clinics developed and opened in 1994. These consolidations were
undertaken to more efficiently serve these geographic markets. In
the first quarter of 1996, the Company acquired all of the assets
of a clinic located in McKinney, Texas, and consolidated its
existing clinic located in McKinney into the acquired facility.
Subsequent to 1996, the Company sold all of the fixed assets of two
clinics, located in Mississippi and Alabama, respectively, and then
closed the two facilities. A total of twelve clinics were opened in
1996. Management presently anticipates to further accelerate the
pace of new clinic openings in 1997.
The clinics provide post-operative care and treatment for a
variety of orthopedic-related disorders and sports-related
injuries, treatment for neurologically-related injuries,
rehabilitation of injured workers and preventative care. Each
clinic's staff typically includes one or more licensed physical
and/or occupational therapists and office personnel, and may also
include physical and/or occupational therapy assistants, aides,
exercise physiologists and athletic trainers. The clinics perform
a tailored and comprehensive evaluation of each patient which is
followed by a treatment plan specific to their type of injury. The
2<PAGE>
treatment plan may include the use of modalities and procedures,
such as ultrasound, electrical stimulation, hot packs and
iontophoresis, therapeutic exercise, manual therapy techniques,
education on management of daily life skills and home exercise
programs. The clinics' business primarily originates from
physician referrals. The principal sources of payment for the
clinics' services are commercial health insurance, workers'
compensation insurance, managed care programs, Medicare and
proceeds from personal injury cases. The Company's strategy is to
develop and acquire outpatient clinics on a national basis.
The Company's development strategy is to attract physical and
occupational therapists who have established relationships with
physicians by offering them the opportunity to acquire a
partnership interest in a new clinic to be developed by the
Company. In addition, the clinic partner receives a competitive
salary and bonus based on his or her clinic's net revenue and
profitability. The Company is presently engaged in discussions
with several prospective therapist partners.
The Company was formed in June 1990 and operated as a subchapter
S Corporation until August 1991 when, in conjunction with a
$2,500,000 private placement, it reorganized into a limited
partnership form of organization. In May 1992, in connection with
the Company's initial public offering, the Company was reorganized
into its present form, a Nevada corporation with operating
subsidiaries organized in the form of limited partnerships. In
such reorganization, the prior owners of the limited partnership
interests and the corporate general partner corporations exchanged
their interests for 2,000,000 shares of the Company's common stock.
In June 1992, the Company completed its initial public offering.
The offering proceeds, net of offering costs, were $7,010,350
resulting from the sale by the Company of 1,200,000 shares of its
common stock in the initial offering and the subsequent sale of
140,000 over allotment shares. In connection with its initial
public offering, the Company issued to RAS Securities Corp., as
representative of the underwriters, warrants to purchase from the
Company 120,000 shares of Common Stock. The warrants are initially
exercisable at a price of $8.125 per share for a period of four
years, commencing May 28, 1993.
3<PAGE>
In June 1993, the Company completed the issuance and sale at par
in a private placement of $3,050,000 of 8% Convertible Subordinated
Notes due June 30, 2003. In March 1994, the Company completed the
private placement of 172,000 shares of Common Stock at a purchase
price of $7.50 per share. In May 1994, the Company completed the
issuance and sale at par in a private placement of $2,000,000 of 8%
Convertible Subordinated Notes, Series B due June 30, 2004 and
$3,000,000 of 8% Convertible Subordinated Notes, Series C due
June 30, 2004 (collectively, the initial series of convertible
subordinated notes, the Series B Notes and the Series C Notes are
hereinafter referred to as the "Convertible Subordinated Notes").
The Convertible Subordinated Notes are convertible at the option of
the holders thereof into the number of whole shares of Company
Common Stock determined by dividing the principal amount of the
Notes so converted by $10.00 (in the case of the initial series and
the Series C Notes) or $12.00 (in the case of the Series B Notes),
subject to adjustment under certain circumstances. Holders of
Series B Notes were entitled to receive an interest enhancement
payable in shares of Company Common Stock based upon the market
value of the Company's Common Stock at June 30, 1996, which was two
years from the date of issuance of the Series B Notes. In July
1996, the Company issued 70,965 shares of its Common Stock in
connection with the interest enhancement feature. Net proceeds
from these private placements totaled approximately $6,166,000, and
were used by the Company to fund prior period deficits from
operations and capital expenditures in 1993 through 1996 relating
to the Company's clinic development program in 1993, 1994, 1995 and
1996.
Unless the context otherwise requires, references in this Form
10-KSB to the Company include the Company and all its subsidiaries.
The Company's principal executive offices are located at 3040 Post
Oak Blvd., Suite 222, Houston, Texas 77056, and its telephone
number is (713) 297-7000.
The Company's Clinics
The managing physical and occupational therapist of each clinic
owns a partial interest in the clinic he or she operates. This is
accomplished by having each clinic structured as a separate limited
partnership (the "Operating Subsidiaries"). As of December 31,
1996, the Company, through its wholly-owned subsidiaries, owned a
1% general partnership interest and limited partnership interests
4<PAGE>
ranging from 59% to 80% in the clinics it operates. For the
majority of the clinics, the managing therapist of each such
clinic, along with other therapists at the clinic in several of the
partnerships, own the remaining limited partnership interest in the
clinic which ranges from 19% to 40%.
The majority of the partnership agreements are structured such
that the managing therapist begins with a 20% profit interest in
his or her clinic limited partnership and, at the end of each of
the first five years, the managing therapist's profit interest
increases by 3% until his or her interest reaches 35%. These
therapists have no interest in net losses of clinic partnerships,
except to the extent of their capital accounts. The Company
presently anticipates that future clinics developed by the Company
will be structured in a comparable manner.
In addition, each managing therapist has entered into a five-year
employment agreement with the Company providing for a covenant not
to compete during his or her employment plus one to two years
thereafter. Pursuant to each employment agreement, the managing
therapist receives a base salary and a monthly bonus based on the
gross revenues or operating profit generated by his or her
Operating Subsidiary. Each employment agreement provides that each
managing therapist is required to sell his or her partnership
interest in the Operating Subsidiary for the amount of his or her
capital account if he or she terminates employment with the
Operating Subsidiary during the employment term. There are no
provisions for purchase by the Company of the managing therapist's
interest in the Operating Subsidiary in the event of death or
disability, or after the initial five-year term of employment.
The Company's business plan is to have each clinic maintain an
independent local identity, while at the same time enjoying the
benefits of national purchasing, third party payor contracts and
centralized management controls. Pursuant to a management
agreement, U.S. PT Management, Ltd. ("USPTM"), a Texas limited
partnership owned indirectly by the Company, provides a variety of
services to each clinic, including supervision of site selection,
construction, clinic design and equipment selection, establishment
of accounting systems and procedures and training of office support
personnel, management oversight of operations, ongoing accounting
services and marketing support. Each clinic pays USPTM a
management fee equal to 10% of gross revenue.
5<PAGE>
The Company's typical clinic occupies approximately 2,000 to
4,000 square feet of space under a lease in an office building or
shopping center. The Company seeks to obtain leases for its
clinics at ground level (although it may not always be successful
in obtaining such leases), in order to make access to its clinics
as easy as possible for patients. The Company also attempts to
make the decor in its clinics less institutional and more
aesthetically pleasing than hospital clinics. The typical staff
needed to operate a clinic in its initial stages is a licensed
physical and/or occupational therapist and an office manager.
Staffing may also include physical and/or occupational therapy
assistants, aides, exercise physiologists and athletic trainers.
As patient visits grow over several years, the typical staffing
will be increased to include two or more additional licensed
physical and/or occupational therapists and one or two additional
office personnel. All therapy services provided are performed
under the direct supervision of a licensed physical and/or
occupational therapist.
The clinics provide post-operative care and treatment for a
variety of orthopedic-related disorders and sports-related
injuries, treatment for neurologically related injuries,
rehabilitation of injured workers and preventative care. The
clinics perform a tailored and comprehensive evaluation of each
patient which is followed by a treatment plan specific to their
type of injury. The treatment plan may include the use of
modalities and procedures, such as ultrasound, electrical
stimulation, hot packs, iontophoresis, therapeutic exercise, manual
therapy techniques, education on management of daily life skills
and home exercise programs. The Company currently provides its
services at its clinics only on an outpatient basis. Patients
requiring these types of services are usually treated for
approximately one hour per day, two to five times a week. This
form of treatment typically lasts two to six weeks. The Company's
charge for the treatment is generally on a per procedure basis. In
addition to the services mentioned, the clinics will, when
appropriate, develop individual maintenance exercise programs to be
continued after treatment. Advice on postural improvements and
changes in work habits or lifestyle to promote self-management of
patient's condition is provided. The Company intends to assess the
potential for developing new services and expanding the method of
providing its current services, with an emphasis on health
insurance and workers' compensation insurance cost containment.
6<PAGE>
Industry Background
Physical and occupational therapy is the process of aiding in the
restoration of individuals disabled by injury or disease or
recovering from surgery. Management believes that the following
factors are influencing the growth of outpatient physical and
occupational therapy services:
Economic Benefits of Physical and Occupational Therapy Services.
Purchasers and providers of health care services such as insurance
companies, health maintenance organizations, business and industry,
are seeking ways to save on traditional health care services.
Management believes physical and occupational therapy services
represent a cost-effective service, by attempting to prevent short-term
disabilities from becoming chronic conditions, and by speeding
the recovery from surgery and musculoskeletal injuries.
Earlier Hospital Discharge. Changes in health insurance
reimbursement, both public and private, have encouraged the early
discharge of patients in order to contain and reduce costs.
Management believes early hospital discharge practices foster
greater numbers of individuals requiring outpatient physical and
occupational therapy services.
Aging Population. The elderly population, which has experienced
rapid growth over the past several decades, has a greater incidence
of major disability. This growth has fueled the demand for
rehabilitation services.
Marketing
On a local basis, the Company focuses its marketing efforts on
physicians, mainly orthopedic surgeons, neurosurgeons,
physiotrists, occupational medicine, and general practitioners,
which generally account for the majority of physical and
occupational therapy referrals. In marketing to the physician
community, the clinics emphasize their commitment to quality
patient care and communication with physicians regarding patient
progress. On a national level, the Company employs a marketing
director to assist the managing therapists in establishing referral
relationships with health maintenance organizations, preferred
provider organizations, industry and case managers and insurance
7<PAGE>
companies for clinic therapy services, as well as to develop and
implement marketing plans for marketing to the physician community.
Sources of Revenue/Reimbursement
Payor sources for the current clinics' services are primarily
commercial health insurance, managed care programs, workers'
compensation insurance, Medicare and proceeds from personal injury
cases. Commercial health insurance and managed care programs
generally provide outpatient services coverage to patients
utilizing the clinics, and the patient is normally required to pay
an annual deductible and a co-insurance payment. Workers'
compensation is a statutorily defined employee benefit which varies
on a state-by-state basis. Workers' compensation laws generally
require employers to pay for employees' costs of medical
rehabilitation, lost wages, legal fees and other costs associated
with work-related injuries and disabilities and, in certain
jurisdictions, mandatory vocational rehabilitation. These statutes
generally require that these benefits be offered to employees
without any deductibles, co-payments or cost sharing. Companies
may provide such coverage to their employees through either the
purchase of insurance from private insurance companies,
participation in state-run funds or through self-insurance.
Treatments for patients who are parties to personal injury cases
are generally paid for from the proceeds of settlements with
insurance companies or from judgements, if favorable. If an
unfavorable judgement is received, collection efforts are generally
not pursued against the patient and the patient's account is
written off against established reserves. The Company estimates
the percentage of accounts receivable relating to personal injury
cases that the Company expects will be uncollectible. Such
percentage, which currently ranges from 10% to 20%, is periodically
reviewed and adjusted by the Company.
The Company's business depends to a significant extent on its
relationships with physicians, commercial health insurers, workers'
compensation insurers, and other referral sources such as health
maintenance organizations and preferred provider organizations. If
clinics are located in certain geographical areas, it is important
for them to be approved as providers by certain key health
maintenance organizations and preferred provider plans. If these
clinics do not obtain such approval, or if they cannot maintain
such approval, the Company could be adversely affected.
8<PAGE>
To date, fifty-eight of the Company's clinics have been certified
as Medicare providers and most of the remainder are in the process
of becoming certified. Management anticipates that, in the future,
newly developed clinics will also elect to become certified as
Medicare providers. No assurance can be given that the newly
developed clinics will become certified as Medicare providers.
Medicare reimbursement for outpatient physical and/or occupational
therapy furnished by a Medicare-certified rehabilitation agency or
clinic is equal to the lesser of the provider's "reasonable costs"
as allowed under Medicare regulations or the provider's customary
charges. Individual beneficiaries, or their "Medigap" insurance
carriers if such coverage exists, are required to pay a deductible
and co-payment amount, so that governmental payments to the Company
do not exceed 80% of the reasonable cost of such services. The
Company files annual cost reports for each of its Medicare-certified clinics.
These cost reports serve as the basis for determining the prior year's
reimbursement settlements and interim Medicare payment rates for the next
year. Medicare regulations require that a physician must certify the need
for physical and/or occupational therapy services for each patient and that
these services must be provided in accordance with an established plan of
treatment which is periodically revised. State Medicaid programs
generally do not provide coverage for outpatient physical or
occupational therapy, and, therefore, Medicaid is not and is not
expected to be a material payor for the Company.
Regulation and Health Care Reform
The health care industry is subject to numerous federal, state
and local regulations. Many states prohibit commercial enterprises
from engaging in the corporate practice of medicine. There is a
risk that the corporate practice of medicine could be interpreted
in those states to also include the practice of physical and/or
occupational therapy, or that the corporate practice of physical
and/or occupational therapy itself could be specifically prohibited
in some states. In Texas, a 1979 opinion of the State Attorney
General states that corporate entities may not engage in the
practice of physical therapy, unless such corporations are
professional corporations with all shareholders being licensed
therapists. While management believes that this opinion has
generally not been followed or enforced in Texas, there can be no
assurance that the Texas Attorney General will not seek to enforce
this position in the future and apply the prohibition to include
limited partnerships, the legal entity for each Operating
9<PAGE>
Subsidiary. In the event that the Company was found to be engaged
in prohibited corporate practice in any state, management believes
that it could restructure its operations so as to be in compliance
with applicable law. If the Company was required to restructure
its operations, the Company anticipates that, in lieu of owning
clinics, it could engage in clinic management and leasing of
equipment and clinic sites. The availability of these or other
options for restructuring would depend on the requirements of
applicable law. However, such restructuring could negatively
impact the income of the Company, and there can be no assurance
that a satisfactory restructuring could be accomplished.
Certain states into which the Company may expand have laws that
require facilities that employ health professionals and provide
health related services to be licensed and, in some cases, to
obtain a certificate of need. Pursuant to certificate of need
laws, the affected entity is required to demonstrate to a state
regulatory authority the need for and financial feasibility of
certain expenditures related to such activities as the construction
of new facilities or the commencement of new health care services.
Based on its operating experience to date, the Company believes
that its business, as presently conducted, does not require
certificates of need or other facility approvals or licenses.
There can be no assurance, however, that existing laws or
regulations will not be interpreted or modified to require the
Company to obtain such approvals or licenses and, if so, that such
approvals or licenses could be obtained.
Fifty-eight of the Company's clinics have become certified as
Medicare providers. In order to receive Medicare reimbursement, a
rehabilitation agency or clinic must meet the applicable conditions
of participation set forth by the Department of Health and Human
Services relating to the type of facility, its equipment, record
keeping, personnel and standards of medical care as well as
compliance with all state and local laws. Clinics are subject to
periodic inspections or surveys to determine compliance.
The Social Security Act imposes criminal and/or civil penalties
upon persons who pay or receive any "remuneration" in connection
with the referral of patients covered under Medicare, Medicaid or
certain other federally funded health care programs. The "anti-kickback" law
prohibits providers and others from offering or paying (or soliciting or
receiving), directly or indirectly, any
10<PAGE>
remuneration to induce or in return for making a referral for, or
ordering or recommending (or arranging for ordering or
recommending) a Medicare/Medicaid-covered service. Each violation
of this law may be punished by a fine (of up to $250,000 for
individuals and $500,000 for organizations, or twice the pecuniary
gain to the defendant or loss to another from the illegal conduct)
or imprisonment for up to five years, or both. In addition, a
provider may be excluded from participation in Medicare or Medicaid
for violation of these prohibitions through an administrative
proceeding, without the need for any criminal proceeding. Many
states, including some states in which the Company operates
clinics, have similar laws, which apply whether or not Medicare or
Medicaid patients are involved; and health care reform proposals in
the last few years would have expanded federal law to cover all
patients as well. Because the federal anti-kickback law has been
broadly interpreted to apply where even one purpose (as opposed to
a sole or primary purpose) of a payment is to induce referrals, it
limits the relationships which the Company may have with referral
sources, including any ownership relationships. The Company's
managing physical therapists are limited partners in their
respective clinics. Management does not believe that the ownership
structure of its clinics violates the anti-kickback laws, since no
direct or indirect owner of the clinics, including the partner
therapists, serves as a referral source for the clinics. The anti-kickback
laws may also apply to the structure of acquisitions by
the Company of physician-owned physical therapy clinics, to the
extent that any portion of the purchase price or terms of payment
are deemed to be an inducement to the physician to make referrals
to the clinic which, under a December 1992 letter by the Chief
Counsel of the Department of Health and Human Services' Inspector
General, could include payments for goodwill or other intangibles.
Management considers these anti-kickback laws in planning its
clinic acquisitions, marketing and other activities, and believes
its operations are in compliance with applicable law, but no
assurance can be given regarding compliance in any particular
factual situation.
In addition, another federal law, known as the "Stark law" after
its original Congressional sponsor, was expanded in 1993 to impose,
effective January 1, 1995, a prohibition on referrals of Medicare
or Medicaid patients for, among other things, physical therapy
services by physicians who have a financial relationship with the
provider furnishing the services. With certain specified
11<PAGE>
exceptions, the referral prohibition applies to any physician who
has (or whose immediate family member has) a direct or indirect
ownership or investment interest in, or compensation relationship
with, a provider of physical therapy services such as the Company's
clinics. This law also prohibits billing for services rendered
pursuant to a prohibited referral. Penalties for violation include
denial of payment for the services, significant civil monetary
penalties, and exclusion from Medicare and Medicaid. Several
states have enacted laws similar to the Stark law, but which cover
all (not just Medicare and Medicaid) patients; and many health care
reform proposals in the last few years would have expanded the
Stark law to cover all patients as well. The Stark law, as
effective January 1, 1995, covers any financial relationships
between the Company and referring physicians, including any
financial transaction resulting from a clinic acquisition. As with
the anti-kickback law, management considers the Stark law in
planning its clinic acquisitions, marketing and other activities,
and believes that its operations are in compliance with applicable
law. However, as noted above, no assurance can be given regarding
compliance in any particular factual situation.
Pursuant to the recently enacted Kennedy-Kassebaum insurance
reform bill, a number of new authorities to combat health care
fraud and abuse will become law in 1997. Among other things, the
law creates a new federal crime of "health care fraud", establishes
an all-payor fraud and abuse program to be directed by the U.S.
Attorney General and the HHS Inspector General in cooperation with
the states, creates an enforcement fund of a portion of all
penalties collected under such program, and expands authority to
impose penalties and Medicare/Medicaid exclusions. The Company
cannot predict what effect, if any, these expanded enforcement
authorities will have on the health care industry generally or on
its business.
Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change.
Although Congress has failed to pass comprehensive health care
reform legislation to date, the Company anticipates that Congress,
state legislatures and the private sector will continue to review
and assess alternative health care delivery and payment systems.
12<PAGE>
Potential approaches that have been considered include mandated
basic health care benefits, controls on health care spending
through limitations on the growth of private health insurance
premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups, price controls and other fundamental
changes to the health care delivery system. Managed care entities,
which represent an ever-growing percentage of health care payors,
are demanding lower costs from health care providers, and in many
cases, requiring or encouraging providers to accept capitated
payments that may not be adequate to allow providers to cover their
full costs or may reduce their profitability. Legislative debate
is expected to continue in the future, market forces are expected
to demand reduced costs and the Company cannot predict what impact
the adoption of any federal or state health care reform measures or
future private sector reform may have on its business.
Competition
The health care industry, generally, and the physical and
occupational therapy businesses, in particular, are highly
competitive and subject to continual changes in the manner in which
services are delivered and in which providers are selected. The
competitive factors in the physical and occupational therapy
businesses are quality of care, cost, treatment outcomes,
convenience of location, and relationships with and ability to meet
the needs of referral and payor sources. The Company's clinics
compete directly or indirectly with the physical and occupational
therapy departments of acute care hospitals, physician-owned
physical therapy clinics, private physical therapy clinics and
chiropractors.
The main sources of competition are acute care hospital
outpatient therapy clinics and private therapy clinic organizations
that provide therapy services. The Company will face further
competition as consolidation of the therapy industry continues
through the acquisition of physician-owned and other privately
owned therapy practices.
Although there is a shortage of physical and occupational
therapists in the United States, the Company believes that it can
compete favorably with its competitors in hiring managing
therapists by offering them ownership interests in their clinics.
13<PAGE>
In addition, management believes that providing the managing
therapist with an opportunity to participate in ownership will help
to ensure commitment by local management to the success of the
clinic and will minimize turnover of managing therapists.
The Company also believes its competitive position is enhanced by
its strategy of locating its clinics, where possible, on the ground
floor in office buildings and shopping centers, with nearby
parking, thereby making the clinics more easily accessible to
patients. The Company attempts to make the decor in its clinics
less institutional and more aesthetically pleasing than hospital
clinics. Management also believes it can generally provide its
services at a lesser cost than comparable services of hospitals,
due to hospitals' higher overhead.
Employees
At December 31, 1996, the Company employed 506 total employees of
which 345 were full-time employees. At that date, none of the
Company's employees were subject to collective bargaining
agreements or were members of unions. Management considers the
relations between the Company and its employees to be good.
In the states in which the Company's current clinics are located,
persons performing physical and occupational therapy services are
required to be licensed by the state. All persons currently
employed by the Company and its clinics who are required to be
licensed are licensed, and the Company intends that all future
employees who are required to be licensed will be licensed.
Management is not aware of any federal licensing requirements
applicable to its employees.
Insurance
The Company maintains professional malpractice liability coverage
on professionals employed in each of its clinics, in addition to
general liability insurance and coverage for the customary risks
inherent in the operation of health care facilities and businesses
in general. Management believes its insurance policies in force to
be adequate in amount and coverage for its current operations.
14<PAGE>
Item 2. Description of Property.
Property
The Company presently leases, under noncancelable lease terms
ranging from one to five years, all of the properties used for its
clinics with the exception of one clinic located in Brownwood,
Texas, for which the Company owns the facility. The Company also
intends, where feasible, to lease the premises in which new clinics
will be located. The Company's typical clinic occupies
approximately 2,000 to 4,000 square feet of space.
The Company also leases, under a five-year noncancelable
operating lease beginning July 1993, its executive offices located
in Houston, Texas. The executive offices occupy approximately
13,190 square feet of space (including allocations for common
areas). Upon expiration of the lease, the Company has the option
to extend the lease for one additional five-year period.
Item 3. Legal Proceedings.
The Company is subject to litigation and other proceedings
arising in the ordinary course of business. While the ultimate
outcome of lawsuits or other proceedings cannot be predicted with
certainty, management does not believe the impact, if any, would be
material to the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the
Company, through solicitation of proxies or otherwise, during the
fourth quarter of 1996.
15<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Price Quotations
The Company's common stock trades on The Nasdaq Small Cap Market
tier of the Nasdaq Stock Market under the symbol "USPH". The
Company's common stock is also listed on the Boston Stock Exchange
under the symbol "USP". The range of trading prices, as reported
by NASDAQ for each quarterly period, is set forth below. The
reported quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
1996 1995
HIGH LOW HIGH LOW
QUARTER
First $11 3/4 $11 1/8 $ 11 $ 9
Second 11 1/4 9 1/4 10 8 1/4
Third 9 1/4 8 3/4 12 1/4 8 1/4
Fourth 9 7/8 8 3/8 12 11
Record Holders
As of March 11, 1997, there were 68 holders of record of the
Company's outstanding common stock.
Dividends
Since inception, the Company has not declared or paid cash
dividends or made distributions on its equity securities, and the
Company does not anticipate that it will pay cash dividends or make
distributions in the foreseeable future.
16<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company operates outpatient physical and occupational therapy
clinics which provide post-operative care and treatment for a
variety of orthopedic-related disorders and sports-related
injuries. At December 31, 1996, the Company operated sixty-nine
outpatient physical and occupational therapy clinics. Sixty-nine
clinics were developed by the Company and opened in 1990 (one
clinic), 1991 (two clinics), 1992 (three clinics), 1993 (fifteen
clinics), 1994 (twenty-seven clinics), 1995 (nine clinics) and 1996
(twelve clinics). Five clinics were acquired by the Company during
1992 (three clinics) and 1994 (two clinics). In March 1995, the
Company closed two clinics, which originally opened in 1994, due to
adverse clinic performance and consolidated the operations of one
of its clinics opened in 1994 with another clinic opened in 1993.
In 1995, the Company consolidated the operations of two previously
acquired clinics into one single facility and consolidated another
previously acquired clinic with one of the clinics developed and
opened in 1991. These consolidations were undertaken to more
efficiently serve these geographic markets. In the first quarter
of 1996, the Company acquired all of the assets of a clinic located
in McKinney, Texas and consolidated its existing clinic located in
McKinney into the acquired facility. In February 1997, the Company
sold certain fixed assets located at two of the Company's clinics
which opened in 1994 and 1996, respectively, and then closed such
facilities.
Net Patient Revenues
Net patient revenues increased to $32,029,000 for 1996 from
$24,814,000 for 1995, an increase of $7,215,000, or 29%. Net
patient revenues from the twelve clinics developed since 1995 (the
"New Clinics") accounted for 9% of the increase or $657,000. The
remaining increase of $6,558,000 in net patient revenues comes from
those fifty-seven clinics opened more than one year as of
December 31, 1996 (the "Pre-1996 Clinics"). Of the $6,558,000
increase in net patient revenues for these clinics, a 26% increase
in the number of patient visits increased net patient revenues by
$6,524,000, which was coupled by a slight increase in the average
rate charged per visit of 0.1%.
17<PAGE>
Net patient revenues are based on established billing rates less
allowances and discounts for patients covered by worker's
compensation programs and other contractual programs. Payments
received under these programs are based on predetermined rates and
are generally less than the established billing rates of the
clinics. Net patient revenues reflect reserves, which are
evaluated quarterly by management, for contractual and other
adjustments relating to patient discounts from certain payors. Net
patient revenues also are reported net of estimated retrospective
adjustments under Medicare. Medicare reimbursement for outpatient
physical or occupational therapy services furnished by clinics or
rehabilitation agencies is paid based on a cost reimbursement
methodology. The Company is initially reimbursed at a tentative
rate with final settlement determined after submission of an annual
cost report by the Company and audits thereof by the Medicare
fiscal intermediary.
Other Revenues
Other revenues, consisting of interest, sublease and real estate
commission income, increased by $68,000, or 62%, to $178,000 for
1996 from $110,000 for 1995. This increase was due primarily to an
increase in interest income as a result of the higher average
amount of cash and cash equivalents available for investment during
1996 compared to 1995, offset, in part, by a decrease in real
estate commission income related to lease agreements entered into
during 1995 for certain of the Company's clinic facilities.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
remained stable at 77% for 1996 compared to 79% for 1995.
Clinic Operating Costs - Salaries and Related Costs
Clinic operating costs - salaries and related costs increased to
$14,743,000 for 1996 from $11,256,000 for 1995, an increase of
$3,487,000 or 31%. Approximately 14% of the increase, or $505,000,
was due to the New Clinics. The remaining 86% increase or
$2,984,000 is due principally to increased staffing to meet the
increase in patient visits for the clinics opened prior to 1996,
coupled with an increase in bonuses earned by the managing
therapists at the clinics opened prior to 1996. Such bonuses are
based on the gross revenues or operating profit generated by the
individual clinics.
18<PAGE>
Clinic Operating Costs - Rent, Clinic Supplies and Other
Clinic operating costs - rent, clinic supplies and other increased
to $9,144,000 for 1996 from $7,738,000 for 1995, an increase of
$1,406,000, or 18%. Approximately 27% of the increase, or
$374,000, was due to the New Clinics, while 73%, or $1,032,000, of
the increase was due to the clinics opened prior to 1995. Clinic
operating costs - rent, clinic supplies and other as a percent of
net patient revenues has declined slightly from 31% for 1995 to 29%
for 1996.
Clinic Operating Costs - Provision for Doubtful Accounts
Clinic operating costs - provision for doubtful accounts increased
to $929,000 for 1996 from $500,000 for 1995, an increase of 86% or
$429,000. Approximately 4% of the increase, or $17,000, was due to
the New Clinics, while 96%, or $412,000, of the increase relates to
the clinics opened prior to 1996. The provision as a percent of
net patient revenues increased to 3% for 1996 compared to 2% for
1995, reflecting management's evaluation of the increase in bad
debts written off at several of the clinics opened prior to 1996.
Corporate Office Costs - General & Administrative
Corporate office costs - general and administrative, consisting
primarily of salaries of corporate office personnel and related
costs, insurance costs, depreciation and amortization, travel and
legal, and professional fees increased by 6% to $3,097,000 for 1996
from $2,932,000 for 1995, primarily due to an increase in salaries
and related costs of corporate office personnel needed to service
the increased number of clinics in operation at December 31, 1996
compared to December 31, 1995. Corporate office costs - general
and administrative, as a percent of net revenues, decreased from
12% for 1995 to 10% for 1996, reflecting increased revenues in
1996.
Corporate Office Costs - Recruitment & Development
Corporate office costs - recruitment and development primarily
represent salaries of recruitment and development personnel,
travel, marketing and recruiting fees attributed directly to the
Company's activities in the development and acquisition of new and
future clinics. All recruitment and development personnel are
located at the corporate office in Houston, Texas. Once a clinic
has opened, these personnel are not involved with the clinic. Also
included in recruiting and development expenses is the amortization
of certain pre-opening costs which represent travel costs of
personnel at the corporate office which were incurred to identify
19<PAGE>
and open new clinics. The amortization of pre-opening costs
incurred directly by the clinics are reflected in clinic operating
costs. Corporate office costs - recruitment and development
increased $49,000 or 7% to $784,000 for 1996 from $735,000 for
1995. The majority of this increase relates to additional
recruiting fees incurred in connection with the Company's opening
of twelve clinics in 1996 compared to the nine clinics opened in
1995.
Loss on Closure of Facilities
In February 1995, the Company decided to close two of its clinics,
located in Georgia and Arizona, due to adverse clinic performance.
In 1995, the Company recognized a $359,000 loss relating to these
closures which occurred in March 1995. Prior to the opening of all
clinic facilities, management evaluates the potential clinic
partner and the demographics of the area and decides, based on this
evaluation, if the elements exist for a successful partnership.
The factors considered include the prospective partner's experience
and reputation within the local health care community, the
prospective partner's potential for attracting referrals from
physicians and other referral sources, and the potential for
increased business based on the competitive situation as well as
the overall ability of the prospective partner to manage and market
the business. The Company overestimated the partners' ability to
attract patients at the two clinics that were closed during 1995,
and, consequently, revenues at the two clinics did not meet minimum
expectations. Upon further analysis, the Company did not believe
the revenue shortfalls in these two clinics could be remedied in a
reasonable period of time. The Georgia and Arizona clinics, which
both opened during 1994, accounted for net patient revenues and
clinic operating costs of $35,000 and $78,000, respectively, for
1995.
In February 1997, the Company sold certain fixed assets located at
one of the Company's clinics in Mississippi, along with assets
located at the Alabama satellite of this facility. No loss was
recognized relating to the closure of these two facilities. The
Mississippi and Alabama clinics, which opened in 1994 and 1996,
respectively, accounted for net patient revenues for 1996 and 1995
of $345,000 and $419,000, respectively, and clinic operating costs
for 1996 and 1995 of $506,000 and $292,000, respectively.
20<PAGE>
No other clinic closures are planned at this time; however, no
assurance can be given that clinic closures will not occur in the
future if a particular clinic is not operating at satisfactory
levels.
Interest Expense
Interest expense of $745,000 for 1996 relates primarily to $244,000
of interest expense on the $3,050,000 aggregate principal amount of
8% Convertible Subordinated Notes issued by the Company in June
1993 and $400,000 of interest expense on the $5,000,000 aggregate
principal amount of 8% Series B and Series C Notes issued by the
Company in May 1994. In addition, $75,000 of interest expense was
recorded in 1996 relating to the Contingent Interest Enhancement
feature of the Series B Notes. This feature allowed Series B Note
holders to receive an interest enhancement payable in shares of
Company Common Stock based upon the market value of the Company's
shares for the month of June 1996, which corresponded to two years
from the date of issuance of the Series B Notes (the "Contingent
Interest Enhancement"). A total of 70,965 shares of Company Common
Stock were issued in connection with the Contingent Interest
Enhancement feature.
Life Insurance Proceeds
During 1995, the managing physical therapist at one of the
Company's clinics passed away in an automobile accident. In
connection with this event, the Company recognized a net $700,000
in life insurance proceeds.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$460,000, or 84%, to $1,007,000 in 1996 from $547,000 in 1995 due
to the increase in aggregate profitability of those clinics in
which partners have achieved positive retained earnings and are
accruing partnership income.
Provision for Income Taxes
The provision for income taxes increased to $117,000 for 1996
compared to $77,000 for 1995, an increase of $40,000 or 52%. This
increase is due primarily to an increase in taxable income from
1995 to 1996.
21<PAGE>
Net Income
The Company's net income for 1996 of $1,641,000 exceeded 1995's net
income of $742,000 principally due to the $7,283,000 increase in
net revenues, which more than offset the $5,276,000 increase in
clinic operating costs and the $460,000 increase in minority
interests in subsidiary limited partnerships. In addition, 1995
included the $700,000 gain from life insurance proceeds, offset by
the $359,000 loss on closure of facilities, both of which were not
present in 1996.
Liquidity and Capital Resources
At December 31, 1996, the Company had $4,912,000 in cash and cash
equivalents, which is available to fund the working capital needs
of its operating subsidiaries and future clinic developments and
acquisitions. Included in cash and cash equivalents at
December 31, 1996 is $3,199,000 of short-term government agency
securities and $500,000 of short-term government money market
funds. The market value of the short-term U.S. government agency
securities and the Government money market funds approximated the
carrying value of such securities as of December 31, 1996.
The increase in cash of $2,278,000 from December 31, 1995 to
December 31, 1996 is due to cash provided by operating activities
of $4,719,000, coupled with proceeds from notes payable of
$215,000, offset in part by the Company's use of cash to fund
capital expenditures, primarily for physical therapy equipment,
leasehold improvements and intangibles, in the amount of
$1,967,000, and distributions to minority partners in subsidiary
limited partnerships of $666,000.
The Company's current ratio remained relatively stable at 4.56 to
1.00 at December 31, 1996 compared to 4.70 to 1.00 at December 31,
1995. At December 31, 1996, the Company had a debt-to-equity ratio
of 1.10 to 1.0 compared to 1.59 to 1.0 at December 31, 1995. The
improvement in the debt-to-equity ratio from December 31, 1995 to
December 31, 1996 relates primarily to the increase in equity as a
result of the net income of $1,641,000 for 1996.
As of December 31, 1996, the Company had outstanding commitments
for construction of certain facilities totaling approximately
$39,000. The quarterly interest obligation on the outstanding 8%
Convertible Subordinated Notes, the 8% Convertible Subordinated
Notes, Series B and the 8% Convertible Subordinated Notes, Series
22<PAGE>
C is $61,000, $40,000 and $60,000, respectively, through June 30,
2003, June 30, 2004 and June 30, 2004, respectively.
Management believes that existing funds, supplemented by cash flows
from existing operations, will be sufficient to meet its current
operating needs and its development plans through 1997.
Recently Promulgated Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted
Statement 121 in the first quarter of 1996. The effect of adoption
did not have any material effect on the financial statements.
Factors Affecting Future Results
In 1995, the Company reduced the number of new clinic openings to
nine from twenty-nine new clinics opened during 1994 and focused
primarily on enhancing the results of operations of its existing
clinics. The fewer clinic openings in 1995 significantly reduced
corporate office-recruitment and development expenses, since new
clinics traditionally involve a significant amount of start-up
costs, such as travel and recruitment fees, as well as reduced the
effect of initial operating losses from new clinics on the
Company's results of operations. During the initial period of
operation, operating margins for newly opened clinics tend to be
lower than more seasoned clinics due to the start-up costs of newly
opened clinics (salaries and related costs of the physical
therapist and other clinic personnel, rent and equipment and other
supplies required to open the clinic) and the fact that patient
revenues tend to be lower in the first year of a new clinic's
operation and increase over the next several years. With the
majority of the clinics being more seasoned and now recognizing
profitable monthly results, the Company increased the number of new
clinic openings to twelve for 1996 and expects to further
accelerate the pace of new clinic openings in 1997.
23<PAGE>
Item 7. Financial Statements
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 25
Audited Financial Statements
Consolidated Balance Sheets as of
December 31, 1996 and 1995 26
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995 28
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1996 and 1995 29
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 30
Notes to Consolidated Financial Statements 32
24<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
U.S. Physical Therapy, Inc.
We have audited the accompanying consolidated balance sheets of
U.S. Physical Therapy, Inc., and subsidiaries (the "Company") as of
December 31, 1996 and 1995, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of U.S. Physical Therapy, Inc. and subsidiaries
at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
March 14, 1997
25<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 4,912 $ 2,634
Patient accounts receivable, less
allowance for doubtful accounts
of $1,159 and $727, respectively 6,359 5,873
Accounts receivable-other 127 108
Other current assets 407 382
Total current assets 11,805 8,997
Fixed assets (Note 4):
Furniture and equipment 7,043 6,008
Leasehold improvements 3,280 2,781
10,323 8,789
Less accumulated depreciation 4,317 2,897
6,006 5,892
Noncompete agreements, net of
amortization of $406, and $308,
respectively 218 317
Goodwill, net of amortization of
$94, and $56, respectively 811 547
Other assets 643 157
$ 19,483 $ 15,910
See notes to consolidated financial statements.
26<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 275 $ 287
Accrued expenses 971 887
Estimated third-party payor
(Medicare) settlements (Note 2) 1,277 715
Notes payable (Note 4) 68 24
Total current liabilities 2,591 1,913
Notes payable - long-term portion
(Note 4) 226 116
Convertible subordinated notes
payable (Note 4) 8,050 8,050
Minority interests in subsidiary limited
partnerships (Note 12) 1,021 669
Commitments (Note 12) - -
Shareholders' equity(Notes 7,8,9 and 10):
Preferred stock, $.01 par value,
500 shares authorized, -0- shares
outstanding - -
Common stock, $.01 par value, 10,000
shares authorized, 3,595 and 3,520
shares outstanding at December 31,
1996 and 1995, respectively 36 35
Additional paid-in capital 11,661 10,870
Accumulated deficit (4,102) (5,743)
Total shareholders' equity 7,595 5,162
$ 19,483 $ 15,910
See notes to consolidated financial statements.
27<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
1996 1995
Net patient revenues $ 32,029 $ 24,814
Other revenues 178 110
Net revenues 32,207 24,924
Clinic operating costs:
Salaries and related costs 14,743 11,256
Rent, clinic supplies and other 9,144 7,738
Provision for doubtful accounts 929 500
24,816 19,494
Corporate office costs:
General and administrative 3,097 2,932
Recruitment and development 784 735
3,881 3,667
Loss on closure of facilities - 359
Operating income before non-
operating expenses 3,510 1,404
Interest expense (745) (738)
Life insurance proceeds - 700
Minority interests in subsidiary
limited partnerships (1,007) (547)
Income before income taxes 1,758 819
Provision for income taxes
(Notes 2 and 6) (117) (77)
Net income $ 1,641 $ 742
Net income per common and common
equivalent share $ .45 $ .20
See notes to consolidated financial statements.
28<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Total
Add'l Accumu- Share-
Number Paid-In lated holders'
Of Shares Amount Capital Deficit Equity
Balance at
Dec. 31,1994 3,512 $ 35 $10,821 $(6,485) $4,371
Proceeds from
exercise of
stock options 8 - 49 - 49
Net income - - - 742 742
Balance at
Dec. 31, 1995 3,520 35 10,870 (5,743) 5,162
Proceeds from
exercise of
stock options 4 - 27 - 27
Interest enhance-
ment on 8%
Convertible
Subordinated
Notes,Series B 71 1 764 - 765
Net income - - - 1,641 1,641
Balance at
Dec. 31, 1996 3,595 $ 36 $11,661 $(4,102) $7,595
See notes to consolidated financial statements.
29<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1996 1995
Operating activities
Net income $ 1,641 $ 742
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 1,735 1,672
Minority interests in earnings of
subsidiary limited partnerships 1,007 547
Provision for bad debts 929 500
Loss on sale of fixed assets 2 1
Loss on disposal of certain assets
in closure of facilities - 158
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (1,415) (1,885)
Decrease (increase) in accounts
receivable-other (19) 121
Decrease (increase) in other assets 43 (38)
Increase in accounts payable and
accrued expenses 234 92
Increase in estimated third-party
payer (Medicare)settlements 562 446
Net cash provided by operating
activities 4,719 2,356
Investing activities
Purchase of fixed assets (1,677) (1,485)
Purchase of intangibles (301) (26)
Proceeds on sale of fixed assets 11 48
Net cash used in investing activities (1,967) (1,463)
See notes to consolidated financial statements.
30<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
1996 1995
Financing activities
Proceeds from notes payable 215 -
Payment of notes payable (61) (247)
Proceeds from investment of minority
investors in subsidiary limited
partnerships 11 94
Proceeds from exercise of stock options 27 49
Distributions to minority investors
in subsidiary limited partnerships (666) (272)
Net cash used in financing activities (474) (376)
Net increase in cash and cash
equivalents 2,278 517
Cash and cash equivalents - beginning
of period 2,634 2,117
Cash and cash equivalents - end of
period $ 4,912 $ 2,634
Supplemental disclosures of cash flow
information
Cash paid during the period for:
Income taxes $ 137 $ 50
Interest $ 667 $ 665
See notes to consolidated financial statements.
31<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Organization, Nature of Operations and Basis of Presentation
U.S. Physical Therapy, Inc. and its wholly owned subsidiaries (the
"Company") is engaged in the business of developing, owning and
operating outpatient physical therapy and occupational therapy
clinics. As of December 31, 1996, the Company was operating sixty-nine
clinics: seventeen in Texas, twelve in Michigan, six in
Florida, five in Mississippi, four in Georgia and Pennsylvania,
respectively, three in Louisiana, two in Maine, Missouri, Oklahoma
and Wisconsin, respectively, and one in Alabama, Connecticut,
Illinois, Iowa, Minnesota, Montana, New Mexico, New Jersey, South
Carolina and Virginia, respectively. The clinics provide post-operative care
and treatment for a variety of orthopedic-related
disorders and sports-related injuries, treatment for neurologically
related injuries, rehabilitation of injured workers and
preventative care. The clinics' business primarily originates from
physician referrals. The principal sources of payment for the
clinics' services are commercial health insurance, workers'
compensation insurance, managed care programs, Medicare and
proceeds from personal injury cases.
The consolidated financial statements include the accounts of U.S.
Physical Therapy, Inc., and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated. The Company, through its wholly-owned subsidiaries,
currently owns a 1% general partnership interest and limited
partnership interests ranging from 59% to 80% in the clinics it
operates. For the majority of the clinics, the managing therapist
of each such clinic, along with other therapists at the clinic in
several of the partnerships, own the remaining limited partnership
interest in the clinic which ranges from 19% to 40%. The minority
interest in the equity and earnings of the subsidiary clinic
limited partnerships are presented separately in the consolidated
financial statements.
32<PAGE>
2. Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity
of three months or less, when purchased, to be cash equivalents.
The Company, pursuant to its investment policy, invests its cash in
deposits with major financial institutions, in highly rated
commercial paper, Eurodollar deposits and short-term treasury and
U.S. government agency securities. Included in cash and cash
equivalents at December 31, 1996 is $3,199,000 of short-term U.S.
government agency securities and $500,000 of short-term government
money market funds.
Long-Lived Assets
Fixed assets are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the
related assets. Estimated useful lives for furniture and equipment
range from three to eight years. Leasehold improvements are
amortized over the estimated useful lives of the assets or the
related lease terms, whichever is shorter.
Non-compete agreements are being amortized on a straight-line basis
over their respective six- or seven-year terms. Goodwill is being
amortized on a straight-line basis over twenty years.
In March 1995, the FASB issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The adoption of
Statement 121 in the first quarter of 1996 did not have a material
effect on the Company's operations.
Net Patient Revenues
Net patient revenues are reported at the estimated net realizable
amounts from patients, third party payors, and others for services
rendered, including estimated retrospective adjustments under
33<PAGE>
Medicare. Retrospective 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.
The Company has agreements with third party payors that provide for
payments to the Company at amounts different from its established
rates. Medicare reimbursement for outpatient physical therapy or
occupational therapy services furnished by clinics or
rehabilitation agencies is paid based on a cost reimbursement
methodology. The Company is initially reimbursed at a tentative
rate with final settlement determined after submission of an annual
cost report by the Company and audits thereof by the Medicare
fiscal intermediary. The Company's Medicare cost reports have been
audited by the Medicare fiscal intermediary through December 31,
1994. Revenues from the Medicare program accounted for
approximately 13% of the Company's net patient revenues for the
year ended December 31, 1996. Laws and regulations governing the
Medicare program are complex and subject to interpretation. The
Company believes that it is in compliance with all applicable laws
and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing.
While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action
including fines, penalties, and exclusion from the Medicare
program. The Company has also entered into payment agreements with
certain commercial insurance carriers and health maintenance
organizations. The basis for payment to the Company under these
agreements is primarily based on discounts from established rates.
Income Taxes
The Company uses the liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are
expected to reverse.
34<PAGE>
Fair Values
The carrying amounts reported in the balance sheet for cash and
cash equivalents and long-term borrowings approximate their fair
values. The fair values of the long-term borrowings are estimated
using discounted cash flow analyses, based on the current
incremental borrowing rates for similar types of borrowing
arrangements.
Pre-opening Costs
Pre-opening costs, which are costs incurred prior to the opening of
a new clinic and consist primarily of legal and travel costs and
salary paid to the clinic director, are deferred and amortized on
a straight-line basis over a period ranging from one to two years
commencing with opening of the facility. As of December 31, 1996
and 1995, $0 and $34,000 of pre-opening costs, net of accumulated
amortization, were capitalized in Other Assets. Amortization
expense for 1996 and 1995 relating to such assets was $34,000 and
$174,000, respectively.
Net Income Per Share
Earnings per share are computed by dividing net earnings by the weighted
average number of common and common equivalent shares outstanding.
Convertible subordinated notes have not been included as the computation would
not be dilutive. Weighted average common shares outstanding were 3,680,000
and 3,729,000 for the years ended December 31, 1996 and 1995, respectively.
Use of Estimates
Management is required to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Reclassifications
The accompanying financial statements for 1995 have been
reclassified to conform with the presentation used for 1996.
3. Non-Cash Transaction
In May 1994, the Company issued $2,000,000 aggregate principal
amount of 8% Convertible Subordinated Notes, Series B ("the Series
35<PAGE>
B Notes"). The Series B Notes contained a contingent interest
enhancement feature which allowed the Series B Note holders to
receive an interest enhancement payable in shares of Company Common
Stock based upon the market value of the Company's shares for the
month of June 1996. A total of 70,965 shares of the Company's
Common Stock were issued in connection with the Contingent Interest
Enhancement feature. Deferred financing costs, included in "Other
Assets" on the balance sheet and being amortized over the life of
the Series B Notes, totaling $765,000 were recorded in connection
with the issuance of the 70,965 shares. As of December 31, 1996,
$200,000 of amortization relating to the deferred financing costs
had been recorded.
4. Notes Payable
On June 2, 1993, the Company completed the issuance and sale of
$3,050,000 aggregate principal amount of the Company's 8%
Convertible Subordinated Notes due June 30, 2003 (the "Notes"). The
Notes, which are subordinated to any indebtedness for borrowed
money, were issued at par in a private placement transaction to a
total of six investors, including two directors who purchased a
total of $175,000 of the Notes and a company controlled by one of
the Company's directors, Mr. Richard C.W. Mauran, who purchased
$2,000,000 of the Notes. The Notes bear interest at 8% per annum,
payable quarterly, and are convertible at the option of the Note
holders into common stock of the Company at any time during the
life of the Notes. The conversion price is $10.00 per share
(subject to adjustment as provided in the Notes). The Company can
require the Note holders to convert the Notes into shares of common
stock at any time that the average trading price of the Company's
common stock equals or exceeds $20.00 per share (subject to
adjustment as provided in the Notes) during the immediately
preceding 90-day period. As of December 31, 1996, none of the Notes
had been converted into Common Stock of the Company.
On May 5, 1994, the Company completed the issuance and sale of
$2,000,000 aggregate principal amount of 8% Convertible Subordinated
Notes, Series B, due June 30, 2004 (the "Series B Notes"). The
Series B Notes were issued at par in a private placement. The
36<PAGE>
Series B Notes are convertible at the option of the holder, into the
number of whole shares of the Company's Common Stock, determined by
dividing the principal amount so converted by $12.00 (the
"Conversion Price"), subject to adjustment upon the occurrence of
certain events. The Company may require conversion, in whole or in
part, at any time at the Conversion Price then in effect if, during
the preceding 90-day period, the average market price of the
Company's Common Stock equals or exceeds $20.00 per share. The
Series B Notes bear interest from the date of issuance at a rate of
8% per annum, payable quarterly. Holders of Series B Notes were
entitled to receive an interest enhancement payable in shares of
Company Common Stock based upon the market value of the Company's
Common Stock at June 30, 1996, which was two years from the date of
issuance of the Series B Notes. In July 1996, the Company issued 70,965
shares of its Common Stock in connection with the interest enhancement
feature.
The Company also completed on May 5, 1994, the issuance and sale of
$3,000,000 aggregate principal amount of 8% Convertible
Subordinated Notes, Series C due June 30, 2004 (the "Series C
Notes"). The Series C Notes were issued at par in a private
placement to a company controlled by one of the Company's
directors, Mr. Richard C. W. Mauran. The Series C Notes are
convertible, at the option of the holder, into the number of whole
shares of Common Stock, determined by dividing the principal amount
so converted by $10.00, subject to adjustment upon the occurrence
of certain events. The Series C Notes bear interest from the date
of issuance at a rate of 8% per annum, payable quarterly.
Both Series B and C Notes are unsecured subordinated obligations of
the Company and rank pari passu with the Company's 8% Convertible
Subordinated Notes due June 30, 2003. Each of the Notes are
subordinated in right of payment to all other indebtedness for
borrowed money incurred by the Company.
Holders of the Notes have piggy-back registration rights as set
forth in the Registration Agreement relating to the Notes. Holders
of the Series B Notes and Series C Notes each have demand and
piggy-back registration rights as set forth in the Registration
Agreements relating to the Notes.
37<PAGE>
Notes payable as of December 31, 1996 and 1995 consist of the
following:
December 31,
1996 1995
Promissory note at a floating
interest rate of 1% above prime,
payable in semi-annual install-
ments beginning January 31, 1993
until the earlier of payment of
the entire principal and accrued
interest due or 30 days from the
sixth anniversary of the date of
this note. Each installment of
principal is equal to the greater
of $9,375 or 4.5% of the net patient
revenue of one of the Company's
clinics for the six months of the
calendar year immediately preceding
each installment date. This note
is secured by certain furniture and
equipment with a net book value
of approximately $15,000. $ 73,000 $ 96,000
Promissory note at a floating
interest rate of 1% above prime,
payable in monthly installments
through November 1, 2001. This
note is secured by the facility,
with a net book value of approxi-
mately $84,000 of one of the
Company's clinics 38,000 44,000
Unsecured promissory notes with
a 7% interest rate payable in
equal monthly installments
through December 31, 2000 183,000 -
8% Convertible Subordinated
Notes due June 30, 2003 with
interest payable quarterly 3,050,000 3,050,000
38<PAGE>
December 31,
1996 1995
8% Convertible Subordinated
Notes, Series B due June 30,
2004, with interest payable
quarterly 2,000,000 2,000,000
8% Convertible Subordinated
Notes, Series C, due June 30,
2004, with interest payable
quarterly 3,000,000 3,000,000
8,344,000 8,190,000
Less current portion (68,000) (24,000)
$8,276,000 $8,166,000
Scheduled maturities for the next five years and thereafter as of
December 31, 1996 are as follows:
1997 $ 68,000
1998 69,000
1999 69,000
2000 69,000
2001 19,000
Thereafter 8,050,000
$8,344,000
5. Related Party Transactions
During both 1996 and 1995, the Company recognized interest expense
of $414,000, respectively, relating to Convertible Subordinated
Notes held by directors of the Company.
See Note 4 for additional related party transactions.
39<PAGE>
6. Income Taxes
Significant components of the Company's deferred tax assets at
December 31, 1996 and 1995, are as follows:
1996 1995
Deferred tax assets:
Tax net operating loss
carryforwards $ 745,000 $1,577,000
Investment in partnerships 567,000 367,000
Minimum tax credit carryforward 75,000 -
Total 1,387,000 1,944,000
Less valuation allowance (1,387,000) (1,944,000)
Net deferred federal income taxes - -
The valuation allowance decreased by $557,000 due to the
utilization of the net operating loss carryforwards.
The differences between the federal tax rate and the Company's
effective tax rate, at December 31, 1996 and 1995, are as follows:
1996 1995
U.S. tax at statutory
rate $574,000 35.00% $260,000 35.00%
Utilization of net
operating loss
carryforwards (557,000) (33.95) (15,000) (2.02)
State income taxes 43,000 2.62 77,000 10.38
Nondeductible expenses 29,000 1.76 26,000 3.52
Nontaxable income - - (271,000) (36.51)
Other-net 28,000 1.70 - -
$117,000 7.13% $ 77,000 10.37%
Significant components of the provision for income taxes, for the
years ended December 31, 1996 and 1995, are as follows:
40<PAGE>
1996 1995
Current:
Federal $ 74,000 $ -
State 43,000 77,000
Total current 117,000 77,000
Total income tax provision $ 117,000 $ 77,000
As of December 31, 1996 and 1995, the Company had total unused
operating loss carryforwards of $2,130,000 and $4,507,000,
respectively, for income tax purposes which will expire beginning
in the years 2008 and 2007, respectively.
Income taxes paid during 1996 and 1995 were approximately $137,000
and $50,000, respectively.
7. Stock Option Plans
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related Interpretations in accounting for its employee stock
options. Pro forma information regarding net income and earnings
per share is required by FASB Statement No. 123, "Accounting and
Disclosure of Stock-Based Compensation", and has been determined as
if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes
option pricing model.
1992 Stock Option Plan, as Amended
The Company has a 1992 Stock Option Plan, as amended (the "Option
Plan") which permits the Company to grant to key employees and
outside directors of the Company options to purchase up to 550,000
shares of Common Stock (subject to proportionate adjustments in the
event of stock dividends, splits, and similar corporate
transactions).
Incentive stock options (those intended to satisfy the requirements
of the Internal Revenue Code) granted under the Option Plan are
granted at an exercise price of not less than the fair market value
of the shares of Common Stock on the date of grant. The exercise
41<PAGE>
prices of non-incentive options granted under the Option Plan are
determined by the committee which administers the Option Plan upon
each grant. The period within which each option will be
exercisable is determined by the committee which administers the
Option Plan (in no event may the exercise period of an incentive
stock option extend beyond 10 years from the date of grant). As of
December 31, 1996 and 1995, 78,750 and 78,750 incentive stock
options and 416,000 and 310,500 non-incentive stock options have
been granted.
Outstanding incentive stock options vest one-fourth on each of the
second, third, fourth and fifth anniversaries of the date of grant.
Of the 416,000 non-incentive stock options granted as of
December 31, 1996, 191,000 options vest 100% on the date of grant,
217,000 options vest one-fourth on each of the second, third,
fourth and fifth anniversaries of the date of grant and 8,000
options vest 100% six months from the date of grant.
The following weighted-average assumptions for 1996 were used in
estimating the fair value of the options granted under the Option
Plan: risk-free interest rates ranging from 6.13% to 6.36%;
dividend yield rate of 0%; volatility factor of the expected market
price of the Company's common stock of .261; and a weighted-average
expected life of the option of 8 years for those options which vest
one-fourth on each of the second, third, fourth and fifth
anniversaries of the date of grant and a weighted-average expected
life of 5 years for the remaining options.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
42<PAGE>
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The pro forma effect on net income for 1996 is not
representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995. The
Company's pro forma information follows (in thousands except for
earnings per share information):
1996 1995
Pro forma net income $1,426 $ 447
Pro forma earnings per share $ .40 $ .13
A summary of the Company's Option Plan activity, and related
information for the years ended December 31 follows:
1996 1995
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
Outstanding-
beginning
of year 381,500 $ 8.41 246,250 $ 7.48
Granted 105,750 9.59 164,750 9.82
Exercised (4,000) 6.75 (7,750) 6.51
Forfeited (250) 8.63 (21,750) 9.23
Outstanding-
end of year 483,000 $ 8.68 381,500 $ 8.41
Exercisable
at end
of year 241,625 $ 8.66 181,500 $ 8.61
Weighted-
average
fair value
of options
granted
during the
year $ 4.12 $ 4.02
43<PAGE>
Exercise prices for options outstanding as of December 31, 1996
ranged from $6.25 to $12.00. The weighted-average remaining
contractual life of those options is 7.95 years.
Executive Option Plan
The Executive Option Plan ( the "Executive Plan") was adopted by
the Board of Directors of the Company on March 2, 1993 and was
approved by the Company's stockholders on May 24, 1993. The
Executive Plan permits the Company to grant to any officer of the
Company or its affiliates options to purchase up to 200,000 shares
of Common Stock (subject to adjustments in the event of stock
dividends, splits, and similar corporate transactions). The
exercise prices of the options granted under the Executive Plan are
determined by the committee which administers the Executive Plan
upon each grant, and in the case of incentive and non-incentive
options, may not be less than the greater of 175% of the fair
market value of a share of Common Stock on the date of grant of the
option or the par value per share of the stock. The period within
which each option will be exercisable is determined by the
committee which administers the Executive Plan (in no event may the
exercise period extend beyond 10 years from the date of grant).
The outstanding options vest one-third on each of the third, fourth
and fifth anniversaries of the date of grant.
A summary of the Company's Executive Plan activity, and related
information for the years ended December 31 follows:
1996 1995
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
Outstanding-
beginning
of year 105,000 $ 13.31 140,000 $ 13.16
Granted - - - -
Exercised - - - -
Forfeited - - (35,000) 12.69
Outstanding-
end of year 105,000 $ 13.31 105,000 $ 13.31
44<PAGE>
Exercisable
at end
of year 25,000 $ 12.69 - -
Weighted-
average
fair value
of options
granted
during the
year - -
Exercise prices for options outstanding as of December 31, 1996
ranged from $12.69 to $14.88. The weighted-average remaining
contractual life of those options is 6.71 years.
8. Warrants
In connection with the Company's initial public offering of its
stock effective May 28, 1992, the Company agreed to sell to the
managing underwriter, for nominal consideration, warrants to
purchase from the Company 120,000 shares of Common Stock (the
"Representative's Warrants"). The Representative's Warrants are
initially exercisable at a price of $8.125 per share of Common
Stock for a period of four years, commencing one year from the
initial public offering date.
The Representative's Warrants contain anti-dilution provisions
providing for adjustment of the number of warrants and exercise
price under certain circumstances. In addition, the
Representative's Warrants grant to the holders certain rights of
registration of the Common Stock issuable upon exercise of the
Representative's Warrants. As of December 31, 1996 and 1995, none
of the Representative's Warrants have been exercised.
In connection with the private placement of 172,000 shares of the
Company's Common Stock on March 10, 1994, the Company also issued
warrants to purchase 8,600 shares of the Company's Common Stock
(the "Agent's Warrants") to the Company's placement agent as part
of such placement agent's fee. The Agent's Warrants, which were
initially exercisable at $10.00 per share of Common Stock for a
period of eighteen months, were repurchased by the Company in
September 1995 for $7,526.
45<PAGE>
9. Preferred Stock
The Board of Directors of the Company is empowered, without
approval of the stockholders, to cause shares of Preferred Stock to
be issued in one or more series and to establish the number of
shares to be included in each such series and the rights, powers,
preferences, and limitations of each series. There are no
provisions in the Company's Articles of Incorporation specifying
the vote required by the holders of Preferred Stock to take action.
All such provisions would be set out in the designation of any
series of Preferred Stock established by the Board of Directors.
The bylaws of the Company specify that, when a quorum is present at
any meeting the vote of the holders of at least a majority of the
outstanding shares entitled to vote who are present, in person or
by proxy, shall decide any question brought before the meeting,
unless a different vote is required by law or the Company's
Articles of Incorporation. Because the Board of Directors has the
power to establish the preferences and rights of each series, it
may afford the holders of any series of Preferred Stock
preferences, powers, and rights, voting or otherwise, senior to the
right of holders of Common Stock. The issuance of the Preferred
Stock could have the effect of delaying or preventing a change in
control of the Company. The Board of Directors has no present
plans to issue any of the Preferred Stock.
10. Stock Purchase and Matching Share Plan
On November 17, 1993, the Board of Directors of the Company adopted
the U.S. Physical Therapy, Inc. Stock Purchase and Matching Share
Plan (the "Plan"), effective January 1, 1993, covering 100,000
shares of the Company's Common Stock, $.01 par value, issuable upon
purchase of shares and awards of matching shares under the Plan.
The Plan is intended to further the profitability and growth of the
Company by providing incentives to eligible physical therapy clinic
partners. The Plan will provide eligible physical therapy clinic
partners with stock ownership opportunities in the form of
purchases of the Company's Common Stock and matching grants by the
Company of the Company's Common Stock in accordance with the terms
and conditions of the Plan. As of December 31, 1996 and 1995, no
shares have been purchased or awarded under the Plan.
46<PAGE>
In total, the Company has 1,741,667 shares which are reserved for
issuance under the 1992 Stock Option Plan, the Executive Option
Plan, the Representative's Warrants, the 8% Convertible
Subordinated Notes, the Series B Notes, the Series C Notes and the
Stock Purchase and Matching Share Plan.
11. Defined Contribution Plan
The Company has a 401(k) profit sharing plan covering all employees
with three months of service. The Company may make discretionary
contributions of up to 50% of employee contributions. The Company
recognized $-0- in contribution expense for the years ended
December 31, 1996 and 1995, respectively.
12. Commitments and Contingencies
Operating Leases
The Company has entered into operating leases for its executive
offices and clinic facilities. In connection with these agreements,
the Company incurred rent expense of $2,415,000 and $2,093,000 for
the years ended December 31, 1996 and 1995, respectively. Several
of the leases provide for an annual increase in the rental payment
based upon the Consumer Price Index for each particular year. The
leases also provide for renewal periods ranging from one to six
years. The agreements to extend the leases specify that rental
rates would be adjusted to market rates as of each renewal date.
The future minimum lease commitments for the next five years and in
the aggregate are as follows:
1997 $2,568,000
1998 2,173,000
1999 1,225,000
2000 539,000
2001 183,000
Thereafter 17,000
$6,705,000
Employment Agreements
At December 31, 1996, the Company had an outstanding employment
agreement with one of its executive officers for $150,000
47<PAGE>
annually for a three-year period ending in 1997. Subsequent to
December 31, 1996, this agreement was amended to extend to the year
2002 at $165,000 annually.
In addition, the Company has outstanding employment agreements with
the managing physical therapist partners of the Company's physical
therapy clinics and with certain other clinic employees which
obligate subsidiaries of the Company to pay compensation of
$4,523,000 in 1997 and $6,954,000 in the aggregate through 2001.
In addition, each employment agreement with the managing physical
therapists provides for monthly bonus payments calculated as a
percentage of each clinic's gross revenues (not in excess of
operating profits) or operating profits. The Company recognized
salaries and bonus expense for the managing physical therapist
partners of $4,852,000 and $3,919,000 for the years ended
December 31, 1996 and 1995, respectively.
The employment agreements generally include a non-competition
provision which extends through the term of the agreement and for
one to two years thereafter.
Minority Interest in Outpatient Physical Therapy Clinic Limited
Partnerships
The managing physical and occupational therapist of each clinic owns
a partial interest in the clinic he or she operates. This is
accomplished by having each clinic structured as a separate limited
partnership (the "Operating Subsidiaries"). The Company, through
its wholly-owned subsidiaries, currently owns a 1% general
partnership interest and limited partnership interests ranging from
59% to 80% in the clinics it operates. For the majority of the
clinics, the managing therapist of each such clinic, along with
other therapists at the clinic in several of the partnerships, own
the remaining limited partnership interest in the clinic which
ranges from 19% to 40%.
The majority of the partnership agreements are structured such that
the managing therapist begins with a 20% profit interest in his or
her clinic limited partnership and, at the end of each of the first
five years, the managing therapist's profit interest increases by 3%
48<PAGE>
until his or her interest reaches 35%. These therapists have no
interest in net losses of clinic partnerships, except to the extent
of their capital accounts. The Company presently anticipates that
future clinics developed by the Company will be structured in a
comparable manner.
13. Subsequent Event
In February 1997, the Company sold certain fixed assets located at
one of the Company's clinics in Mississippi, along with assets
located at the Alabama satellite of this facility. No loss was
recognized relating to the closure of these two facilities. The
Mississippi and Alabama clinics, which opened in 1994 and 1996,
respectively, accounted for net patient revenues for 1996 and 1995
of $345,000 and $419,000, respectively, and clinic operating costs
for 1996 and 1995 of $506,000 and $292,000, respectively.
49<PAGE>
PART III
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
None
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act.
The information required by Items 401 and 405 of Regulation S-B is
omitted from this Report as the Company intends to file its
definitive annual meeting proxy materials within 120 days after its
fiscal year-end and the information to be included therein in
response to such Items is incorporated herein by reference.
Item 10. Executive Compensation.
The information required by Item 402 of Regulation S-B is omitted
from this Report as the Company intends to file its definitive
annual meeting proxy materials within 120 days after its fiscal
year-end and the information to be included therein in response to
such Item is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Item 403 of Regulation S-B is omitted
from this Report as the Company intends to file its definitive
annual meeting proxy materials within 120 days after its fiscal
year-end and the information to be included therein in response to
such Item is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-B is omitted
from this Report as the Company intends to file its definitive
annual meeting proxy materials within 120 days after its fiscal
year-end and the information to be included therein in response to
such Item is incorporated herein by reference.
50<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) List of Exhibits
3.1 Articles of Incorporation of the Company (filed as an
exhibit to the Company's Registration Statement on Form S-1
(33-47019) and incorporated herein by reference).
3.2 Bylaws of the Company, as amended (filed as an exhibit to
the Company's 1993 Form 10-KSB).
4.1 Form of Representative's Warrant Agreement (filed as an
exhibit to the Company's Registration Statement on Form S-1
(33-47019) and incorporated herein by reference).
4.2 Convertible Subordinated Note Purchase Agreement dated June
2, 1993 (filed as an exhibit to the Company's Form 8-K dated
June 10, 1993 and incorporated herein by reference).
4.3 Form of U.S. Physical Therapy, Inc. 8% Convertible
Subordinated Note (filed as an exhibit to the Company's Form
8-K dated June 2, 1993 and incorporated herein by
reference).
4.4 Amendment to Convertible Subordinated Note Purchase
Agreement dated March 10, 1994 (filed as an exhibit to the
Company's Form 8-K dated March 25, 1994 and incorporated
herein by reference).
4.5 Amendment to Representative's Warrant Agreement dated as of
May 28, 1992 (filed as an exhibit to the Company's Form 8-K
dated March 25, 1994 and incorporated herein by reference).
4.6 Form of 8% Convertible Subordinated Note, Series C (filed as
an exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
4.7 Registration Agreement for Series B Note (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
51<PAGE>
4.8 Form of 8% Convertible Subordinated Note, Series C (filed as
an exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
4.9 Registration Agreement for Series C Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.1 1992 Stock Option Plan, as amended (filed as an exhibit to
Amendment No. 1 to the Company's Form 10-QSB, for the
quarter ended March 31, 1995 and incorporated herein by
reference).
10.2 Executive Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S-8 (33-63444) and
incorporated herein by reference).
10.3 Amended Employment Agreement between the Company and J.
Livingston Kosberg (filed as an exhibit to Amendment No. 1
to the Company's Form 10-QSB, for the quarter ended March
31, 1995 and incorporated herein by reference).
10.4 Employment Agreement between the Company and Mark J.
Brookner (filed as an exhibit to the Company's Registration
Statement on Form S-1 (33-47019) and incorporated herein by
reference).
10.5 Employment Agreement between the Company and Roy W. Spradlin
(filed as an exhibit to Amendment No. 1 to the Company's
Form 10-KSB, for the year ended December 31, 1994 and
incorporated herein by reference).
10.6 Amended and Restated Employment Agreement between the
Company and Roy W. Spradlin.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP (Registration Nos. 33-63446,
33-63444, 33-91004 and 33-93040).
52<PAGE>
27 Financial Data Schedule.
(b) Reports on Form 8-K
No Form 8-K was filed for the quarter ended December
31, 1996.
53<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC. By: /s/ Mark J. Brookner
(Registrant) Mark J. Brookner, Chief
Financial Officer,
Assistant Secretary and
Treasurer
(principal financial
and accounting officer)
Date: March 27, 1997
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities as of the date indicated above.
By: /s/ J. Livingston Kosberg By: /s/ George H. Hargrave
J. Livingston Kosberg, George H. Hargrave,
Chairman of the Board Director
By: /s/ Roy W. Spradlin By: /s/ James B. Hoover
Roy W. Spradlin, President, James B. Hoover,
Chief Exeutive Officer and Director
Director
(principal executive officer)
By: /s/ Mark J. Brookner By: /s/ Marlin W. Johnston
Mark J. Brookner, Chief Marlin W. Johnston,
Financial Officer, Assistant Director
Secretary, Treasurer and
Director
(principal financial and
accounting officer)
By: By:
Daniel C. Arnold, Richard C.W. Mauran,
Director Director
54<PAGE>
By: /S/ Nelson Broms By: /s/ Albert L. Rosen
Nelson Broms Albert L. Rosen
Director Director
55<PAGE>
INDEX OF EXHIBITS
EXHIBIT NO. IDENTITY OF EXHIBIT PAGE NO.
3.1 Articles of Incorporation of
the Company (filed as an exhibit
to the Company's Registration
Statement on Form S-1 (33-47019)
and incorporated herein by
reference). --
3.2 Bylaws of the Company, as amended
(filed as an exhibit to the Company's
1993 Form 10-KSB). --
4.1 Form of Representative's Warrant
Agreement (filed as an exhibit
to the Company's Registration
Statement on Form S-1 (33-47019)
and incorporated herein by reference). --
4.2 Convertible Subordinated Note Purchase
Agreement dated June 2, 1993 (filed as
an exhibit to the Company's Form 8-K
dated June 10, 1993 and incorporated
herein by reference). --
4.3 Form of U.S. Physical Therapy, Inc.
8% Convertible Subordinated Note
dated June 2, 1993 (filed as an
exhibit to the Company's Form 8-K
dated June 2, 1993 and incorporated
herein by reference). --
4.4 Amendment to Convertible Subordinated
Note Purchase Agreement dated March 10,
1994 (filed as an exhibit to the Company's
Form 8-K dated March 25, 1994 and
incorporated herein by reference). --
56<PAGE>
INDEX OF EXHIBITS
EXHIBIT NO. IDENTITY OF EXHIBIT PAGE NO.
4.5 Amendment to Representative's Warrant
Agreement dated as of May 28, 1992
(filed as an exhibit to the Company's
Form 8-K dated March 25, 1994 and
incorporated herein by reference). --
4.6 Form of 8% Convertible Subordinated
Note, Series B (filed as an exhibit
to the Company's Form 8-K dated
May 5, 1995 and incorporated herein
by reference). --
4.7 Registration Agreement for Series B
Note (filed as an exhibit to the
Company's Form 8-K dated May 5, 1995
and incorporated herein by reference). --
4.8 Form of 8% Convertible Subordinated
Note, Series C (filed as an exhibit
to the Company's Form 8-K dated
May 5, 1995 and incorporated herein
by reference). --
4.9 Registration Agreement for Series C
Notes (filed as an exhibit to the
Company's Form 8-K dated May 5, 1995
and incorporated herein by reference). --
10.1 1992 Stock Option Plan, as amended
(filed as an exhibit to Amendment
No. 1 to the Company's Form 10-QSB,
for the quarter ended March 31, 1995
and incorporated herein by reference). --
10.2 Executive Option Plan (filed as an
exhibit to the Company's Registration
Statement on Form S-8 (33-63444)
and incorporated herein by reference). --
57<PAGE>
INDEX OF EXHIBITS
EXHIBIT NO. IDENTITY OF EXHIBIT PAGE NO.
10.3 Amended Employment Agreement between
the Company and J. Livingston Kosberg
(filed as an exhibit to Amendment
No. 1 to the Company's Form 10-QSB for
the quarter ended March 31, 1995 and
incorporated herein by reference). --
10.4 Employment Agreement between the
Company and Mark J. Brookner (filed
as an exhibit to the Company's
Registration Statement on Form S-1
(33-47019) and incorporated herein
by reference). --
10.5 Employment Agreement between the
Company and Roy W. Spradlin (filed
as an exhibit to Amendment No. 1 to
the Company's Form 10-KSB for
the year ended December 31, 1994
and incorporated herein by reference). --
10.6 Amended and Restated Employment
Agreement between the Company and
Roy W. Spradlin. 59
21 Subsidiaries of the Company. 69
23 Consent of Ernst & Young LLP
(Registration Nos. 33-63446, 33-63444,
33-91004 and 33-93040). 75
27 Financial Data Schedule. 76
58<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is
entered into by and between U. S. Physical Therapy, Inc. a Nevada
corporation ("Employer") and Roy Spradlin ("Employee") as of
February 21, 1997, and supersedes that certain Employment Agreement
between the parties effective May 18, 1994. Employer and Employee
may be referred to herein collectively as the "Parties" and
individually as a "Party."
Section 1. Term. Employer hereby continues the employment of
Employee and Employee hereby accepts continued employment with
Employer for a term of five (5) years beginning on the date of
execution hereof ("Commencement Date") and continuing until February
21, 2002.
Section 2. Duties of Employee. Employee is engaged to serve as
President and Chief Executive Officer of Employer and to perform
such duties and responsibilities as are customarily performed by
persons acting in such capacity or such other duties as may be
assigned by Employer from time to time. Employee shall perform
these duties in accordance with the policies and objectives
established by Employer's Board of Directors.
Section 3. Full-Time Employment. Employee shall devote
substantially all of his working time and talent to the business of
Employer during the term hereof and shall diligently and to the best
of his ability perform all duties incident to his employment
hereunder, using his best efforts to promote the interests of
Employer.
Section 4. Position on the Board of Directors. Employer agrees to
use its best efforts to cause Employee to be elected to the Board of
Directors of Employer.
Section 5. Base Compensation. Subject to the terms and conditions
of this Agreement, as partial compensation for services rendered and
Employee's covenants and agreements under this Agreement, Employer
shall pay to Employee a base salary of ONE HUNDRED AND SIXTY-FIVE
THOUSAND AND NO/100THS DOLLARS ($165,000.00) per year
59<PAGE>
("Base Compensation"), payable in equal semi-monthly installments on
the fifteenth (15th) and final days of each month during the term
hereof. From time to time (but at least once a year) Employer and
Employee shall review Employee's performance, and at that time
Employer, in its sole discretion, shall determine whether Employee's
salary should be increased. At no time during the term hereof will
Employee's salary be decreased.
Section 6. Additional Compensation. Subject to the terms and
conditions of this Agreement, in addition to the Base Compensation,
Employer may provide incentive compensation in the form of cash
bonuses. The amount of such bonus is discretionary and will be
determined by the Board of Directors of Employer or a compensation
committee thereof, taking into consideration any factor as the Board
of Directors or compensation committee deems relevant, but the total
amount of the cash bonuses shall not generally exceed twenty percent
(20%) of Employee's Base Compensation except in the case of
extraordinary results or performance.
Section 7. Business Expenses. Employer shall reimburse Employee
for business expenses directly and reasonably incurred in the
performance of his duties.
Section 8. Benefits and Plans. Employee shall be entitled to such
fringe benefits, including vacation, sick and personal leave,
insurance (health, disability and life) and stock options generally
available to the executive officers of Employer, and Employee shall
be entitled to participate, subject to all conditions of
eligibility, in any qualified retirement plan(s), deferred
compensation plan, and in any benefits provided by any salary
continuation, disability insurance, hospitalization insurance, major
medical insurance, medical reimbursement, life insurance or other
benefit plan which may be adopted by Employer. Also, the Employer
shall continue Employee's monthly salary for a period of up to 90
continuous days during any period of Employee's sickness or
disability.
Section 9. Termination. This Agreement shall terminate prior to
the expiration of the term hereof upon the occurrence of any one of
the following events:
60<PAGE>
(a) Disability. In the event that Employee is unable fully to
perform his duties and responsibilities hereunder to the full extent
required by Employer by reason of illness, injury or incapacity for
ninety (90) consecutive days, this Agreement may be terminated by
Employer, and Employer shall have no further liability or obligation
to Employee for compensation or otherwise hereunder; provided,
however, that Employee shall continue to be compensated as provided
in this Agreement during such 90-day period and until termination
under this section, and provided further, that Employee will be
entitled to receive the payments prescribed under any disability
benefits plan in which Employee was participating. In the event of
any dispute under this Section 9, Employee shall submit to a
physical examination by a licensed physician selected by Employer.
(b) Death. In the event that Employee dies during the term
hereof, Employer shall pay to his executors, legal representatives
or administrators an amount equal to one (1) year's base
compensation set forth in Section 5 hereof, and thereafter Employer
shall have no further liability or obligation hereunder to
Employee's executors, legal representatives, administrators, heirs
or assigns or any other person claiming under or through Employee;
provided, however, that Employee's heirs, legal representatives or
administrators will be entitled to receive the payments prescribed
under any death or disability benefits plan in which Employee was
participating.
(c) Cause. Nothing in this Agreement shall be construed to
prevent its termination by Employer at any time for "cause". For
purposes of this Agreement, "cause" shall mean (i) the failure of
Employee to perform or observe (other than by reason of illness,
injury or incapacity) any of the terms or provisions of this
Agreement, including the failure of Employee to follow the
reasonable written directions of Employer's Board of Directors, (ii)
dishonesty or misconduct on the part of Employee that is or is
reasonably likely to be damaging or detrimental to the business of
Employer, (iii) conviction of a crime involving moral turpitude,
(iv) habitual insobriety or failure to perform duties due to abuse
of alcohol or drugs, or (v) misappropriation of funds. Prior to
terminating this Agreement on account of Employee's failure to
perform or observe any of the terms and conditions of this
61<PAGE>
Agreement (but not for any of the other enumerated "causes" stated
in (ii) through (v) above, Employer shall give Employee thirty (30)
days written notice and an opportunity to cure such failure to the
satisfaction of Employer. Upon termination for cause, Employer
shall pay to Employee all sums due to Employee through the date of
such termination. Following such a termination, Employer shall have
no further duty or obligation to Employee; provided, however, that
Employee shall continue to be bound by Sections 11 through 17.
Section 10. Special Benefit in the Event of Termination Without
Cause or Merger, Sale, or Dissolution. In the event of the
occurrence of any of the following events:
a. The termination of employment of Employee by Employer
without "cause" as cause is defined in Section 9(c) hereof;
b. The transfer or sale by Employer of all or substantially all
of the assets of Employer whether or not this Agreement is assigned
or transferred as a part of such sale;
c. The transfer or sale by Employer's stockholders of more than
fifty percent (50%) of the outstanding shares of Common Stock of
Employer;
d. The merger or consolidation of the Employer in a transaction
in which the shareholders of the Employer immediately prior to the
merger or consolidation own less than fifty percent (50%) of the
surviving company; or
e. The voluntary or involuntary dissolution of Employer; then
and upon the occurrence of any of the foregoing events, Employee
shall be paid a benefit (in the case of Section 10(a) above, a
termination/severance benefit, and in all other stipulated cases a
bonus, regardless of whether Employee continues his employment)
equal to one and one-half (1 1/2) times Employee's Base Compensation
plus bonus, based upon such Base Compensation and bonus paid or
payable in the most recent twelve (12) month period, such benefit to
be paid in a lump sum on or before thirty (30) days after the event
stipulated in Sections 10 (a) through (e) above occurs.
62<PAGE>
In the event Employee's employment is terminated (whether by the
Company or Employee) as a result of an event described in Sections
10(b) through (d) at the time such event occurs, the term of the
applicability of Sections 11 and 12 shall be reduced from two (2)
years to one (1) year, but if Employee continues to be employed by
the Company after such event occurs, the periods of applicability of
Sections 11 and 12 shall remain for the periods stated therein.
Notwithstanding any other provision of this Section 10, if an event
described in Sections 10(b) through (d) hereof occurs, the payment
stipulated herein to be paid shall only be paid if Employee remains
an employee of the Company to the date of consummation of such
event, unless Employee is terminated prior thereto without cause or
the provisions of Sections 9(a) or 9(b) become applicable.
Should the provisions of this Section 10 apply, except as otherwise
provided in this Section 10, the covenants contained in Sections 11
through 17 hereof shall continue to apply.
Section 11. Non-Competition. During the term and for a two (2)
year period following the termination of his employment under this
Agreement for any reason, Employee shall not, directly or
indirectly, for himself or on behalf of any other person or entity
as an employee, employer, consultant, agent, lender, principal,
partner, stockholder, corporate officer, director, or in any other
individual or representative capacity, (i) invest, engage in, or
permit his name to be used in connection with any business that is
in competition with the Employer, (ii) accept employment with or
render services to a competitor of Employer, as a director, officer,
agent partner, employee or consultant, or (iii) solicit or accept
from any of the customers of Employer or from any person or entity
whose business Employer is soliciting, any business of the type
which Employer is engaged in or actively is preparing to engage in.
Employee shall be prohibited from engaging in the activities
described above within fifty (50) miles of any of Employer's
rehabilitation clinic locations.
Section 12. Non-Solicitation. During the term hereof and for a
two (2) year period following the termination of this Agreement for
any reason, Employee agrees not to, directly or indirectly, for
himself or on behalf of any other person or entity (a) solicit or
induce, or attempt to solicit or induce, any person employed by, or
any agent of, Employer, to terminate the employee's or agent's
63<PAGE>
relationship with Employer, nor (b) call on, solicit, or divert, or
attempt to call on, solicit or divert any person, firm, corporation
or other entity who was or had been a customer or a patient referral
source (including, without limitation, any physician) of Employer
who referred ten or more customers to Employer, who is a customer or
a patient referral source of Employer who has referred ten or more
customers to Employer, or who is a prospective customer or a patient
referral source of Employer with whom Employee had contact as an
employee of Employer and who, within six months of such
solicitation, Employer was or is actively recruiting as a customer
or patient referral source.
Section 13. Confidential Information. Employee will not, during
or after the termination of this Agreement, disclose any customer
lists, customer mailing lists, prospective customer lists, lists of
referral sources or prospective referral sources, trade secrets, or
pricing, marketing or advertising plans or methods used by Employer
(the "Confidential Information") to any person, firm, corporation,
association or other entity for any reason or purpose whatsoever,
nor shall Employee make use of the Confidential Information for his
own purposes or for the benefit of any person, firm, corporation or
other entity (except Employer) under any circumstances during or
after the termination of this Agreement. On demand of Employer, at
any time, Employee shall immediately deliver all printed or written
Confidential Information to Employer. To the extent that Employee's
property does not contain Confidential Information, Employee may
remove all of Employee's property (such as computer software and
tapes) upon termination of this Agreement.
Section 14. Reasonableness of Restrictions. Employee agrees that
(a) the covenants contained in Sections 11, 12 and 13 hereof are
necessary for the protection of Employer's business goodwill and
trade secrets, (b) a portion of the compensation paid to Employee
under this Agreement is paid in consideration of the covenants
herein contained, the sufficiency of which consideration is hereby
acknowledged, and if the scope of any restriction contained in
Sections 11, 12 and 13 is too broad to permit enforcement of such
restriction to its full extent, then such restriction shall be
enforced to the maximum permitted by law, and the Parties hereby
consent that such scope may be judicially modified accordingly in
any proceeding brought to enforce such restriction.
64<PAGE>
Section 15. Enforcement. Employee acknowledges Employee's
employment with Employer is special and unique in character and that
Employee will acquire special skill and training and gain special
knowledge during Employee's employment with Employer, that the
restrictions contained in Sections 11, 12 and 13 hereof are
reasonable and necessary to protect the legitimate interests of
Employer and its affiliates, that Employer would not have entered
into this Agreement in the absence of such restrictions, and that
any violation of any provision of those Sections will result in
irreparable injury to Employer. Employee also acknowledges that
Employer shall be entitled to preliminary and permanent injunctive
relief, without the necessity of proving actual damages as well as
an equitable accounting of all earnings, profits and other benefits
arising from any such violation, which rights shall be cumulative
and in addition to any other rights or remedies to which Employer
may be entitled. The existence of any claim or cause of action of
Employee against Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by
Employer of these covenants.
Section 16. Copy of Covenants. Until the expiration of the
applicable restrictions, Employee will provide, and Employer
similarly may provide, a copy of the covenants contained in Sections
11, 12 and 13 of this Agreement to any business or enterprise which
Employee may (i) directly or indirectly own, manage, operate,
finance, join, control or participate in the ownership, management
operation, financing, or control of, (ii) serve as an officer,
director, employee, partner, principal, agent, representative,
consultant, lender or otherwise, or (iii) with which he may use or
permit his name to be used.
Section 17. Special Definition of Employer. For the purposes
of Sections 11 through 16 above, the definition of Employer shall
include any subsidiary or affiliate of Employer, including all
affiliated physical therapy partnerships of Employer.
Section 18. Notices. Any notices to be given hereunder by either
Party to the other may be effected in writing either by personal
delivery, via telefacsimile or by mail, registered or certified,
postage prepaid with return receipt requested:
65<PAGE>
If to Employer: U.S. Physical Therapy, Inc.
3040 Post Oak Blvd., Suite 222
Houston, Texas 77056
with a copy to: Eddy J. Rogers, Jr., Esq.
Mayor, Day, Caldwell & Keeton
700 Louisiana, Suite 1900
Houston, Texas 77002
If to Employee: Roy Spradlin
3040 Post Oak Blvd., Suite 222
Houston, Texas 77056
Mailed notices shall be addressed to the Parties at the addresses
set forth above, but each Party may change the address by written
notice in accordance with this Section 19. Notices delivered
personally or by telefacsimile shall be deemed communicated as of
actual receipt mailed notices shall be deemed communicated as of
three days after mailing.
Section 19. Entire Agreement. This Agreement supersedes any and
all other agreements, either oral or in writing, between the Parties
hereto with respect to the employment of Employee by Employer, and
contains all of the covenants and agreements between the Parties
with respect to such employment in any manner whatsoever.
Section 20. Headings. The headings or titles to sections in this
Agreement are intended solely for convenience and no provision of
this Agreement is to be construed by reference to the heading or
title of any section.
Section 21. Amendment or Modification; Waiver. No provision of
this Agreement may be amended, modified or waived unless such
amendment, modification or waiver is authorized by Employer and is
agreed to in writing, signed by Employee and by an officer of
Employer (other than Employee) thereunto duly authorized. Except as
otherwise specifically provided in this Agreement, no waiver by any
Party hereto of any breach by any other Party hereto of any
condition or provision of this Agreement to be performed by such
other Party shall be deemed a waiver of a similar or dissimilar
66<PAGE>
provision or condition at the same or at any prior or subsequent
time nor shall the receipt or acceptance of Employee's employment be
deemed a waiver of any condition or provision hereof.
Section 22. Assignability. Employee shall not assign, pledge or
encumber any interest in this Agreement or any part thereof without
the express written consent of Employer, this Agreement being
personal to Employee. This Agreement shall, however, inure to the
benefit of Employee's estate, dependents, beneficiaries and legal
representatives. This Agreement shall not be assignable by Employer
without the written consent of Employee which will not be
unreasonably withheld. Subject to the terms of this Agreement,
Employer may merge or consolidate with or into, or transfer
substantially all of its assets to, another corporation or other
form of business organization without Employee's consent, and as a
result of such merger, consolidation or transfer, this Agreement
shall bind the successor of Employer resulting from such merger,
consolidation or transfer. No such merger, consolidation or
transfer, however, shall relieve the Parties from liability and
responsibility for the performance of their respective duties and
obligations hereunder.
Section 23. Governing Law. This Agreement shall be interpreted,
construed and governed by and in accordance with the internal
substantive law of the State of Texas.
Section 24. Severability. Each provision of this Agreement
constitutes a separate and distinct undertaking, covenant and/or
provision hereof. In the event that any provision of this Agreement
shall finally be determined to be unlawful, such provision shall be
deemed severed from this Agreement, but every other provision of
this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be
substituted a provision of similar import reflecting the original
intent of the Parties hereto to the extent permissible under law.
67<PAGE>
EMPLOYER:
U.S. PHYSICAL THERAPY, INC.
By:/s/ J. Livingston Kosberg
Name: J. Livingston Kosberg
Position: Chairman of the Board
EMPLOYEE:
/s/ Roy Spradlin
Roy Spradlin
68<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
U.S. PT - Delaware, Inc. Corporation Delaware
U.S. Therapy, Inc. Corporation Texas
National Rehab GP, Inc. Corporation Texas
U.S. Physical Therapy, Ltd. Limited
Partnership Texas
U.S. PT Management, Ltd. Limited
Partnership Texas
National Rehab Management
GP, Inc. Corporation Texas
Rehab Partners #1, Inc. Corporation Texas
Rehab Partners #2, Inc. Corporation Texas
Rehab Partners #3, Inc. Corporation Texas
Rehab Partners #4, Inc. Corporation Texas
Rehab Partners #5, Inc. Corporation Texas
Rehab Partners #6, Inc. Corporation Texas
Rehab Partners #7, Inc. Corporation Texas
Rehab Partners Acquisition
#1, Inc. Corporation Texas
Southeastern Hand
Rehabilitation, Inc. Corporation Florida
The Browning Realty
Group, Inc. Corporation Texas
Action Physical Therapy Limited
Clinic, Ltd. Partnership Texas
Cypresswood Physical Limited
Therapy Centre, Ltd. Partnership Texas
Progressive Physical Limited
Therapy Clinic, ltd. Partnership Texas
Virginia Parc Physical
Therapy, Ltd., dba
McKinney Physical Therapy
Associates, Limited Limited
Partnership Partnership Texas
69 <PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Dearborn Physical Therapy,
Ltd., dba Advanced Limited
Physical Therapy Partnership Texas
Saline Physical Therapy Limited
of Michigan, Ltd. Partnership Texas
Roepke Physical Therapy, Limited
Limited Partnership Partnership Texas
R. Clair Physical Therapy, Limited
Limited Partnership Partnership Texas
Merrill Physical Therapy, Limited
Limited Partnership Partnership Texas
Kingwood Physical Limited
Therapy, Ltd. Partnership Texas
Enid Therapy Center, Limited
Limited Partnership Partnership Texas
Dynamic Physical Therapy Limited
of Round Rock, Ltd. Partnership Texas
Active Physical Therapy, Limited
Limited Partnership Partnership Texas
Southwind Physical Therapy, Limited
Limited Partnership Partnership Texas
Genesis Rehabilitation and
Sports Center - Jackson, Limited
Limited Partnership Partnership Texas
Cleveland Physical Therapy
and Industrial Rehabili- Limited
tation, Ltd. Partnership Texas
Aquatic and Orthopedic
Rehab Specialists, Limited
Limited Partnership Partnership Texas
Vileno Therapy of Treasure Limited
Coast, Limited Partnership Partnership Texas
70<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Trussell Physical Therapy,
Limited Partnership, dba,
GenTech Industrial
Physical Therapy Limited
Services Partnership Texas
Comprehensive Hand &
Physical Therapy, Limited
Limited Partnership Partnership Texas
Tom Melko Physical Therapy, Limited
Limited Partnership Partnership Texas
Debra Dent Physical Therapy, Limited
Limited Partnership Partnership Texas
Maine Physical Therapy, Limited
Limited Partnership Partnership Texas
Brentwood Physical
Therapy, Limited Limited
Partnership Partnership Texas
Saginaw Valley Sport and
Spine, Limited Partner-
ship, dba, Saginaw Valley
Sport & Spine, Bay City
Sport & Spine and Midland Limited
Sport & Spine Partnership Texas
Brazos Valley Physical
Therapy, Limited Limited
Partnership Partnership Texas
Plymouth Physical Therapy
Specialists, Limited Limited
Partnership Partnership Texas
Brick Hand & Rehabilitative
Services, Limited Limited
Partnership Partnership Texas
Heartland Physical Therapy, Limited
Limited Partnership Partnership Texas
71<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Bay View Physical Therapy, Limited
Ltd. Partnership Texas
Rio Grande Physical Therapy, Limited
Limited Partnership Partnership Texas
Brownwood Physical Therapy,
Limited Partnership dba
Pecan Valley Physical Limited
Therapy Partnership Texas
Abbott & Baird Physical
Therapy Associates, Limited
Limited Partnership Partnership Texas
Southern Orthopaedic &
Sports Physical Therapy, Limited
Limited Partnership Partnership Texas
Peachtree Bone and Joint
Physiotherapy, Limited
Partnership, dba, Maxx Limited
Physical Therapy Partnership Texas
Norman Physical Therapy, Limited
Limited Partnership Partnership Texas
Kennesaw Physical Therapy
& Sports Medicine, Limited
Limited Partnership Partnership Texas
Rice Rehabilitation
Associates, Limited Limited
Partnership Partnership Texas
Physical Therapy and
Spine Institute, Limited
Limited Partnership Partnership Texas
C.A.R.E. Physical
Therapy Center, Limited
Limited Partnership Partnership Texas
Ankeny Physical &
Sports Therapy, Limited
Limited Partnership Partnership Texas
72<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Twin Cities Physical
Therapy, Limited Limited
Partnership Partnership Texas
Brem Physical Therapy
Associates, Limited Limited
Partnership Partnership Texas
Penn's Wood Physical
Therapy, Limited Limited
Partnership Partnership Texas
Regional Physical
Therapy Center, Limited Limited
Partnership Partnership Texas
Wyman Physical Therapy, Limited
Limited Partnership Partnership Texas
Adams County Physical
Therapy, Limited Limited
Partnership Partnership Texas
Coppell Spine & Sports
Rehab, Limited Limited
Partnership Partnership Texas
Flint Physical Therapy, Limited
Limited Partnership Partnership Texas
Pelican State Physical
Therapy, Limited Limited
Partnership Partnership Texas
Searle Spine & Physical
Therapy, Limited Limited
Partnership Partnership Texas
Therapy Partners, Limited
Partnership, (formerly
North Hills Physical
Therapy, Limited Limited
Partnership) Partnership Texas
73<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Capital Hand and Physical
Therapy, Limited Limited
Partnership Partnership Texas
Maines & Dean Physical
Therapy, Limited Limited
Partnership Partnership Texas
Edge Physical Therapy,
Limited Partnership,
dba River's Edge Limited
Physical Therapy Partnership Texas
Laurel Physical Therapy, Limited
Limited Partnership Partnership Texas
Riverwest Physical Therapy, Limited
Limited Partnership Partnership Texas
Scott Black Physical
Therapy, Limited Limited
Partnership Partnership Texas
Sport & Spine Clinic, Limited
L.P. Partnership Texas
Physical Therapy & Rehab Limited
Ctr., L.P. Partnership Texas
74<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-63446, 33-63444, 33-91004, 33-93040)
of our report dated March 14, 1997 with respect to the consolidated
financial statements of U.S. Physical Therapy, Inc. and subsidiaries
included in this Annual Report on Form 10-KSB for the year ended
December 31, 1996.
Houston, Texas
March 24, 1997 ERNST & YOUNG LLP
75
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