UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from to
Commission file number 1-11151
U.S. PHYSICAL THERAPY, INC.
(Name of registrant as specified 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
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 X No
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 3,616,509
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
three months and nine months ended
September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 9
<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1998 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,328 $ 5,556
Patient accounts receivable, less
allowance for doubtful accounts
of $1,640 and $1,595,
respectively 8,352 7,707
Accounts receivable-other 263 187
Other current assets 454 504
Total current assets 15,397 13,954
Fixed assets:
Furniture and equipment 8,966 8,111
Leasehold improvements 4,238 3,869
13,204 11,980
Less accumulated depreciation 7,171 5,951
6,033 6,029
Noncompete agreements, net of
amortization of $350, and $501,
respectively 85 124
Goodwill, net of amortization of
$150, and $138, respectively 1,060 1,042
Other assets 1,037 1,399
$ 23,612 $ 22,548
See notes to consolidated financial statements.
3 <PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1998 1997
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 344 $ 250
Accrued expenses 1,195 1,333
Estimated third-party payor
(Medicare) settlements 796 1,095
Notes payable 58 72
Total current liabilities 2,393 2,750
Notes payable - long-term portion 133 189
Convertible subordinated notes
payable 8,050 8,050
Minority interests in subsidiary
limited partnerships 1,779 1,557
Commitments - -
Shareholders' equity:
Preferred stock, $.01 par value,
500,000 shares authorized, -0-
shares outstanding - -
Common stock, $.01 par value,
10,000,000 shares authorized,
3,616,509 and 3,615,634 shares
outstanding at September 30, 1998
and December 31, 1997, respectively 36 36
Additional paid-in capital 11,696 11,689
Accumulated deficit (428) (1,676)
Treasury stock at cost, 4,900 shares
held at September 30, 1998
and December 31, 1997,
respectively (47) (47)
Total shareholders' equity 11,257 10,002
$ 23,612 $ 22,548
See notes to consolidated financial statements.
4<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended
September 30,
1998 1997
(unaudited)
Net patient revenues $ 11,040 $ 10,017
Other revenues 157 139
Net revenues 11,197 10,156
Clinic operating costs:
Salaries and related costs 5,025 4,529
Rent, clinic supplies and other 2,938 2,781
Provision for doubtful accounts 319 297
8,282 7,607
Corporate office costs:
General and administrative 1,100 891
Recruitment and development 387 273
1,487 1,164
Loss on closure of facility 230 -
Operating income before non-
operating expenses 1,198 1,385
Interest expense 185 188
Minority interests in subsidiary
limited partnerships 489 419
Income before income taxes 524 778
Provision for income taxes 267 1
Net income $ 257 $ 777
Basic earnings per common share $ .07 $ .22
Earnings per common share-assuming
dilution $ .07 $ .21
See notes to consolidated financial statements.
5<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Nine Months Ended
September 30,
1998 1997
(unaudited)
Net patient revenues $ 32,181 $ 28,194
Other revenues 446 340
Net revenues 32,627 28,534
Clinic operating costs:
Salaries and related costs 14,998 12,982
Rent, clinic supplies and other 8,289 7,726
Provision for doubtful accounts 861 819
24,148 21,527
Corporate office costs:
General and administrative 3,135 2,687
Recruitment and development 999 814
4,134 3,501
Loss on closure of facility 230 -
Operating income before non-
operating expenses 4,115 3,506
Interest expense 550 555
Minority interests in subsidiary
limited partnerships 1,400 1,106
Income before income taxes 2,165 1,845
Provision for income taxes 917 52
Net income $ 1,248 $ 1,793
Basic earnings per common share $ .35 $ .50
Earnings per common share-assuming
dilution $ .33 $ .48
See notes to consolidated financial statements.
6<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
1998 1997
(unaudited)
Operating activities
Net income $ 1,248 $ 1,793
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,568 1,399
Minority interests in earnings
of subsidiary limited
partnerships 1,400 1,106
Provision for bad debts 861 819
Gain on sale of fixed assets - (3)
Loss on disposal of certain assets
in closure of facility 144 -
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (1,506) (1,864)
Increase in accounts receivable-
other (76) (116)
Decrease (increase) in other assets 383 (400)
Increase (decrease) in accounts
payable and accrued expenses (64) 37
Decrease in estimated third-
party payor (Medicare)
settlements (299) (336)
Net cash provided by operating
activities 3,659 2,435
See notes to consolidated financial statements.
7<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
1998 1997
(unaudited)
Investing activities
Purchase of fixed assets (1,427) (1,383)
Purchase of intangibles (245) (275)
Proceeds on sale of fixed assets 10 67
Net cash used in investing
activities (1,662) (1,591)
Financing activities
Proceeds from notes payable - 40
Payment of notes payable (43) (61)
Acquisition of treasury stock - (47)
Proceeds from investment of minority
investors in subsidiary limited
partnerships 4 1
Proceeds from exercise of stock options 7 -
Distributions to minority investors
in subsidiary limited partnerships (1,193) (731)
Net cash used in financing
activities (1,225) (798)
Net increase in cash
and cash equivalents 772 46
Cash and cash equivalents -
beginning of period 5,556 4,912
Cash and cash equivalents -
end of period $ 6,328 $ 4,958
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Income taxes $ 791 $ 565
Interest $ 492 $ 499
See notes to consolidated financial statements.
8<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. Basis of Presentation and Significant Accounting Policies
The consolidated financial statements include the accounts of U.S.
Physical Therapy, Inc. and its subsidiaries (the "Company"). All
significant intercompany transactions and balances have been
eliminated. As of September 30, 1998, the Company, through its
wholly-owned subsidiaries, owns a 1% general partnership interest
and limited partnership interests ranging from 59% to 99% in the
clinics it operates (89% of the clinics were at 64% as of September
30, 1998). 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 0% to 40%. The minority
interest in the equity and earnings of the subsidiary clinic
limited partnerships are presented separately in the consolidated
financial statements.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with
the instructions for Form 10-Q. Accordingly, the statements do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial
statements contain all necessary adjustments (consisting only of
normal recurring adjustments) to present fairly the Company's
financial position, results of operations and cash flows for the
interim periods presented. For further information regarding the
Company's accounting policies, refer to the audited financial
statements included in the Company's Form 10-KSB for the year ended
December 31, 1997.
Operating results for the three and nine months ended September 30,
1998 are not necessarily indicative of the results expected for the
entire year.
9<PAGE>
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 1997 have been
reclassified to conform with the presentation used for 1998.
2. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Numerator:
Net income $ 257,000 $ 777,000 $1,248,000 $1,793,000
Numerator for basic earnings
per share and diluted
earnings per share $ 257,000 $ 777,000 $1,248,000 $1,793,000
Denominator:
Denominator for basic earnings
per share--weighted-average
shares 3,611,000 3,607,000 3,611,000 3,600,000
Effect of dilutive securities:
Stock Options 158,000 78,000 154,000 85,000
Warrants - - - 13,000
Dilutive potential common
shares 158,000 78,000 154,000 98,000
Denominator for diluted
earnings per share--adjusted
weighted-average shares and
assumed conversions 3,769,000 3,685,000 3,765,000 3,698,000
Basic earnings per share $ 0.07 $ 0.22 $ 0.35 $ 0.50
Diluted earnings per share $ 0.07 $ 0.21 $ 0.33 $ 0.48
During the three and nine months ended September 30, 1998 and 1997,
the Company had outstanding the following notes payable: 8%
Convertible Subordinated Notes due June 30, 2003, for an aggregate
principal amount of $3,050,000; 8% Convertible Subordinated Notes,
Series B, due June 30, 2004, for an aggregate principal amount of
$2,000,000; and 8% Convertible Subordinated Notes, Series C, due
June 30, 2004, for an aggregate principal amount of $3,000,000
10
(collectively "the Notes"). The Notes were not included in the
computation of diluted earnings per share because the effect on the
computation was anti-dilutive.
3. Income Taxes
Significant components of the provision for income taxes were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Current:
Federal $ 14,000 $ 195,000 $ 446,000 $ 429,000
State 54,000 37,000 173,000 159,000
Total current 68,000 232,000 619,000 588,000
Deferred:
Federal 199,000 (231,000) 298,000 (536,000)
State - - - -
Total deferred 199,000 (231,000) 298,000 (536,000)
Total income tax
provision $ 267,000 $ 1,000 $ 917,000 $ 52,000
During 1997, the Company utilized its unused net operating loss
carryforwards to offset its federal tax liability. Accordingly, net
income for 1997 was not subject to federal income tax. During the
three and nine months ended September 30, 1998, the Company accrued
income taxes at tax rates of 51.0% and 42.4%, respectively, which
exceeded the U.S. Tax Statutory rate of 34.0% due primarily to state
income taxes and the write-off of certain intangibles not deductible
for federal income tax purposes in connection with the closure of
its clinic in Corpus Christi, Texas. See Note 4 regarding the
clinic closure in Corpus Christi, Texas.
4. Clinic Closure
In August 1998, the Company closed its clinic located in Corpus
Christi, Texas due to adverse clinic performance. During the three
months ended September 30, 1998, the Company recognized a $230,000
loss relating to this closure. Of the $230,000 loss, $18,000
represents estimated lease commitments, $111,000 is due to the
write-off of goodwill, fixed assets and a non-compete agreement and
the remainder is costs expected to be incurred in connection with
closing the facility. The $230,000 loss includes cash and non-cash
amounts of $86,000 and $144,000, respectively. As of September 30,
1998, $41,000 relating to the closure was accrued in current
liabilities for estimated expenses to be paid in the future.
11
The Corpus Christi, Texas clinic accounted for net patient revenues
for the three months ended September 30, 1998 and 1997 of $51,000
and $93,000, respectively. The clinic accounted for clinic
operating costs for the three months ended September 30, 1998 and
1997 of $196,000 and $144,000, respectively.
No future 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.
Item 2. 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 September 30, 1998, the Company operated 92 outpatient physical
and occupational therapy clinics in 26 states. The average age of
the 92 clinics in operation at September 30, 1998 was 3.2 years old.
Since inception of the Company, 94 clinics have been developed and
six clinics have been acquired by the Company. To date, the Company
has closed three facilities due to adverse clinic performance,
consolidated the operations of three of its clinics with other
existing clinics to more efficiently serve various geographic
markets and sold certain fixed assets at two of the Company's
clinics and then closed such facilities. The sale of fixed assets
and the concurrent closure of two of the Company's clinics occurred
during the three months ended March 31, 1997 ("1997 First Quarter").
No loss was recognized relating to these 1997 First Quarter
closures. These two clinics combined accounted for net patient
revenues and clinic operating costs for the nine months ended
September 30, 1997 of $(6,000) and $54,000, respectively. The
closure of one of the Company's clinics occurred during the three
months ended September 30, 1998 ("1998 Third Quarter"). See "Loss on
Closure of Facility" for additional information.
12
Results of Operations
Three Months Ended September 30, 1998 ("1998 Third Quarter")
Compared to the Three Months Ended September 30, 1997 ("1997 Third
Quarter")
Net Patient Revenues
Net patient revenues increased to $11,040,000 for the 1998 Third
Quarter from $10,017,000 for the 1997 Third Quarter, an increase of
$1,023,000, or 10 percent. Net patient revenues from the 15 clinics
developed since the 1997 Third Quarter (the "New Clinics") accounted
for 47 percent of the increase or $480,000. The remaining increase
of $543,000 in net patient revenues was from the 77 clinics opened
before October 1, 1997 (the "Old Clinics"). The increase in net
patient revenues from these clinics is due to a six percent increase
in the number of patient visits ($632,000), partially offset by a
decrease in the average net revenue per visit of one percent
($89,000) due to an increase in the percentage of managed care
patients.
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. Beginning in 1998, certain changes were imposed in
the method in which the Company is reimbursed for its services by
Medicare as defined in the Balanced Budget Act of 1997 ("BBA"). See
"Balanced Budget Act of 1997".
Other Revenues
Other revenues, consisting of interest, management fees and sublease
income, increased by $18,000, or 13 percent, to $157,000 for the
1998 Third Quarter from $139,000 for the 1997 Third Quarter. This
increase was due primarily to management fees earned in connection
13
with contracts the Company has entered into since the 1997 Third
Quarter to manage third-party physical therapy clinics, coupled with
an increase in interest income as a result of the higher average
amount of cash and cash equivalents available for investment during
the 1998 Third Quarter.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues declined
slightly to 75% for the 1998 Third Quarter from 76% for the 1997
Third Quarter.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $5,025,000 for the 1998
Third Quarter from $4,529,000 for the 1997 Third Quarter, an
increase of $496,000 or 11 percent. Approximately 63 percent of the
increase, or $312,000, was due to the New Clinics. The remaining 37
percent increase or $184,000 is due principally to increased
staffing resulting from increased patient visits and an increase in
bonuses earned by the managing therapists at the Old Clinics. Such
bonuses are based on the net revenues or operating profit generated
by the individual clinics. Salaries and related costs as a percent
of net patient revenues increased to 46 percent for the 1998 Third
Quarter from 45 percent for the 1997 Third Quarter.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $2,938,000 for the 1998
Third Quarter from $2,781,000 for the 1997 Third Quarter, an
increase of $157,000, or six percent. This increase was the result
of a $261,000 increase due to the New Clinics, which was
offset, in part, by a decrease of $104,000 for the Old Clinics.
Rent, clinic supplies and other as a percent of net patient revenues
declined to 27 percent for the 1998 Third Quarter from 28 percent
for the 1997 Third Quarter.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $319,000 for the
1998 Third Quarter from $297,000 for the 1997 Third Quarter, an
increase of seven percent, or $22,000. Approximately 45 percent of
the increase, or $10,000, was due to the New Clinics, while 55
percent, or $12,000, of the increase relates to the Old Clinics.
The provision for doubtful accounts as a percent of net patient
revenues declined slightly to 2.9 percent for the 1998 Third Quarter
compared to 3.0 percent for the 1997 Third Quarter.
14
Corporate Office Costs - General & Administrative
General and administrative costs, consisting primarily of salaries
and benefits of corporate office personnel, rent, insurance costs,
depreciation and amortization, travel and legal and professional
fees increased to $1,100,000 for the 1998 Third Quarter from
$891,000 for the 1997 Third Quarter, an increase of $209,000, or 23
percent. General and administrative costs increased primarily as a
result of salaries and benefits related to additional personnel
hired to support an increasing number of clinics. In addition, at
the beginning of the 1998 Third Quarter, the Company increased the
square footage occupied at its corporate office in Houston, Texas
and extended the lease for a five-year period ending July 2003. In
connection with these changes to the lease, rent for the 1998 Third
Quarter increased substantially. General and administrative costs
as a percent of net patient revenues increased to 10 percent for the
1998 Third Quarter from 9 percent for the 1997 Third Quarter.
Corporate Office Costs - Recruitment & Development
Recruitment and development costs primarily represent salaries and
benefits of recruitment and development personnel, rent, travel,
marketing and recruiting fees attributed directly to the Company's
activities in the development and acquisition of new 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. Recruitment and development costs
increased $114,000 or 42 percent to $387,000 for the 1998 Third
Quarter from $273,000 for the 1997 Third Quarter. The majority of
this increase relates to an increase in salaries and benefits of
recruitment and development personnel to facilitate the acceleration
of new clinic openings during 1998 from the level of 13 new clinics
opened during 1997. Recruitment and development costs as a percent
of net patient revenues was four percent for the 1998 Third Quarter
and three percent for the 1997 Third Quarter.
Loss on Closure of Facility
In August 1998, the Company closed its clinic located in Corpus
Christi, Texas due to adverse clinic performance. During the 1998
Third Quarter, the Company recognized a $230,000 loss relating to
this closure. Of the $230,000 loss, $18,000 represents estimated
lease commitments, $111,000 is due to the write-off of goodwill,
fixed assets and a non-compete agreement and the remainder is costs
expected to be incurred in connection with closing the facility.
15
The Corpus Christi, Texas clinic accounted for net patient revenues
for the three months ended September 30, 1998 and 1997 of $51,000
and $93,000, respectively. This clinic accounted for clinic
operating costs for the three months ended September 30, 1998 and
1997 of $196,000 and $144,000, respectively.
No future 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 $185,000 for the 1998 Third Quarter relates
primarily to $61,000 of interest expense on the $3,050,000 aggregate
principal amount of 8% Convertible Subordinated Notes issued by the
Company in June 1993 and $101,000 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, $19,000 of
interest expense was recorded in the 1998 Third Quarter 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.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$70,000, or 17 percent, to $489,000 for the 1998 Third Quarter from
$419,000 for the 1997 Third Quarter 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 $267,000 for the 1998
Third Quarter from $1,000 for the 1997 Third Quarter, an increase of
$266,000. During 1997, the Company utilized its unused net
operating loss carryforwards to offset any federal income tax
liability. Accordingly, income for 1997 was not subject to federal
income tax. During the 1998 Third Quarter, the Company accrued
income taxes at a tax rate of 51.0% which exceeded the U.S. Tax
Statutory rate of 34.0% due primarily to state income taxes and the
write-off of certain intangibles not deductible for federal
16
income tax purposes in connection with the closure of its clinic in
Corpus Christi, Texas. See "Loss on Closure of Facility" regarding
the clinic closure in Corpus Christi, Texas.
Net Income
The Company's income before income taxes for the 1998 Third Quarter
of $524,000 was less than the 1997 Third Quarter's income before
income taxes of $778,000 principally due to the $230,000 loss on
closure of facility, the $675,000 increase in clinic operating
costs, the $323,000 increase in corporate office costs, and the
$70,000 increase in minority interests in subsidiary limited
partnerships, offset, for the most part, by the $1,041,000 increase
in net revenues.
The Company's net income for the 1998 Third Quarter of $257,000 was
less than the 1997 Third Quarter's net income of $777,000
principally due to the factors affecting income before income taxes
and the fact that during 1997, the Company utilized its remaining
tax operating loss carryforwards to offset any federal income tax
liability.
Nine Months Ended September 30, 1998 ("1998 Nine Months") Compared
to the Nine Months Ended September 30, 1997 ("1997 Nine Months")
Net Patient Revenues
Net patient revenues increased to $32,181,000 for the 1998 Nine
Months from $28,194,000 for the 1997 Nine Months, an increase of
$3,987,000, or 14 percent. Net patient revenues from the 15 clinics
opened since September 30, 1997 (the "New Clinics") accounted for 20
percent of the increase or $807,000. The remaining increase of
$3,180,000 in net patient revenues comes from those 77 clinics
opened prior to October 1, 1997 (the "Old Clinics"). Of the
$3,180,000 increase in net patient revenues from these clinics, an
11 percent increase in the number of patient visits increased net
patient revenues by $3,009,000 and the remaining $171,000 resulted
from a small increase in the average net revenue per visit.
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
17
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. Beginning in 1998, certain changes were imposed in
the method in which the Company is reimbursed for its services by
Medicare as defined in the BBA. See "Balanced Budget Act of 1997".
Other Revenues
Other revenues, consisting of interest, management fees and sublease
income, increased by $106,000, or 31 percent, to $446,000 for the
1998 Nine Months from $340,000 for the 1997 Nine Months. 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 and increased management fees earned in
connection with contracts the Company has entered into to manage
third-party physical therapy clinics.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues declined
to 75% for the 1998 Nine Months from 76% for the 1997 Nine Months.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $14,998,000 for the 1998
Nine Months from $12,982,000 for the 1997 Nine Months, an increase
of $2,016,000, or 16 percent. Approximately 32 percent of the
increase, or $639,000, was due to the New Clinics. The remaining 68
percent increase or $1,377,000 is due principally to increased
staffing resulting from increased patient visits and an increase in
bonuses earned by the managing therapists at the Old Clinics. Such
bonuses are based on the net revenues or operating profit generated
by the individual clinics. Salaries and related costs as a percent
of net patient revenues increased slightly to 47 percent for the
1998 Nine Months from 46 percent for the 1997 Nine Months.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other costs increased to $8,289,000 for
the 1998 Nine Months from $7,726,000 for the 1997 Nine Months, an
increase of $563,000, or seven percent. Approximately 89 percent of
the increase, or $499,000, was due to the New Clinics, while 11
percent, or $64,000, of the increase was due to the Old Clinics.
Rent, clinic supplies and other costs as a percent of net patient
18
revenues declined to 26 percent for the 1998 Nine Months from 27
percent for the 1997 Nine Months.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $861,000 for the
1998 Nine Months from $819,000 for the 1997 Nine Months, an increase
of five percent or $42,000. Approximately 38 percent of the
increase, or $16,000, was due to the New Clinics, while 62 percent,
or $26,000, of the increase relates to the Old Clinics. The
provision for doubtful accounts as a percent of net patient revenues
declined to 2.7 percent for the 1998 Nine Months compared to 2.9
percent for the 1997 Nine Months.
Corporate Office Costs - General & Administrative
General and administrative costs, consisting primarily of salaries
and benefits of corporate office personnel, insurance costs, rent,
depreciation and amortization, travel and legal and professional
fees increased to $3,135,000 for the 1998 Nine Months from
$2,687,000 for the 1997 Nine Months, an increase of $448,000, or 17
percent. General and administrative costs increased primarily as a
result of salaries and benefits related to additional personnel
hired to support an increasing number of clinics and increased legal
and professional fees relating to the additional clinics. General
and administrative costs as a percent of net patient revenues was
10 percent for the 1998 Nine Months and the 1997 Nine Months.
Corporate Office Costs - Recruitment & Development
Recruitment and development costs primarily represent salaries and
benefits of recruitment and development personnel, rent, travel,
marketing and recruiting fees attributed directly to the Company's
activities in the development and acquisition of new 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. Recruitment and development costs
increased $185,000, or 23 percent, to $999,000 for the 1998 Nine
Months from $814,000 for the 1997 Nine Months. The majority of this
increase relates to an increase in salaries and related costs of
recruitment and development personnel which were added to facilitate
the acceleration of new clinic openings during 1998 from the level
of 13 new clinics opened during 1997. Recruitment and development
costs as a percent of net patient revenues was three percent for the
1998 Nine Months and the 1997 Nine Months.
19
Loss on Closure of Facility
In August 1998, the Company closed its clinic located in Corpus
Christi, Texas due to adverse clinic performance. During the 1998
Nine Months, the Company recognized a $230,000 loss relating to this
closure. Of the $230,000 loss, $18,000 represents estimated lease
commitments, $111,000 is due to the write-off of goodwill, fixed
assets and a non-compete agreement and the remainder is costs
expected to be incurred in connection with closing the facility.
The Corpus Christi, Texas clinic accounted for net patient revenues
for the nine months ended September 30, 1998 and 1997 of $223,000
and $324,000, respectively. This clinic accounted for clinic
operating costs for the nine months ended September 30, 1998 and
1997 of $543,000 and $440,000, respectively.
No future 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 $550,000 for the 1998 Nine Months relates
primarily to $182,000 of interest expense on the $3,050,000
aggregate principal amount of 8% Convertible Subordinated Notes
issued by the Company in June 1993 and $299,000 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,
$56,000 of interest expense was recorded in the 1998 Nine Months
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.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$294,000, or 27 percent, to $1,400,000 for the 1998 Nine Months from
$1,106,000 for the 1997 Nine Months due to the increase in aggregate
profitability of those clinics in which partners have achieved
positive retained earnings and are accruing partnership income.
20
Provision for Income Taxes
The provision for income taxes increased to $917,000 for the 1998
Nine Months from $52,000 for the 1997 Nine Months, an increase of
$865,000. During 1997, the Company utilized its unused net
operating loss carryforwards to offset any federal income tax
liability. Accordingly, income for 1997 was not subject to federal
income tax. During the 1998 Nine Months, the Company accrued income
taxes at a tax rate of 42.4% which exceeded the U.S. Tax Statutory
rate of 34.0% due primarily to state income taxes and the write-off
of certain intangibles not deductible for federal income tax
purposes in connection with the closure of its clinic in Corpus
Christi, Texas. See "Loss on Closure of Facility" regarding the
clinic closure in Corpus Christi, Texas.
Net Income
The Company's income before income taxes for the 1998 Nine Months of
$2,165,000 exceeded the 1997 Nine Month's income before income taxes
of $1,845,000 principally due to the $4,093,000 increase in net
revenues, which more than offset the $2,621,000 increase in clinic
operating costs, the $633,000 increase in corporate office costs,
the $294,000 increase in minority interests in subsidiary limited
partnerships and the loss on closure of facility of $230,000.
The Company's net income for the 1998 Nine Months of $1,248,000 was
less than the 1997 Nine Month's net income of $1,793,000 principally
due to the factors affecting income before income taxes and the fact
that during 1997, the Company utilized its remaining tax operating
loss carryforwards to offset any federal income tax liability.
Liquidity and Capital Resources
At September 30, 1998, the Company had $6,328,000 in cash and cash
equivalents, which is available to fund the working capital needs of
its operating subsidiaries, future clinic developments and
acquisitions and the Company's repurchase of shares of its common
stock. Included in cash and cash equivalents at September 30,
1998 is $4,700,000 of short-term United States government agency
securities and $615,000 of short-term United States government money
market funds. The market value of the short-term United States
government agency securities and the United States government money
market funds approximated the carrying value of such securities as
of September 30, 1998.
The increase in cash of $772,000 from December 31, 1997 to September
30, 1998 is due to cash provided by operating activities of
$3,659,000, offset, in part, by the Company's use of cash to fund
21
capital expenditures, primarily for physical therapy equipment,
leasehold improvements and intangibles in the amount of $1,662,000,
distributions to minority partners in subsidiary limited
partnerships of $1,193,000 and payment on notes payable of $43,000.
The Company's current ratio increased to 6.43 to 1.00 at September
30, 1998 from 5.07 to 1.00 at December 31, 1997. The increase in
the current ratio is due primarily to a decrease in estimated third-
party payor (Medicare) settlements, offset, in part, by an increase
in patients accounts receivable resulting from increased patient
revenues. At September 30, 1998, the Company had a debt-to-equity
ratio of 0.73 to 1.00 compared to 0.83 to 1.00 at December 31, 1997.
The improvement in the debt-to-equity ratio from December 31, 1997
to September 30, 1998 relates primarily to the increase in equity as
a result of the net income of $1,248,000 for the 1998 Nine Months.
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 C is $61,000,
$40,000 and $60,000, respectively, through June 30, 2003, June 30,
2004 and June 30, 2004, respectively.
In January 1997, the Company's Board of Directors authorized it to
repurchase up to 200,000 shares of its common stock. The timing and
the actual number of shares purchased will depend on market
conditions. The repurchased shares, which will be financed with
available cash, will be held as treasury shares and be available for
general corporate purposes. As of September 30, 1998, 4,900 shares
have been repurchased at a cost of $47,000.
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.
The Balanced Budget Act of 1997
Beginning in 1998, Medicare imposed new interim constraints on
reimbursement for outpatient physical and/or occupational therapy
services and has published a fee schedule pursuant to which the
Company's clinics will be paid for care provided to Medicare
patients in 1999. In 1998, 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 "adjusted reasonable costs" as allowed under Medicare
regulations and defined in the BBA or the provider's charges, in
each case less 20% of the amount of the charge imposed for the
services. For rehabilitation agencies and clinics, the "adjusted
22
reasonable cost" of a service is the service's reasonable cost, as
determined under Medicare regulations, less 10%. The 20% deduction
represents the co-insurance amount that an individual beneficiary,
or their "Medigap" insurance carrier if such coverage exists, is
required to pay in addition to the beneficiary's annual deduction.
The impact of the BBA on the Company's operations has been to reduce
the estimated reimbursement from Medicare on services rendered to
Medicare patients during the 1998 Nine Months by approximately
$240,000.
The BBA also provides that after 1998, outpatient rehabilitation
services will be paid based on a fee schedule which has been
published by the Secretary of HHS. Beginning in 1999, the total
amount that may be paid by Medicare in any one year for outpatient
physical or occupational therapy to any one patient will be limited
to $1,500, except for services provided in hospitals. The effect
of this payment change may be to encourage patients with extensive
rehabilitation needs to seek treatment in a hospital setting. Based
on preliminary analysis of the Company's clinics, management
presently believes that the changes imposed by the BBA will not have
a significant impact on its business in 1999.
Recently Promulgated Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which required the Company to
change the method presently used to compute earnings per share and
to restate all prior period amounts. Statement 128 replaced primary
and fully diluted earnings per share with basic and diluted earnings
per share. Under the new requirements for calculating earnings per
share, the dilutive effect of stock options is excluded from basic
earnings per share but included in the computation of diluted
earnings per share. The new standard did not have a material impact
on the basic or fully diluted earnings per share computations for
1997.
Factors Affecting Future Results
Clinic Development
As of September 30, 1998, the Company has opened 92 clinics, six of
which occurred in the 1998 Third Quarter. The Company expects to
accelerate new clinic openings in the fourth quarter of 1998 with
operating clinics reaching 99 by year-end from the 92 presently
operating, subject to, among other things, the Company's ability to
identify suitable geographic locations and physical therapy clinic
23
partners. Accordingly, recruitment and development expenses are
expected to increase since new clinics traditionally involve a
significant amount of start-up costs, such as travel and recruitment
fees. In addition, the Company's operating results will be impacted
by initial operating losses from the new clinics. 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.
Based on the historical performance of the Company's new clinics,
new clinic openings in the fourth quarter of 1998 should favorably
impact the Company's results of operations for 1999 and beyond.
Growth in Physical Therapy Management
In July 1998, the Company entered into an agreement with an
orthopedic group to manage a physical therapy facility in New
England, bringing third-party facilities under management to five.
Management believes that with physician groups facing declining
incomes, the opportunity for enhancing the physicians' income
through the ownership of in-house physical therapy facilities is
becoming increasingly attractive. Since 1992, the Company has
offered management and administrative services to its network of
clinics owned with physical therapist partners. The Company is now
offering that expertise to physician groups nationwide. The Company
believes it has adequate internally generated funds to support its
planned growth in this area.
The Balanced Budget Act of 1997
The BBA provides that beginning in 1999, outpatient rehabilitation
services will be paid based on a fee schedule which has been
published by the Secretary of HHS. The BBA also provides that
beginning in 1999, the total amount that may be paid by Medicare in
any one year for outpatient physical or occupational therapy to any
one patient will be limited to $1,500, except for services provided
in hospitals. The effect of this payment change may be to encourage
patients with extensive rehabilitation needs to seek treatment in a
hospital setting. Based on preliminary analysis of the Company's
clinics, management presently believes that the changes imposed by
the BBA will not have a significant impact on its business in 1999.
See discussion above entitled "The Balanced Budget Act of 1997".
24
Year 2000
The Year 2000 problem is the result of two potential malfunctions
that could have an impact on the Company's systems and equipment.
The first problem arises due to computers being programmed to use
two rather than four digits to define the applicable year. The
second problem arises in embedded chips, where microchips and micro
controllers have been designed using two rather than four digits to
define the applicable year. Certain of the Company's computer
programs, building infrastructure components (e.g. alarm systems and
HVAC systems) and medical devices that are date sensitive, may
recognize a date using "00" as the year 1900 rather than the year
2000. If uncorrected, the problem could result in computer system
and program failures or equipment and medical device malfunctions
that could result in a disruption of business operations or that
could affect patient treatment.
With respect to the information technology ("IT") portions of the
Company's Year 2000 project, which address the assessment,
remediation, testing and implementation of software, the Company,
which uses only third-party software applications, has identified
third-party software applications and has begun remediation for all
these purchased software applications and is testing the software
applications where remediation has been completed. The Company
anticipates completing, in all material respects, remediation,
testing and implementation for third-party software by June 1999.
The Company's efforts are currently on schedule.
With respect to the IT infrastructure portion of the Company's Year
2000 project, the Company has undertaken a program to inventory,
assess and correct, replace or otherwise address impacted vendor
products (hardware and telecommunication equipment). The Company
has implemented a program to contact vendors, analyze information
provided, and to remediate, replace or otherwise address IT products
that pose a material Year 2000 impact. The Company anticipates
completion, in all material respects, of the IT infrastructure
portion of its program by June 1999. The IT infrastructure portion
of the Company's Year 2000 project is currently on schedule.
The Company presently believes that with modifications to existing
software or the installation of upgraded software under the IT
infrastructure portion, the Year 2000 will not pose material
operational problems for its computer systems. However, if such
modifications or upgrades are not accomplished in a timely manner,
Year 2000 related failures may present a material adverse impact on
the operations of the Company. Contingency planning will be
established and implemented in an effort to minimize any impact from
Year 2000 related failures.
25
With respect to the non-IT infrastructure portion of the Company's
Year 2000 project, the Company believes that it will not be
significantly affected by the Year 2000 since most of the Company's
physical and occupational equipment is manual in operation, rather
than being computerized. The Company will contact vendors as needed
to remediate, replace or otherwise address devices or equipment that
pose a Year 2000 impact.
The Company relies on third-party payors and intermediaries,
including government payors and intermediaries, for accurate and
timely reimbursement of claims, often through the use of electronic
data interfaces. Failure of these third-party systems could have a
material adverse affect on the Company's results of operations.
The Company is utilizing both internal and external resources to
manage and implement its Year 2000 program. With the assistance of
such resources, the Company has recently undertaken the development
of contingency plans in the event that its Year 2000 efforts, or the
failures of third parties upon which the Company relies, are not
accurately or timely completed. This development phase will
continue through the end of 1998 with the implementation of
contingency plans occurring in 1999.
The Year 2000 project is currently estimated to have a minimum total
cost of $114,000, of which the Company has incurred $34,000 through
the 1998 Third Quarter. The Company recognizes that the total cost
may increase as it continues its remediation and testing of IT
systems. The majority of the costs related to the Year 2000 project
will be capitalized and expensed over a useful life of three years
and will be funded through operating cash flows.
The costs of the project and estimated completion dates for the Year
2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-
party modification plans and other factors. However, there can be
no guarantees that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in
this area.
26
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held a special meeting of shareholders
("Special Meeting") on September 9, 1998. At the Special Meeting,
the Company's stockholders approved (i) a 350,000 increase in the
number of shares of Company common stock reserved for issuance under
the 1992 Stock Option Plan and (ii) an increase in the number of
stock options that may be granted to any one eligible individual in
any one calendar year from 50,000 to 100,000.
(b) Not applicable.
(c) There were 1,880,132 votes cast FOR the increase in the
number of shares of Common Stock reserved for issuance under the
Company's 1992 Stock Option Plan and the increase in the number of
stock options that may be granted to any one eligible individual in
any one calendar year, 319,399 votes were cast AGAINST such proposal
and there were -0- abstentions.
There were a total of 2,199,531 shares represented by
person or by proxy at the Special Meeting.
(d) Not applicable.
27
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits
27. Financial Data Schedule
(b) Reports of Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 1998.
10. 1992 Stock Option Plan, as amended (filed as an exhibit to the
Company's Registration Statement on Form S-8 (333-64159) and
incorporated herein by reference.
28<PAGE>
SIGNATURES
In accordance with the requirements 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.
Date: November 16, 1998 By: /s/ J. MICHAEL MULLIN
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
officer)
29
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