UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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:
Not Applicable
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.
<PAGE>
State issuer's revenues for its most recent fiscal year:
$ 38,807,000
State the aggregate market value of the voting stock held by
non-affiliates of the registrant:
$ 25,846,000
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 3,610,734
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-KSB
Portions of Definitive Proxy PART III
Statement for the 1997 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, 1997,
the Company was operating 80 clinics: eighteen in Texas, fourteen
in Michigan, six in Florida and Georgia, respectively, four in
Mississippi and Pennsylvania, respectively, three in Louisiana and
Oklahoma, respectively, two in Illinois, Maine, Missouri, Virginia
and Wisconsin, respectively, and one in Connecticut, Idaho, Iowa,
Minnesota, Montana, New Mexico, New Jersey, North Carolina, Oregon,
South Carolina, Tennessee and Vermont, respectively. 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 the first
quarter of 1997, 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 13 clinics were opened in
1997. Management presently anticipates to accelerate the pace of
new clinic openings in 1998.
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
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.
2<PAGE>
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 were
initially exercisable at a price of $8.125 per share for a period
of four years, commencing May 28, 1993. During 1997, 96,000 of the
warrants were exercised and the remaining 24,000 warrants expired.
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
3<PAGE>
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/or 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, 1997, the Company, through its wholly-owned
subsidiaries, owned a 1% general partnership interest and limited
partnership interest ranging from 59% to 99% in the clinics it
operates (92.5% of the clinics were at 64%). 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% (7.5% of the clinics were at 35%).
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.
4<PAGE>
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.
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.
5<PAGE>
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 continues 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.
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.
6<PAGE>
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
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
7<PAGE>
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.
As of December 31, 1997, 69 of the Company's clinics have been
certified as Medicare providers and six of the remainder are in the
process of becoming certified. Management anticipates that, in the
future, newly developed clinics will generally elect to become
certified as Medicare providers. No assurance can be given that the
newly developed clinics will become certified as Medicare
providers. Prior to 1998, Medicare reimbursement for outpatient
physical and/or occupational therapy furnished by a Medicare-
certified rehabilitation agency or clinic was 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, were required to pay a deductible and co-payment
amount, so that governmental payments to the Company did not exceed
80% of the reasonable cost of such services. Beginning in 1998,
Medicare will impose new constraints on reimbursement for
outpatient physical and/or occupational therapy services. In 1998,
Medicare reimbursement for outpatient physical and/or occupational
8<PAGE>
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 Balanced Budget Act of 1997 ("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 reasonable cost" of a service is the service's reasonable
cost, as determined under Medicare regulations, less 10%. The 10%
reduction will not apply to services provided by hospitals. 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 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. Furthermore, the
BBA also provides that after 1998, outpatient rehabilitation
services will be paid based on a fee schedule, the amounts for
which will be determined 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 these payment changes may be to encourage
patients with extensive rehabilitation needs to seek treatment in
a hospital setting. Revenues from the Medicare program for the
year ended December 31, 1997 accounted for approximately 13% of
the Company's net patient revenues. The Company does not
anticipate that the 10% reduction in the "adjusted reasonable cost"
beginning in 1998 will have a material impact on the Company's
profitability. The Company will not be able to determine the
impact the changes imposed by the BBA will have on its business for
1999 until the Secretary of HHS publishes its fee schedule.
Medicare regulations require that a physician certify the need for
physical and/or occupational therapy services for each patient and
that these services 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.
9<PAGE>
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
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.
10<PAGE>
As of December 31, 1997, 69 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
most 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
remuneration to induce or in return for making a referral for, or
ordering or recommending (or arranging for ordering or
recommending) a service covered under such health care programs.
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 federal
healthcare programs, and other federal procurement and
nonprocurement programs, 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 federal health care funds 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
11<PAGE>
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
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 became 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.
12<PAGE>
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.
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.
13<PAGE>
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.
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, 1997, the Company employed 650 total employees of
which 419 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.
14<PAGE>
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.
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 two clinics located in Brownwood,
Texas and Mineral Wells, Texas, respectively, 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 currently occupy
approximately 13,190 square feet of space (including allocations
for common areas). The Company has executed a lease for an
additional 5,536 square feet of space that it will occupy during
the second quarter of 1998 for a total of 18,726 square feet. In
addition, the Company has exercised its option under the original
lease to extend the lease for a five-year period ending July 2003.
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 1997.
15<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Price Quotations
On April 28, 1997, the Company's common stock began trading on
the Nasdaq Stock Market, Inc. ("Nasdaq") National Market under the
symbol "USPH". Prior thereto, the Company's common stock traded on
The Nasdaq Small Cap Market tier of the Nasdaq Stock Market under
the symbol "USPH". 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.
1997 1996
HIGH LOW HIGH LOW
QUARTER
First $10 3/4 $ 9 1/4 $11 3/4 $11 1/8
Second 9 3/4 9 11 1/4 9 1/4
Third 9 5/8 8 7/8 9 1/4 8 3/4
Fourth 12 9 1/2 9 7/8 8 3/8
Record Holders
As of March 18, 1998, there were 62 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/or occupational
therapy clinics which provide post-operative care and treatment for
a variety of orthopedic-related disorders and sports-related
injuries. At December 31, 1997, the Company operated 80 outpatient
physical and/or occupational therapy clinics in 25 states. The
average age of the 80 clinics in operation at December 31, 1997 is
3.0 years old. Since inception of the Company, 81 clinics have
been developed and six clinics have been acquired by the Company.
To date, the Company has closed two 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 the two clinics occurred
during the three months ended March 31, 1997 ("1997 First Quarter").
No loss was recognized relating to these 1997 First Quarter
closures. The two clinics combined accounted for net patient
revenues and clinic operating costs for the year ended December 31,
1997 of $(6,000) and $57,000, respectively, and for the year ended
December 31, 1996 of $345,000 and $506,000, respectively.
Net Patient Revenues
Net patient revenues increased to $38,342,000 for 1997 from
$32,029,000 for 1996, an increase of $6,313,000, or 20%. Net
patient revenues from the 13 clinics developed since 1996 (the "New
Clinics") accounted for 28% of the increase or $1,743,000. The
remaining increase of $4,570,000 in net patient revenues comes from
those 67 clinics opened more than one year as of December 31, 1997
(the "Pre-1997 Clinics"). The majority of the $4,570,000 increase
in net patient revenues from these clinics resulted from a 14%
increase in the number of patient visits, while the rate charged
per visit remained stable.
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
17<PAGE>
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 Factors Affecting Future Results section of
Management's Discussion and Analysis or Plan of Operation.
Other Revenues
Other revenues, consisting of interest, management fees, sublease
and real estate commission income, increased by $287,000, or 161%,
to $465,000 for 1997 from $178,000 for 1996. This increase was due
primarily to management fees earned in connection with a contract
the Company entered into during the 1997 First Quarter to manage a
third party physical therapy clinic, an increase in interest income
as a result of the higher average amount of cash and cash
equivalents available for investment during 1997 compared to 1996
and an increase in real estate commission income.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
declined slightly to 76% for 1997 compared to 77% for 1996.
Clinic Operating Costs - Salaries and Related Costs
Clinic operating costs - salaries and related costs increased to
$17,624,000 for 1997 from $14,743,000 for 1996, an increase of
$2,881,000 or 20%. Approximately 31% of the increase, or $887,000,
was due to the New Clinics. The remaining 69% increase or
$1,994,000 is due principally to increased staffing to meet the
increase in patient visits for the clinics opened prior to 1997,
coupled with an increase in bonuses earned by the managing
therapists at the clinics opened prior to 1997. Such bonuses are
based on the net revenues or operating profit generated by the
individual clinics. Clinic operating costs - salaries and related
costs as a percent of net patient revenues remained stable at 46%
for 1997 compared to 1996.
18
Clinic Operating Costs - Rent, Clinic Supplies and Other
Clinic operating costs - rent, clinic supplies and other increased
to $10,562,000 for 1997 from $9,144,000 for 1996, an increase of
$1,418,000, or 16%. Approximately 55% of the increase, or
$786,000, was due to the New Clinics, while 45%, or $632,000, of
the increase was due to the clinics opened prior to 1997. Clinic
operating costs - rent, clinic supplies and other as a percent of
net patient revenues has declined slightly from 29% for 1996 to 28%
for 1997.
Clinic Operating Costs - Provision for Doubtful Accounts
Clinic operating costs - provision for doubtful accounts increased
to $1,050,000 for 1997 from $929,000 for 1996, an increase of 13%
or $121,000. Approximately 32% of the increase, or $39,000, was
due to the New Clinics, while 68%, or $82,000, of the increase
relates to the clinics opened prior to 1997. The provision as a
percent of net patient revenues remained stable at 3% for 1997 and
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,
legal, application fees and professional fees increased to
$3,666,000 for 1997 from $3,097,000 for 1996, an increase of
$569,000, or 18%. Corporate office costs - general and
administrative increased primarily as a result of additional
personnel hired in 1997 to oversee the operations of an increasing
number of clinics in operation and to establish a corporate
compliance program. Coupled with this increase was an increase in
legal expenses associated with opening an increased number of
clinics in 1997. Corporate office costs - general and
administrative, as a percent of net patient revenues, remained
stable at 10% for 1997 and 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.
19<PAGE>
Corporate office costs - recruitment and development increased
$321,000 or 41% to $1,105,000 in 1997 from $784,000 in 1996. The
majority of this increase relates to an increase in salaries and
related costs of recruitment and development personnel associated
with opening an increased number of clinics in 1997 and personnel
added in response to management's intention to accelerate the pace
of new clinic openings in future years. Coupled with the increase
in salaries and related costs is an increase in travel expenses and
recruiting fees which also correlate with the increasing number of
clinics in operation at December 31, 1997, and an increase in rent
due to an expansion of office space needed to support additional
personnel. In addition, in conjunction with the accelerated clinic
opening schedule, management has implemented an aggressive
marketing approach resulting in increased marketing costs during
1997. Corporate office costs - recruitment and development, as a
percent of net patient revenues, increased slightly to 3% for 1997
from 2% for 1996.
Interest Expense
Interest expense of $741,000 for 1997 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 1997 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 1996 in connection with the Contingent
Interest Enhancement feature.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$571,000, or 57%, to $1,578,000 in 1997 from $1,007,000 in 1996 due
to the increase in aggregate profitability of those clinics in
which partners have achieved positive retained earnings and are
accruing partnership income.
20<PAGE>
Provision for Income Taxes
The provision for income taxes decreased to $55,000 for 1997 compared to
$117,000 for 1996, a decrease of $62,000 or 53%. The decrease in federal
income taxes to $(203,000) in 1997 from $74,000 in 1996 is due to the
Company's recognition during 1997 of its net deferred federal tax asset of
$833,000, offset, in part, by an increase in current federal taxes of
$556,000. State income taxes increased to $258,000 in 1997 from $43,000 in
1996. The increase in current federal and state income taxes corresponds to
the increase in profitability of the clinics.
Net Income
The Company's net income for 1997 of $2,426,000 exceeded 1996 net
income of $1,641,000 principally due to the $6,600,000 increase in
net revenues, which more than offset the $4,420,000 increase in
clinic operating costs, the $890,000 increase in corporate office
costs and the $571,000 increase in minority interests in subsidiary
limited partnerships. In addition, during 1997, the Company recognized its
net deferred federal tax asset of $833,000 which was offset by current
federal tax expense of $630,000 and current state tax expense of $258,000.
Liquidity and Capital Resources
At December 31, 1997, the Company had $5,556,000 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 December 31,
1997 is $3,800,000 of short-term United States government agency
securities and $875,000 of short-term United States government
money market funds. The market value of the United States
government agency securities and the United States government money
market funds approximated the carrying value of such securities as
of December 31, 1997.
The increase in cash of $644,000 from December 31, 1996 to December
31, 1997 is due primarily to cash provided by operating activities
of $3,792,000, coupled with proceeds from notes payable of $40,000,
proceeds from the sale of fixed assets of $67,000 and proceeds from
the exercise of stock options of $28,000, 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 $2,120,000, distributions to minority partners in
subsidiary limited partnerships of $1,044,000, for payment on notes
payable of $73,000 and to acquire treasury stock of $47,000.
21<PAGE>
The Company's current ratio increased to 5.07 to 1.00 at December
31, 1997 compared to 4.56 to 1.00 at December 31, 1996. The
increase in the current ratio is due primarily to an increase in
net patient revenues, which, in turn, have caused an increase in
patient accounts receivable. In addition, estimated third-party
payor (Medicare) settlements decreased as a result of Medicare's
reducing the Company's reimbursement rates in mid-1997. In May of
each year when the Company files its cost reports with Medicare for
the previous year, Medicare adjusts the Company's reimbursement
rates so that the percent of charges paid by Medicare during the
remainder of the year will more closely reflect the actual cost to
charges ratio realized by the Company. After a clinic has been
Medicare certified for several years, the actual cost to charge
ratio generally approximates the reimbursement rates paid by
Medicare. At December 31, 1997, the Company had a debt-to-equity
ratio of 0.83 to 1.00 compared to 1.10 to 1.00 at December 31,
1996. The improvement in the debt-to-equity ratio from December
31, 1996 to December 31, 1997 relates primarily to the increase in
equity as a result of the net income of $2,426,000 for 1997.
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 the
repurchase of up to 200,000 shares of Company common stock. The
timing of which 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
will thereafter be available for general corporate purposes. As of
December 31, 1997, 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 through at least 1998.
22<PAGE>
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 and 1996.
Factors Affecting Future Results
Clinic Development
During 1998 the Company intends to further accelerate the pace of
new clinic openings from the 13 clinics opened during 1997.
Accordingly, corporate office-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.
The Balanced Budget Act of 1997
Beginning in 1998, Medicare will impose new constraints on
reimbursement for outpatient physical and/or occupational therapy
services. 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 Balanced Budget Act of 1997 ("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 reasonable cost" of a service is the
service's reasonable cost, as determined under Medicare
23<PAGE>
regulations, less 10%. The 10% reduction will not apply to
services provided by hospitals. 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.
Furthermore, the BBA also provides that after 1998, outpatient
rehabilitation services will be paid based on a fee schedule, the
amounts for which will be determined 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 these payment changes may be
to encourage patients with extensive rehabilitation needs to seek
treatment in a hospital setting. Revenues from the Medicare
program for the year ended December 31, 1997 accounted for
approximately 13% of the Company's net patient revenues. The
Company does not anticipate that the 10% reduction in the "adjusted
reasonable cost" beginning in 1998 will have a material impact on
the Company's profitability. The Company will not be able to
determine the impact the changes imposed by the BBA will have on
its business for 1999 until the Secretary of HHS publishes its fee
schedule.
Year 2000
Some of the Company's older computer programs were written using
two digits rather than four to define the applicable year. As a
result, those computer programs have time-sensitive software that
recognize a date using "00" as the year 1900 rather than the year
2000. The Company has completed an assessment and will have to
modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year
2000 and thereafter. The Company does not anticipate that the cost
of such modifications or replacements will be material to its
operations. The Company believes that with modifications to
existing software and conversions to new software, the Year 2000
issue will not pose significant operational problems for its
computer systems.
Income Taxes
During 1997, the Company utilized all of its remaining unused
operating loss carryforwards. Accordingly, during 1998, the
Company anticipates a significant increase in federal income tax
expense.
24<PAGE>
Item 7. Financial Statements.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 26
Audited Financial Statements
Consolidated Balance Sheets as of
December 31, 1997 and 1996 27
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996 29
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1997 and 1996 30
Consolidated Statements of Cash Flows for the years
ended December 31, 1997 and 1996 31
Notes to Consolidated Financial Statements 33
25<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, 1997 and 1996, 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, 1997 and 1996, 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 13, 1998
26<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 5,556 $ 4,912
Patient accounts receivable, less
allowance for doubtful accounts
of $1,595 and $1,159, respectively 7,707 6,359
Accounts receivable-other 187 127
Other current assets 504 407
Total current assets 13,954 11,805
Fixed assets (Note 4):
Furniture and equipment 8,111 7,043
Leasehold improvements 3,869 3,280
11,980 10,323
Less accumulated depreciation 5,951 4,317
6,029 6,006
Noncompete agreements, net of
amortization of $501, and $406,
respectively 124 218
Goodwill, net of amortization of
$138, and $94, respectively 1,042 811
Other assets 1,399 643
$ 22,548 $ 19,483
See notes to consolidated financial statements.
27<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 250 $ 275
Accrued expenses 1,333 971
Estimated third-party payor
(Medicare) settlements (Note 2) 1,095 1,277
Notes payable (Note 4) 72 68
Total current liabilities 2,750 2,591
Notes payable - long-term portion
(Note 4) 189 226
Convertible subordinated notes
payable (Note 4) 8,050 8,050
Minority interests in subsidiary limited
partnerships (Note 11) 1,557 1,021
Commitments (Note 11) - -
Shareholders' equity(Notes 7,8, and 9):
Preferred stock, $.01 par value,
500,000 shares authorized, -0- shares
outstanding - -
Common stock, $.01 par value, 10,000,000
shares authorized, 3,615,634 and
3,594,715 shares outstanding at
December 31, 1997 and 1996,
respectively 36 36
Additional paid-in capital 11,689 11,661
Accumulated deficit (1,676) (4,102)
Treasury stock at cost, 4,900 and
-0- shares held at December 31,
1997 and 1996, respectively (47) -
Total shareholders' equity 10,002 7,595
$ 22,548 $ 19,483
See notes to consolidated financial statements.
28<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
1997 1996
Net patient revenues $ 38,342 $ 32,029
Other revenues 465 178
Net revenues 38,807 32,207
Clinic operating costs:
Salaries and related costs 17,624 14,743
Rent, clinic supplies and other 10,562 9,144
Provision for doubtful accounts 1,050 929
29,236 24,816
Corporate office costs:
General and administrative 3,666 3,097
Recruitment and development 1,105 784
4,771 3,881
Operating income before non-
operating expenses 4,800 3,510
Interest expense 741 745
Minority interests in subsidiary
limited partnerships 1,578 1,007
Income before income taxes 2,481 1,758
Provision for income taxes
(Notes 2 and 6) 55 117
Net income $ 2,426 $ 1,641
Basic earnings per common share $ .67 $ .46
Earnings per common share-assuming
dilution $ .65 $ .45
See notes to consolidated financial statements.
29<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Total
Add'l Accumu- Share-
Common Stock Paid-In lated Treasury Stock holders'
Shares Amount Capital Deficit Shares Amount Equity
Balance at
Jan. 1, 1996 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
Proceeds from
exercise of
stock options 4 - 28 - - - 28
Proceeds from
exercise of
warrants 17 - - - - - -
Repurchase of
treasury
shares - - - - (5) (47) (47)
Net income - - - - - - 2,426
Balance at
Dec. 31, 1997 3,616 $ 36 $11,689 $(1,676) (5) $ (47) $10,002
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,
1997 1996
Operating activities
Net income $ 2,426 $ 1,641
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,880 1,735
Minority interests in earnings of
subsidiary limited partnerships 1,578 1,007
Provision for bad debts 1,050 929
Loss on sale of fixed assets 28 2
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (2,398) (1,415)
Increase in accounts receivable-
other (60) (19)
Decrease (increase) in other assets (867) 43
Increase in accounts payable and
accrued expenses 337 234
Increase (decrease) in estimated
third-party payor (Medicare)
settlements (182) 562
Net cash provided by operating
activities 3,792 4,719
Investing activities
Purchase of fixed assets (1,844) (1,677)
Purchase of intangibles (276) (301)
Proceeds on sale of fixed assets 67 11
Net cash used in investing activities (2,053) (1,967)
See notes to consolidated financial statements.
31<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1997 1996
Financing activities
Proceeds from notes payable 40 215
Payment of notes payable (73) (61)
Acquisition of treasury stock (47) -
Proceeds from investment of minority
investors in subsidiary limited
partnerships 1 11
Proceeds from exercise of stock options 28 27
Distributions to minority investors
in subsidiary limited partnerships (1,044) (666)
Net cash used in financing activities (1,095) (474)
Net increase in cash and cash
equivalents 644 2,278
Cash and cash equivalents - beginning
of year 4,912 2,634
Cash and cash equivalents - end of
year $ 5,556 $ 4,912
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Income taxes $ 735 $ 137
Interest $ 667 $ 667
See notes to consolidated financial statements.
32<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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, 1997, the Company was operating 80
clinics: eighteen in Texas, fourteen in Michigan, six in Florida
and Georgia, respectively, four in Mississippi and Pennsylvania,
respectively, three in Louisiana and Oklahoma, respectively, two in
Illinois, Maine, Missouri, Virginia and Wisconsin, respectively,
and one in Connecticut, Idaho, Iowa, Minnesota, Montana, New
Mexico, New Jersey, North Carolina, Oregon, South Carolina,
Tennessee and Vermont, 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 99% 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 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.
33<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, 1997 is $3,800,000 of short-term U.S.
government agency securities and $875,000 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
Medicare. Retrospective adjustments are accrued on an estimated
basis in the period the related services are rendered and adjusted
34<PAGE>
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 majority of the Company's Medicare cost
reports have been audited by the Medicare fiscal intermediary
through December 31, 1995. Revenues from the Medicare program
accounted for approximately 13% of the Company's net patient
revenues for the year ended December 31, 1997. 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.
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.
35<PAGE>
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation
of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the
Statement 128 requirements.
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.
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
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. In 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, 1997 and
1996, $276,000 and $200,000, respectively, 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
36<PAGE>
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, 1997, 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
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.
37<PAGE>
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.
38<PAGE>
Notes payable as of December 31, 1997 and 1996 consist of the
following:
December 31,
1997 1996
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 -0-. $ 51,000 $ 73,000
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 $79,000 of one of the
Company's clinics 32,000 38,000
Promissory note with an 8% interest
rate payable in equal monthly in-
stallments through March 19, 2007.
This note is secured by the facility,
with a net book value of approxi-
mately $52,000 of one of the
Company's clinics 38,000 -
Unsecured promissory notes with
a 7% interest rate payable in
equal monthly installments
through December 31, 2000 140,000 183,000
39<PAGE>
December 31,
1997 1996
8% Convertible Subordinated
Notes due June 30, 2003 with
interest payable quarterly 3,050,000 3,050,000
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
8,311,000 8,344,000
Less current portion (72,000) (68,000)
$8,239,000 $8,276,000
Scheduled maturities for the next five years and thereafter as of
December 31, 1997 are as follows:
1998 $ 72,000
1999 72,000
2000 68,000
2001 23,000
2002 4,000
Thereafter 8,072,000
$8,311,000
5. Related Party Transactions
During both 1997 and 1996, 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.
40<PAGE>
6. Income Taxes
Significant components of the Company's deferred tax assets at
December 31 were as follows:
1997 1996
Deferred tax assets:
Tax operating losses $ - $ 745,000
Investment in partnerships 855,000 567,000
Minimum tax credit carryforward 279,000 75,000
Total 1,134,000 1,387,000
Less valuation allowance (301,000) (1,387,000)
Net deferred federal income taxes $ 833,000 $ -
The differences between the federal tax rate and the Company's
effective tax rate, at December 31 were as follows:
1997 1996
U.S. tax at statutory
rate $ 844,000 34.00% $ 574,000 35.00%
Reduction in valuation
allowance (1,087,000) (43.80) (557,000) (33.95)
State income taxes 170,000 6.87 43,000 2.62
Nondeductible expenses 16,000 0.63 29,000 1.76
Other-net 112,000 4.52 28,000 1.70
$ 55,000 2.22% $ 117,000 7.13%
Significant components of the provision/(benefit) for income taxes,
for the years ended December 31, were as follows:
1997 1996
Current:
Federal $ 630,000 $ 74,000
State 258,000 43,000
Total current 888,000 117,000
Deferred:
Federal (833,000) -
State - -
Total deferred (833,000) -
Total income tax provision $ 55,000 $ 117,000
41<PAGE>
Income taxes paid during 1997 and 1996 were approximately $735,000
and $137,000, 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 shares of
Common Stock (subject to proportionate adjustments in the event of
stock dividends, splits, and similar corporate transactions).
During 1997, the 1992 Stock Option Plan was amended to (i) specify
that options covering no more than 50,000 shares of common stock of
the Company may be granted to any officer or other employee during
any calendar year and (ii) increase by 95,000 (from 550,000 to
645,000) the number of shares of common stock reserved for issuance
under the Plan. The 95,000 share increase in the shares reserved
for issuance under the 1992 Stock Option Plan represents the number
of remaining shares available for grant under the Executive Option
Plan.
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
prices of non-incentive options granted under the Option Plan are
42<PAGE>
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, 1997 and 1996, 78,750 and 78,750 incentive stock
options and 520,375 and 416,000 non-incentive stock options have
been granted. Incentive stock options of 3,750 and 3,750 and non-
incentive stock options of 12,125 and 8,000 have been exercised as
of December 31, 1997 and 1996, respectively.
Outstanding incentive stock options vest one-fourth on each of the
second, third, fourth and fifth anniversaries of the date of grant.
Of the 508,250 non-incentive stock options granted, but not yet
exercised, as of December 31, 1997, 227,000 options vest 100% on
the date of grant, and 281,250 options vest one-fourth on each of
the second, third, fourth and fifth anniversaries of the date of
grant.
The following weighted-average assumptions for 1997 and 1996 were
used in estimating the fair value of the options granted under the
Option Plan: risk-free interest rates ranging from 5.75% to 6.36%;
dividend yield rate of 0%; volatility factor of the expected market
price of the Company's common stock of .245 and .261, respectively;
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.
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 1997 and 1996 is
43
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):
1997 1996
Pro forma net income $2,249 $ 1,426
Pro forma earnings per share $ 0.62 $ 0.40
A summary of the Company's Option Plan activity, and related
information for the years ended December 31 follows:
1997 1996
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
Outstanding-
beginning
of year 483,000 $ 8.68 381,500 $ 8.41
Granted 111,250 9.89 105,750 9.59
Exercised (4,125) 7.19 (4,000) 6.75
Forfeited (6,875) 8.78 (250) 8.63
Outstanding-
end of year 583,250 $ 8.92 483,000 $ 8.68
Exercisable
at end
of year 329,063 $ 8.89 241,625 $ 8.66
Weighted-
average
fair value
of options
granted
during the
year $ 3.99 $ 4.12
Exercise prices for options outstanding as of December 31, 1997
ranged from $6.25 to $12.00. The weighted-average remaining
contractual life of those options is 7.48 years.
44<PAGE>
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). No further
grants of options will be made under the Executive Option Plan as
a result of the amendment to the 1992 Stock Option Plan (see Note
7, 1992 Stock Option Plan). 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:
1997 1996
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
Outstanding-
beginning
of year 105,000 $ 13.31 105,000 $ 13.31
Granted - - - -
Exercised - - - -
Forfeited - - - -
Outstanding-
end of year 105,000 $ 13.31 105,000 $ 13.31
Exercisable
at end
of year 60,000 $ 13.05 25,000 $ 12.69
45<PAGE>
Exercise prices for options outstanding as of December 31, 1997
ranged from $12.69 to $14.88. The weighted-average remaining
contractual life of those options is 5.71 years.
In total, the Company has 1,505,792 shares which are reserved for
issuance under the 1992 Stock Option Plan, the Executive Option
Plan, the 8% Convertible Subordinated Notes, the Series B Notes and
the Series C Notes.
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 were
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.
In May 1997, 96,000 of the Representative's Warrants were exercised
by surrendering the Warrants in exchange for 16,794 shares of
Company Common Stock. The remaining 24,000 of the Representative's
Warrants expired.
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
46<PAGE>
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. 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, 1997 and 1996, respectively.
11. 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 $2,831,000 and $2,415,000 for
the years ended December 31, 1997 and 1996, 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:
1998 $3,020,517
1999 2,306,830
2000 1,613,860
2001 1,279,149
2002 891,188
Thereafter 310,540
$9,422,084
47<PAGE>
Employment Agreements
At December 31, 1997, the Company had an outstanding employment
agreement with one of its executive officers for $180,000 annually,
subject to adjustment to reflect positive performance, for a term
extending through February 2002.
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
$5,920,000 in 1998 and $8,982,000 in the aggregate through 2002.
In addition, each employment agreement with the managing physical
therapists provides for monthly bonus payments calculated as a
percentage of each clinic's net revenues (not in excess of
operating profits) or operating profits. The Company recognized
salaries and bonus expense for the managing physical therapist
partners of $5,810,000 and $4,852,000 for the years ended
December 31, 1997 and 1996, 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/or 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 interest ranging from
59% to 99% 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 0% 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
48<PAGE>
of their capital accounts. The Company presently anticipates that
future clinics developed by the Company will be structured in a
comparable manner.
12. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1997 1996
Numerator:
Net income $2,426,000 $1,641,000
Numerator for basic earnings
per share and diluted earnings
per share $2,426,000 $1,641,000
Denominator:
Denominator for basic earnings
per share--weighted-average shares 3,603,159 3,557,113
Effect of dilutive securities:
Stock options 94,346 92,463
Warrants 10,803 30,010
Dilutive potential common shares 105,149 122,473
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 3,708,308 3,679,586
Basic earnings per share $0.67 $0.46
Diluted earnings per share $0.65 $0.45
For additional disclosures regarding the stock options and
warrants, see Notes 7 and 8, respectively.
The Notes, the Series B Notes and the Series C Notes were all
outstanding during 1996 and 1997, but were not included in the
computation of diluted earnings per share because the effect on the
computation was anti-dilutive.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None
49<PAGE>
PART III
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 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).
4.2 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).
4.3 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).
4.4 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).
4.5 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).
4.6 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 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 the Company's Registration Statement on Form S-8 (333-
30071) and incorporated herein by reference).
51<PAGE>
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 and Restated Employment Agreement between the
Company and Roy W. Spradlin (filed as an exhibit to the
Company's Form 10-KSB, for the year ended December 31,
1996 and incorporated herein by reference).
10.4 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, 33-93040 and 333-30071).
27 Financial Data Schedule.
(b) Reports on Form 8-K
No Form 8-K was filed for the quarter ended
December 31, 1997.
52<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
(principal financial
and accounting officer)
Date: March 26, 1998
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:
Roy W. Spradlin, President, James B. Hoover,
Chief Executive Officer and Director
Director
(principal executive officer)
By: /s/ Mark J. Brookner By:
Mark J. Brookner, Chief Marlin W. Johnston,
Financial Officer and Director Director
(principal financial and
accounting officer)
By: /s/ Daniel C. Arnold By: /s/ Richard C.W. Mauran
Daniel C. Arnold, Richard C.W. Mauran,
Director Director
By: By: /s/ Albert L. Rosen
Nelson Broms Albert L. Rosen
Director Director
53<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 State-
ment 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 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). --
4.2 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). --
4.3 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). --
4.4 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). --
4.5 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). --
54<PAGE>
INDEX OF EXHIBITS
EXHIBIT NO. IDENTITY OF EXHIBIT PAGE NO.
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 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 the Company's
Registration Statement on Form S-8
(333-30071) 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 and Restated Employment Agreement
between the Company and Roy W. Spradlin
(filed as an exhibit to the Company's
Form 10-KSB, for the year ended
December 31, 1996 and incorporated
herein by reference). -
10.4 Amended and Restated Employment
Agreement between the Company and
Roy W. Spradlin. 56
21 Subsidiaries of the Company. 65
23 Consent of Ernst & Young LLP (Registra-
tion Nos. 33-63446, 33-63444, 33-91004,
33-93040 and 333-30071). 72
27 Financial Data Schedule. 73
55<PAGE>
EXHIBIT 10.4
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 24, 1998, and supersedes that certain Employment Agreement
between the parties effective February 21, 1997. 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 ("Base Compensation"), payable in equal semi-monthly
installments on the fifteenth (15th) and final days of each month
56<PAGE>
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:
(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
57<PAGE>
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
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.
58<PAGE>
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.
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.
59<PAGE>
Section 11. Non-Competition. During the term and for a one (1)
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
one (1) 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
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
60<PAGE>
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.
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.
61
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:
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.
62
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
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.
63
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.
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
64<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.
dba Reist Hand Therapy 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
65<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
R. Clair Physical Therapy, Limited
Limited Partnership Partnership Texas
Roepke Physical Therapy, Limited
Limited Partnership Partnership Texas
Merrill Physical Therapy, Limited
Limited Partnership Partnership Texas
Genesee Valley Physical
Therapy, Limited Limited
Partnership Partnership Texas
Joan Ostermeier Physical
Therapy, Limited
Partnership dba Sport & Limited
Spine of Wittenberg 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
66<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Vileno Therapy of Treasure Limited
Coast, Limited Partnership Partnership Texas
Trussell Physical Therapy,
Limited Partnership, dba,
GenTech Industrial
Physical Therapy
Services (closed, but Limited
not yet dissolved) 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
Hands Plus Therapy Center, 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
67<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Heartland Physical Therapy, Limited
Limited Partnership Partnership Texas
Bay View Physical Therapy, Limited
Ltd. Partnership Texas
Rio Grande Physical Therapy, Limited
Limited Partnership Partnership Texas
Thomas Hand and Rehabili-
tation Specialists, Limited
Limited Partnership Partnership Texas
Brownwood Physical Therapy,
Limited Partnership dba
Pecan Valley Physical Limited
Therapy Partnership Texas
Quantum Physical Therapy,
Limited Partnership
(formerly Abbott & Baird
Physical Therapy
Associates, Limited Limited
Partnership) Partnership Texas
Spine & Sport Physical
Therapy, Limited Partner-
ship (formerly Southern
Orthopaedic & Sports
Physical Therapy, Limited
Limited Partnership) Partnership Texas
Peachtree Bone and Joint
Physiotherapy, Limited
Partnership, dba, Maxx
Physical Therapy, Limited
Partnership (Dissolved Limited
effective 6/17/97) Partnership Texas
Norman Physical Therapy, Limited
Limited Partnership Partnership Texas
68 <PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Kennesaw Physical Therapy
& Sports Medicine, Limited
Partnership (Merged into
Spine & Sport Physical
Therapy effective 6/1/97
and cancelled effective Limited
7/1/97) Partnership Texas
Rice Rehabilitation
Associates, Limited Limited
Partnership Partnership Texas
Physical Therapy and Spine
Institute, Limited Limited
Partnership Partnership Texas
Forest City Physical Therapy, Limited
Limited Partnership Partnership Texas
Leader Physical Therapy, Limited
Limited Partnership Partnership Texas
Spine & Sports Physical
Therapy of Towne Lake,
Limited Partnership
(Merged into Spine &
Sport Physical Therapy
effective 6/1/97 and
cancelled effective Limited
7/1/97) Partnership Texas
Crossroads Physical Therapy, Limited
Limited Partnership Partnership Texas
Functions by Fletchall, Limited
Limited Partnership Partnership Texas
C.A.R.E. Physical Therapy Limited
Center, Limited Partnership Partnership Texas
Ankeny Physical & Sports
Therapy, Limited Limited
Partnership Partnership Texas
Twin Cities Physical Therapy Limited
Limited Partnership Partnership Texas
69<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Brem Physical Therapy
Associates, Limited Limited
Partnership Partnership Texas
Penn's Wood Physical
Therapy, Limited Limited
Partnership Partnership Texas
Regional Physical Therapy Limited
Center, 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
Julie Emond Physical Therapy,
Limited Partnership, dba
Maple Valley Physical Limited
Therapy Partnership Texas
City of Lakes Physical
Therapy, 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
Partnership (Dissolved Limited
effective 7/17/97) Partnership Texas
70<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Airpark Physical Therapy,
Limited Partnership
(formerly Therapy Partners,
Limited Partnership which
was formerly North Hills
Physical Therapy, Limited Limited
Partnership) Partnership Texas
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
Mountain View Physical
Therapy, Limited Limited
Partnership Partnership Texas
Intermountain Physical
Therapy, Limited Limited
Partnership Partnership Texas
Staunton Hand & Rehab
Services, Limited Limited
Partnership Partnership Texas
Sport & Spine Clinic, Limited
L.P. Partnership Texas
Physical Therapy & Rehab Limited
Ctr., L.P. Partnership Texas
71<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, 333-30071) of our report dated March 13, 1998 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, 1997.
Houston, Texas
March 26, 1998 ERNST & YOUNG LLP
72
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000885978
<NAME> U.S. PHYSICAL THERAPY, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5556
<SECURITIES> 0
<RECEIVABLES> 9302
<ALLOWANCES> 1595
<INVENTORY> 0
<CURRENT-ASSETS> 13954
<PP&E> 11980
<DEPRECIATION> 5951
<TOTAL-ASSETS> 22548
<CURRENT-LIABILITIES> 2750
<BONDS> 8239
0
0
<COMMON> 36
<OTHER-SE> 9966
<TOTAL-LIABILITY-AND-EQUITY> 22548
<SALES> 0
<TOTAL-REVENUES> 38807
<CGS> 0
<TOTAL-COSTS> 34007
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 741
<INCOME-PRETAX> 2481
<INCOME-TAX> 55
<INCOME-CONTINUING> 2426
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2426
<EPS-PRIMARY> .67
<EPS-DILUTED> .65
</TABLE>
