UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from to
Commission file number 1-11151
U.S. PHYSICAL THERAPY, INC.
(Name of registrant as specified in its charter)
Nevada 76-0364866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3040 Post Oak Blvd., Suite 222, Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713) 297-7000
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: 3,610,734
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
three months and six months ended
June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 9
<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1998 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,959 $ 5,556
Patient accounts receivable, less
allowance for doubtful accounts
of $1,623 and $1,595,
respectively 8,061 7,707
Accounts receivable-other 243 187
Other current assets 524 504
Total current assets 14,787 13,954
Fixed assets:
Furniture and equipment 8,761 8,111
Leasehold improvements 4,096 3,869
12,857 11,980
Less accumulated depreciation 6,884 5,951
5,973 6,029
Noncompete agreements, net of
amortization of $548, and $501,
respectively 92 124
Goodwill, net of amortization of
$177, and $138, respectively 1,094 1,042
Other assets 1,281 1,399
$ 23,227 $ 22,548
See notes to consolidated financial statements.
3 <PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1998 1997
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 192 $ 250
Accrued expenses 1,491 1,333
Estimated third-party payor
(Medicare) settlements 597 1,095
Notes payable 72 72
Total current liabilities 2,352 2,750
Notes payable - long-term portion 163 189
Convertible subordinated notes
payable 8,050 8,050
Minority interests in subsidiary
limited partnerships 1,669 1,557
Commitments - -
Shareholders' equity:
Preferred stock, $.01 par value,
500,000 shares authorized, -0-
shares outstanding - -
Common stock, $.01 par value,
10,000,000 shares authorized,
3,615,634 shares outstanding
at June 30, 1998 and
December 31, 1997, respectively 36 36
Additional paid-in capital 11,689 11,689
Accumulated deficit (685) (1,676)
Treasury stock at cost, 4,900
shares held at June 30, 1998
and December 31, 1997,
respectively (47) (47)
Total shareholders' equity 10,993 10,002
$ 23,227 $ 22,548
See notes to consolidated financial statements.
4<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended
June 30,
1998 1997
(unaudited)
Net patient revenues $ 10,689 $ 9,550
Other revenues 151 136
Net revenues 10,840 9,686
Clinic operating costs:
Salaries and related costs 5,006 4,326
Rent, clinic supplies and other 2,685 2,596
Provision for doubtful accounts 269 288
7,960 7,210
Corporate office costs:
General and administrative 1,025 952
Recruitment and development 324 272
1,349 1,224
Operating income before non-
operating expenses 1,531 1,252
Interest expense 183 184
Minority interests in subsidiary
limited partnerships 481 411
Income before income taxes 867 657
Provision for income taxes 345 35
Net income $ 522 $ 622
Basic earnings per common share $ .14 $ .17
Earnings per common share-assuming
dilution $ .14 $ .17
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Six Months Ended
June 30,
1998 1997
(unaudited)
Net patient revenues $ 21,141 $ 18,177
Other revenues 289 201
Net revenues 21,430 18,378
Clinic operating costs:
Salaries and related costs 9,973 8,453
Rent, clinic supplies and other 5,351 4,945
Provision for doubtful accounts 542 522
15,866 13,920
Corporate office costs:
General and administrative 2,035 1,796
Recruitment and development 612 541
2,647 2,337
Operating income before non-
operating expenses 2,917 2,121
Interest expense 365 367
Minority interests in subsidiary
limited partnerships 911 687
Income before income taxes 1,641 1,067
Provision for income taxes 650 51
Net income $ 991 $ 1,016
Basic earnings per common share $ .27 $ .28
Earnings per common share-assuming
dilution $ .26 $ .27
See notes to consolidated financial statements.
6
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
1998 1997
(unaudited)
Operating activities
Net income $ 991 $ 1,016
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,032 921
Minority interests in earnings
of subsidiary limited
partnerships 911 687
Provision for bad debts 542 522
Loss (gain) on sale of fixed
assets 1 (3)
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (896) (1,160)
Increase in accounts receivable-
other (56) (60)
Decrease (increase) in other assets 90 (233)
Increase in accounts payable
and accrued expenses 100 18
Decrease in estimated third-
party payor (Medicare)
settlements (498) (535)
Net cash provided by operating
activities 2,217 1,173
See notes to consolidated financial statements.
7<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
1998 1997
(unaudited)
Investing activities
Purchase of fixed assets (882) (896)
Purchase of intangibles (107) -
Proceeds on sale of fixed assets - 67
Net cash used in investing
activities (989) (829)
Financing activities
Proceeds from notes payable - 40
Payment of notes payable (26) (37)
Acquisition of treasury stock - (47)
Proceeds from investment of minority
investors in subsidiary limited
partnerships 1 1
Distributions to minority investors
in subsidiary limited partnerships (800) (487)
Net cash used in financing
activities (825) (530)
Net increase (decrease) in cash
and cash equivalents 403 (186)
Cash and cash equivalents -
beginning of period 5,556 4,912
Cash and cash equivalents -
end of period $ 5,959 $ 4,726
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Income taxes $ 513 $ 390
Interest $ 326 $ 276
See notes to consolidated financial statements.
8<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
1. Basis of Presentation and Significant Accounting Policies
The consolidated financial statements include the accounts of U.S.
Physical Therapy, Inc. and its subsidiaries (the "Company"). All
significant intercompany transactions and balances have been
eliminated. As of June 30, 1998, the Company, through its wholly-
owned subsidiaries, owns a 1% general partnership interest and
limited partnership interests ranging from 59% to 99% in the
clinics it operates (87% of the clinics were at 64% as of June 30,
1998). For the majority of the clinics, the managing therapist of
each such clinic, along with other therapists at the clinic in
several of the partnerships, own the remaining limited partnership
interest in the clinic which ranges from 0% to 40%. The minority
interest in the equity and earnings of the subsidiary clinic
limited partnerships are presented separately in the consolidated
financial statements.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with
the instructions for Form 10-Q. Accordingly, the statements do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited financial
statements contain all necessary adjustments (consisting only of
normal recurring adjustments) to present fairly the Company's
financial position, results of operations and cash flows for the
interim periods presented. For further information regarding the
Company's accounting policies, refer to the audited financial
statements included in the Company's Form 10-KSB for the year ended
December 31, 1997.
Operating results for the three and six months ended June 30, 1998
are not necessarily indicative of the results expected for the
entire year.
9
Use of Estimates
Management is required to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Reclassifications
The accompanying financial statements for 1997 have been
reclassified to conform with the presentation used for 1998.
2. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Numerator:
Net income $ 522,000 $ 622,000 $ 991,000 $1,016,000
Numerator for basic earnings
per share and diluted
earnings per share $ 522,000 $ 622,000 $ 991,000 $1,016,000
Denominator:
Denominator for basic earnings
per share--weighted-average
shares 3,611,000 3,598,000 3,611,000 3,594,000
Effect of dilutive securities:
Stock Options 166,000 83,000 166,000 84,000
Warrants - - - 21,000
Dilutive potential common
shares 166,000 83,000 166,000 105,000
Denominator for diluted
earnings per share--adjusted
weighted-average shares and
assumed conversions 3,777,000 3,681,000 3,777,000 3,699,000
Basic earnings per share $ 0.14 $ 0.17 $ 0.27 $ 0.28
Diluted earnings per share $ 0.14 $ 0.17 $ 0.26 $ 0.27
During the three and six months ending June 30, 1998 and 1997, the
Company had outstanding the following notes payable: 8% Convertible
Subordinated Notes due June 30, 2003, for an aggregate principal
amount of $3,050,000; 8% Convertible Subordinated Notes, Series B,
due June 30, 2004, for an aggregate principal amount of $2,000,000;
10
and 8% Convertible Subordinated Notes, Series C, due June 30, 2004,
for an aggregate principal amount of $3,000,000 (collectively "the
Notes"). The Notes were not included in the computation of diluted
earnings per share because the effect on the computation was anti-
dilutive.
3. Income Taxes
Significant components of the provision for income taxes were as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Current:
Federal $ 182,000 $ 140,000 $ 432,000 $ 234,000
State 64,000 77,000 119,000 122,000
Total current 246,000 217,000 551,000 356,000
Deferred:
Federal 99,000 (182,000) 99,000 (305,000)
State - - - -
Total deferred 99,000 (182,000) 99,000 (305,000)
Total income tax
provision $ 345,000 $ 35,000 $ 650,000 $ 51,000
During 1997, the Company utilized all of its unused net operating
loss carryforwards. Accordingly, during the three and six months
ending June 30, 1998, the Company was taxed at the corporate level
federal tax rate of 39.8% and 39.6%, respectively.
4. Subsequent Event
In August 1998, the Company decided to close its clinic
located in Corpus Christi, Texas due to adverse local market
conditions and economic performance. The Company anticipates that
the loss which will be recognized relating to this closure, which is
expected to occur on August 15, 1998, will approximate $230,000.
This clinic, which opened during 1992, accounted for net patient
revenues for the three and six months ended June 30, 1998 of $67,000
and $172,000, respectively, compared to $124,000 and $231,000 in the
corresponding periods in 1997. Operating losses before income taxes
from the clinic were ($113,000) and ($175,000) for the three
and six month periods endedJune 30, 1998 compared to ($25,000) and
($65,000) for the three and six month periods ended June 30, 1997.
11
Item 2. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company operates outpatient physical and occupational therapy
clinics which provide post-operative care and treatment for a
variety of orthopedic-related disorders and sports-related injuries.
At June 30, 1998, the Company operated 87 outpatient physical and
occupational therapy clinics in 25 states. The average age of the
87 clinics in operation at June 30, 1998 is 3.2 years old. Since
inception of the Company, 88 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. These
two clinics combined accounted for net patient revenues and clinic
operating costs for the six months ended June 30, 1997 of $(1,000)
and $54,000, respectively.
Results of Operations
Three Months Ended June 30, 1998 ("1998 Second Quarter") Compared to
the Three Months Ended June 30, 1997 ("1997 Second Quarter")
Net Patient Revenues
Net patient revenues increased to $10,689,000 for the 1998 Second
Quarter from $9,550,000 for the 1997 Second Quarter, an increase of
$1,139,000, or 12 percent. Net patient revenues from the 12 clinics
developed since the 1997 Second Quarter (the "New Clinics")
accounted for 30 percent of the increase or $347,000. The remaining
increase of $792,000 in net patient revenues comes from those 75
clinics opened more than one year as of June 30, 1998 (the "Pre-June
1997 Clinics"). Of the $792,000 increase in net patient revenues
from these clinics, a six percent increase in the number of patient
visits increased net patient revenues by $592,000, which was coupled
with an increase in the average net revenue per visit of two
percent.
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
12
clinics. Net patient revenues reflect reserves, which are evaluated
quarterly by management, for contractual and other adjustments
relating to patient discounts from certain payors. Net patient
revenues also are reported net of estimated retrospective
adjustments under Medicare. Medicare reimbursement for outpatient
physical or occupational therapy services furnished by clinics or
rehabilitation agencies is paid based on a cost reimbursement
methodology. The Company is initially reimbursed at a tentative
rate with final settlement determined after submission of an annual
cost report by the Company and audits thereof by the Medicare fiscal
intermediary. Beginning in 1998, certain changes were imposed in
the method in which the Company is reimbursed for its services by
Medicare as defined in the Balanced Budget Act of 1997 ("BBA"). See
"Factors Affecting Future Results".
Other Revenues
Other revenues, consisting of interest, management fees and sublease
income, increased by $15,000, or 11 percent, to $151,000 for the
1998 Second Quarter from $136,000 for the 1997 Second Quarter. This
increase was due primarily to an increase in interest income as a
result of the higher average amount of cash and cash equivalents
available for investment during the 1998 Second Quarter.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues declined
slightly to 74% for the 1998 Second Quarter from 75% for the 1997
Second Quarter.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $5,006,000 for the 1998 Second
Quarter from $4,326,000 for the 1997 Second Quarter, an increase of
$680,000 or 16 percent. Approximately 43 percent of the increase, or
$293,000, was due to the New Clinics. The remaining 57 percent increase
or $387,000 is due principally to increased staffing to meet the increase in
patient visits for the clinics opened prior to the 1997 Second
Quarter, coupled with an increase in bonuses earned by the managing
therapists at the clinics opened prior to the 1998 Second Quarter.
Such bonuses are based on the net revenues or operating profit
generated by the individual clinics. Salaries and related costs as
a percent of net patient revenues increased to 47 percent for the 1998
Second Quarter from 45 percent for the 1997 Second Quarter.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other costs increased to $2,685,000 for the 1998
Second Quarter from $2,596,000 for the 1997 Second Quarter, an increase
13
of $89,000, or three percent. This net increase was the result of a
$189,000 increase due to the New Clinics, which was offset, in part, by a
decrease of $100,000 for clinics opened prior to the 1997 Second
Quarter. Rent, clinic supplies and other costs as a percent of net patient
revenues declined to 25 percent for the 1998 Second Quarter from 27
percent for the 1997 Second Quarter.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts decreased to $269,000 for the
1998 Second Quarter from $288,000 for the 1997 Second Quarter,
a decrease of seven percent or $19,000. Approximately 32 percent of
the decrease, or $6,000, was due to the New Clinics, while 68 percent,
or $13,000, of the decrease relates to the clinics opened prior to
the 1997 Second Quarter. The provision as a percent of net patient
revenues declined to 2.5 percent for the 1998 Second Quarter compared
to 3.0 percent for the 1997 Second Quarter.
Corporate Office Costs - General & Administrative
General and administrative costs, consisting primarily of salaries and
benefits of corporate office personnel, recruiting fees associated with
hiring personnel at both the corporate office and at the seasoned clinics,
insurance costs, depreciation and amortization, travel and legal and
professional fees increased to $1,025,000 for the 1998 Second Quarter from
$952,000 for the 1997 Second Quarter, an increase of $73,000, or
eight percent. General and administrative costs increased primarily as a
result of additional personnel hired to oversee the operations of an
increasing number of clinics in operation. General and administrative costs,
as a percent of net patient revenues, was 10 percent for the 1998 Second
Quarter and for the 1997 Second Quarter.
Corporate Office Costs - Recruitment & Development
Recruitment and development costs primarily represent salaries and benefits
of recruitment and development personnel, rent, travel, marketing and
recruiting fees attributed directly to the Company's activities in the
development and acquisition of new clinics. All recruitment and development
personnel are located at the corporate office in Houston, Texas.
Once a clinic has opened, these personnel are not involved with the
clinic. Recruitment and development costs increased $52,000 or 19 percent
to $324,000 for the 1998 Second Quarter from $272,000 for the 1997 Second
Quarter. The majority of this increase relates to an increase in salaries
and benefits of recruitment and development personnel which were added in
response to management's intention to accelerate the pace of new
14
clinic openings during 1998 from the level of 13 new clinics
developed and opened during 1997. Recruitment and development costs, as a
percent of net patient revenues was three percent for the 1998 Second
Quarter and the 1997 Second Quarter.
Interest Expense
Interest expense of $183,000 for the 1998 Second Quarter relates
primarily to $65,000 of interest expense on the $3,050,000 aggregate
principal amount of 8% Convertible Subordinated Notes issued by the
Company in June 1993 and $99,000 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, $18,000 of
interest expense was recorded in the 1998 Second Quarter relating to
the Contingent Interest Enhancement feature of the Series B Notes.
This feature allowed Series B Note holders to receive an interest
enhancement payable in shares of Company Common Stock based upon the
market value of the Company's shares for the month of June 1996,
which corresponded to two years from the date of issuance of the
Series B Notes (the "Contingent Interest Enhancement"). A total of
70,965 shares of Company Common Stock were issued in connection with
the Contingent Interest Enhancement feature.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$70,000, or 17 percent, to $481,000 for the 1998 Second Quarter from
$411,000 for the 1997 Second Quarter due to the increase in
aggregate profitability of those clinics in which partners have
achieved positive retained earnings and are accruing partnership
income.
Provision for Income Taxes
The provision for income taxes increased to $345,000 for the 1998
Second Quarter from $35,000 for the 1997 Second Quarter, an increase
of $310,000. This increase relates primarily to the increase in
profitability of the clinics, coupled with the fact that during 1997, the
Company utilized all of its unused net operating loss carryforwards.
Accordingly, during the 1998 Second Quarter, the Company was taxed
at the corporate level federal tax rate of 39.8%.
Net Income
The Company's net income for the 1998 Second Quarter of $522,000 was
less than the 1997 Second Quarter's net income of $622,000
principally due to the fact that during 1997, the Company utilized
15
all of its remaining tax operating loss carryforwards and,
therefore, incurred corporate income tax at an effective rate of
39.8% in the 1998 Second Quarter. The Company's income before
income taxes for the 1998 Second Quarter of $867,000 exceeded the
1997 Second Quarter's income before income taxes of $657,000
principally due to the $1,154,000 increase in net revenues, which
more than offset the $750,000 increase in clinic operating costs,
the $125,000 increase in corporate office costs and the $70,000
increase in minority interests in subsidiary limited partnerships.
Six Months Ended June 30, 1998 ("1998 Six Months") Compared to the
Six Months Ended June 30, 1997 ("1997 Six Months")
Net Patient Revenues
Net patient revenues increased to $21,141,000 for the 1998 Six
Months from $18,177,000 for the 1997 Six Months, an increase of
$2,964,000, or 16 percent. Net patient revenues from the 12 clinics
developed since the 1997 Six Months (the "New Clinics") accounted
for 21 percent of the increase or $624,000. The remaining increase
of $2,340,000 in net patient revenues comes from those 75 clinics
opened more than one year as of June 30, 1998 (the "Pre-June 1997
Clinics"). Of the $2,340,000 increase in net patient revenues from
these clinics, an 11 percent increase in the number of patient
visits increased net patient revenues by $1,956,000, which was
coupled with an increase in the average net revenue per visit of
two percent.
Net patient revenues are based on established billing rates less
allowances and discounts for patients covered by worker's
compensation programs and other contractual programs. Payments
received under these programs are based on predetermined rates and
are generally less than the established billing rates of the
clinics. Net patient revenues reflect reserves, which are evaluated
quarterly by management, for contractual and other adjustments
relating to patient discounts from certain payors. Net patient
revenues also are reported net of estimated retrospective
adjustments under Medicare. Medicare reimbursement for outpatient
physical or occupational therapy services furnished by clinics or
rehabilitation agencies is paid based on a cost reimbursement
methodology. The Company is initially reimbursed at a tentative
rate with final settlement determined after submission of an annual
cost report by the Company and audits thereof by the Medicare fiscal
intermediary. Beginning in 1998, certain changes were imposed in
the method in which the Company is reimbursed for its services by
Medicare as defined in the BBA. See "Factors Affecting Future
Results".
16
Other Revenues
Other revenues, consisting of interest, management fees and sublease
income, increased by $88,000, or 44 percent, to $289,000 for the
1998 Six Months from $201,000 for the 1997 Six Months. This
increase was due primarily to an increase in interest income as a
result of the higher average amount of cash and cash equivalents
available for investment and 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.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues declined
to 75% for the 1998 Six Months from 77% for the 1997 Six Months.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $9,973,000 for the 1998 Six Months
from $8,453,000 for the 1997 Six Months, an increase of $1,520,000, or
18 percent. Approximately 34 percent of the increase, or $518,000, was
due to the New Clinics. The remaining 66 percent increase or $1,002,000 is
due principally to increased staffing to meet the increase in patient visits
for the clinics opened prior to the 1997 Six Months, coupled with an
increase in bonuses earned by the managing therapists at the clinics
opened prior to the 1998 Six Months. Such bonuses are based on the
net revenues or operating profit generated by the individual
clinics. Salaries and related costs as a percent of net patient revenues
was 47 percent for the 1998 Six Months and the 1997 Six Months.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other costs increased to $5,351,000 for the 1998
Six Months from $4,945,000 for the 1997 Six Months, an increase of $406,000,
or eight percent. Approximately 88 percent of the increase, or $356,000,
was due to the New Clinics, while 12 percent, or $50,000, of the increase was
due to clinics opened prior to the 1997 Six Months. Rent, clinic supplies
and other costs as a percent of net patient revenues declined to 25 percent
for the 1998 Six Months from 27 percent for the 1997 Six Months.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $542,000 for the 1998 Six
Months from $522,000 for the 1997 Six Months, an increase of four percent
or $20,000. Approximately 60 percent of the increase, or $12,000, was due
to the New Clinics, while 40 percent, or $8,000, of the increase relates to
the clinics opened prior to the 1997 Six Months. The provision for doubtful
accounts as a percent of net patient revenues declined slightly to 2.6
percent for the 1998 Six Months compared to 2.9 percent for the 1997 Six
Months.
17
Corporate Office Costs - General & Administrative
General and administrative costs, consisting primarily of salaries and
benefits of corporate office personnel, insurance costs, depreciation and
amortization, travel and legal and professional fees increased to $2,035,000
for the 1998 Six Months from $1,796,000 for the 1997 Six Months, an increase
of $239,000, or 13 percent. General and administrative costs increased
primarily as a result of additional personnel hired to oversee the
operations of an increasing number of clinics in operation and increased
legal and professional fees relating to operating these additional clinics.
General and administrative costs, as a percent of net patient revenues,
was 10 percent for the 1998 Six Months and the 1997 Six Months.
Corporate Office Costs - Recruitment & Development
Recruitment and development costs primarily represent salaries and benefits
of recruitment and development personnel, rent, travel, marketing and
recruiting fees attributed directly to the Company's activities in the
development and acquisition of new clinics. All recruitment and development
personnel are located at the corporate office in Houston, Texas.
Once a clinic has opened, these personnel are not involved with the
clinic. Recruitment and development costs increased $71,000, or 13 percent,
to $612,000 for the 1998 Six Months from $541,000 for the 1997 Six Months.
The majority of this increase relates to an increase in salaries and related
costs of recruitment and development personnel which were added in response
to management's intention to accelerate the pace of new clinic
openings during 1998 from the level of 13 new clinics developed and
opened during 1997. Recruitment and development costs, as a percent of net
patient revenues, was three percent for the 1998 Six Months and the 1997
Six Months.
Interest Expense
Interest expense of $365,000 for the 1998 Six Months relates
primarily to $121,000 of interest expense on the $3,050,000
aggregate principal amount of 8% Convertible Subordinated Notes
issued by the Company in June 1993 and $198,000 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,
$37,000 of interest expense was recorded in the 1998 Second Quarter
relating to the Contingent Interest Enhancement feature of the
Series B Notes. This feature allowed Series B Note holders to
receive an interest enhancement payable in shares of Company Common
Stock based upon the market value of the Company's shares for the
18
month of June 1996, which corresponded to two years from the date of
issuance of the Series B Notes (the "Contingent Interest
Enhancement"). A total of 70,965 shares of Company Common Stock
were issued in connection with the Contingent Interest Enhancement
feature.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$224,000, or 33 percent, to $911,000 for the 1998 Six Months from
$687,000 for the 1997 Six Months due to the increase in aggregate
profitability of those clinics in which partners have achieved
positive retained earnings and are accruing partnership income.
Provision for Income Taxes
The provision for income taxes increased to $650,000 for the 1998
Six Months from $51,000 for the 1997 Six Months, an increase of
$599,000. This increase relates primarily to the increase in profitablity
of the clinics, coupled with the fact that during 1997, the Company
utilized all of its unused net operating loss carryforwards.
Accordingly, during the 1998 Six Months, the Company was taxed at
the corporate level federal tax rate of 39.6%.
Net Income
The Company's net income for the 1998 Six Months of $991,000 was
less than the 1997 Six Month's net income of $1,016,000 principally
due to the fact that during 1997, the Company utilized all of its
remaining tax operating loss carryforwards and, therefore, incurred
corporate income tax at an effective rate of 39.6% during the 1998
Six Months. The Company's income before income taxes for the 1998
Six Months of $1,641,000 exceeded the 1997 Six Month's income before
income taxes of $1,067,000 principally due to the $3,052,000
increase in net revenues, which more than offset the $1,946,000
increase in clinic operating costs, the $310,000 increase in
corporate office costs and the $224,000 increase in minority
interests in subsidiary limited partnerships.
Liquidity and Capital Resources
At June 30, 1998, the Company had $5,959,000 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 June 30, 1998
is $4,300,000 of short-term United States government agency
19
securities and $625,000 of short-term United States government money
market funds. The market value of the short-term United States
government agency securities and the United States government money
market funds approximated the carrying value of such securities as
of June 30, 1998.
The increase in cash of $403,000 from December 31, 1997 to June 30,
1998 is due to cash provided by operating activities of $2,217,000,
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 $989,000,
distributions to minority partners in subsidiary limited
partnerships of $800,000 and payment on notes payable of $26,000.
The Company's current ratio increased to 6.29 to 1.00 at June 30,
1998 from 5.07 to 1.00 at December 31, 1997. The increase in the
current ratio is due primarily to a decrease in estimated third-
party payor (Medicare) settlements, offset, in part, by an increase
in patient accounts receivable resulting from increased patient revenues.
At June 30, 1998, the Company had a debt-to-equity ratio of 0.75 to 1.00
compared to 0.83 to 1.00 at December 31, 1997. The improvement in the
debt-to-equity ratio from December 31, 1997 to June 30, 1998 relates
primarily to the increase in equity as a result of the net income of
$991,000 for the 1998 Six Months.
The quarterly interest obligation on the outstanding 8% Convertible
Subordinated Notes, the 8% Convertible Subordinated Notes, Series
B and the 8% Convertible Subordinated Notes, Series C is $61,000,
$40,000 and $60,000, respectively, through June 30, 2003, June 30,
2004 and June 30, 2004, respectively.
In January 1997, the Company's Board of Directors authorized it to
repurchase up to 200,000 shares of its common stock. The timing
and the actual number of shares purchased will depend on
market conditions. The repurchased shares, which will be financed
with available cash, will be held as treasury shares and
be available for general corporate purposes. As of June
30, 1998, 4,900 shares have been repurchased at a cost of $47,000.
Management believes that existing funds, supplemented by cash flows
from existing operations, will be sufficient to meet its current
operating needs and its development plans through at least 1998.
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
20
to restate all prior period amounts. Statement 128 replaced primary
and fully diluted earnings per share with basic and diluted earnings
per share. Under the new requirements for calculating earnings per
share, the dilutive effect of stock options is excluded from basic
earnings per share but included in the computation of diluted
earnings per share. The new standard did not have a material impact
on the basic or fully diluted earnings per share computations for
1997.
Factors Affecting Future Results
Clinic Closure
In August 1998, the Company decided to close its clinic
located in Corpus Christi, Texas due to adverse local market
conditions and economic performance. The Company anticipates that
the loss which will be recognized relating to this closure, which is
expected to occur on August 15, 1998, will approximate $230,000.
This clinic, which opened during 1992, accounted for net patient
revenues for the three and six months ended June 30, 1998 of $67,000
and $172,000, respectively, compared to $124,000 and $231,000 in the
corresponding periods in 1997. The Company's future results should be
positively impacted by the reduction in net loss, before income
taxes, incurred by this clinic. Such losses incurred were
($113,000) and ($175,000) for the three and six month periods ended
June 30, 1998 compared to ($25,000) and ($65,000) for the three and
six month periods ended June 30, 1997.
Clinic Development
As of June 30, 1998, the Company has opened 87 clinics, three of
which occurred in the 1998 Second Quarter. The Company expects to
accelerate new clinic openings in the third and fourth quarters of
1998 with operating clinics reaching 100 by year-end from the 87
presently operating, subject to, among other things, the Company's
ability to identify suitable geographic locations and physical
therapy clinic partners. Accordingly, recruitment and
development costs are expected to increase since new clinics
traditionally involve a significant amount of start-up costs, such
as travel and recruitment fees. In addition, the Company's
operating results will be impacted by initial operating losses from
the new clinics. During the initial period of operation, operating
margins for newly opened clinics tend to be lower than more seasoned
clinics due to the start-up costs of newly opened clinics (salaries
and related costs of the physical therapist and other clinic
personnel, rent and equipment and other supplies required to open
the clinic) and the fact that patient revenues tend to be lower in
the first year of a new clinic's operation and increase over the
next several years. Based on the historical performance of the
21
Company's new clinics, new clinic openings in the third and fourth
quarters of 1998 should favorably impact the Company's results of
operations for 1999 and beyond.
Growth in Physical Therapy Management
In July 1998, the Company entered into an agreement with an
orthopedic group to manage a physical therapy facility in New
England, bringing third-party facilities under management to three.
Management believes that with physician groups facing declining
incomes, the opportunity for enhancing the physicians' income
through the ownership of in-house physical therapy facilities is
becoming increasingly attractive. Since 1992, the Company has
offered management and administrative services to its network of
clinics owned with physical therapist partners. The Company is now
offering that expertise to physician groups nationwide. The Company
believes it has adequate internally generated funds to support its
planned growth in this area.
The Balanced Budget Act of 1997
Beginning in 1998, Medicare imposed new interim constraints on
reimbursement for outpatient physical and/or occupational therapy
services and will publish a fee schedule pursuant to which the
Company's clinics will be paid for care provided Medicare patients in 1999.
In 1998, Medicare reimbursement for outpatient physical and/or
occupational therapy furnished by a Medicare-certified
rehabilitation agency or clinic is equal to the lesser of the
provider's "adjusted reasonable costs" as allowed under Medicare
regulations and defined in the BBA or the provider's charges, in
each case less 20% of the amount of the charge imposed for the
services. For rehabilitation agencies and clinics, the "adjusted
reasonable cost" of a service is the service's reasonable cost, as
determined under Medicare regulations, less 10%. The 20% deduction
represents the co-insurance amount that an individual beneficiary,
or their "Medigap" insurance carrier if such coverage exists, is
required to pay in addition to the beneficiary's annual deduction.
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 this payment change may be to
encourage patients with extensive rehabilitation needs to seek
treatment in a hospital setting. The Company will not be able to
determine the impact the changes imposed by the BBA will have on its
business in 1999 until the Secretary of HHS publishes its fee
schedule.
22<PAGE>
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.
23<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 1998 annual meeting of shareholders
("Annual Meeting") on May 19, 1998. At the Annual Meeting, nine
directors were elected for one-year terms.
(b) The names of the nine directors elected at the Annual
Meeting are as follows: J. Livingston Kosberg, Roy W. Spradlin, Mark
J. Brookner, Daniel C. Arnold, George H. Hargrave, James B. Hoover,
Marlin W. Johnston, Richard C.W. Mauran and Albert L. Rosen.
(c) The following votes were cast in the election of
directors:
WITHHOLD
Nominees For AUTHORITY
J. Livingston Kosberg 2,545,698 1,000
Roy W. Spradlin 2,545,698 1,000
Mark J. Brookner 2,545,698 1,000
Daniel C. Arnold 2,545,698 1,000
George H. Hargrave 2,545,698 1,000
James B. Hoover 2,545,698 1,000
Marlin W. Johnston 2,545,698 1,000
Richard C.W. Mauran 2,545,598 1,100
Albert L. Rosen 2,484,388 62,310
There were a total of 2,546,698 shares represented by person or by
proxy at the Annual Meeting.
(d) Not applicable.
Item 5. Other Information
Effective August 3, 1998, Mark J. Brookner, the Company's Chief
Financial Officer since April 1992 and a Director since 1990, was
promoted to Vice Chairman. In this capacity, he will serve the
Company on a part-time basis, focusing on strategic planning and
corporate development. Also effective August 3, 1998, the Company
named J. Michael Mullin, C.P.A., to the position of Chief Financial
Officer.
24
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits
27. Financial Data Schedule
(b) Reports of Form 8-K
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended June 30, 1998.
25<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: August 14, 1998 By: /s/ J. MICHAEL MULLIN
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
officer)
26<PAGE>
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