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, 1999
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)
Registrant's telephone number, including area code: (713) 297-7000
Indicate by check mark whether the registrant (1) has 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
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 3,275,609 (as of August 14, 1999)
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, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1999 1998
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,626 $ 6,328
Patient accounts receivable, less
allowance for doubtful accounts
of $1,851 and $1,692,
respectively 9,179 8,505
Accounts receivable-other 916 270
Other current assets 499 614
Total current assets 13,220 15,717
Fixed assets:
Furniture and equipment 10,017 9,523
Leasehold improvements 4,793 4,537
14,810 14,060
Less accumulated depreciation 8,456 7,636
6,354 6,424
Noncompete agreements, net of
amortization of $367 and $340,
respectively 14 41
Goodwill, net of amortization of
$200 and $169, respectively 1,085 1,000
Other assets 1,002 1,005
$ 21,675 $ 24,187
See notes to consolidated financial statements.
3
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, December 31,
1999 1998
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 259 $ 553
Accrued expenses 1,602 1,181
Estimated third-party payor
(Medicare) settlements 499 944
Notes payable 33 32
Total current liabilities 2,393 2,710
Notes payable - long-term portion 60 76
Convertible subordinated notes
payable 8,050 8,050
Minority interests in subsidiary
limited partnerships 1,834 1,746
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,
3,626,509 and 3,616,509 shares
issued at June 30, 1999 and
December 31, 1998, respectively 36 36
Additional paid-in capital 11,763 11,696
Accumulated earnings (deficit) 1,000 (80)
Treasury stock at cost, 350,900
and 4,900 shares held at
June 30, 1999 and December 31,
1998,respectively (3,461) (47)
Total shareholders' equity 9,338 11,605
$ 21,675 $ 24,187
See notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended
June 30,
1999 1998
(unaudited)
Net patient revenues $ 12,337 $ 10,600
Other revenues 211 184
Net revenues 12,548 10,784
Clinic operating costs:
Salaries and related costs 5,642 4,950
Rent, clinic supplies and other 3,164 2,685
Provision for doubtful accounts 294 269
9,100 7,904
Corporate office costs:
General and administrative 1,245 1,025
Recruitment and development 341 324
1,586 1,349
Operating income before non-
operating expenses 1,862 1,531
Interest expense 182 183
Minority interests in subsidiary
limited partnerships 664 481
Income before income taxes 1,016 867
Provision for income taxes 397 345
Net income $ 619 $ 522
Basic earnings per common share $ .18 $ .14
Earnings per common share-assuming
dilution $ .17 $ .14
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,
1999 1998
(unaudited)
Net patient revenues $ 23,675 $ 20,960
Other revenues 397 366
Net revenues 24,072 21,326
Clinic operating costs:
Salaries and related costs 11,149 9,869
Rent, clinic supplies and other 6,060 5,351
Provision for doubtful accounts 538 542
17,747 15,762
Corporate office costs:
General and administrative 2,352 2,035
Recruitment and development 633 612
2,985 2,647
Operating income before non-
operating expenses 3,340 2,917
Interest expense 361 365
Minority interests in subsidiary
limited partnerships 1,194 911
Income before income taxes 1,785 1,641
Provision for income taxes 705 650
Net income $ 1,080 $ 991
Basic earnings per common share $ .31 $ .27
Earnings per common share-assuming
dilution $ .30 $ .26
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,
1999 1998
(unaudited)
Operating activities
Net income $ 1,080 $ 991
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,045 1,032
Minority interests in earnings
of subsidiary limited
partnerships 1,194 911
Provision for bad debts 538 542
Loss on sale of fixed assets 7 1
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (1,211) (896)
Increase in accounts receivable-
other (646) (56)
Decrease in other assets 110 90
Increase in accounts payable
and accrued expenses 150 100
Decrease in estimated third-party
payor (Medicare) settlements (445) (498)
Net cash provided by operating
activities 1,822 2,217
See notes to consolidated financial statements.
7
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
1999 1998
(unaudited)
Investing activities
Purchase of fixed assets (963) (882)
Purchase of intangibles (116) (107)
Proceeds on sale of fixed assets 24 -
Net cash used in investing
activities (1,055) (989)
Financing activities
Payment of notes payable (16) (26)
Acquisition of treasury stock (3,414) -
Proceeds from investment of minority
investors in subsidiary limited
partnerships 1 1
Proceeds from exercise of stock options 67 -
Distributions to minority investors
in subsidiary limited partnerships (1,107) (800)
Net cash used in financing
activities (4,469) (825)
Net increase (decrease) in cash and
cash equivalents (3,702) 403
Cash and cash equivalents -
beginning of period 6,328 5,556
Cash and cash equivalents -
end of period $ 2,626 $ 5,959
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Income taxes $ 686 $ 513
Interest $ 323 $ 326
See notes to consolidated financial statements.
8
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
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. The Company, through its wholly-owned subsidiaries,
currently owns a 1% general partnership interest, with the
exception of one clinic in which the Company owns a 26% general
partnership interest, and limited partnership interests ranging
from 59% to 99% in the clinics it operates (89% of the clinics were
at 64% as of June 30, 1999). For the majority of the clinics, the
managing therapist of the clinic, along with other therapists at
the clinic in several of the partnerships, own the remaining
limited partnership interests in the clinic. The minority
interests 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-K for the year ended
December 31, 1998.
Operating results for the three months and six months ended June
30, 1999 are not necessarily indicative of the results expected for
the entire year.
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.
9
Reclassifications
Certain amounts presented in the accompanying financial statements
for the three months and six months ended June 30, 1998 have been
reclassified to conform with the presentation used for the three
months and six months ended June 30, 1999. Such reclassifications
had no effect on net income.
2. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income $ 619,000 $ 522,000 $1,080,000 $ 991,000
Numerator for basic earnings
per share and diluted
earnings per share 619,000 522,000 1,080,000 991,000
Effect of dilutive
securities:
Interest on convertible
subordinated notes payable 119,000 - - -
Numerator for diluted earnings
per share - income available
to common stockholders after
assumed conversions $ 738,000 $ 522,000 $1,080,000 $ 991,000
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 3,439,000 3,611,000 3,526,000 3,611,000
Effect of dilutive securities:
Stock options 39,000 166,000 40,000 166,000
Convertible subordinated
notes payable 772,000 - - -
Dilutive potential common
shares 811,000 166,000 40,000 166,000
Denominator for diluted
earnings per share--adjusted
weighted-average shares
and assumed conversions 4,250,000 3,777,000 3,566,000 3,777,000
Basic earnings per share $ 0.18 $ 0.14 $ 0.31 $ 0.27
Diluted earnings per share $ 0.17 $ 0.14 $ 0.30 $ 0.26
</TABLE>
10
During the three and six months ended June 30, 1999 and 1998, the
Company had outstanding the following notes payable: 8% Convertible
Subordinated Notes due June 30, 2003 - $3,050,000; 8% Convertible
Subordinated Notes, Series B, due June 30, 2004 - $2,000,000; and
8% Convertible Subordinated Notes, Series C, due June 30, 2004 -
$3,000,000 (collectively "the Notes"). The Notes were not included
in the computation of diluted earnings per share for the three
months ended June 30, 1998 and the six months ended June 30, 1999
and 1998 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,
1999 1998 1999 1998
Current:
Federal $ 325,000 $ 182,000 $ 570,000 $ 432,000
State 72,000 64,000 135,000 119,000
Total current 397,000 246,000 705,000 551,000
Deferred:
Federal - 99,000 - 99,000
State - - - -
Total deferred - 99,000 - 99,000
Total income tax
provision $ 397,000 $ 345,000 $ 705,000 $ 650,000
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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, 1999, the Company operated 104 outpatient
physical and occupational therapy clinics in 29 states. The
average age of the 104 clinics in operation at June 30, 1999 was
3.5 years old. Since inception of the Company, 108 clinics have
been developed and six clinics have been acquired by the Company.
To date, the Company has closed five 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.
Results of Operations
Three Months Ended June 30, 1999 Compared to the Three Months Ended
June 30, 1998
Net Patient Revenues
Net patient revenues increased to $12,337,000 for the three months
ended June 30, 1999 ("1999 Second Quarter") from $10,600,000 for
the three months ended June 30, 1998 ("1998 Second Quarter"), an
increase of $1,737,000, or 16.4%. Net patient revenues from the 20
clinics opened after June 30, 1998 (the "New Clinics") accounted
for 61% of the increase, or $1,062,000. The remaining increase of
$675,000 in net patient revenues comes from those clinics open more
than one year as of June 30, 1999 (the "Old Clinics"). Of the
$675,000 increase in net patient revenues from these clinics, a 5%
increase in the number of patient visits increased net patient
revenues by $539,000, which was coupled with a slight increase in
the average net revenue per visit of one 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.
Prior to January 1, 1999, net patient revenues were reported net of
estimated retrospective adjustments under Medicare. Medicare
reimbursement for outpatient physical or occupational therapy
12
services furnished by clinics was based on a cost reimbursement
methodology. The Company was 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 1999, the Company's reimbursement for
outpatient therapy services provided to Medicare beneficiaries is
pursuant to a fee schedule published by the Department of Health
and Human Services ("HHS"). See "Balanced Budget Act of 1997."
Other Revenues
Other revenues, consisting of interest, management fees and
sublease income, increased by $27,000, or 15%, to $211,000 for the
1999 Second Quarter from $184,000 for the 1998 Second Quarter.
This increase was due primarily to management fees earned in
connection with four contracts the Company entered into during 1998
to manage third-party physical therapy clinics, offset, in part, by
a decrease in interest income as a result of both lower average
amounts of cash available for investment during the 1999 Second
Quarter and lower interest rates earned on invested cash.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
decreased slightly to 74% for the 1999 Second Quarter from 75% for
the 1998 Second Quarter.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $5,642,000 for the 1999
Second Quarter from $4,950,000 for the 1998 Second Quarter, an
increase of $692,000, or 14%. Approximately 88% of the increase,
or $607,000, was due to the New Clinics. This increase was coupled
with an increase of $85,000 for the Old Clinics. Salaries and
related costs as a percent of net patient revenues decreased
slightly to 46% for the 1999 Second Quarter from 47% for the 1998
Second Quarter.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $3,164,000 for the
1999 Second Quarter from $2,685,000 for the 1998 Second Quarter, an
increase of $479,000, or 18%. Approximately 93% of the increase,
or $445,000, was due to the New Clinics. This increase was coupled
with an increase of $34,000 for the Old Clinics. Rent, clinic
supplies and other as a percent of net patient revenues increased
slightly to 26% for the 1999 Second Quarter from 25% for the 1998
second Quarter.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $294,000 for the
1999 Second Quarter from $269,000 for the 1998 Second Quarter, an
increase of 9%, or $25,000. Approximately 92% of the increase, or
$23,000, was due to the New Clinics. The provision for doubtful
13
accounts as a percent of net patient revenues declined slightly to
2.4% for the 1999 Second Quarter from 2.5% for the 1998 Second
Quarter.
Corporate Office Costs - General & Administrative
General and administrative costs, consisting primarily of salaries
and benefits of corporate office personnel, rent, insurance costs,
depreciation and amortization, travel and legal and professional
fees, increased to $1,245,000 for the 1999 Second Quarter from
$1,025,000 for the 1998 Second Quarter, an increase of $220,000, or
21%. General and administrative costs increased primarily as a
result of salaries and benefits related to additional personnel
hired to support an increasing number of clinics and increased
legal and professional fees relating to the additional clinics. In
addition, in July 1998, the Company increased the square footage
occupied at its corporate office in Houston, Texas and extended the
lease for a five-year period ending July 2003. In connection with
these changes to the lease, rent expense increased substantially.
General and administrative costs as a percent of net patient
revenues remained unchanged at 10% for the 1999 and 1998 Second
Quarters.
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 $17,000, or 5%, to $341,000 for the
1999 Second Quarter from $324,000 for the 1998 Second Quarter. The
majority of this increase relates to an increase in salaries and
benefits of recruitment and development personnel and an increase
in marketing expenses. Recruitment and development costs as a
percent of net patient revenues remained unchanged at 3% for the
1999 and 1998 Second Quarters.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$183,000, or 38%, to $664,000 for the 1999 Second Quarter from
$481,000 for the 1998 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.
Income Before Income Taxes
The Company's income before income taxes rose $149,000 to
$1,016,000 for the 1999 Second Quarter from $867,000 for the 1998
Second Quarter principally due to the $1,764,000 increase in net
14
revenues, offset, in part, by the increase of $1,196,000 in clinic
operating costs, the $237,000 increase in corporate office costs,
and the $183,000 increase in minority interests in subsidiary
limited partnerships.
Provision for Income Taxes
The provision for income taxes increased to $397,000 for the 1999
Second Quarter from $345,000 for the 1998 Second Quarter, an
increase of $52,000, or 15%. During the 1999 and 1998 Second
Quarters, the Company accrued income taxes at an effective tax rate
of 39% and 40%, respectively. These rates exceeded the U.S.
statutory tax rate of 34% due primarily to state income taxes.
Six Months Ended June 30, 1999 Compared to the Six Months Ended
June 30, 1998
Net Patient Revenues
Net patient revenues increased to $23,675,000 for the six months
ended June 30, 1999 ("1999 Six Months") from $20,960,000 for the
six months ended June 30, 1998 ("1998 Six Months"), an increase of
$2,715,000, or 13%. Net patient revenues from the 20 clinics
opened after June 30, 1998 (the "New Clinics") accounted for 66% of
the increase, or $1,797,000. The remaining increase of $918,000 in
net patient revenues comes from those 84 clinics opened more than
one year as of June 30, 1999 (the "Old Clinics"). Of the $918,000
increase in net patient revenues from these clinics, a 4% increase
in the number of patient visits increased net patient revenues by
$878,000, which was coupled with a slight increase in the average
net revenue per visit.
Net patient revenues are based on established billing rates less
allowances and discounts for patients covered by worker's
compensation programs and other contractual programs. Payments
received under these programs are based on predetermined rates and
are generally less than the established billing rates of the
clinics. Net patient revenues reflect reserves, which are
evaluated quarterly by management, for contractual and other
adjustments relating to patient discounts from certain payors.
Prior to January 1, 1999, patient revenues were reported net of
estimated retrospective adjustments under Medicare. Medicare
reimbursement for outpatient physical or occupational therapy
services furnished by clinics was based on a cost reimbursement
methodology. The Company was 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 1999, the Company's reimbursement for
outpatient therapy services provided to Medicare beneficiaries is
pursuant to a fee schedule published by the HHS. See "Balanced
Budget Act of 1997".
15
Other Revenues
Other revenues, consisting of interest, management fees and
sublease income, increased by $31,000, or 8%, to $397,000 for the
1999 Six Months from $366,000 for the 1998 Six Months. This
increase was due primarily to management fees earned in connection
with four contracts the Company entered into during 1998 to manage
third-party physical therapy clinics, offset, in part, by a
decrease in interest income as a result of both lower average
amounts of cash available for investment during the 1999 Six Months
and lower interest rates earned on invested cash.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
remained unchanged at 75% for the 1999 and 1998 Six Months.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $11,149,000 for the 1999
Six Months from $9,869,000 for the 1998 Six Months, an increase of
$1,280,000, or 13%. Approximately 84% of the increase, or
$1,071,000, was due to the New Clinics. The remaining 16%
increase, or $209,000, is due principally to increased staffing to
meet the increase in patient visits for the Old Clinics, coupled
with an increase in bonuses earned by the managing therapists at
the Old Clinics. Such bonuses are based on the net revenues or
operating profit generated by the individual clinics. Salaries and
related costs as a percent of net patient revenues remained
unchanged at 47% for the 1999 and 1998 Six Months.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $6,060,000 for the
1999 Six Months from $5,351,000 for the 1998 Six Months, an
increase of $709,000, or 13%. Approximately 107% of the increase,
or $758,000, was due to the New Clinics. This increase was offset,
in part, by a decrease of $49,000 for the Old Clinics. Rent,
clinic supplies and other as a percent of net patient revenues
remained unchanged at 26% for the 1999 and 1998 Six Months.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts decreased to $538,000 for the
1999 Six Months from $542,000 for the 1998 Six Months, a decrease
of 0.7%, or $4,000. This decrease was due to a $42,000 decrease in
the Old Clinics, which was offset, in part, by an increase of
$38,000 related to the New Clinics. The provision for doubtful
accounts as a percent of net patient revenues declined slightly to
2.3% for the 1999 Six Months compared to 2.6% for the 1998 Six
Months.
Corporate Office Costs - General & Administrative
General and administrative costs, consisting primarily of salaries
and benefits of corporate office personnel, rent, insurance costs,
16
depreciation and amortization, travel and legal and professional
fees, increased to $2,352,000 for the 1999 Six Months from
$2,035,000 for the 1998 Six Months, an increase of $317,000, or
16%. General and administrative costs increased primarily as a
result of salaries and benefits related to additional personnel
hired to support an increasing number of clinics and increased
legal and professional fees relating to the additional clinics. In
addition, in July 1998, the Company increased the square footage
occupied at its corporate office in Houston, Texas and extended the
lease for a five-year period ending July 2003. In connection with
these changes to the lease, rent expense increased substantially.
General and administrative costs as a percent of net patient
revenues remained unchanged at 10% for the 1999 and 1998 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 $21,000, or 3%, to $633,000 for the
1999 Six Months from $612,000 for the 1998 Six Months. The
majority of this increase relates to an increase in salaries and
benefits of recruitment and development personnel. Recruitment and
development costs as a percent of net patient revenues remained
unchanged at 3% for the 1999 and 1998 Six Months.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$283,000, or 31%, to $1,194,000 for the 1999 Six Months from
$911,000 for the 1998 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.
Income Before Income Taxes
The Company's income before income taxes rose $144,000, or 9%, to
$1,785,000 for the 1999 Six Months from $1,641,000 for the 1998 Six
Months principally due to the $2,746,000 increase in
net revenues and the decrease in interest expense of $4,000,
offset, in part, by the increase of $1,985,000 in clinic operating
costs, the $338,000 increase in corporate office costs, and the
$283,000 increase in minority interests in subsidiary limited
partnerships.
Provision for Income Taxes
The provision for income taxes increased to $705,000 for the 1999
Six Months from $650,000 for the 1998 Six Months, an increase of
$55,000, or 8%. During the 1999 and 1998 Six Months, the Company
17
accrued income taxes at an effective tax rate of 39% and 40%,
respectively. These rates exceeded the U.S. statutory tax rate of
34% due primarily to state income taxes.
Liquidity and Capital Resources
At June 30, 1999, the Company had $2,626,000 in cash and cash
equivalents available to fund the working capital needs of its
operating subsidiaries, future clinic developments, acquisitions
and investments. Included in cash and cash equivalents at June 30,
1999 is $1,627,000 in a money market fund invested in short-term
debt instruments issued by an agency of the U.S. Government. The
market value of the money market fund approximated the carrying
value as of June 30, 1999.
The decrease in cash of $3,702,000 from December 31, 1998 to June
30, 1999 is due to the Company's use of cash to repurchase 346,000
shares of its common stock in May 1999 for $3,414,000, to fund
capital expenditures, primarily for physical therapy equipment and
leasehold improvements in the amount of $963,000, the purchase of
intangibles in the amount of $116,000, distributions to minority
investors in subsidiary limited partnerships of $1,107,000 and
payment on notes payable of $16,000, offset, in part, by cash
provided by operating activities of $1,822,000, proceeds from the
sale of fixed assets of $24,000, and proceeds of $67,000 from the
exercise of stock options.
The Company's current ratio decreased to 5.52 to 1.00 at June 30,
1999 from 5.80 to 1.00 at December 31, 1998. The decrease in the
current ratio is due primarily to the decrease in cash and cash
equivalents, a decrease in other current assets due to amortization
of prepaid expenses and an increase in accrued expenses due to an
increase in group health insurance. These factors were offset, in
part, by an increase in net patient revenues, which, in turn, have
caused an increase in patient accounts receivable, a reduction in
trade accounts payable and estimated third-party payor (Medicare)
settlements, and an increase in other accounts receivable. The
Company self insures its employees for health insurance. The
increase in other accounts receivable relates primarily to the
Company's recording an amount due from an insurance carrier
relating to health claims paid in excess of the Company's primary
liability.
At June 30, 1999, the Company had a debt-to-equity ratio of 0.87 to
1.00 compared to 0.70 to 1.00 at December 31, 1998. The increase
in the debt-to-equity ratio from December 31, 1998 to June 30, 1999
relates primarily to the decrease in equity as a result of the
common stock repurchase of $3,414,000 which was offset, in part, by
net income of $1,080,000 and the proceeds from the exercise of
stock options of $67,000 for the six months ended June 30, 1999.
18
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
use of available cash to repurchase up to 200,000 shares of Company
common stock in the open market. The timing and the actual number
of shares purchased will depend on market conditions. The
repurchased shares will be held as treasury shares and be available
for general corporate purposes. To date, under this authorization,
the Company has repurchased 4,900 shares at a cost of $47,000.
In addition, in April 1999, the Company's Board of Directors
authorized the use of available cash to purchase up to 346,000
shares of its common stock at a price not greater than $10.00 nor
less than $8.50 per share (the "Offer"). The Company conducted the
Offer through a procedure commonly referred to as a "Dutch
Auction." The Offer expired Friday, May 7, 1999. On May 14, 1999,
the Company completed the repurchase of 346,000 shares (9.6% of the
outstanding shares) pursuant to the terms of the Offer. The shares
were repurchased at a price of $9.75 per share for a total
aggregate cost of $3,414,000 (including expenses).
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.
Recently Promulgated Accounting Standards
In June 1997, the FASB issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information, which requires
public companies to use the "Management Approach" for disclosing
segment information. This replaces the "Industry Approach"
required by Statement No. 14. The new standard did not have a
material impact on the Company because the Company's management
approach is to view the Company as one reportable segment.
Factors Affecting Future Results
Clinic Development
As of June 30, 1999, the Company had 104 clinics in operation, five
of which opened in the 1999 Second Quarter. The Company expects to
continue opening new clinics at the same pace it did in 1998,
subject to, among other things, the Company's ability to identify
suitable geographic locations and physical therapy clinic partners.
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
19
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 significantly over the next three to five
years. Based on historical performance of the Company's new
clinics, the clinics opened since the 1998 Second Quarter should
favorably impact the Company's results of operations for 1999 and
beyond.
Growth in Physical Therapy Management
In July 1998, the Company entered into an agreement with an
orthopedic group to manage a physical therapy facility in New
England, bringing third-party facilities under management to five.
Management believes that with physician groups facing declining
incomes, the opportunity for enhancing the physicians' income
through the ownership of in-house physical therapy facilities is
becoming increasingly attractive. Since 1992, the Company has
offered management and administrative services to its network of
clinics owned with physical therapist partners. The Company is now
offering that expertise to physician groups nationwide. The
Company believes it has adequate internally generated funds to
support its planned growth in this area.
The Balanced Budget Act of 1997
The BBA provides that beginning in 1999, outpatient rehabilitation
services will be paid based on a fee schedule which has been
published by the Department of Health and Human Services ("HHS").
The BBA also provides that beginning in 1999, the total amount that
may be paid by Medicare in any one year for outpatient physical or
occupational therapy to any one patient will be limited to $1,500,
except for services provided in hospitals. The effect of the BBA
may be to encourage patients with extensive rehabilitation needs to
seek treatment in a hospital setting.
The Company does not anticipate that the changes in Medicare
reimbursement rates as outlined in the BBA will have a negative
impact on revenues in 1999. Management believes that the average
rate calculated under the cost reimbursement methodology will not
be significantly different than the average rate on the fee
schedule.
Year 2000
The Year 2000 problem is the result of two potential malfunctions
that could have an impact on the Company's systems and equipment.
The first problem arises due to computers being programmed to use
two rather than four digits to define the applicable year. The
second problem arises in embedded chips, where microchips and micro
controllers have been designed using two rather than four digits to
define the applicable year. Certain of the Company's computer
programs, building infrastructure components (e.g. alarm systems
20
and HVAC systems) and medical devices that are date sensitive, may
recognize a date using "00" as the year 1900 rather than the year
2000. If uncorrected, the problem could result in computer system
and program failures or equipment and medical device malfunctions
that could result in a disruption of business operations or that
could affect patient treatment.
With respect to the information technology ("IT") portions of the
Company's Year 2000 project, which address the assessment,
remediation, testing and implementation of software, the Company,
which uses only third-party software applications, has identified
third-party software applications and has begun remediation for all
these purchased software applications and is testing the software
applications where remediation has been completed. The Company
anticipates completing, in all material respects, remediation,
testing and implementation for third-party software by October
1999. The Company's efforts are currently on schedule.
With respect to the IT infrastructure portion of the Company's Year
2000 project, the Company has undertaken a program to inventory,
assess and correct, replace or otherwise address impacted vendor
products (hardware and telecommunication equipment). The Company
has implemented a program to contact vendors, analyze information
provided, and to remediate, replace or otherwise address IT
products that pose a material Year 2000 impact. The Company
anticipates completion, in all material respects, of the IT
infrastructure portion of its program by October 1999. The IT
infrastructure portion of the Company's Year 2000 project is
currently on schedule.
The Company presently believes that with modifications to existing
software or the installation of upgraded software under the IT
infrastructure portion, the Year 2000 will not pose material
operational problems for its computer systems. However, if such
modifications or upgrades are not accomplished in a timely manner,
Year 2000 related failures may present a material adverse impact on
the operations of the Company. Contingency planning will be
established and implemented in an effort to minimize any impact
from Year 2000 related failures.
With respect to the non-IT infrastructure portion of the Company's
Year 2000 project, the Company believes that it will not be
affected significantly by the Year 2000 since most of the Company's
physical and occupational equipment is manual in operation, rather
than being computerized. The Company will contact vendors as
needed to remediate, replace or otherwise address devices or
equipment that pose a Year 2000 impact.
The Company relies on third-party payors and intermediaries,
including government payors and intermediaries, for accurate and
timely reimbursement of claims, often through the use of electronic
data interfaces. Failure of these third-party systems could have
a material adverse affect on the Company's results of operations.
21
The Company is utilizing both internal and external resources to
manage and implement its Year 2000 program. With the assistance of
such resources, the Company has recently undertaken the development
of contingency plans in the event that its Year 2000 efforts are
not accurately or timely completed, or upon the failure of third-
party systems upon which the Company relies. This development
phase has continued into 1999 with the implementation of
contingency plans occurring later in 1999.
The Year 2000 project is currently estimated to have a minimum
total cost of $114,000, of which the Company has incurred $73,000
through June 30, 1999. The Company recognizes that the total cost
may increase as it continues its remediation and testing of IT
systems. The majority of the costs related to the Year 2000
project relate to purchases of equipment and software which will be
capitalized and expensed over a useful life of three years and
funded through operating cash flows.
The costs of the project and estimated completion dates for the
Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-
party modification plans and other factors. However, there can be
no guarantees that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in
this area.
Forward-Looking Statements
We make statements in this report that are considered to be
forward-looking statements within the meaning of the Securities and
Exchange Act of 1934. Such statements involve risks and
uncertainties that could cause actual results to differ materially
from those we project. When used in this report, the words
"anticipate,""believe,""estimate,""intend" and "expect" and similar
expressions are intended to identify such forward-looking
statements. The forward-looking statements are based on the
company's current views and assumptions and involve risks and
uncertainties that include, among other things, general economic,
business, and regulatory conditions, competition, federal and state
regulations, availability, terms and use of capital, environmental
issues, weather and Year 2000 readiness. Some or all of the
factors are beyond the Company's control. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. Please see the other sections of this
report and our other periodic reports filed with the SEC for more
information on these factors. These forward-looking statements
represent our estimates and assumptions only as of the date of this
report.
22
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
As of June 30, 1999, the Company had outstanding $3,050,000
aggregate principal amount of 8% Convertible Subordinated Notes due
June 30, 2003, $2,000,000 aggregate principal amount of 8%
Convertible Subordinated Notes, Series B, due June 30, 2004 and
$3,000,000 aggregate principal amount of 8% Convertible
Subordinated Notes, Series C, due June 30, 2004 (collectively, "the
Notes"). The Notes, which were issued in private placement
transactions, 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 ranges from $10.00 to $12.00 per share, subject to
adjustment as provided in the Notes. The fair value of the Notes
is not currently determinable due primarily to the convertibility
provision of the Notes and the fact that the Notes are not readily
marketable.
23
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 1999 annual meeting of shareholders
("Annual Meeting") on May 25, 1999. 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, James B.
Hoover, Marlin W. Johnston, Richard C.W. Mauran, Albert
L. Rosen and Bruce D. Broussard.
(c) The following votes were cast in the election of
directors:
Withhold
Nominees For Authority
J. Livingston Kosberg 2,267,242 3,100
Roy W. Spradlin 2,269,742 600
Mark J. Brookner 2,269,042 1,300
Daniel C. Arnold 2,269,742 600
James B. Hoover 2,269,742 600
Marlin W. Johnston 2,269,242 1,100
Richard C.W. Mauran 2,269,742 600
Albert L. Rosen 2,267,742 2,600
Bruce D. Broussard 2,269,742 600
There were a total of 2,270,342 shares represented by person or by
proxy at the Annual Meeting.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended June 30,
1999.
24
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, 1999 By: /s/ J. MICHAEL MULLIN
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
officer)
25
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