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 March 31, 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: 3,621,609 (as of April 30, 1999)
<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 March 31, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
1999 1998
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,276 $ 6,328
Patient accounts receivable, less
allowance for doubtful accounts
of $1,722 and $1,692,
respectively 8,865 8,505
Accounts receivable-other 316 183
Other current assets 558 614
Total current assets 16,015 15,630
Fixed assets:
Furniture and equipment 9,604 9,523
Leasehold improvements 4,667 4,537
14,271 14,060
Less accumulated depreciation 7,988 7,636
6,283 6,424
Noncompete agreements, net of
amortization of $354 and $340,
respectively 27 41
Goodwill, net of amortization of
$184 and $169, respectively 985 1,000
Other assets 989 1,005
$ 24,299 $ 24,100
See notes to consolidated financial statements.
3<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, December 31,
1999 1998
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 243 $ 553
Accrued expenses 887 1,094
Estimated third-party payor
(Medicare) settlements 906 944
Notes payable 33 32
Total current liabilities 2,069 2,623
Notes payable - long-term portion 68 76
Convertible subordinated notes
payable 8,050 8,050
Minority interests in subsidiary
limited partnerships 1,979 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 March 31, 1999 and
December 31, 1998, respectively 36 36
Additional paid-in capital 11,763 11,696
Accumulated earnings (deficit) 381 (80)
Treasury stock at cost, 4,900
shares held at March 31, 1999
and December 31, 1998,
respectively (47) (47)
Total shareholders' equity 12,133 11,605
$ 24,299 $ 24,100
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
March 31,
1999 1998
(unaudited)
Net patient revenues $ 11,338 $ 10,360
Other revenues 186 182
Net revenues 11,524 10,542
Clinic operating costs:
Salaries and related costs 5,507 4,919
Rent, clinic supplies and other 2,896 2,666
Provision for doubtful accounts 244 273
8,647 7,858
Corporate office costs:
General and administrative 1,107 1,010
Recruitment and development 292 288
1,399 1,298
Operating income before non-
operating expenses 1,478 1,386
Interest expense 179 182
Minority interests in subsidiary
limited partnerships 530 430
Income before income taxes 769 774
Provision for income taxes 308 305
Net income $ 461 $ 469
Basic earnings per common share $ .13 $ .13
Earnings per common share-assuming
dilution $ .13 $ .13
See notes to consolidated financial statements.
5<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
1999 1998
(unaudited)
Operating activities
Net income $ 461 $ 469
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 516 512
Minority interests in earnings
of subsidiary limited
partnerships 530 430
Provision for bad debts 244 273
Loss on sale of fixed assets 6 1
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (603) (562)
Increase in accounts receivable-
other (133) (55)
Decrease in other assets 68 64
Increase (decrease) in accounts
payable and accrued expenses (494) 177
Increase (decrease) in estimated
third-party payor (Medicare)
settlements (38) 179
Net cash provided by operating
activities 557 1,488
See notes to consolidated financial statements.
6<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
1999 1998
(unaudited)
Investing activities
Purchase of fixed assets (394) (423)
Proceeds on sale of fixed assets 23 -
Net cash used in investing
activities (371) (423)
Financing activities
Payment of notes payable (8) (17)
Proceeds from (withdrawals of)
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 (296) (209)
Net cash used in financing
activities (238) (225)
Net increase (decrease) in cash and
cash equivalents (52) 840
Cash and cash equivalents -
beginning of period 6,328 5,556
Cash and cash equivalents -
end of period $ 6,276 $ 6,396
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Income taxes $ 288 $ 55
Interest $ 161 $ 162
See notes to consolidated financial statements.
7<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 and limited
partnership interests ranging from 59% to 99% in the clinics it
operates (88% of the clinics were at 64% as of March 31, 1999).
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 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 ended March 31, 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.
8<PAGE>
Reclassifications
Certain amounts presented in the accompanying financial statements
for the three months ended March 31, 1998 have been reclassified to
conform with the presentation used for the three months ended March
31, 1999. This reclassification had no effect on net income.
2. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31,
1999 1998
Numerator:
Net income $ 461,000 $ 469,000
Numerator for basic earnings
per share and diluted earnings
per share $ 461,000 $ 469,000
Denominator:
Denominator for basic earnings
per share--weighted-average shares 3,614,165 3,610,734
Effect of dilutive securities:
Stock options 38,200 138,766
Dilutive potential common shares 38,200 138,766
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 3,652,365 3,749,500
Basic earnings per share $ 0.13 $ 0.13
Diluted earnings per share $ 0.13 $ 0.13
During the 1999 and 1998 First Quarters, the Company had
outstanding the following notes payable: 8% Convertible
Subordinated Notes due June 30, 2003, for an aggregate principal
amount of $3,050,000; 8% Convertible Subordinated Notes, Series B,
due June 30, 2004, for an aggregate principal amount of $2,000,000;
and 8% Convertible Subordinated Notes, Series C, due June 30, 2004,
for an aggregate principal amount of $3,000,000 (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.
9<PAGE>
3. Income Taxes
Significant components of the provision for income taxes, for the
three months ended March 31, were as follows:
1999 1998
Current:
Federal $ 246,000 $ 250,000
State 62,000 55,000
Total current 308,000 305,000
Deferred:
Federal - -
State - -
Total deferred - -
Total income tax provision $ 308,000 $ 305,000
4. Subsequent Event
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, at 5:00 p.m., New York City time.
The Company has set the purchase price under the Offer at $9.75.
The number of shares properly tendered and not withdrawn at or
below the purchase price was 579,203. The Company will purchase
346,000 shares at $9.75 per share under the terms of this Offer.
The proration fraction is 59.7%. The shares to be purchased
pursuant to the Offer represent approximately 9.6% of the common
stock outstanding as of May 12, 1999. The Company expects that the
depository will begin issuing payment for the shares on May 17,
1999. Following the purchase of the shares through the Offer, the
Company will have 3,275,609 shares of common stock outstanding.
10<PAGE>
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 March 31, 1999, the Company operated 101 outpatient
physical and occupational therapy clinics in 28 states. The
average age of the 101 clinics in operation at March 31, 1999 was
3.4 years old. Since inception of the Company, 103 clinics have
been developed and six clinics have been acquired by the Company.
To date, the Company has closed three facilities due to adverse
clinic performance, consolidated the operations of three of its
clinics with other existing clinics to more efficiently serve
various geographic markets and sold certain fixed assets at two of
the Company's clinics and then closed such facilities.
Results of Operations
Three Months Ended March 31, 1999 Compared to the Three Months
Ended March 31, 1998
Net Patient Revenues
Net patient revenues increased to $11,338,000 for the three months
ended March 31, 1999 ("1999 First Quarter") from $10,360,000 for
the three months ended March 31, 1998 ("1998 First Quarter"), an
increase of $978,000, or nine percent. Net patient revenues from
the 18 clinics developed since the 1998 First Quarter (the "New
Clinics") accounted for 102% of the increase, or $1,002,000. This
increase was offset, in part, by a decrease of $24,000 in net
patient revenues from clinics open more than one year as of March
31, 1999 (the "Old Clinics"). The $24,000 decrease relating to the
Old Clinics was due to a 0.8% decline in the average net revenue
per visit, offset, in part, by a 0.6% increase in the number of
patient visits. Excluding $105,000 of net patient revenues from a
clinic closed in August 1998, net patient revenues for the Old
Clinics would have increased by $81,000.
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
11<PAGE>
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 1998, certain changes were imposed on
the method in which the Company is reimbursed for its services by
Medicare as defined in the Balanced Budget Act of 1997 ("BBA").
See "Balanced Budget Act of 1997."
Other Revenues
Other revenues, consisting of interest, management fees and
sublease income, increased by $4,000, or two percent, to $186,000
for the 1999 First Quarter from $182,000 for the 1998 First
Quarter. This increase was due primarily to management fees earned
in connection with several 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
First Quarter and lower interest rates earned on invested cash.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
remained unchanged at 76% for the 1999 and 1998 First Quarters.
Excluding $167,000 of clinic operating costs from a clinic closed
in August 1998, clinic operating costs as a percent of net patient
revenues for the 1998 First Quarter would have been 74%.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $5,507,000 for the 1999
First Quarter from $4,919,000 for the 1998 First Quarter, an
increase of $588,000, or 12%. Approximately 101% of the increase,
or $591,000, was due to the New Clinics. This increase was offset,
in part, by a decrease of $3,000 for the Old Clinics. Salaries and
related costs as a percent of net patient revenues increased to 49%
for the 1999 First Quarter from 47% for the 1998 First Quarter.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $2,896,000 for the
1999 First Quarter from $2,666,000 for the 1998 First Quarter, an
increase of $230,000, or nine percent. Approximately 162% of the
increase, or $374,000, was due to the New Clinics. This increase
was offset, in part, by a decrease of $144,000 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 First
Quarters.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts decreased to $244,000 for the
1999 First Quarter from $273,000 for the 1998 First Quarter, a
decrease of 11%, or $29,000. Approximately 167% of the decrease,
or $49,000, was due to the Old Clinics, which was offset, in part,
12<PAGE>
by an increase of $20,000 related to the New Clinics. The
provision for doubtful accounts as a percent of net patient
revenues declined to 2.2% for the 1999 First Quarter from 2.6% for
the 1998 First 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 $1,107,000 for the 1999 First Quarter from
$1,010,000 for the 1998 First Quarter, an increase of $97,000, or
10%. General and administrative costs increased primarily as a
result of salaries and benefits related to additional personnel
hired to support an increasing number of clinics. In addition, 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 First
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 $4,000, or one percent, to $292,000 for
the 1999 First Quarter from $288,000 for the 1998 First Quarter.
The majority of this increase relates to an increase in salaries
and benefits of recruitment and development personnel added in 1998
to facilitate the acceleration of new clinic openings. This
increase was offset, in part, by a decrease in recruiting,
marketing and travel expenses as a result of two clinic openings in
the 1999 First Quarter compared to four in the 1998 First Quarter.
Recruitment and development costs as a percent of net patient
revenues remained unchanged at three percent for the 1999 and 1998
First Quarters.
Interest Expense
Interest expense decreased slightly to $179,000 for the 1999 First
Quarter from $182,000 for the 1998 First Quarter, primarily due to
the reduction in notes payable of $143,000 to $8,151,000 at March
31, 1999 from $8,294,000 at March 31, 1998.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$100,000, or 23%, to $530,000 for the 1999 First Quarter from
13<PAGE>
$430,000 for the 1998 First 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 of $769,000 for the 1999
First Quarter was slightly less than 1998's First Quarter income
before income taxes of $774,000 principally due to the $789,000
increase in clinic operating costs, the $101,000 increase in
corporate office costs, and the $100,000 increase in minority
interests in subsidiary limited partnerships, offset, in part, by
a $982,000 increase in net revenues.
Provision for Income Taxes
The provision for income taxes increased to $308,000 for the 1999
First Quarter from $305,000 for the 1998 First Quarter, an increase
of $3,000, or one percent. During the 1999 and 1998 First
Quarters, the Company accrued income taxes at a tax rate of 40% and
39%, respectively. These rates exceeded the U.S. statutory tax
rate of 34% due primarily to state income taxes.
Liquidity and Capital Resources
At March 31, 1999, the Company had $6,276,000 in cash and cash
equivalents 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 March 31, 1999 is
$3,700,000 of short-term U.S. government agency securities and
$1,216,000 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 U.S. government agency securities and the money market
fund approximated the carrying value as of March 31, 1999.
The decrease in cash of $52,000 from December 31, 1998 to March 31,
1999 is due to the Company's use of cash to fund capital
expenditures, primarily for physical therapy equipment and
leasehold improvements in the amount of $394,000, distributions to
minority partners in subsidiary limited partnerships of $296,000
and payment on notes payable of $8,000, offset, in part, by cash
provided by operating activities of $557,000, proceeds from the
sale of fixed assets of $23,000, and proceeds of $67,000 from the
exercise of stock options.
The Company's current ratio increased to 7.74 to 1.00 at March 31,
1999 from 5.96 to 1.00 at December 31, 1998. 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, coupled with a decrease in trade accounts
payable and accrued expenses as the Company used cash reserves to
reduce these amounts. Upon filing of cost reports for Medicare-
14<PAGE>
certified clinics due June 30, the Company expects to owe the
federal government approximately $906,000 as compared to $944,000
owed last year, relating to amounts paid exceeding allowable costs
for services to Medicare patients. The Company will pay these
amounts due related to Medicare cost report settlements from
existing cash reserves.
At March 31, 1999, the Company had a debt-to-equity ratio of 0.67
to 1.00 compared to 0.70 to 1.00 at December 31, 1998. The
improvement in the debt-to-equity ratio from December 31, 1998 to
March 31, 1999 relates primarily to the increase in equity as a
result of the net income of $461,000 and the proceeds from the
exercise of stock options of $67,000 for the quarter ended March
31, 1999.
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. As of March 31, 1999, 4,900 shares
have been repurchased 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.
Pursuant to the terms of the Offer, the Company will purchase
346,000 shares at $9.75 per share, aggregating $3,373,500. The
shares to be purchased pursuant to the Offer will represent
approximately 9.6% of the common stock outstanding as of May 12,
1999. Payment for the shares will be made using the Company's
available cash and should begin on May 17, 1999. Following the
purchase of the shares through the Offer, the Company will have
3,275,609 shares of common stock outstanding.
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.
15<PAGE>
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 March 31, 1999, the Company had 101 clinics in operation, two
of which opened in the 1999 First 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
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 First 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
16<PAGE>
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. Although these
provisions of the BBA are to be effective January 1, 1999, many
Medicare intermediaries do not yet have systems in place to begin
paying on the HHS fee schedule. Accordingly, they are continuing
to pay at the same rate as under the cost reimbursement methodology
and then, once the systems are in place, will make a retroactive
adjustment to January 1, 1999 for the difference in rates. This
adjustment should not significantly impact the Company's cash flow
or income.
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
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 July 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
17<PAGE>
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 July 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.
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 $48,000
through March 31, 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.
18<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
As of March 31, 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.
19<PAGE>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
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 March 31, 1999.
20<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: May 17, 1999 By: /s/ J. MICHAEL MULLIN
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
officer)
21<PAGE>
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