UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 10, 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 September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1999 1998
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,616 $ 6,328
Patient accounts receivable, less
allowance for doubtful accounts
of $1,940 and $1,692,
respectively 9,350 8,505
Accounts receivable - other 994 270
Other current assets 481 614
Total current assets 14,441 15,717
Fixed assets:
Furniture and equipment 10,346 9,523
Leasehold improvements 5,039 4,537
15,385 14,060
Less accumulated depreciation 8,934 7,636
6,451 6,424
Noncompete agreements, net of
amortization of $380 and $340,
respectively 1 41
Goodwill, net of amortization of
$217 and $169, respectively 1,077 1,000
Other assets 1,272 1,180
$ 23,242 $ 24,362
See notes to consolidated financial statements.
3
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
1999 1998
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 345 $ 553
Accrued expenses 2,186 1,356
Estimated third-party payor
(Medicare) settlements 492 944
Notes payable 33 32
Total current liabilities 3,056 2,885
Notes payable - long-term portion 51 76
Convertible subordinated notes
payable 8,050 8,050
Minority interests in subsidiary
limited partnerships 2,077 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 September 30, 1999 and
December 31, 1998, respectively 36 36
Additional paid-in capital 11,763 11,696
Accumulated earnings (deficit) 1,670 (80)
Treasury stock at cost, 350,900
and 4,900 shares held at
September 30, 1999 and
December 31, 1998, respectively (3,461) (47)
Total shareholders' equity 10,008 11,605
$ 23,242 $ 24,362
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
September 30,
1999 1998
(unaudited)
Net patient revenues $ 12,622 $ 10,956
Other revenues 264 188
Net revenues 12,886 11,144
Clinic operating costs:
Salaries and related costs 5,730 4,972
Rent, clinic supplies and other 3,160 2,938
Provision for doubtful accounts 296 319
9,186 8,229
Corporate office costs:
General and administrative 1,242 1,100
Recruitment and development 489 387
1,731 1,487
Loss on closure of facility - 230
Operating income before non-
operating expenses 1,969 1,198
Interest expense 183 185
Minority interests in subsidiary
limited partnerships 678 489
Income before income taxes 1,108 524
Provision for income taxes 438 267
Net income $ 670 $ 257
Basic earnings per common share $ .20 $ .07
Earnings per common share-assuming
dilution $ .19 $ .07
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Nine Months Ended
September 30,
1999 1998
(unaudited)
Net patient revenues $ 36,297 $ 31,916
Other revenues 661 554
Net revenues 36,958 32,470
Clinic operating costs:
Salaries and related costs 16,879 14,841
Rent, clinic supplies and other 9,220 8,289
Provision for doubtful accounts 834 861
26,933 23,991
Corporate office costs:
General and administrative 3,594 3,135
Recruitment and development 1,122 999
4,716 4,134
Loss on closure of facility - 230
Operating income before non-
operating expenses 5,309 4,115
Interest expense 544 550
Minority interests in subsidiary
limited partnerships 1,872 1,400
Income before income taxes 2,893 2,165
Provision for income taxes 1,143 917
Net income $ 1,750 $ 1,248
Basic earnings per common share $ .51 $ .35
Earnings per common share-assuming
dilution $ .49 $ .33
See notes to consolidated financial statements.
6
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
1999 1998
(unaudited)
Operating activities
Net income $ 1,750 $ 1,248
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,563 1,568
Minority interests in earnings
of subsidiary limited
partnerships 1,872 1,400
Provision for bad debts 834 861
Loss on sale of fixed assets 9 -
Loss on disposal of certain assets
in closure of facility - 144
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (1,678) (1,506)
Increase in accounts receivable-
other (724) (76)
Decrease in other assets 33 383
Increase (decrease) in accounts
payable and accrued expenses 645 (64)
Decrease in estimated third-party
payor (Medicare) settlements (452) (299)
Net cash provided by operating
activities 3,852 3,659
See notes to consolidated financial statements.
7
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
1999 1998
(unaudited)
Investing activities
Purchase of fixed assets (1,552) (1,427)
Purchase of intangibles (125) (245)
Proceeds on sale of fixed assets 25 10
Net cash used in investing
activities (1,652) (1,662)
Financing activities
Payment of notes payable (24) (43)
Acquisition of treasury stock (3,414) -
Proceeds from investment of minority
investors in subsidiary limited
partnerships 1 4
Proceeds from exercise of stock options 67 7
Distributions to minority investors
in subsidiary limited partnerships (1,542) (1,193)
Net cash used in financing
activities (4,912) (1,225)
Net increase (decrease) in cash and
cash equivalents (2,712) 772
Cash and cash equivalents -
beginning of period 6,328 5,556
Cash and cash equivalents -
end of period $ 3,616 $ 6,328
Supplemental disclosures of cash
flow information
Cash paid during the period for:
Income taxes $ 896 $ 791
Interest $ 487 $ 492
See notes to consolidated financial statements.
8
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 two clinics in which the Company owns a 26% and 6%
general partnership interest, and limited partnership interests
ranging from 59% to 99% in the clinics it operates (89% of the
clinics were at 64% as of September 30, 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 and nine months ended September 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 and nine months ended September 30, 1998 have been
reclassified to conform with the presentation used for the three
and nine months ended September 30, 1999. Such reclassifications
had no effect on net income.
2. Nature of Operations
Since inception, the Company has been engaged in the business of
developing, owning and operating outpatient physical therapy and
occupational therapy clinics. While physical and occupational
therapy remain the Company's primary focus, the Company's Board of
Directors has approved the implementation of several formative
steps in the establishment of a new line of business to own and
manage surgery centers in partnerships with surgeons. Although no
agreements have been reached to date, the Company is in discussions
with a number of orthopedic, as well as other, surgeons as part of
its new surgery center initiative. Recruitment and development
expenses include $146,000 and $149,000 of costs relating to the
surgery center initiative for the three and nine months ended
September 30, 1999, respectively.
10
3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Numerator:
<S> <C> <C> <C> <C>
Net income $ 670,000 $ 257,000 $1,750,000 $1,248,000
Numerator for basic earnings
per share and diluted
earnings per share 670,000 257,000 1,750,000 1,248,000
Effect of dilutive
securities:
Interest on convertible
subordinated notes payable 120,000 - 355,000 -
Numerator for diluted earnings
per share - income available
to common stockholders after
assumed conversions $ 790,000 $ 257,000 $2,105,000 $1,248,000
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 3,276,000 3,611,000 3,442,000 3,611,000
Effect of dilutive securities:
Stock options 48,000 158,000 46,000 154,000
Convertible subordinated
notes payable 772,000 - 772,000 -
Dilutive potential common
shares 820,000 158,000 818,000 154,000
Denominator for diluted
earnings per share--adjusted
weighted-average shares
and assumed conversions 4,096,000 3,769,000 4,260,000 3,765,000
Basic earnings per share $ .20 $ .07 $ .51 $ .35
Diluted earnings per share $ .19 $ .07 $ .49 $ .33
</TABLE>
During the three and nine months ended September 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 and nine months ended September 30, 1998 because the
effect on the computation was anti-dilutive.
11
4. Income Taxes
Significant components of the provision for income taxes were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Current:
Federal $ 467,000 $ 14,000 $1,037,000 $ 446,000
State 80,000 54,000 215,000 173,000
Total current 547,000 68,000 1,252,000 619,000
Deferred:
Federal (109,000) 199,000 (109,000) 298,000
State - - - -
Total deferred (109,000) 199,000 (109,000) 298,000
Total income tax
provision $ 438,000 $ 267,000 $1,143,000 $ 917,000
12
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 September 30, 1999, the Company operated 107
outpatient physical and occupational therapy clinics in 29 states.
The average age of the 107 clinics in operation at September 30,
1999 was 3.6 years old. Since inception of the Company, 112
clinics have been developed and six clinics have been acquired by
the Company. To date, the Company has closed six 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.
While the business of physical and occupational therapy remains the
Company's primary focus, the Company's Board of Directors has
approved the implementation of several formative steps in the
establishment of a new line of business to own and manage surgery
centers in partnerships with surgeons. Although no agreements have
been reached to date, the Company is in discussions with a number
of orthopedic, as well as other, surgeons as part of its new
surgery center initiative.
Results of Operations
Three Months Ended September 30, 1999 Compared to the Three Months
Ended September 30, 1998
Net Patient Revenues
Net patient revenues increased to $12,622,000 for the three months
ended September 30, 1999 ("1999 Third Quarter") from $10,956,000
for the three months ended September 30, 1998 ("1998 Third
Quarter"), an increase of $1,666,000, or 15.2%. Net patient
revenues from the 18 clinics opened after September 30, 1998 (the
"New Clinics") accounted for 49.9% of the increase, or $831,000.
The remaining increase of $835,000 in net patient revenues comes
from those 89 clinics open more than one year as of September 30,
1999 (the "Old Clinics"). Of the $835,000 increase in net patient
revenues from the Old Clinics, $427,000 was due to a 3.9% increase
in the number of patient visits, while $408,000 was due to a 3.6%
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 and reflect
13
amounts the Company ultimately expects to collect for services
provided. Payments received under these programs are based on
predetermined rates and are generally less than the established
billing rates of the clinics. Prior to January 1, 1999, Medicare
reimbursement for outpatient physical and 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 Balanced Budget Act of 1997
("BBA") provides that 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"),
and the total amount that may be paid by Medicare in any one year
for outpatient physical or occupational therapy to any one patient
is limited to $1,500, except for services provided in hospitals.
Other Revenues
Other revenues, consisting of interest, management fees and
sublease income, increased by $76,000, or 40%, to $264,000 for the
1999 Third Quarter from $188,000 for the 1998 Third 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 due primarily to lower average amounts
of cash available for investment during the 1999 Third Quarter.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
decreased to 73% for the 1999 Third Quarter from 75% for the 1998
Third Quarter, reflecting higher net patient revenues.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $5,730,000 for the 1999
Third Quarter from $4,972,000 for the 1998 Third Quarter, an
increase of $758,000, or 15%. Approximately 60% of the increase,
or $454,000, was due to the New Clinics. The remaining 40%
increase, or $304,000, related to the Old Clinics. Salaries and
related costs as a percent of net patient revenues remained
unchanged at 45% for the 1999 and 1998 Third Quarters.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $3,160,000 for the
1999 Third Quarter from $2,938,000 for the 1998 Third Quarter, an
increase of $222,000, or 8%. The total increase was comprised of
a $289,000 increase related to the New Clinics, offset, in part, by
a $67,000 decrease related to the Old Clinics. Rent, clinic
supplies and other as a percent of net patient revenues decreased
to 25% for the 1999 Third Quarter from 27% for the 1998 Third
Quarter.
14
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts decreased to $296,000 for the
1999 Third Quarter from $319,000 for the 1998 Third Quarter, a
decrease of 7%, or $23,000. This decrease was due to a $40,000
decrease in the Old Clinics, which was offset, in part, by an
increase of $17,000 related to the New Clinics. The provision for
doubtful accounts as a percent of net patient revenues declined to
2.3% for the 1999 Third Quarter from 2.9% for the 1998 Third
Quarter.
Corporate Office Costs - General and 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 $1,242,000 for the 1999 Third Quarter from
$1,100,000 for the 1998 Third Quarter, an increase of $142,000, or
13%. 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. General and
administrative costs as a percent of net patient revenues remained
unchanged at 10% for the 1999 and 1998 Third Quarters.
Corporate Office Costs - Recruitment and 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 and
the development of the new surgery center line of business.
Recruitment and development personnel have no involvement with a
facility following opening. All recruitment and development
personnel are located at the corporate office in Houston, Texas.
Recruitment and development costs increased $102,000, or 26%, to
$489,000 for the 1999 Third Quarter from $387,000 for the 1998
Third Quarter. Recruitment and development expenses related to the
new surgery center initiative accounted for 143%, or $146,000, of
the increase between the 1999 and 1998 periods. The majority of
the $146,000 related to consulting fees, salaries of development
personnel, legal fees and travel associated with potential
acquisitions of surgery centers and identifying and investigating
potential sites for the development of new surgery centers, coupled
with costs incurred to begin development of systems needed to
operate surgery centers. Excluding the effects of the new surgery
center initiative, recruitment and development expenses decreased
$44,000, or 11%. Recruitment and development costs as a percent of
net patient revenues increased slightly to 3.9% for the 1999 Third
Quarter from 3.5% for the 1998 Third Quarter.
Loss on Closure of Facility
In August 1998, the Company closed its clinic located in Corpus
Christi, Texas due to adverse clinic performance. During 1998, the
Company recognized a $230,000 loss related to this closure. Of the
15
$230,000 loss, $18,000 represented lease commitments, $99,000 was
due to the write-off of goodwill, fixed assets, leasehold
improvements and a non-compete agreement and the remainder was
costs incurred in connection with closing the facility.
The Corpus Christi, Texas clinic accounted for net patient revenues
and clinic operating costs for the three months ended September 30,
1998 of $51,000 and $196,000, respectively.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$189,000, or 39%, to $678,000 for the 1999 Third Quarter from
$489,000 for the 1998 Third Quarter due to the increase in
aggregate profitability of those clinics in which partners have
achieved positive retained earnings and are accruing partnership
income.
Income Before Income Taxes
Excluding the 1998 Third Quarter loss on closure of the Corpus
Christi, Texas facility, the Company's income before income taxes
rose $354,000 to $1,108,000 for the 1999 Third Quarter from
$754,000 for the 1998 Third Quarter principally due to the
$1,742,000 increase in net revenues, offset, in part, by the
increase of $957,000 in clinic operating costs, the $244,000
increase in corporate office costs, and the $189,000 increase in
minority interests in subsidiary limited partnerships.
Provision for Income Taxes
The provision for income taxes increased to $438,000 for the 1999
Third Quarter from $267,000 for the 1998 Third Quarter, an increase
of $171,000, or 64%. During the 1999 and 1998 Third Quarters, the
Company accrued income taxes at an effective tax rate of 40% and
51%, respectively. The 1999 rate exceeded the U.S. statutory tax
rate of 34% due primarily to state income taxes. The 1998 Third
Quarter tax provision included the write-off of intangibles not
deducted for federal income tax purposes in connection with the
closure of the Company's clinic in Corpus Christi, Texas. This
write-off, coupled with the effect of state income taxes, caused
the effective tax rate for the 1998 Third Quarter to exceed the
U.S. statutory tax rate of 34%.
Nine Months Ended September 30, 1999 Compared to the Nine Months
Ended September 30, 1998
Net Patient Revenues
Net patient revenues increased to $36,297,000 for the nine months
ended September 30, 1999 ("1999 Nine Months") from $31,916,000 for
the nine months ended September 30, 1998 ("1998 Nine Months"), an
increase of $4,381,000, or 14%. Net patient revenues from the New
16
Clinics accounted for 34% of the increase, or $1,507,000. The
remaining increase of $2,874,000 in net patient revenues related to
the Old Clinics. Of the $2,874,000 increase in net patient
revenues from the Old Clinics, $2,533,000 was due to an 8% increase
in patient visits with the remainder resulting from 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 and reflects
amounts the Company ultimately expects to collect for services
provided. Payments received under these programs are based on
predetermined rates and are generally less than the established
billing rates of the clinics. Prior to January 1, 1999, Medicare
reimbursement for outpatient physical and 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 BBA provides that
reimbursement for outpatient therapy services provided to Medicare
beneficiaries is pursuant to a fee schedule published by HHS and
the total amount that may be paid by Medicare in any one year for
outpatient physical or occupational therapy to any one patient is
limited to $1,500, except for services provided in hospitals.
Other Revenues
Other revenues, consisting of interest, management fees and
sublease income, increased by $107,000, or 19%, to $661,000 for the
1999 Nine Months from $554,000 for the 1998 Nine 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 due primarily to lower average amounts
of cash available for investment during the 1999 Nine Months.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
decreased slightly to 74% for the 1999 Nine Months from 75% for the
1998 Nine Months.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $16,879,000 for the 1999
Nine Months from $14,841,000 for the 1998 Nine Months, an increase
of $2,038,000, or 14%. Approximately 48% of the increase, or
$988,000, was due to the New Clinics. The remaining 52% increase,
or $1,050,000, was 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
17
costs as a percent of net patient revenues remained unchanged at
47% for the 1999 and 1998 Nine Months.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $9,220,000 for the
1999 Nine Months from $8,289,000 for the 1998 Nine Months, an
increase of $931,000, or 11%. Approximately 80% of the increase,
or $749,000, was due to the New Clinics. The remaining 20%
increase, or $182,000, related to the Old Clinics. Rent, clinic
supplies and other as a percent of net patient revenues decreased
slightly to 25% for the 1999 Nine Months from 26% for the 1998 Nine
Months.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts decreased to $834,000 for the
1999 Nine Months from $861,000 for the 1998 Nine Months, a decrease
of 3%, or $27,000. This decrease was due to a $58,000 decrease in
the Old Clinics, which was offset, in part, by an increase of
$31,000 related to the New Clinics. The provision for doubtful
accounts as a percent of net patient revenues declined to 2.3% for
the 1999 Nine Months compared to 2.7% for the 1998 Nine Months.
Corporate Office Costs - General and 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 $3,594,000 for the 1999 Nine Months from
$3,135,000 for the 1998 Nine Months, an increase of $459,000, or
15%. 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 Nine
Months.
Corporate Office Costs - Recruitment and 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 and
the development of the new surgery center line of business.
Recruitment and development personnel have no involvement with a
facility following opening. All recruitment and development
personnel are located at the corporate office in Houston, Texas.
Recruitment and development costs increased $123,000, or 12%, to
$1,122,000 for the 1999 Nine Months from $999,000 for the 1998 Nine
18
Months. Recruitment and development expenses related to the new
surgery center initiative accounted for 121%, or $149,000, of the
increase between the 1999 and 1998 nine month periods. The
majority of the $149,000 related to consulting fees, salaries of
development personnel, legal fees and travel associated with
potential acquisitions of surgery centers and identifying and
investigating potential sites for the development of new surgery
centers, coupled with costs incurred to begin development of
systems needed to operate surgery centers. Excluding the effects
of the new surgery center initiative, recruitment and development
expenses decreased $26,000, or 3%. Recruitment and development
costs as a percent of net patient revenues remained unchanged at 3%
for the 1999 and 1998 Nine Months.
Loss on Closure of Facility
In August 1998, the Company closed its clinic located in Corpus
Christi, Texas due to adverse clinic performance. During 1998, the
Company recognized a $230,000 loss related to this closure. Of the
$230,000 loss, $18,000 represented lease commitments, $99,000 was
due to the write-off of goodwill, fixed assets, leasehold
improvements and a non-compete agreement and the remainder was
costs incurred in connection with closing the facility.
The Corpus Christi, Texas clinic accounted for net patient revenues
and clinic operating costs for the nine months ended September 30,
1998 of $223,000 and $543,000, respectively.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$472,000, or 34%, to $1,872,000 for the 1999 Nine Months from
$1,400,000 for the 1998 Nine Months due to the increase in
aggregate profitability of those clinics in which partners have
achieved positive retained earnings and are accruing partnership
income.
Income Before Income Taxes
Excluding the 1998 Nine Month loss on closure of the Corpus
Christi, Texas facility, the Company's income before income taxes
rose $498,000, or 21%, to $2,893,000 for the 1999 Nine Months from
$2,395,000 for the 1998 Nine Months principally due to the
$4,488,000 increase in net revenues, offset, in part, by the
increase of $2,942,000 in clinic operating costs, the $582,000
increase in corporate office costs, and the $472,000 increase in
minority interests in subsidiary limited partnerships.
Provision for Income Taxes
The provision for income taxes increased to $1,143,000 for the 1999
Nine Months from $917,000 for the 1998 Nine Months, an increase of
$226,000, or 25%. During the 1999 and 1998 Nine Months, the
Company accrued income taxes at an effective tax rate of 40% and
19
42%, respectively. The 1999 rate exceeded the U.S. statutory tax
rate of 34% due primarily to state income taxes. The 1998 Nine
Months tax provision included the write-off of intangibles not
deducted for federal income tax purposes in connection with the
closure of the Company's clinic in Corpus Christi, Texas. This
write-off, coupled with the effect of state income taxes, caused
the effective tax rate for the 1998 Nine Months to exceed the U.S.
statutory tax rate of 34%.
Liquidity and Capital Resources
At September 30, 1999, the Company had $3,616,000 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
September 30, 1999 was $994,000 of short-term commercial paper and
$1,334,000 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 commercial paper and money market fund approximated
the carrying value as of September 30, 1999.
The decrease in cash of $2,712,000 from December 31, 1998 to
September 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, funding capital expenditures, primarily for physical
therapy equipment and leasehold improvements in the amount of
$1,552,000, the purchase of intangibles in the amount of $125,000,
distributions to minority investors in subsidiary limited
partnerships of $1,542,000 and payment on notes payable of $24,000,
offset, in part, by cash provided by operating activities of
$3,852,000, proceeds from the sale of fixed assets of $25,000, and
proceeds of $67,000 from the exercise of stock options.
The Company's current ratio decreased to 4.73 to 1.00 at September
30, 1999 from 5.45 to 1.00 at December 31, 1998. The decrease in
the current ratio was due primarily to the decrease in cash and
cash equivalents, a decrease in other current assets due to
amortization of prepaid expenses, an increase in accrued expenses
due to an increase in the group health insurance accrual and an
increase in the current tax liability. 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 accounts receivable -
other. The Company self insures its employees for health insurance
and reinsures risks beyond a primary liability amount. The
increase in accounts receivable - other related primarily to an
amount due, subject to audit, from an insurance carrier related to
health claims paid by the Company in excess of the Company's
primary liability.
20
At September 30, 1999, the Company had a debt-to-equity ratio of
0.81 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
September 30, 1999 related 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 $1,750,000 and the proceeds from
the exercise of stock options of $67,000 for the nine months ended
September 30, 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. 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," and completed the repurchase of 346,000 shares (9.6% of
the outstanding shares) in May 1999. 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 September 30, 1999, the Company had 107 clinics in operation,
four of which opened in the 1999 Third Quarter. The Company
21
expects to continue opening new clinics at the same pace, 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 Third 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 facilities managed for physician groups to four.
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.
Surgery Center Initiative
While the business of physical and occupational therapy remains the
Company's primary focus, the Company's Board of Directors has
approved the implementation of several formative steps in the
establishment of a new line of business to own and manage surgery
centers in partnerships with surgeons. Although no agreements have
been reached to date, the Company is in discussions with a number
of orthopedic, as well as other, surgeons as part of its new
surgery center initiative. The Company has hired a Senior Vice
President of Surgery Center Operations and engaged a consultant,
with several years of experience in the acquisition, construction,
and operation of surgery centers, to assist the Company to develop
the systems, methods, and projects necessary for a surgery center
business. For the three and nine months ended September 30, 1999,
the Company expensed approximately $146,000 and $149,000,
respectively, related to the development of its surgery center
initiative.
22
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 which may malfunction in the year
2000 and has substantially completed the remediation process for
such third-party software where such Year 2000 failure would have
a significant impact on the Company's operations. The Company is
testing the software applications where remediation has been
completed.
With respect to the IT infrastructure portion of the Company's Year
2000 project, the Company has completed a program to inventory,
assess and correct, replace or otherwise address impacted vendor
products (hardware and telecommunication equipment). The Company
has completed a program to contact vendors, analyze information
provided, and has remediated, replaced or otherwise addressed IT
products that pose a material Year 2000 impact. The Company has
also purchased and inventoried additional Year 2000 compliant
hardware as part of its contingency plan for Year 2000 related
hardware failures.
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. The Company's mission critical
functions, such as payroll and billing, can be performed using
manual procedures should the software applications fail. The
Company is continuing to explore alternative methods of performing
various functions which may be subject to Year 2000 related
failures.
23
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 therapy 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 will have credit facilities with a bank in place should
failure of third-party systems or payors create an interruption in
cash receipts for services.
The Year 2000 project is currently estimated to have a minimum
total cost of $114,000 of which the Company has incurred $92,000
through September 30, 1999 for hardware and software. The Company
does not feel that the total cost will 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
Some statements in this report are considered to be forward-looking
statements within the meaning of the Securities and Exchange Act of
1934. 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
24
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 Securities and Exchange
Commission 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 September 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.
25
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
A current report on Form 8-K reporting a change in
registrant's independent public accountants, which
occurred on September 27, 1999, was filed with the
Securities and Exchange Commission on September 30, 1999.
26
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: November 15, 1999 By: /s/ J. MICHAEL MULLIN
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
officer)
27
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