UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 1-11151
U.S. PHYSICAL THERAPY, INC.
(Name of 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
Securities registered pursuant to Section 12(b) of the Exchange
Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange
Act: Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
State the aggregate market value of the voting stock held by
non-affiliates of the registrant:
$18,295,000
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable
date: 3,611,609
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K
Portions of Definitive Proxy PART III
Statement for the 1999 Annual
Meeting of Shareholders
Forward Looking Statements
We make statements in this report that are considered forward
looking statements within the meaning of the Securities Exchange
Act of 1934. Sometimes these statements will contain words such as
"believes,""expects,""intends,""plans," and other similar words.
These statements are not guarantees of our future performance and
are subject to risks, uncertainties, and other important factors
that could cause our actual performance or achievements to be
materially different from those we project. These risks,
uncertainties, and factors include, but are not limited to:
general economic, business, and regulatory conditions,
competition,
federal and state regulations,
availability, terms, and use of capital,
nuclear and environmental issues,
weather,
industry restructuring and cost recovery, and
year 2000 readiness.
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.
PART I
Item 1. Description of Business.
General
U.S. Physical Therapy, Inc. (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 December 31, 1998, the
Company operated 99 outpatient physical and occupational therapy
clinics in 28 states. The average age of the 99 clinics in
operation at December 31, 1998 was 3.2 years. Since inception of
the Company, 101 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
2
closed such facilities. A total of 20 clinics were opened in 1998.
Management presently anticipates to maintain the pace of new clinic
openings in 1999.
The clinics provide post-operative care and treatment for a
variety of orthopedic-related disorders and sports-related
injuries, treatment for neurologically-related injuries,
rehabilitation of injured workers and preventative care. Each
clinic's staff typically includes one or more licensed physical
and/or occupational therapists and office personnel, and may also
include physical and/or occupational therapy assistants, aides,
exercise physiologists and athletic trainers. The clinics perform
a tailored and comprehensive evaluation of each patient which is
followed by a treatment plan specific to their type of injury. The
treatment plan may include the use of modalities and procedures
such as ultrasound, electrical stimulation, hot packs and
iontophoresis, therapeutic exercise, manual therapy techniques,
education on management of daily life skills and home exercise
programs. The clinics' business primarily originates from
physician referrals. The principal sources of payment for the
clinics' services are commercial health insurance, workers'
compensation insurance, managed care programs, Medicare and
proceeds from personal injury cases. The Company's strategy is to
develop and acquire outpatient clinics on a national basis.
The Company's development strategy is to attract physical and
occupational therapists who have established relationships with
physicians by offering them the opportunity to acquire a
partnership interest in a new clinic to be developed by the
Company. In addition, the clinic partner receives a competitive
salary and bonus based on his or her clinic's net revenue and
profitability. The Company is presently engaged in discussions
with several prospective therapist partners.
While the Company is committed to the partnership program as
its core business, it has begun to manage third-party physical
therapy facilities for physician practices, with five such third-
party facilities under management as of December 31, 1998. The
Company 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.
3
The Company was formed in June 1990 and operated as a
subchapter S Corporation until August 1991 when, in conjunction
with a $2,500,000 private placement, it reorganized into a limited
partnership form of organization. In May 1992, in connection with
the Company's initial public offering, the Company was reorganized
into its present form, a Nevada corporation with operating
subsidiaries organized in the form of limited partnerships. In
such reorganization, the prior owners of the limited partnership
interests and the corporate general partner corporations exchanged
their interests for 2,000,000 shares of the Company's common stock.
In June 1992, the Company completed its initial public offering.
The offering proceeds, net of offering costs, were $7,010,350
resulting from the sale by the Company of 1,200,000 shares of its
common stock in the initial offering and the subsequent sale of
140,000 over allotment shares.
In June 1993, the Company completed the issuance and sale at
par in a private placement of $3,050,000 of 8% Convertible
Subordinated Notes due June 30, 2003. In March 1994, the Company
completed the private placement of 172,000 shares of common stock
at a purchase price of $7.50 per share. In May 1994, the Company
completed the issuance and sale at par in a private placement of
$2,000,000 of 8% Convertible Subordinated Notes, Series B due June
30, 2004 and $3,000,000 of 8% Convertible Subordinated Notes,
Series C due June 30, 2004 (collectively, the initial series of
Convertible Subordinated Notes, the Series B Notes and the Series
C Notes are hereinafter referred to as the "Convertible
Subordinated Notes").
The Convertible Subordinated Notes are convertible at the
option of the holders thereof into the number of whole shares of
Company common stock determined by dividing the principal amount of
the Notes so converted by $10.00 (in the case of the initial series
and the Series C Notes) or $12.00 (in the case of the Series B
Notes), subject to adjustment under certain circumstances. Holders
of Series B Notes were entitled to receive an interest enhancement
payable in shares of Company common stock based upon the market
value of the Company's common stock at June 30, 1996. In July
1996, the Company issued 70,965 shares of its common stock in
connection with the interest enhancement provision. Net proceeds
from these private placements totaled approximately $6,166,000, and
were used by the Company to fund prior period deficits from
operations and capital expenditures in 1993 through 1996 relating
to the Company's clinic development program in those years.
4
Unless the context otherwise requires, references in this Form
10-K to the Company include the Company and all its subsidiaries.
The Company's principal executive offices are located at 3040 Post
Oak Blvd., Suite 222, Houston, Texas 77056, and its telephone
number is (713) 297-7000.
The Company's Clinics
The managing physical and/or occupational therapist of each
clinic owns a partial interest in the clinic he or she operates.
For the majority of the clinics, this is accomplished by having
each clinic structured as a separate limited partnership (the
"Operating Subsidiaries"). As of December 31, 1998, the Company,
through its wholly-owned subsidiaries, owned a 1% general
partnership interest and limited partnership interest ranging from
59% to 99% in the clinics it operates (88% of the clinics were at
64%). For the majority of the clinics, the managing therapist of
each such clinic, along with other therapists at the clinic in
several of the partnerships, own the remaining limited partnership
interest in the clinic which ranges from 0% to 40% (12% of the
clinics were at 35%).
The majority of the partnership agreements are structured such
that the managing therapist begins with a 20% profit interest in
his or her clinic limited partnership and, at the end of each of
the first five years, the managing therapist's profit interest
increases by 3% until his or her interest reaches 35%. These
therapists have no interest in net losses of clinic partnerships,
except to the extent of their capital accounts. The Company
presently anticipates that future clinics developed by the Company
will be structured in a comparable manner.
In addition, each managing therapist initially enters into a
five-year employment agreement with the Company providing for a
covenant not to compete during his or her employment plus one to
two years thereafter. Pursuant to each employment agreement, the
managing therapist receives a base salary and a monthly bonus based
on the net revenues or operating profit generated by his or her
Operating Subsidiary. Each employment agreement provides that each
managing therapist is required to sell his or her partnership
interest in the Operating Subsidiary for the amount of his or her
capital account if he or she terminates employment with the
Operating Subsidiary during the employment term. There are no
provisions for purchase by the Company of the managing therapist's
interest in the Operating Subsidiary in the event of death or
disability, or after the initial five-year term of employment.
5
The Company's business plan is to have each clinic maintain an
independent local identity, while at the same time enjoying the
benefits of national purchasing, third-party payor contracts and
centralized management controls. Pursuant to a management
agreement, U.S. PT Management, Ltd. ("USPTM"), a Texas limited
partnership owned indirectly by the Company, provides a variety of
services to each clinic, including supervision of site selection,
construction, clinic design and equipment selection, establishment
of accounting systems and procedures and training of office support
personnel, management oversight of operations, ongoing accounting
services and marketing support.
The Company's typical clinic occupies approximately 2,000 to
4,000 square feet of space under a lease in an office building or
shopping center. The Company seeks to obtain leases for its
clinics at ground level (although it may not always be successful
in obtaining such leases), in order to make access to its clinics
as easy as possible for patients. The Company also attempts to
make the decor in its clinics less institutional and more
aesthetically pleasing than hospital clinics. The typical staff
needed to operate a clinic in its initial stages is a licensed
physical and/or occupational therapist and an office manager.
Staffing may also include physical and/or occupational therapy
assistants, aides, exercise physiologists and athletic trainers.
As patient visits grow over several years, the typical staffing
will be increased to include two or more additional licensed
physical and/or occupational therapists and one or two additional
office personnel. All therapy services provided are performed
under the direct supervision of a licensed physical and/or
occupational therapist.
The clinics provide post-operative care and treatment for a
variety of orthopedic-related disorders and sports-related
injuries, treatment for neurologically-related injuries,
rehabilitation of injured workers and preventative care. The
clinics perform a tailored and comprehensive evaluation of each
patient which is followed by a treatment plan specific to their
type of injury. The treatment plan may include the use of
modalities and procedures, such as ultrasound, electrical
stimulation, hot packs, iontophoresis, therapeutic exercise, manual
therapy techniques, education on management of daily life skills
and home exercise programs. The Company currently provides its
services at its clinics only on an outpatient basis. Patients
requiring these types of services are usually treated for
approximately one hour per day, two to five times a week. This
form of treatment typically lasts two to six weeks. The Company's
6
charge for the treatment is generally on a per procedure basis. In
addition to the services mentioned, the clinics will, when
appropriate, develop individual maintenance exercise programs to be
continued after treatment. Advice on postural improvements and
changes in work habits or lifestyle is provided to promote self-
management of the patient's condition. The Company continues to
assess the potential for developing new services and expanding the
method of providing its current services, with an emphasis on
health insurance and workers' compensation insurance cost
containment.
Industry Background
Physical and occupational therapy is the process of aiding in
the restoration of individuals disabled by injury or disease or
recovering from surgery. Management believes that the following
factors are influencing the growth of outpatient physical and
occupational therapy services:
Economic Benefits of Physical and Occupational Therapy
Services. Purchasers and providers of health care services, such
as insurance companies, health maintenance organizations, business
and industry, are seeking ways to save on traditional health care
services. Management believes physical and occupational therapy
services represent a cost-effective service, by attempting to
prevent short-term disabilities from becoming chronic conditions,
and by speeding the recovery from surgery and musculoskeletal
injuries.
Earlier Hospital Discharge. Changes in health insurance
reimbursement, both public and private, have encouraged the early
discharge of patients in order to contain and reduce costs.
Management believes early hospital discharge practices foster
greater numbers of individuals requiring outpatient physical and
occupational therapy services.
Aging Population. The elderly population, which has
experienced rapid growth over the past several decades, has a
greater incidence of major disability. This growth has fueled the
demand for rehabilitation services.
Marketing
On a local basis, the Company focuses its marketing efforts on
physicians, mainly orthopedic surgeons, neurosurgeons,
physiatrists, occupational medicine and general practitioners,
7
which generally account for the majority of physical and
occupational therapy referrals. In marketing to the physician
community, the clinics emphasize their commitment to quality
patient care and communication with physicians regarding patient
progress. On a national level, the Company employs a marketing
director to assist the managing therapists in establishing referral
relationships with health maintenance organizations, preferred
provider organizations, industry and case managers and insurance
companies for clinic therapy services, as well as to develop and
implement marketing plans for marketing to the physician community.
Sources of Revenue/Reimbursement
Payor sources for the current clinics' services are primarily
commercial health insurance, managed care programs, workers'
compensation insurance, Medicare and proceeds from personal injury
cases. Commercial health insurance and managed care programs
generally provide outpatient services coverage to patients
utilizing the clinics, and the patient is normally required to pay
an annual deductible and a co-insurance payment. Workers'
compensation is a statutorily defined employee benefit which varies
on a state-by-state basis. Workers' compensation laws generally
require employers to pay for employees' costs of medical
rehabilitation, lost wages, legal fees and other costs associated
with work-related injuries and disabilities and, in certain
jurisdictions, mandatory vocational rehabilitation. These statutes
generally require that these benefits be offered to employees
without any deductibles, co-payments or cost sharing. Companies
may provide such coverage to their employees through either the
purchase of insurance from private insurance companies,
participation in state-run funds or through self-insurance.
Treatments for patients who are parties to personal injury cases
are generally paid for from the proceeds of settlements with
insurance companies or from judgements, if favorable. If an
unfavorable judgement is received, collection efforts are generally
not pursued against the patient and the patient's account is
written off against established reserves. The Company estimates
the percentage of accounts receivable relating to personal injury
cases that will be uncollectible. Such percentage, which currently
ranges from 10% to 20%, is periodically reviewed and adjusted by
the Company.
The Company's business depends to a significant extent on its
relationships with physicians, commercial health insurers, workers'
compensation insurers, and other referral sources, such as health
maintenance organizations and preferred provider organizations. If
8
clinics are located in certain geographical areas, it is important
for them to be approved as providers by certain key health
maintenance organizations and preferred provider plans. If these
clinics do not obtain such approval, or if they cannot maintain
such approval, the Company could be adversely affected.
As of December 31, 1998, 78 of the Company's clinics have been
certified as Medicare providers and 11 are in the process of
becoming certified. Management anticipates that, in the future,
newly developed clinics will generally elect to become certified as
Medicare providers. No assurance can be given that the newly
developed clinics will become certified as Medicare providers.
Prior to 1998, Medicare reimbursement for outpatient physical
and/or occupational therapy furnished by a Medicare-certified
rehabilitation agency or clinic was equal to the lesser of the
provider's "reasonable costs" as allowed under Medicare
regulations, or the provider's customary charges. Individual
beneficiaries, or their "Medigap" insurance carriers if such
coverage exists, were required to pay a deductible and co-payment
amount, so that governmental payments to the Company did not exceed
80% of the reasonable cost of such services. Beginning in 1998,
Medicare imposed new constraints on reimbursement for outpatient
physical and/or occupational therapy services. In 1998, Medicare
reimbursement for outpatient physical and/or occupational therapy
furnished by a Medicare-certified rehabilitation agency or clinic
was equal to the lesser of the provider's "adjusted reasonable
costs" as allowed under Medicare regulations and defined in the
Balanced Budget Act of 1997 ("BBA"), or the provider's charges, in
each case less 20% of the amount of the charge for the services.
For rehabilitation agencies and clinics, the "adjusted reasonable
cost" of a service is the service's reasonable cost, as determined
under Medicare regulations, less 10%. The 10% reduction does not
apply to services provided by hospitals. The 20% deduction
represents the co-insurance amount that an individual beneficiary,
or their "Medigap" insurance carrier if such coverage exists, is
required to pay in addition to the beneficiary's annual deduction.
The Company files annual cost reports for each of its Medicare-
certified clinics. These cost reports serve as the basis for
determining the prior year's reimbursement settlements and, prior
to 1999, interim Medicare payment rates for the following year.
Furthermore, the BBA also provides that after 1998, outpatient
rehabilitation services will be paid based on a fee schedule which
has been published by the Department of Health and Human Services
("HHS"). Beginning in 1999, the total amount that is paid by
9
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. The effect of this payment change
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. Revenues from
the Medicare program for the years ended December 31, 1998 and 1997
accounted for approximately 12% and 13% of the Company's net
patient revenues, respectively.
Medicare regulations require that a physician certify the need
for physical and/or occupational therapy services for each patient
and that these services be provided in accordance with an
established plan of treatment which is periodically revised. State
Medicaid programs generally do not provide coverage for outpatient
physical or occupational therapy, and, therefore, Medicaid is not,
nor is it expected to be, a material payor for the Company.
Regulation and Health Care Reform
The health care industry is subject to numerous federal, state
and local regulations. Many states prohibit commercial enterprises
from engaging in the corporate practice of medicine. There is a
risk that the corporate practice of medicine could be interpreted
in those states to also include the practice of physical and/or
occupational therapy, or that the corporate practice of physical
and/or occupational therapy itself could be specifically prohibited
in some states. In Texas, a 1979 opinion of the State Attorney
General states that corporate entities may not engage in the
practice of physical therapy, unless such corporations are
professional corporations with all shareholders being licensed
therapists. While management believes that this opinion has
generally not been followed or enforced in Texas, there can be no
assurance that the Texas Attorney General will not seek to enforce
this position in the future and apply the prohibition to include
limited partnerships, the legal entity for each Operating
Subsidiary. In the event that the Company was found to be engaged
in prohibited corporate practice in any state, management believes
that it could restructure its operations so as to be in compliance
with applicable law. If the Company was required to restructure
its operations, the Company anticipates that, in lieu of owning
clinics, it could engage in clinic management and leasing of
10
equipment and clinic sites. The availability of these or other
options for restructuring would depend on the requirements of
applicable law. However, such restructuring could negatively
impact the income of the Company, and there can be no assurance
that a satisfactory restructuring could be accomplished.
Certain states into which the Company may expand have laws that
require facilities that employ health professionals and provide
health related services to be licensed and, in some cases, to
obtain a certificate of need. Pursuant to certificate of need
laws, the affected entity is required to demonstrate to a state
regulatory authority the need for and financial feasibility of
certain expenditures related to such activities as the construction
of new facilities or the commencement of new health care services.
Based on its operating experience to date, the Company believes
that its business, as presently conducted, does not require
certificates of need or other facility approvals or licenses.
There can be no assurance, however, that existing laws or
regulations will not be interpreted or modified to require the
Company to obtain such approvals or licenses and, if so, that such
approvals or licenses could be obtained.
As of December 31, 1998, 78 of the Company's clinics have
become certified as Medicare providers. In order to receive
Medicare reimbursement, a rehabilitation agency or clinic must
meet the applicable conditions of participation set forth by HHS
relating to the type of facility, its equipment, record keeping,
personnel and standards of medical care as well as compliance with
all state and local laws. Clinics are subject to periodic
inspections or surveys to determine compliance.
The Social Security Act imposes criminal and/or civil penalties
upon persons who pay or receive any "remuneration" in connection
with the referral of patients covered under Medicare, Medicaid or
most other federally funded health care programs. The "anti-
kickback" law prohibits providers and others from offering or
paying (or soliciting or receiving), directly or indirectly, any
remuneration to induce or in return for making a referral for, or
ordering or recommending (or arranging for ordering or
recommending) a service covered under such health care programs.
Each violation of this law may be punished by a fine (of up to
$250,000 for individuals and $500,000 for organizations, or twice
the pecuniary gain to the defendant or loss to another from the
illegal conduct) or imprisonment for up to five years, or both. In
addition, a provider may be excluded from participation in federal
healthcare programs, and other federal procurement and
11
nonprocurement programs, for violation of these prohibitions
through an administrative proceeding, without the need for any
criminal proceeding. Many states, including some states in which
the Company operates clinics, have similar laws which apply whether
or not federal health care funds are involved; and health care
reform proposals in the last few years would have expanded federal
law to cover all patients as well. Because the federal anti-
kickback law has been broadly interpreted to apply where even one
purpose (as opposed to a sole or primary purpose) of a payment is
to induce referrals, it limits the relationships which the Company
may have with referral sources, including any ownership
relationships. The Company's managing physical therapists are
limited partners in their respective clinics. Management does not
believe that the ownership structure of its clinics violates the
anti-kickback laws, since no direct or indirect owner of the
clinics, including the partner therapists, serves as a referral
source for the clinics. The anti-kickback laws may also apply to
the structure of acquisitions by the Company of physician-owned
physical therapy clinics, to the extent that any portion of the
purchase price or terms of payment are deemed to be an inducement
to the physician to make referrals to the clinic which, under a
December 1992 letter by the Chief Counsel of the HHS office of
Inspector General ("OIG"), could include payments for goodwill or
other intangibles. The Company's new practice of offering its
management services to physician-owned physical therapy facilities
also raises anti-kickback law issues both under recent
interpretations of the law by the OIG, which suggest that
percentage-based contracts that include marketing services may
implicate the law, and under some older interpretations indicating
that the law may be implicated where a company in a line of
business "partners" with a physician practice as a way of sharing
profits with the physicians. Management considers these anti-
kickback laws in planning its clinic acquisitions, marketing and
other activities, and believes its operations are in compliance
with applicable law, but no assurance can be given regarding
compliance in any particular factual situation.
In addition, another federal law, known as the "Stark law"
after its original Congressional sponsor, was expanded in 1993 to
impose, effective January 1, 1995, a prohibition on referrals of
Medicare or Medicaid patients for, among other things, physical
therapy services by physicians who have a financial relationship
with the provider furnishing the services. With certain specified
exceptions, the referral prohibition applies to any physician who
has (or whose immediate family member has) a direct or indirect
ownership or investment interest in, or compensation relationship
12
with, a provider of physical therapy services such as the Company's
clinics. This law also prohibits billing for services rendered
pursuant to a prohibited referral. Penalties for violation include
denial of payment for the services, significant civil monetary
penalties, and exclusion from Medicare and Medicaid. Several
states have enacted laws similar to the Stark law, but which cover
all (not just Medicare and Medicaid) patients; and many health care
reform proposals in the last few years would have expanded the
Stark law to cover all patients as well. The Stark law, as
effective January 1, 1995, covers a management contract with a
physician group and any financial relationship between the Company
and referring physicians, including any financial transaction
resulting from a clinic acquisition. As with the anti-kickback
law, management considers the Stark law in planning its clinic
acquisitions, marketing and other activities, and believes that its
operations are in compliance with applicable law. However, as noted
above, no assurance can be given regarding compliance in any
particular factual situation.
Pursuant to the recently enacted Kennedy-Kassebaum insurance
reform bill, a number of new authorities to combat health care
fraud and abuse became law in 1997. Among other things, the law
creates a new federal crime of "health care fraud", establishes an
all-payor fraud and abuse program to be directed by the U.S.
Attorney General and the HHS Inspector General in cooperation with
the states, creates an enforcement fund of a portion of all
penalties collected under such program, and expands authority to
impose penalties and Medicare/Medicaid exclusions. The Company
cannot predict what effect, if any, these expanded enforcement
authorities will have on the health care industry generally or on
its business.
Political, economic and regulatory influences are subjecting
the health care industry in the United States to fundamental
change. Although Congress has failed to pass comprehensive health
care reform legislation to date, the Company anticipates that
Congress, state legislatures and the private sector will continue
to review and assess alternative health care delivery and payment
systems. Potential approaches that have been considered include
mandated basic health care benefits, controls on health care
spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation
of large insurance purchasing groups, price controls and other
fundamental changes to the health care delivery system. Managed
care entities, which represent an ever-growing percentage of health
care payors, are demanding lower costs from health care providers,
13
and in many cases, requiring or encouraging providers to accept
capitated payments that may not be adequate to allow providers to
cover their full costs or may reduce their profitability.
Legislative debate is expected to continue in the future and market
forces are expected to demand reduced costs. The Company cannot
predict what impact the adoption of any federal or state health
care reform measures or future private sector reform may have on
its business.
Competition
The health care industry, generally, and the physical and
occupational therapy businesses, in particular, are highly
competitive and subject to continual changes in the manner in which
services are delivered and in which providers are selected. The
competitive factors in the physical and occupational therapy
businesses are quality of care, cost, treatment outcomes,
convenience of location, and relationships with and ability to meet
the needs of referral and payor sources. The Company's clinics
compete directly or indirectly with the physical and occupational
therapy departments of acute care hospitals, physician-owned
physical therapy clinics, private physical therapy clinics and
chiropractors.
The main sources of competition are acute care hospital
outpatient therapy clinics and private therapy clinic organizations
that provide therapy services. The Company will face further
competition as consolidation of the therapy industry continues
through the acquisition of physician-owned and other privately
owned therapy practices.
The Company believes that it can compete favorably with its
competitors in hiring managing therapists by offering them
ownership interests in their clinics. In addition, management
believes that providing the managing therapist with an opportunity
to participate in ownership will help to ensure commitment by local
management to the success of the clinic and will minimize turnover
of managing therapists.
The Company also believes its competitive position is enhanced
by its strategy of locating its clinics, where possible, on the
ground floor in office buildings and shopping centers with nearby
parking, thereby making the clinics more easily accessible to
patients. The Company attempts to make the decor in its clinics
less institutional and more aesthetically pleasing than hospital
clinics. Management also believes it can generally provide its
14
services at a lesser cost than comparable services of hospitals,
due to hospitals' higher overhead.
Employees
At December 31, 1998, the Company employed 716 total employees
of which 475 were full-time employees. At that date, none of the
Company's employees were subject to collective bargaining
agreements or were members of unions. Management considers the
relations between the Company and its employees to be good.
In the states in which the Company's current clinics are
located, persons performing physical and occupational therapy
services are required to be licensed by the state. All persons
currently employed by the Company and its clinics who are required
to be licensed are licensed, and the Company intends that all
future employees who are required to be licensed will be licensed.
Management is not aware of any federal licensing requirements
applicable to its employees.
Insurance
The Company maintains professional malpractice liability
coverage on professionals employed in each of its clinics, in
addition to general liability insurance and coverage for the
customary risks inherent in the operation of health care facilities
and businesses in general. Management believes its insurance
policies in force to be adequate in amount and coverage for its
current operations.
Item 2. Description of Property.
Property
The Company presently leases, under noncancelable lease terms
ranging from one to five years, all of the properties used for its
clinics with the exception of two clinics located in Brownwood,
Texas and Mineral Wells, Texas, for which the Company owns the
facility. The Company also intends, where feasible, to lease the
premises in which new clinics will be located. The Company's
typical clinic occupies approximately 2,000 to 4,000 square feet of
space.
The Company also leases, under a five-year noncancelable
operating lease beginning July 1998, its executive offices located
in Houston, Texas. The executive offices currently occupy
15
approximately 18,726 square feet of space (including allocations
for common areas).
Item 3. Legal Proceedings.
The Company is subject to litigation and other proceedings
arising in the ordinary course of business. While the ultimate
outcome of lawsuits or other proceedings cannot be predicted with
certainty, management does not believe the impact, if any, would be
material to the Company's financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the
Company, through solicitation of proxies or otherwise, during the
fourth quarter of 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Price Quotations
On April 28, 1997, the Company's common stock began trading on
the Nasdaq Stock Market, Inc. ("Nasdaq") National Market under the
symbol "USPH". Prior thereto, the Company's common stock traded on
The Nasdaq Small Cap Market tier of the Nasdaq Stock Market under
the symbol "USPH". The range of trading prices, as reported by
Nasdaq for each quarterly period, is set forth below. The reported
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
1998 1997
HIGH LOW HIGH LOW
QUARTER
First $12 1/2 $10 1/2 $10 3/4 $9 1/4
Second 13 1/2 11 1/4 9 3/4 9
Third 14 3/8 8 1/2 9 5/8 8 7/8
Fourth 10 1/8 7 12 9 1/2
16
Record Holders
As of March 17, 1999, there were 52 holders of record of the
Company's outstanding common stock.
Dividends
Since inception, the Company has not declared or paid cash
dividends or made distributions on its equity securities, and the
Company does not anticipate that it will pay cash dividends or make
distributions in the foreseeable future.
Item 6. Selected Financial Data.
Year Ended December 31,
1998 1997 1996 1995 1994
(in thousands, except per share data)
Net revenues $44,023 $38,807 $32,207 $24,924 $17,162
Income (loss) before
income taxes $ 2,704 $ 2,481 $ 1,758 $ 819 $(2,722)
Net income (loss)(1) $ 1,596 $ 2,426 $ 1,641 $ 742 $(2,775)
Per common share:
Basic $ 0.44 $ 0.67 $ 0.46 $ 0.21 $ (0.80)
Diluted $ 0.43 $ 0.65 $ 0.45 $ 0.20 $ (0.80)
Total assets $24,100 $22,548 $19,483 $15,910 $14,460
Long-term debt, less
current portion $ 8,126 $ 8,239 $ 8,276 $ 8,166 $ 8,265
Working capital $13,007 $11,204 $ 9,214 $ 7,084 $ 5,673
Current ratio 5.96 5.07 4.56 4.70 4.72
Long-term debt to
total capitalization 0.41 0.45 0.52 0.61 0.65
(1) Prior to 1998, the Company had available unused net operating
loss carryforwards to offset any federal income tax liability.
17
Item 7. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company operates outpatient physical and/or occupational
therapy clinics which provide post-operative care and treatment for
a variety of orthopedic-related disorders and sports-related
injuries. At December 31, 1998, the Company operated 99 outpatient
physical and/or occupational therapy clinics in 28 states. The
average age of the 99 clinics in operation at December 31, 1998 was
3.2 years. Since inception of the Company, 101 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. The sale of
fixed assets and the concurrent closure of two of the clinics
occurred during the three months ended March 31, 1997 ("1997 First
Quarter"). No loss was recognized relating to these 1997 First
Quarter closures. These two clinics combined accounted for net
patient revenues and clinic operating costs for the year ended
December 31, 1997 of $(6,000) and $57,000, respectively, and for
the year ended December 31, 1996 of $345,000 and $506,000,
respectively. The closure of one of the Company's clinics, due to
adverse clinic performance, occurred during the three months ended
September 30, 1998 ("1998 Third Quarter"). See "Loss on Closure of
Facility" for additional information.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net Patient Revenues
Net patient revenues increased to $43,444,000 for 1998 from
$38,342,000 for 1997, an increase of $5,102,000, or 13%. Net
patient revenues from the 20 clinics developed since 1997 (the
"1998 New Clinics") accounted for 28% of the increase, or
$1,416,000. The remaining increase of $3,686,000 in net patient
revenues comes from those 79 clinics opened before 1998. The
majority of the $3,686,000 increase in net patient revenues from
these clinics resulted from a 10% increase in the number of patient
visits, while net revenues per visit remained stable.
Net patient revenues are based on established billing rates less
allowances and discounts for patients covered by worker's
compensation programs and other contractual programs. Payments
received under these programs are based on predetermined rates and
are generally less than the established billing rates of the
18
clinics. Net patient revenues reflect reserves, which are
evaluated quarterly by management, for contractual and other
adjustments relating to patient discounts from certain payors. Net
patient revenues also are reported net of estimated retrospective
adjustments under Medicare. Medicare reimbursement for outpatient
physical or occupational therapy services furnished by clinics or
rehabilitation agencies is based on a cost reimbursement
methodology. The Company is initially reimbursed at a tentative
rate with final settlement determined after submission of an annual
cost report by the Company and audits thereof by the Medicare
fiscal intermediary. Beginning in 1998, certain changes were
imposed in the method in which the Company is reimbursed for its
services by Medicare as defined in the Balanced Budget Act of 1997
("BBA"). See "Balanced Budget Act of 1997".
Other Revenues
Other revenues, consisting of interest, management fees, sublease
and real estate commission income, increased by $114,000, or 24.5%,
to $579,000 for 1998 from $465,000 for 1997. This increase was due
primarily to an increase in interest income as a result of the
higher average amount of cash and cash equivalents available for
investment during 1998 compared to 1997 and management fees earned
in connection with several contracts the Company entered into
during 1998 to manage third-party physical therapy clinics.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
remained stable at 76% for 1998 and 1997.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $20,263,000 for 1998 from
$17,624,000 for 1997, an increase of $2,639,000, or 15%.
Approximately 36% of the increase, or $956,000, was due to the 1998
New Clinics. The remaining 64% increase, or $1,683,000, was due
principally to increased staffing to meet the increase in patient
visits for the clinics opened prior to 1998, coupled with an
increase in bonuses earned by the managing therapists at the
clinics opened prior to 1998. Such bonuses are based on the net
revenues or operating profit generated by the individual clinics.
Salaries and related costs as a percent of net patient revenues
increased slightly to 47% for 1998 compared to 46% for 1997.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $11,454,000 for 1998
from $10,562,000 for 1997, an increase of $892,000, or 8%.
Approximately 97% of the increase, or $867,000, was due to the 1998
19
New Clinics, while 3%, or $25,000, of the increase was due to the
clinics opened prior to 1998. Rent, clinic supplies and other as
a percent of net patient revenues has declined slightly to 26% for
1998 compared to 28% for 1997.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $1,143,000 for
1998 from $1,050,000 for 1997, an increase of 9%, or $93,000.
Approximately 31% of the increase, or $29,000, was due to the 1998
New Clinics, while 69%, or $64,000, of the increase relates to the
clinics opened prior to 1998. The provision for doubtful accounts
as a percent of net patient revenues remained stable at 3% for 1998
and 1997.
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 $4,240,000 for 1998 from $3,666,000 for 1997, an
increase of $574,000, 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. Coupled with this increase was an increase in legal and
professional fees associated with opening an increased number of
clinics in 1998. 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 for 1998
increased substantially. General and administrative costs as a
percent of net patient revenues remained stable at 10% for 1998 and
1997.
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 $291,000, or 26%, to $1,396,000 in 1998
from $1,105,000 in 1997. The majority of this increase relates to
an increase in salaries and benefits of recruitment and development
personnel which were added to facilitate the acceleration of new
clinic openings during 1998 from the level of 13 new clinics opened
during 1997. Coupled with the increase in salaries and benefits is
20
an increase in travel expenses and recruiting and marketing fees
which also correlate with the higher number of clinics in operation
at December 31, 1998. Recruitment and development costs as a
percent of net patient revenues has remained stable at 3% for 1998
and 1997.
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 relating 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
for 1998 and 1997 of $218,000 and $407,000, respectively. This
clinic accounted for clinic operating costs for 1998 and 1997 of
$603,000 and $575,000, respectively.
Management may close clinics in the future that are not operating
at satisfactory levels.
Interest Expense
Interest expense of $730,000 for 1998 relates primarily to $244,000
of interest expense on the $3,050,000 aggregate principal amount of
8% Convertible Subordinated Notes issued by the Company in June
1993 and $400,000 of interest expense on the $5,000,000 aggregate
principal amount of 8% Series B and Series C Notes issued by the
Company in May 1994. In addition, $75,000 of interest expense was
recorded in 1998 relating to the Contingent Interest Enhancement
provision of the Series B Notes. This provision allowed Series B
Note holders to receive an interest enhancement payable in shares
of Company common stock based upon the market value of the
Company's shares for the month of June 1996. A total of 70,965
shares of Company common stock were issued in 1996 in connection
with the Contingent Interest Enhancement provision.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$285,000, or 18%, to $1,863,000 in 1998 from $1,578,000 in 1997 due
to the increase in aggregate profitability of those clinics in
which partners have achieved positive retained earnings and are
accruing partnership income.
21
Income Before Income Taxes
The Company's income before income taxes for 1998 of $2,704,000
exceeded 1997's income before income taxes of $2,481,000
principally due to the $5,216,000 increase in net revenues, offset,
in part, by the $3,624,000 increase in clinic operating costs, the
$865,000 increase in corporate office costs, the $230,000 loss on
closure of facility, and the $285,000 increase in minority
interests in subsidiary limited partnerships.
Provision for Income Taxes
The provision for income taxes increased $1,053,000 to $1,108,000
for 1998 from $55,000 for 1997. During 1997, the Company utilized
its unused net operating loss carryforwards to offset any federal
income tax expense. During 1998, the Company accrued income taxes
at a tax rate of 41.0% which exceeded the U.S. statutory tax rate
of 34.0% due primarily to state income taxes.
Net Income
The Company's net income for 1998 of $1,596,000 was less than
1997's net income of $2,426,000 principally due to the fact that
during 1997, the Company utilized its remaining tax operating loss
carryforwards to offset any federal income tax expense. The impact
on net income from the increase in income tax expense was offset,
in part, by the factors affecting income before income taxes. See
"Income Before Income Taxes".
Fiscal Year 1997 Compared to Fiscal Year 1996
Net Patient Revenues
Net patient revenues increased to $38,342,000 for 1997 from
$32,029,000 for 1996, an increase of $6,313,000, or 20%. Net
patient revenues from the 13 clinics developed since 1996 (the
"1997 New Clinics") accounted for 28% of the increase or
$1,743,000. The remaining increase of $4,570,000 in net patient
revenues came from those 67 clinics opened before 1997. The
majority of the $4,570,000 increase in net patient revenues from
these clinics resulted from a 14% increase in the number of patient
visits, while net revenues per visit remained stable.
Other Revenues
Other revenues increased by $287,000, or 161%, to $465,000 for 1997
from $178,000 for 1996. This increase was due primarily to
management fees earned in connection with a contract the Company
entered into during the three months ended March 31, 1997 to manage
a third-party physical therapy clinic, an increase in interest
income as a result of the higher average amount of cash and cash
22
equivalents available for investment during 1997 compared to 1996
and an increase in real estate commission income.
Clinic Operating Costs
Clinic operating costs as a percent of net patient revenues
declined slightly to 76% for 1997 compared to 77% for 1996.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $17,624,000 for 1997 from
$14,743,000 for 1996, an increase of $2,881,000, or 20%.
Approximately 31% of the increase, or $887,000, was due to the 1997
New Clinics. The remaining 69% increase, or $1,994,000, was due
principally to increased staffing to meet the increase in patient
visits for the clinics opened prior to 1997, coupled with an
increase in bonuses earned by the managing therapists at the
clinics opened prior to 1997. Such bonuses are based on the net
revenues or operating profit generated by the individual clinics.
Salaries and related costs as a percent of net patient revenues
remained stable at 46% for 1997 and 1996.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $10,562,000 for 1997
from $9,144,000 for 1996, an increase of $1,418,000, or 16%.
Approximately 55% of the increase, or $786,000, was due to the 1997
New Clinics, while 45%, or $632,000, of the increase was due to the
clinics opened prior to 1997. Rent, clinic supplies and other as
a percent of net patient revenues declined slightly from 29% for
1996 to 28% for 1997.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $1,050,000 for
1997 from $929,000 for 1996, an increase of 13%, or $121,000.
Approximately 32% of the increase, or $39,000, was due to the 1997
New Clinics, while 68%, or $82,000, of the increase relates to the
clinics opened prior to 1997. The provision for doubtful accounts
as a percent of net patient revenues remained stable at 3% for 1997
and 1996.
Corporate Office Costs - General & Administrative
General and administrative costs increased to $3,666,000 for 1997
from $3,097,000 for 1996, an increase of $569,000, or 18%. General
and administrative costs increased primarily as a result of
salaries and benefits related to additional personnel hired in 1997
to oversee the operations of an increasing number of clinics in
operation and to establish a corporate compliance program. Coupled
with this increase was an increase in legal and professional fees
23
associated with opening an increased number of clinics in 1997.
General and administrative costs as a percent of net patient
revenues remained stable at 10% for 1997 and 1996.
Corporate Office Costs - Recruitment & Development
Recruitment and development costs increased $321,000, or 41%, to
$1,105,000 in 1997 from $784,000 in 1996. The majority of this
increase relates to an increase in salaries and benefits of
recruitment and development personnel associated with opening an
increased number of clinics in 1997 and personnel added in response
to management's intention to accelerate the pace of new clinic
openings in future years. Coupled with the increase in salaries
and benefits is an increase in travel expenses and recruiting fees
which also correlate with the higher number of clinics in operation
at December 31, 1997, and an increase in rent due to an expansion
of office space needed to support additional personnel. In
addition, in conjunction with the accelerated clinic opening
schedule, management has implemented an aggressive marketing
approach resulting in increased marketing costs during 1997.
Recruitment and development costs as a percent of net patient
revenues increased slightly to 3% for 1997 from 2% for 1996.
Interest Expense
Interest expense of $741,000 for 1997 relates primarily to $244,000
of interest expense on the $3,050,000 aggregate principal amount of
8% Convertible Subordinated Notes issued by the Company in June
1993 and $400,000 of interest expense on the $5,000,000 aggregate
principal amount of 8% Series B and Series C Notes issued by the
Company in May 1994. In addition, $75,000 of interest expense was
recorded in 1997 relating to the Contingent Interest Enhancement
provision of the Series B Notes. This provision allowed Series B
Note holders to receive an interest enhancement payable in shares
of Company common stock based upon the market value of the
Company's shares for the month of June 1996. A total of 70,965
shares of Company common stock were issued in 1996 in connection
with the Contingent Interest Enhancement provision.
Minority Interests in Subsidiary Limited Partnerships
Minority interests in subsidiary limited partnerships increased
$571,000, or 57%, to $1,578,000 in 1997 from $1,007,000 in 1996 due
to the increase in aggregate profitability of those clinics in
which partners have achieved positive retained earnings and are
accruing partnership income.
24
Provision for Income Taxes
The provision for income taxes decreased to $55,000 for 1997
compared to $117,000 for 1996, a decrease of $62,000, or 53%. The
decrease in federal income tax expense to $(203,000) in 1997 from
$74,000 in 1996 is due to the Company's recognition during 1997 of
its net deferred federal income tax asset of $833,000, offset, in
part, by an increase in current federal income tax expense of
$556,000. State income taxes increased to $258,000 in 1997 from
$43,000 in 1996. The increase in current federal and state income
taxes corresponds to the increase in profitability of the clinics.
Net Income
The Company's net income for 1997 of $2,426,000 exceeded 1996 net
income of $1,641,000 principally due to the $6,600,000 increase in
net revenues, which more than offset the $4,420,000 increase in
clinic operating costs, the $890,000 increase in corporate office
costs and the $571,000 increase in minority interests in subsidiary
limited partnerships. In addition, during 1997, the Company
recognized its net deferred federal tax asset of $833,000 which was
offset by current federal income tax expense of $630,000 and
current state income tax expense of $258,000.
Liquidity and Capital Resources
At December 31, 1998, the Company had $6,328,000 in cash and cash
equivalents, which is available to fund the working capital needs
of its operating subsidiaries, future clinic developments and
acquisitions and the Company's repurchase of shares of its common
stock. Included in cash and cash equivalents at December 31,
1998 is $4,700,000 of short-term U.S. government agency securities
and $415,000 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 December 31, 1998.
The increase in cash of $772,000 from December 31, 1997 to December
31, 1998 is due primarily to cash provided by operating activities
of $5,000,000, offset, in part, by the Company's use of cash to
fund capital expenditures, primarily for physical therapy
equipment, leasehold improvements and intangibles in the amount of
$2,520,000, distributions to minority partners in subsidiary
limited partnerships of $1,692,000, and principal payments on notes
payable of $55,000.
The Company's current ratio increased to 5.96 to 1.00 at December
31, 1998 compared to 5.07 to 1.00 at December 31, 1997 and 4.56 to
25
1.00 at December 31, 1996. The increase in the current ratio is
due primarily to an increase in net patient revenues, which, in
turn, have caused an increase in patient accounts receivable. In
addition, estimated third-party payor (Medicare) settlements
decreased as a result of a reduction by Medicare in the Company's
reimbursement rates due to lower costs per visit in the older
clinics. In May of each year when the Company files its cost
reports with Medicare for the previous year, Medicare adjusts the
Company's reimbursement rates so that the percent of charges paid
by Medicare during the remainder of the year will more closely
reflect the actual cost realized by the Company. After a clinic
has been in operation for several years, the actual cost per visit
stabilizes and the reimbursement rates paid by Medicare generally
approximate reimbursable costs. At December 31, 1998, the Company
had a debt-to-equity ratio of 0.70 to 1.00 compared to 0.83 to 1.00
at December 31, 1997 and 1.10 to 1.00 at December 31, 1996. The
improvement in the debt-to-equity ratio each year relates primarily
to the increase in equity as a result of net income of $1,596,000
for 1998 and $2,426,000 for 1997.
The quarterly interest obligation on the outstanding 8% Convertible
Subordinated Notes, the 8% Convertible Subordinated Notes, Series
B and the 8% Convertible Subordinated Notes, Series C is $61,000,
$40,000 and $60,000, respectively, through June 30, 2003, June 30,
2004 and June 30, 2004, respectively.
In January 1997, the Company's Board of Directors authorized the
use of available cash to repurchase up to 200,000 shares of Company
common stock. 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 December 31, 1998, 4,900 shares have been
repurchased at a cost of $47,000.
Management believes that existing funds, supplemented by cash flows
from existing operations, will be sufficient to meet its current
operating needs and its development plans.
The Balanced Budget Act of 1997
Beginning in 1998, Medicare imposed new interim constraints on
reimbursement for outpatient physical and/or occupational therapy
services and has published a fee schedule pursuant to which the
Company's clinics will be paid for care provided to Medicare
patients in 1999. In 1998, Medicare reimbursement for outpatient
physical and/or occupational therapy furnished by a Medicare-
certified rehabilitation agency or clinic was equal to the lesser
26
of the provider's "adjusted reasonable costs" as allowed under
Medicare regulations and defined in the BBA, or the provider's
charges, in each case less 20% of the amount of the charge imposed
for the services. For rehabilitation agencies and clinics, the
"adjusted reasonable cost" of a service is the service's reasonable
cost, as determined under Medicare regulations, less 10%. The 20%
deduction represents the co-insurance amount that an individual
beneficiary, or their "Medigap" insurance carrier if such coverage
exists, is required to pay in addition to the beneficiary's annual
deduction. The impact of the BBA on the Company's operations has
been to reduce the estimated reimbursement from Medicare on
services rendered to Medicare patients during 1998 by approximately
$581,000.
The BBA also provides that after 1998, outpatient rehabilitation
services will be paid based on a fee schedule which has been
published by the Secretary of Health and Human Services ("HHS").
Beginning in 1999, the total amount that may be paid by Medicare in
any one year for outpatient physical or occupational therapy to any
one patient is limited to $1,500, except for services provided in
hospitals. The effect of this payment change may be to encourage
patients with extensive rehabilitation needs to seek treatment in
a hospital setting. The Company 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.
Recently Promulgated Accounting Standards
In February 1997, the Financial Accounting Standards Board, "FASB",
issued Statement No. 128, Earnings per Share, which required the
Company to change the method used to compute earnings per share and
to restate all prior period amounts. Statement No. 128 replaced
primary and fully diluted earnings per share with basic and diluted
earnings per share. Under the new requirements for calculating
earnings per share, the dilutive effect of stock options is
excluded from basic earnings per share but included in the
computation of diluted earnings per share. The new standard did
not have a material impact on the basic or fully diluted earnings
per share computations for 1997 and 1996.
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"
27
required by Statement No. 14. The new standard did not have a material
impact on the Company since the Company's management approach is to view
the Company as one reportable segment.
Factors Affecting Future Results
Clinic Development
As of December 31, 1998, the Company had 99 clinics in operation,
20 of which opened in 1998. 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 the historical performance of the Company's new
clinics, the clinics opened in 1998 should favorably impact the
Company's results of operations for 1999 and beyond.
Growth in Physical Therapy Management
In July 1998, the Company entered into an agreement with an
orthopedic group to manage a physical therapy facility in New
England, bringing third-party facilities under management to 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 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.
28
The effect of this payment change 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 June 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 June 1999. The IT
infrastructure portion of the Company's Year 2000 project is
currently on schedule.
29
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
significantly affected 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 1998. 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-
30
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.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
As of December 31, 1998, 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.
31
Item 8. Financial Statements.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 33
Audited Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 and 1997 34
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996 36
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996 37
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 38
Notes to Consolidated Financial Statements 40
32
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
U.S. Physical Therapy, Inc.
We have audited the accompanying consolidated balance sheets of
U.S. Physical Therapy, Inc., and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the years
ended December 31, 1998, 1997 and 1996. Our audits also included
the financial statement schedule listed in the index at Item 14(a).
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of U.S. Physical Therapy, Inc. and subsidiaries
at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Houston, Texas
March 16, 1999
33
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 6,328 $ 5,556
Patient accounts receivable, less
allowance for doubtful accounts
of $1,692 and $1,595,
respectively 8,505 7,707
Accounts receivable-other 183 187
Other current assets 614 504
Total current assets 15,630 13,954
Fixed assets:
Furniture and equipment 9,523 8,111
Leasehold improvements 4,537 3,869
14,060 11,980
Less accumulated depreciation 7,636 5,951
6,424 6,029
Noncompete agreements, net of
amortization of $340, and $501,
respectively 41 124
Goodwill, net of amortization of
$169, and $138, respectively 1,000 1,042
Other assets 1,005 1,399
$ 24,100 $ 22,548
See notes to consolidated financial statements.
34
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 553 $ 250
Accrued expenses 1,094 1,333
Estimated third-party payor
(Medicare) settlements 944 1,095
Notes payable 32 72
Total current liabilities 2,623 2,750
Notes payable - long-term portion 76 189
Convertible subordinated notes
payable 8,050 8,050
Minority interests in subsidiary
limited partnerships 1,746 1,557
Commitments - -
Shareholders' equity:
Preferred stock, $.01 par value,
500,000 shares authorized, -0-
shares outstanding - -
Common stock, $.01 par value,
10,000,000 shares authorized,
3,616,509 and 3,615,634 shares
outstanding at December 31, 1998
and 1997, respectively 36 36
Additional paid-in capital 11,696 11,689
Accumulated deficit (80) (1,676)
Treasury stock at cost, 4,900 shares
held at December 31, 1998 and
and 1997, respectively (47) (47)
Total shareholders' equity 11,605 10,002
$ 24,100 $ 22,548
See notes to consolidated financial statements.
35
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
1998 1997 1996
Net patient revenues $ 43,444 $ 38,342 $ 32,029
Other revenues 579 465 178
Net revenues 44,023 38,807 32,207
Clinic operating costs:
Salaries and related costs 20,263 17,624 14,743
Rent, clinic supplies and other 11,454 10,562 9,144
Provision for doubtful accounts 1,143 1,050 929
32,860 29,236 24,816
Corporate office costs:
General and administrative 4,240 3,666 3,097
Recruitment and development 1,396 1,105 784
5,636 4,771 3,881
Loss on closure of facility 230 - -
Operating income before non-
operating expenses 5,297 4,800 3,510
Interest expense 730 741 745
Minority interests in subsidiary
limited partnerships 1,863 1,578 1,007
Income before income taxes 2,704 2,481 1,758
Provision for income taxes 1,108 55 117
Net income $ 1,596 $ 2,426 $ 1,641
Basic earnings per common share $ .44 $ .67 $ .46
Earnings per common share-assuming
dilution $ .43 $ .65 $ .45
See notes to consolidated financial statements.
36
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Add'l Total
Common Stock Paid-In Accumulated Treasury Stock Shareholders'
Shares Amount Capital Deficit Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 3,520 $ 35 $10,870 $(5,743) - $ - $ 5,162
Proceeds from exercise
of stock options 4 - 27 - - - 27
Interest enhancement
on 8% Convertible
Subordinated Notes,
Series B 71 1 764 - - - 765
Net income - - - 1,641 - - 1,641
Balance at
December 31, 1996 3,595 36 11,661 (4,102) - - 7,595
Proceeds from exercise
of stock options 4 - 28 - - - 28
Proceeds from exercise
of warrants 17 - - - - - -
Repurchase of treasury
shares - - - - (5) (47) (47)
Net income - - - 2,426 - - 2,426
Balance at
December 31, 1997 3,616 36 11,689 (1,676) (5) (47) 10,002
Proceeds from exercise
of stock options 1 - 7 - - - 7
Net income - - - 1,596 - - 1,596
Balance at
December 31, 1998 3,617$ 36 $11,696 $ (80) (5) $ (47) $ 11,605
</TABLE>
See notes to consolidated financial statements.
37
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1998 1997 1996
Operating activities
Net income $ 1,596 $ 2,426 $ 1,641
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,071 1,880 1,735
Minority interests in earnings
of subsidiary limited
partnerships 1,863 1,578 1,007
Provision for bad debts 1,143 1,050 929
Deferred income taxes 320 (833) -
Loss on sale of fixed assets - 28 2
Loss on disposal of certain assets
in closure of facility 144 - -
Changes in operating assets and
liabilities:
Increase in patient accounts
receivable (1,941) (2,398) (1,415)
Decrease (increase) in accounts
receivable-other 4 (60) (19)
Decrease (increase) in other assets (84) (34) 43
Increase in accounts payable and
accrued expenses 64 337 234
Increase (decrease) in estimated
third-party payor (Medicare)
settlements (151) (182) 562
Net cash provided by operating
activities 5,029 3,792 4,719
See notes to consolidated financial statements.
38
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1998 1997 1996
Investing activities
Purchase of fixed assets (2,357) (1,844) (1,677)
Purchase of intangibles (192) (276) (301)
Proceeds on sale of fixed assets 26 67 11
Net cash used in investing
activities (2,523) (2,053) (1,967)
Financing activities
Proceeds from notes payable - 40 215
Payment of notes payable (55) (73) (61)
Acquisition of treasury stock - (47) -
Proceeds from investment of minority
investors in subsidiary limited
partnerships 6 1 11
Proceeds from exercise of stock options 7 28 27
Distributions to minority investors
in subsidiary limited partnerships (1,692) (1,044) (666)
Net cash used in financing
activities (1,734) (1,095) (474)
Net increase in cash
and cash equivalents 772 644 2,278
Cash and cash equivalents -
beginning of year 5,556 4,912 2,634
Cash and cash equivalents -
end of year $6,328 $5,556 $4,912
Supplemental disclosures of cash
flow information
Cash paid during the year for:
Income taxes $ 816 $ 735 $ 137
Interest $ 657 $ 667 $ 667
See notes to consolidated financial statements.
39
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Organization, Nature of Operations and Basis of Presentation
U.S. Physical Therapy, Inc. and its subsidiaries (the "Company") is
engaged in the business of developing, owning and operating
outpatient physical therapy and occupational therapy clinics. As
of December 31, 1998, the Company was operating 99 clinics in 28
states. The clinics provide post-operative care and treatment for
a variety of orthopedic-related disorders and sports-related
injuries, treatment for neurologically related injuries,
rehabilitation of injured workers and preventative care. The
clinics' business primarily originates from physician referrals.
The principal sources of payment for the clinics' services are
commercial health insurance, workers' compensation insurance,
managed care programs, Medicare and proceeds from personal injury
cases.
The consolidated financial statements include the accounts of U.S.
Physical Therapy, Inc. and its subsidiaries. All significant
intercompany transactions and balances have been eliminated. The
Company, through its wholly-owned subsidiaries, currently owns a 1%
general partnership interest and limited partnership interest
ranging from 59% to 99% in the clinics it operates. For the
majority of the clinics, the managing therapist of each such
clinic, along with other therapists at the clinic in several of the
partnerships, own the remaining limited partnership interest in the
clinic which ranges from 0% to 40%. The minority interest in the
equity and earnings of the subsidiary clinic limited partnerships
is presented separately in the consolidated financial statements.
2. Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity
of three months or less, when purchased, to be cash equivalents.
The Company, pursuant to its investment policy, invests its cash in
deposits with major financial institutions, in highly rated
commercial paper, Eurodollar deposits and short-term treasury and
United States government agency securities. Included in cash and
cash equivalents at December 31, 1998 is $4,700,000 of short-term
40
U.S. government agency securities and $415,000 in a money market
fund invested in short-term debt securities issued by U.S.
government agencies.
Long-Lived Assets
Fixed assets are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the
related assets. Estimated useful lives for furniture and equipment
range from three to eight years. Leasehold improvements are
amortized over the estimated useful lives of the assets or the
related lease terms, whichever is shorter.
Non-compete agreements are being amortized on a straight-line basis
over their respective six- or seven-year terms. Goodwill is being
amortized on a straight-line basis over twenty years.
In 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 relating 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.
Net Patient Revenues
Net patient revenues are reported at the estimated net realizable
amounts from patients, third-party payors, and others for services
rendered, including estimated retrospective adjustments under
Medicare. Retrospective adjustments are accrued on an estimated
basis in the period the related services are rendered and adjusted
in future periods as final settlements are determined. The Company
has agreements with third-party payors that provide for payments to
the Company at amounts different from its established rates.
Medicare reimbursement for outpatient physical therapy or
occupational therapy services furnished by clinics or
rehabilitation agencies is based on a cost reimbursement
methodology. The Company is initially reimbursed at a tentative
rate with final settlement determined after submission of an annual
cost report by the Company and audits thereof by the Medicare
fiscal intermediary. The majority of the Company's Medicare cost
reports have been audited by the Medicare fiscal intermediary
through December 31, 1997. Revenues from the Medicare program
accounted for approximately 12% and 13% of the Company's net
41
patient revenues for the years ended December 31, 1998 and 1997,
respectively. Laws and regulations governing the Medicare program
are complex and subject to interpretation. The Company believes
that it is in compliance with all applicable laws and regulations
and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and
interpretation as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare program. The
Company has also entered into payment agreements with certain
commercial insurance carriers and health maintenance organizations.
The basis for payment to the Company under these agreements is
primarily based on discounts from established rates.
Income Taxes
The Company uses the liability method in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are
expected to reverse.
Fair Values
The carrying amounts reported in the balance sheet for cash and
cash equivalents approximate their fair values. The fair values of
the majority of long-term borrowings are not readily determinable
due to the features of the borrowings which are described fully in
Note 4.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to
the Statement No. 128 requirements.
42
Use of Estimates
Management is required to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain amounts presented in the accompanying financial statements
for 1997 have been reclassified to conform with the presentation
used for 1998. This reclassification had no effect on net income.
3. Non-Cash Transaction
In May 1994, the Company issued $2,000,000 aggregate principal
amount of 8% Convertible Subordinated Notes, Series B ("the Series
B Notes"). The Series B Notes contained a Contingent Interest
Enhancement provision which allowed the Series B Note holders to
receive an interest enhancement payable in shares of Company common
stock based upon the market value of the Company's shares for the
month of June 1996. In 1996, a total of 70,965 shares of the
Company's common stock were issued in connection with the
Contingent Interest Enhancement provision. Deferred financing
costs, included in "Other Assets" on the balance sheet and being
amortized over the life of the Series B Notes, totaling $765,000
were recorded in connection with the issuance of the 70,965 shares.
As of December 31, 1998, 1997 and 1996, interest expense included
$351,000, $276,000 and $200,000, respectively, of amortization
relating to the deferred financing costs.
4. Notes Payable
On June 2, 1993, the Company completed the issuance and sale of
$3,050,000 aggregate principal amount of the Company's 8%
Convertible Subordinated Notes due June 30, 2003 (the "Notes").
The Notes, which are subordinated to any indebtedness for borrowed
money, were issued at par in a private placement transaction to a
total of six investors, including two directors who purchased a
total of $175,000 of the Notes and a company controlled by one of
the Company's directors, Mr. Richard C.W. Mauran, who purchased
$2,000,000 of the Notes. The Notes bear interest at 8% per annum,
payable quarterly, and are convertible at the option of the Note
holders into common stock of the Company at any time during the
life of the Notes. The conversion price is $10.00 per share
(subject to adjustment as provided in the Notes). The Company can
43
require the Note holders to convert the Notes into shares of common
stock at any time that the average trading price of the Company's
common stock equals or exceeds $20.00 per share (subject to
adjustment as provided in the Notes) during the immediately
preceding 90-day period. As of December 31, 1998, none of the
Notes had been converted into common stock of the Company.
On May 5, 1994, the Company completed the issuance and sale of
$2,000,000 aggregate principal amount of 8% Convertible
Subordinated Notes, Series B, due June 30, 2004 (the "Series B
Notes"). The Series B Notes were issued at par in a private
placement. The Series B Notes are convertible at the option of
the holder, into the number of whole shares of the Company's common
stock, determined by dividing the principal amount so converted by
$12.00 (the "Conversion Price"), subject to adjustment upon the
occurrence of certain events. The Company may require conversion,
in whole or in part, at any time at the Conversion Price then in
effect if, during the preceding 90-day period, the average market
price of the Company's common stock equals or exceeds $20.00 per
share. The Series B Notes bear interest from the date of issuance
at a rate of 8% per annum, payable quarterly. Holders of Series B
Notes were entitled to receive an interest enhancement payable in
shares of Company common stock based upon the market value of the
Company's common stock at June 30, 1996, which was two years from
the date of issuance of the Series B Notes. In July 1996, the
Company issued 70,965 shares of its common stock in connection with
the interest enhancement provision.
The Company also completed on May 5, 1994, the issuance and sale of
$3,000,000 aggregate principal amount of 8% Convertible
Subordinated Notes, Series C due June 30, 2004 (the "Series C
Notes"). The Series C Notes were issued at par in a private
placement to a company controlled by one of the Company's
directors, Mr. Richard C.W. Mauran. The Series C Notes are
convertible, at the option of the holder, into the number of whole
shares of common stock, determined by dividing the principal amount
so converted by $10.00, subject to adjustment upon the occurrence
of certain events. The Series C Notes bear interest from the date
of issuance at a rate of 8% per annum, payable quarterly.
Both Series B Notes and Series C Notes are unsecured subordinated
obligations of the Company and rank pari passu with the Company's
8% Convertible Subordinated Notes due June 30, 2003. Each of the
Notes are subordinated in right of payment to all other
indebtedness for borrowed money incurred by the Company.
44
Holders of the Notes have piggy-back registration rights as set
forth in the Registration Agreement relating to the Notes. Holders
of the Series B Notes and Series C Notes each have demand and
piggy-back registration rights as set forth in the Registration
Agreements relating to the Notes.
Notes payable as of December 31, 1998 and 1997 consist of the
following:
December 31,
1998 1997
Promissory note at a floating interest rate
of 1% above prime, payable in semi-annual
installments beginning January 31, 1993
until the earlier of payment of the entire
principal and accrued interest due or 30
days from the sixth anniversary of the date
of this note. Each installment of principal
is equal to the greater of $9,375 or 4.5%
of the net patient revenues of one of the
Company's clinics for the six months of the
calendar year immediately preceding each
installment date. This note is secured by
certain furniture and equipment with a net
book value of approximately -0-. $ - $ 51,000
Promissory note at a floating interest
rate of 1% above prime, payable in monthly
installments through November 1, 2001.
This note is secured by the facility,
with a net book value of approximately
$74,000, of one of the Company's clinics. 25,000 32,000
Promissory note with an 8% interest rate
payable in equal monthly installments
through March 19, 2007. This note is
secured by the facility, with a net book
value of approximately $49,000, of one of
the Company's clinics. 35,000 38,000
Unsecured promissory notes with a 7%
interest rate payable in equal monthly
installments through December 31, 2000. 48,000 140,000
45
December 31,
1998 1997
8% Convertible Subordinated Notes due
June 30, 2003 with interest payable
quarterly. 3,050,000 3,050,000
8% Convertible Subordinated Notes,
Series B, due June 30, 2004, with
interest payable quarterly. 2,000,000 2,000,000
8% Convertible Subordinated Notes,
Series C, due June 30, 2004, with
interest payable quarterly. 3,000,000 3,000,000
8,158,000 8,311,000
Less current portion (32,000) (72,000)
$8,126,000 $8,239,000
Scheduled maturities for the next five years and thereafter as of
December 31, 1998 are as follows:
1999 $ 32,000
2000 39,000
2001 12,000
2002 4,000
2003 3,054,000
Thereafter 5,017,000
$8,158,000
5. Related Party Transactions
During 1998, 1997 and 1996, the Company recognized interest expense
of $414,000 per year relating to Convertible Subordinated Notes
held by directors of the Company.
See Note 4 for additional related party transactions.
46
6. Income Taxes
Significant components of the Company's deferred tax assets at
December 31 were as follows:
1998 1997
Deferred tax assets:
Accrued liabilities $ 157,000 $ 130,000
Allowance for bad debt 375,000 353,000
Minimum tax credit carryforward - 297,000
Other 7,000 100,000
Total 539,000 880,000
Deferred tax liabilities:
Depreciation (26,000) (47,000)
Net deferred tax assets $ 513,000 $ 833,000
The differences between the federal tax rate and the Company's
effective tax rate, at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
U.S. tax at
statutory rate $ 919,000 34.00% $ 844,000 34.00% $574,000 35.00%
Reduction in valuation
allowance - - (1,087,000)(43.80) (557,000)(33.95)
State income taxes 156,000 5.77 170,000 6.87 43,000 2.62
Nondeductible
expenses 32,000 1.18 16,000 0.63 29,000 1.76
Other - net 1,000 0.03 112,000 4.52 28,000 1.70
$1,108,000 40.98% $ 55,000 2.22% $117,000 7.13%
</TABLE>
Significant components of the provision/(benefit) for income taxes,
for the years ended December 31, were as follows:
1998 1997 1996
Current:
Federal $ 552,000 $ 630,000 $ 74,000
State 236,000 258,000 43,000
Total current 788,000 888,000 117,000
Deferred:
Federal 320,000 (833,000) -
State - - -
Total deferred 320,000 (833,000) -
Total income tax provision $1,108,000 $ 55,000 $ 117,000
Income taxes paid during 1998, 1997 and 1996 were approximately
$816,000, $735,000 and $137,000, respectively.
47
7. Stock Option Plans
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees"(APB 25)
and related interpretations in accounting for its employee stock
options. Pro forma information regarding net income and earnings
per share is required by FASB Statement No. 123, "Accounting and
Disclosure of Stock-Based Compensation", and has been determined as
if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes
option pricing model.
1992 Stock Option Plan, as Amended
The Company has a 1992 Stock Option Plan, as amended (the "Option
Plan") which permits the Company to grant to key employees and
outside directors of the Company options to purchase shares of
common stock (subject to proportionate adjustments in the event of
stock dividends, splits, and similar corporate transactions).
During 1998, the Option Plan was amended to (i) increase by 350,000
(from 645,000 to 995,000) the number of shares of common stock
reserved for issuance upon exercise of options granted under the
Option Plan and (ii) increase the number of stock options that may
be granted to any one eligible individual in any one calendar year
from 50,000 to 100,000 (in each case, subject to adjustments for
stock dividends, stock splits and the like as provided in the
Option Plan).
Incentive stock options (those intended to satisfy the requirements
of the Internal Revenue Code) granted under the Option Plan are
granted at an exercise price of not less than the fair market value
of the shares of common stock on the date of grant. The exercise
prices of non-incentive options granted under the Option Plan are
determined by the committee which administers the Option Plan upon
each grant. The period within which each option will be
exercisable is determined by the committee which administers the
Option Plan (in no event may the exercise period of an incentive
stock option extend beyond 10 years from the date of grant). As of
December 31, 1998, 1997 and 1996, 78,750, 78,750 and 78,750
incentive stock options and 776,175, 520,375 and 416,000 non-
incentive stock options have been granted. Incentive stock options
of 3,750, 3,750 and 3,750 and non-incentive stock options of
13,000, 12,125 and 8,000 have been exercised as of December 31,
1998, 1997 and 1996, respectively.
48
Outstanding incentive stock options vest one-fourth on each of the
second, third, fourth and fifth anniversaries of the date of grant.
Of the 763,175 non-incentive stock options granted, but not yet
exercised as of December 31, 1998, 263,000 options vest 100% on the
date of grant, and 500,175 options vest one-fourth on each of the
second, third, fourth and fifth anniversaries of the date of grant.
The following weighted-average assumptions for 1998, 1997 and 1996
were used in estimating the fair value of the options granted under
the Option Plan: risk-free interest rates ranging from 4.65% to
6.36%; dividend yield rate of 0%; volatility factors of the
expected market price of the Company's common stock ranging from
.245 to .251; and a weighted-average expected life of the option of
eight years for those options which vest one-fourth on each of the
second, third, fourth and fifth anniversaries of the date of grant
and weighted-average expected lives of five to eight years for the
remaining options.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The pro forma effect on net income for 1998, 1997 and 1996
is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995. The
Company's pro forma information follows (in thousands except for
earnings per share information):
1998 1997 1996
Pro forma net income $1,347 $2,249 $1,426
Pro forma earnings per share $ 0.37 $ 0.62 $ 0.40
49
A summary of the Company's Option Plan activity and related
information for the years ended December 31 follows:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding-
beginning
of year 583,250 $8.92 483,000 $8.68 381,500 $8.41
Granted 262,800 10.60 111,250 9.89 105,750 9.59
Exercised (875) 8.89 (4,125) 7.19 (4,000) 6.75
Forfeited (7,000) 9.77 (6,875) 8.78 (250) 8.63
Outstanding-
end of year 838,175 $9.44 583,250 $8.92 483,000 $8.68
Exercisable
at end
of year 427,281 $8.89 329,063 $8.89 241,625 $8.66
Weighted-
average
fair value
of options
granted
during the
year $ 4.41 $ 3.99 $ 4.12
Exercise prices for options outstanding as of December 31, 1998
ranged from $6.25 to $12.19. The weighted-average remaining
contractual life of those options is 7.46 years.
Executive Option Plan
The Executive Option Plan (the "Executive Plan") was adopted by the
Board of Directors of the Company on March 2, 1993 and was approved
by the Company's stockholders on May 24, 1993. The Executive Plan
permits the Company to grant to any officer of the Company or its
affiliates, options to purchase up to 200,000 shares of common
stock (subject to adjustments in the event of stock dividends,
splits and similar corporate transactions). No further grants of
options will be made under the Executive Plan as a result of the
amendment to the 1992 Stock Option Plan (see Note 7, 1992 Stock
Option Plan, as Amended). The exercise prices of the options
50
granted under the Executive Plan are determined by the committee
which administers the Executive Plan upon each grant, and in the
case of incentive and non-incentive options, may not be less than
the greater of 175% of the fair market value of a share of common
stock on the date of grant of the option or the par value per share
of the stock. The period within which each option will be
exercisable is determined by the committee which administers the
Executive Plan (in no event may the exercise period extend beyond
10 years from the date of grant). The outstanding options vest
one-third on each of the third, fourth and fifth anniversaries of
the date of grant.
A summary of the Company's Executive Plan activity and related
information for the years ended December 31 follows:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding-
beginning
of year 105,000 $13.31 105,000 $13.31 105,000 $13.31
Granted - - - - - -
Exercised - - - - - -
Forfeited - - - - - -
Outstanding-
end of year 105,000 $13.31 105,000 $13.31 105,000 $13.31
Exercisable
at end
of year 95,000 $13.15 60,000 $13.05 25,000 $12.69
Exercise prices for options outstanding as of December 31, 1998
ranged from $12.69 to $14.88. The weighted-average remaining
contractual life of those options is 4.71 years.
In total, the Company has 1,854,917 shares which are reserved for
issuance under the 1992 Stock Option Plan, the Executive Option
Plan, the 8% Convertible Subordinated Notes, the Series B Notes and
the Series C Notes.
51
8. Warrants
In connection with the Company's initial public offering of its
stock effective May 28, 1992, the Company agreed to sell to the
managing underwriter, for nominal consideration, warrants to
purchase from the Company 120,000 shares of common stock (the
"Representative's Warrants"). The Representative's Warrants were
initially exercisable at a price of $8.125 per share of common
stock for a period of four years, commencing one year from the
initial public offering date.
In May 1997, 96,000 of the Representative's Warrants were exercised
by surrendering the Warrants in exchange for 16,794 shares of
Company common stock. The remaining 24,000 of the Representative's
Warrants expired.
9. Preferred Stock
The Board of Directors of the Company is empowered, without
approval of the stockholders, to cause shares of Preferred Stock to
be issued in one or more series and to establish the number of
shares to be included in each such series and the rights, powers,
preferences and limitations of each series. There are no
provisions in the Company's Articles of Incorporation specifying
the vote required by the holders of Preferred Stock to take action.
All such provisions would be set out in the designation of any
series of Preferred Stock established by the Board of Directors.
The bylaws of the Company specify that, when a quorum is present at
any meeting, the vote of the holders of at least a majority of the
outstanding shares entitled to vote who are present, in person or
by proxy, shall decide any question brought before the meeting,
unless a different vote is required by law or the Company's
Articles of Incorporation. Because the Board of Directors has the
power to establish the preferences and rights of each series, it
may afford the holders of any series of Preferred Stock,
preferences, powers, and rights, voting or otherwise, senior to the
right of holders of common stock. The issuance of the Preferred
Stock could have the effect of delaying or preventing a change in
control of the Company. The Board of Directors has no present
plans to issue any of the Preferred Stock.
52
10. Defined Contribution Plan
The Company has a 401(k) profit sharing plan covering all employees
with three months of service. The Company may make discretionary
contributions of up to 50% of employee contributions. The Company
recognized $-0- in contribution expense for the years ended
December 31, 1998, 1997 and 1996, respectively.
11. Commitments and Contingencies
Operating Leases
The Company has entered into operating leases for its executive
offices and clinic facilities. In connection with these
agreements, the Company incurred rent expense of $3,125,000,
$2,831,000 and $2,415,000 for the years ended December 31, 1998,
1997 and 1996, respectively. Several of the leases provide for an
annual increase in the rental payment based upon the Consumer Price
Index for each particular year. The leases also provide for
renewal periods ranging from one to five years. The agreements to
extend the leases specify that rental rates would be adjusted to
market rates as of each renewal date.
The future minimum lease commitments for the next five years and in
the aggregate are as follows:
1999 $3,105,000
2000 2,378,000
2001 2,023,000
2002 1,430,000
2003 704,000
Thereafter 101,000
$9,741,000
Employment Agreements
At December 31, 1998, the Company had an outstanding employment
agreement with one of its executive officers for $180,000 annually,
subject to adjustment to reflect positive performance, for a term
extending through February 2002.
In addition, the Company has outstanding employment agreements with
the managing physical therapist partners of the Company's physical
therapy clinics and with certain other clinic employees which
53
obligate subsidiaries of the Company to pay compensation of
$7,126,000 in 1999 and $12,559,000 in the aggregate through 2003.
In addition, each employment agreement with the managing physical
therapists provides for monthly bonus payments calculated as a
percentage of each clinic's net revenues (not in excess of
operating profits) or operating profits. The Company recognized
salaries and bonus expense for the managing physical therapist
partners of $7,044,000, $5,810,000 and $4,852,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The employment agreements generally include a non-competition
provision which extends through the term of the agreement and for
one to two years thereafter.
Minority Interest in Outpatient Physical Therapy Clinic Limited
Partnerships
The managing physical and/or occupational therapist of each clinic
owns a partial interest in the clinic he or she operates. This is
accomplished by having each clinic structured as a separate limited
partnership (the "Operating Subsidiaries"). The Company, through
its wholly-owned subsidiaries, currently owns a 1% general
partnership interest and limited partnership interest ranging from
59% to 99% in the clinics it operates. For the majority of the
clinics, the managing therapist of each such clinic, along with
other therapists at the clinic in several of the partnerships, own
the remaining limited partnership interest in the clinic which
ranges from 0% to 40%.
The majority of the partnership agreements are structured such that
the managing therapist begins with a 20% profit interest in his or
her clinic limited partnership and, at the end of each of the first
five years, the managing therapist's profit interest increases by
3% until his or her interest reaches 35%. These therapists have no
interest in net losses of clinic partnerships, except to the extent
of their capital accounts. The Company presently anticipates that
future clinics developed by the Company will be structured in a
comparable manner.
54
12. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997 1996
Numerator:
Net income $1,596,000 $2,426,000 $1,641,000
Numerator for basic
earnings per share
and diluted earnings
per share $1,596,000 $2,426,000 $1,641,000
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 3,611,039 3,603,159 3,557,113
Effect of dilutive
securities:
Stock options 132,490 94,346 92,463
Warrants - 10,803 30,010
Dilutive potential
common shares 132,490 105,149 122,473
Denominator for diluted
earnings per share--
adjusted weighted-
average shares and
assumed conversions 3,743,529 3,708,308 3,679,586
Basic earnings per share $ 0.44 $ 0.67 $ 0.46
Diluted earnings per share $ 0.43 $ 0.65 $ 0.45
For additional disclosures regarding the stock options and
warrants, see Notes 7 and 8, respectively.
The Notes, the Series B Notes and the Series C Notes were all
outstanding during 1996, 1997 and 1998, but were not included in
the computation of diluted earnings per share because the effect on
the computation was anti-dilutive.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None
55
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange
Act.
The information required by Items 401 and 405 of Regulation S-K is
omitted from this Report as the Company intends to file its
definitive annual meeting proxy materials within 120 days after its
fiscal year-end and the information to be included therein in
response to such Items is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K is omitted
from this Report as the Company intends to file its definitive
annual meeting proxy materials within 120 days after its fiscal
year-end and the information to be included therein in response to
such Item is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Item 403 of Regulation S-K is omitted
from this Report as the Company intends to file its definitive
annual meeting proxy materials within 120 days after its fiscal
year-end and the information to be included therein in response to
such Item is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-K is omitted
from this Report as the Company intends to file its definitive
annual meeting proxy materials within 120 days after its fiscal
year-end and the information to be included therein in response to
such Item is incorporated herein by reference.
56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a)(1) The following consolidated financial statements of U.S.
Physical Therapy, Inc. and subsidiaries are included in
Item 8:
Consolidated balance sheets - December 31, 1998 and 1997
Consolidated statements of operations - Years ended
December 31, 1998, 1997 and 1996
Consolidated statements of shareholders' equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated statements of cash flows - Years ended
December 31, 1998, 1997 and 1996
Notes to consolidated financial statements - December 31,
1998
(2) The following consolidated financial statement schedule
of U.S. Physical Therapy, Inc. is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
(3) List of Exhibits
3.1 Articles of Incorporation of the Company (filed as an
exhibit to the Company's Registration Statement on Form
S-1 (33-47019) and incorporated herein by reference).
3.2 Bylaws of the Company, as amended (filed as an exhibit to
the Company's Form 10-KSB for the year ended December 31,
1993 and incorporated herein by reference).
57
10.1 Convertible Subordinated Note Purchase Agreement dated
June 2, 1993 (filed as an exhibit to the Company's Form
8-K dated June 10, 1993 and incorporated herein by
reference).
10.2 Form of U.S. Physical Therapy, Inc. 8% Convertible
Subordinated Notes (filed as an exhibit to the Company's
Form 8-K dated June 2, 1993 and incorporated herein by
reference).
10.3 Amendment to Convertible Subordinated Note Purchase
Agreement dated March 10, 1994 (filed as an exhibit to
the Company's Form 8-K dated March 25, 1994 and
incorporated herein by reference).
10.4 Form of 8% Convertible Subordinated Notes, Series C
(filed as an exhibit to the Company's Form 8-K dated May
5, 1995 and incorporated herein by reference).
10.5 Registration Agreement for Series B Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.6 Form of 8% Convertible Subordinated Notes, Series C
(filed as an exhibit to the Company's Form 8-K dated May
5, 1995 and incorporated herein by reference).
10.7 Registration Agreement for Series C Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.8 1992 Stock Option Plan, as amended (filed as an exhibit
to the Company's Registration Statement on Form S-8 (333-
64159) and incorporated herein by reference).
10.9 Executive Option Plan (filed as an exhibit to the
Company's Registration Statement on Form S-8 (33-63444)
and incorporated herein by reference).
10.10 Amended and Restated Employment Agreement between the
Company and Roy W. Spradlin (filed as an exhibit to the
Company's Form 10-KSB for the year ended December 31,
1997 and incorporated herein by reference).
21 Subsidiaries of the Company.
58
23 Consent of Ernst & Young LLP (Registration Nos. 33-63446,
33-63444, 33-91004, 33-93040, 333-30071 and 333-64159).
27 Financial Data Schedule.
(b) Reports on Form 8-K
No Form 8-K was filed for the quarter ended December 31,
1998.
59
Item 14. (d)SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
Balance Charged to
at Charged to Other Balance
Beginning Costs and Accounts- Deductions- at End
Description of Period Expenses Describe Describe of Period
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $1,595,000 $1,143,000 $1,046,000(1) $1,692,000
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $1,159,000 $1,050,000 $ 614,000(1) $1,595,000
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $ 727,000 $ 929,000 $ 497,000(1) $1,159,000
<FN>
<F1>
(1)Uncollectible accounts written off, net of recoveries.
<FN>
</TABLE>
60
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC. By: /s/ J. Michael Mullin
(Registrant) J. Michael Mullin,
Chief Financial Officer
(principal financial and
accounting officer)
Date: March 30, 1999
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities as of the date indicated above.
By:/s/ J. Livingston Kosberg By: /s/ Marlin W. Johnston
J. Livingston Kosberg, Marlin W. Johnston,
Chairman of the Board Director
By: /s/ Mark J. Brookner By: /s/ James B. Hoover
Mark J. Brookner, James B. Hoover,
Vice Chairman of the Board Director
By: /s/ Roy W. Spradlin By: /s/ Richard C.W. Mauran
Roy W. Spradlin, President, Richard C.W. Mauran,
Chief Executive Officer and Director
Director
(principal executive officer)
By: /s/ Daniel C. Arnold By:
Daniel C. Arnold, Albert L. Rosen,
Director Director
61
INDEX OF EXHIBITS
EXHIBIT NO. IDENTITY OF EXHIBIT PAGE NO.
3.1 Articles of Incorporation of the
Company (filed as an exhibit to
the Company's Registration State-
ment on Form S-1 (33-47019) and
incorporated herein by reference). --
3.2 Bylaws of the Company, as amended
(filed as an exhibit to the Company's
Form 10-KSB for the year ended
December 31, 1993 and incorporated
herein by reference). --
10.1 Convertible Subordinated Note Purchase
Agreement dated June 2, 1993 (filed as
an exhibit to the Company's Form 8-K
dated June 10, 1993 and incorporated
herein by reference). --
10.2 Form of U.S. Physical Therapy, Inc. 8%
Convertible Subordinated Notes (filed as
an exhibit to the Company's Form 8-K
dated June 2, 1993 and incorporated
herein by reference). --
10.3 Amendment to Convertible Subordinated
Note Purchase Agreement dated
March 10, 1994 (filed as an exhibit
to the Company's Form 8-K dated
March 25, 1994 and incorporated
herein by reference). --
10.4 Form of 8% Convertible Subordinated
Notes, Series C (filed as an exhibit
to the Company's Form 8-K dated
May 5, 1995 and incorporated herein
by reference). --
10.5 Registration Agreement for Series B
Notes (filed as an exhibit to the
Company's Form 8-K dated May 5, 1995
and incorporated herein by reference). --
62
INDEX OF EXHIBITS
EXHIBIT NO. IDENTITY OF EXHIBIT PAGE NO.
10.6 Form of 8% Convertible Subordinated
Notes, Series C (filed as an exhibit to
the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference). --
10.7 Registration Agreement for Series C
Notes (filed as an exhibit to the
Company's Form 8-K dated May 5, 1995
and incorporated herein by reference). --
10.8 1992 Stock Option Plan, as amended
(filed as an exhibit to the Company's
Registration Statement on Form S-8
(333-64159) and incorporated herein
by reference). --
10.9 Executive Option Plan (filed as an
exhibit to the Company's Registration
Statement on Form S-8 (33-63444) and
incorporated herein by reference). --
10.10 Amended and Restated Employment
Agreement between the Company and
Roy W. Spradlin (filed as an exhibit to
the Company's Form 10-KSB for the year
ended December 31, 1997 and incorporated
herein by reference). --
21 Subsidiaries of the Company. 64
23 Consent of Ernst & Young LLP (Registra-
tion Nos. 33-63446, 33-63444, 33-91004,
33-93040, 333-30071 and 333-64159). 70
27 Financial Data Schedule. 71
63
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
U.S. PT - Delaware, Inc. Corporation Delaware
U.S. Therapy, Inc. Corporation Texas
National Rehab GP, Inc. Corporation Texas
National Rehab Delaware, Inc. Corporation Delaware
U.S. PT - Michigan, Inc. Corporation Delaware
HH Rehab Associates, Inc.
dba Genesee Valley
Physical Therapy Corporation Michigan
Professional Rehab Services,
Inc.
dba Northwoods Physical Therapy
dba Thibodeau Physical Therapy Corporation Michigan
U.S. Physical Therapy, Ltd. Limited Partnership Texas
U.S. PT Management, Ltd. Limited Partnership Texas
National Rehab Management
GP, Inc. Corporation Texas
Rehab Partners #1, Inc. Corporation Texas
Rehab Partners #2, Inc. Corporation Texas
Rehab Partners #3, Inc. Corporation Texas
Rehab Partners #4, Inc. Corporation Texas
Rehab Partners #5, Inc. Corporation Texas
Rehab Partners #6, Inc. Corporation Texas
Rehab Partners #7, Inc. Corporation Texas
Rehab Partners Acquisition
#1, Inc. Corporation Texas
Southeastern Hand Rehabilitation,
Inc. dba Reist Hand Therapy Corporation Florida
The Browning Realty Group, Inc. Corporation Texas
Action Physical Therapy
Clinic, Ltd. Limited Partnership Texas
Cypresswood Physical
Therapy Centre, Ltd. Limited Partnership Texas
Progressive Physical
Therapy Clinic, Ltd. Limited Partnership Texas
Virginia Parc Physical
Therapy, Ltd. dba
McKinney Physical Therapy
Associates, Limited
Partnership Limited Partnership Texas
64
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Dearborn Physical Therapy,
Ltd. dba Advanced
Physical Therapy Limited Partnership Texas
Saline Physical Therapy
of Michigan, Ltd. Limited Partnership Texas
R. Clair Physical Therapy,
Limited Partnership Limited Partnership Texas
Roepke Physical Therapy,
Limited Partnership Limited Partnership Texas
Merrill Physical Therapy,
Limited Partnership Limited Partnership Texas
Genesee Valley Physical
Therapy, Limited Partnership
(canceled effective 5/13/98) Limited Partnership Texas
Joan Ostermeier Physical
Therapy, Limited
Partnership dba Sport &
Spine Clinic of Wittenberg Limited Partnership Texas
Crossroads Physical Therapy,
Limited Partnership Limited Partnership Texas
Kelly Lynch Physical Therapy,
Limited Partnership Limited Partnership Texas
U.S. PT Michigan #1, Limited
Partnership Limited Partnership Texas
Spracklen Physical Therapy,
Limited Partnership Limited Partnership Texas
Bosque River Physical Therapy
and Rehabilitation, Limited
Partnership Limited Partnership Texas
Kingwood Physical Therapy, Ltd. Limited Partnership Texas
Enid Therapy Center,
Limited Partnership Limited Partnership Texas
Dynamic Physical Therapy
of Round Rock, Ltd. Limited Partnership Texas
Active Physical Therapy,
Limited Partnership Limited Partnership Texas
Southwind Physical Therapy,
Limited Partnership Limited Partnership Texas
65
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Genesis Rehabilitation and
Sports Center - Jackson,
Limited Partnership Limited Partnership Texas
Cleveland Physical Therapy, Ltd. Limited Partnership Texas
Aquatic and Orthopedic Rehab
Specialists, Limited
Partnership Limited Partnership Texas
Vileno Therapy of Treasure
Coast, Limited Partnership Limited Partnership Texas
Trussell Physical Therapy,
Limited Partnership dba
GenTech Industrial Physical
Therapy Services (dissolved
effective 3/31/98) Limited Partnership Texas
Comprehensive Hand & Physical
Therapy, Limited Partnership Limited Partnership Texas
Tom Melko Physical Therapy,
Limited Partnership Limited Partnership Texas
Debra Dent Physical Therapy,
Limited Partnership Limited Partnership Texas
Hands Plus Therapy Center,
Limited Partnership Limited Partnership Texas
South Tulsa Physical Therapy,
Limited Partnership Limited Partnership Texas
Hands On Therapy, Limited
Partnership Limited Partnership Texas
U.S. PT Michigan #2, Limited
Partnership Limited Partnership Texas
Maine Physical Therapy,
Limited Partnership Limited Partnership Texas
Brentwood Physical Therapy,
Limited Partnership Limited Partnership Texas
Saginaw Valley Sport and Spine,
Limited Partnership dba Saginaw
Valley Sport & Spine, Bay City
Sport & Spine and Midland Sport
& Spine Limited Partnership Texas
Brazos Valley Physical Therapy,
Limited Partnership Limited Partnership Texas
66
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Plymouth Physical Therapy
Specialists, Limited Limited Partnership Texas
Partnership
Brick Hand & Rehabilitative
Services, Limited Partnership Limited Partnership Texas
Heartland Physical Therapy,
Limited Partnership Limited Partnership Texas
Bay View Physical Therapy, Ltd. Limited Partnership Texas
Rio Grande Physical Therapy,
Limited Partnership Limited Partnership Texas
Thomas Hand and Rehabilitation
Specialists, Limited
Partnership Limited Partnership Texas
Excel Occupational and Physical
Therapy, Limited Partnership Limited Partnership Texas
Hand Health and Rehabilitation,
Limited Partnership Limited Partnership Texas
Flannery Physical Therapy,
Limited Partnership dba
Physical Therapy Plus Limited Partnership Texas
Port City Physical Therapy,
Limited Partnership Limited Partnership Texas
Brownwood Physical Therapy,
Limited Partnership dba
Pecan Valley Physical Therapy Limited Partnership Texas
Quantum Physical Therapy, Limited
Partnership (formerly Abbott &
Baird Physical Therapy Associates,
Limited Partnership) Limited Partnership Texas
Spine & Sport Physical Therapy,
Limited Partnership (formerly
Southern Orthopaedic & Sports
Physical Therapy, Limited
Partnership) Limited Partnership Texas
Norman Physical Therapy,
Limited Partnership Limited Partnership Texas
Rice Rehabilitation Associates,
Limited Partnership Limited Partnership Texas
67
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Physical Therapy and Spine
Institute, Limited Partnership Limited Partnership Texas
Forest City Physical Therapy,
Limited Partnership Limited Partnership Texas
Leader Physical Therapy,
Limited Partnership Limited Partnership Texas
Functions by Fletchall,
Limited Partnership Limited Partnership Texas
C.A.R.E. Physical Therapy
Center, Limited Partnership Limited Partnership Texas
Ankeny Physical & Sports Therapy,
Limited Partnership Limited Partnership Texas
Twin Cities Physical Therapy,
Limited Partnership Limited Partnership Texas
Brem Physical Therapy Associates,
Limited Partnership Limited Partnership Texas
Penn's Wood Physical Therapy,
Limited Partnership Limited Partnership Texas
Regional Physical Therapy
Center, Limited Partnership Limited Partnership Texas
Wyman Physical Therapy,
Limited Partnership Limited Partnership Texas
Adams County Physical Therapy,
Limited Partnership Limited Partnership Texas
Coppell Spine & Sports Rehab,
Limited Partnership Limited Partnership Texas
Julie Emond Physical Therapy,
Limited Partnership dba
Maple Valley Physical Therapy Limited Partnership Texas
City of Lakes Physical Therapy,
Limited Partnership Limited Partnership Texas
Radtke Physical Therapy,
Limited Partnership Limited Partnership Texas
Flint Physical Therapy,
Limited Partnership Limited Partnership Texas
Pelican State Physical Therapy,
Limited Partnership Limited Partnership Texas
68
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
Airpark Physical Therapy,
Limited Partnership (formerly
Therapy Partners, Limited
Partnership which was formerly
North Hills Physical Therapy,
Limited Partnership) Limited Partnership Texas
Capital Hand and Physical
Therapy, Limited Partnership Limited Partnership Texas
Maines & Dean Physical Therapy,
Limited Partnership Limited Partnership Texas
Edge Physical Therapy, Limited
Partnership dba River's Edge
Physical Therapy Limited Partnership Texas
Laurel Physical Therapy,
Limited Partnership Limited Partnership Texas
Riverwest Physical Therapy,
Limited Partnership Limited Partnership Texas
Scott Black Physical Therapy,
Limited Partnership Limited Partnership Texas
Mountain View Physical Therapy,
Limited Partnership Limited Partnership Texas
Intermountain Physical Therapy,
Limited Partnership Limited Partnership Texas
Staunton Hand & Rehab Services,
Limited Partnership Limited Partnership Texas
White Mountain Physical Therapy,
Limited Partnership Limited Partnership Texas
Battle Physical Therapy,
Limited Partnership Limited Partnership Texas
Covington Rehabilitation and
Hand Therapy, Limited
Partnership Limited Partnership Texas
Crawford Physical Therapy,
Limited Partnership Limited Partnership Texas
Sport & Spine Clinic, L.P. Limited Partnership Texas
Physical Therapy & Rehab
Ctr., L.P. (dissolved
effective 12/31/98) Limited Partnership Texas
69
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-63446, 33-63444, 33-91004, 33-
93040, 333-30071, 333-64159) of our report dated March 16, 1999
with respect to the consolidated financial statements and schedule
of U.S. Physical Therapy, Inc. and subsidiaries included in this
Annual Report on Form 10-K for the year ended December 31, 1998.
Houston, Texas
March 30, 1999 ERNST & YOUNG LLP
70
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