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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 1-11151
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U.S. PHYSICAL THERAPY, INC.
------------------------------------------------------
(Exact 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 officers) (Zip Code)
Registrant's telephone number, including area code: (713) 297-7000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
As of November 12, 2002, the number of shares outstanding of the
registrant's common stock, par value $.01 per share, was: 11,727,858.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 23
Item 4. Controls and Procedures 23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 24
Signature 25
Certifications 26
2
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, December 31,
2002 2001
--------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,977 $ 8,121
Patient accounts receivable,
less allowance for doubtful accounts
of $4,259 and $3,805, respectively 13,169 12,769
Accounts receivable - other 572 878
Other current assets 1,782 1,168
------------- ---------------
Total current assets 24,500 22,936
Fixed assets:
Furniture and equipment 16,754 14,214
Leasehold improvements 8,660 7,389
------------- ---------------
25,414 21,603
Less accumulated depreciation
and amortization 15,887 13,798
------------- ---------------
9,527 7,805
Goodwill, net of amortization of
$335 and $335, respectively 5,582 4,519
Other assets, net of amortization
of $504 and $501, respectively 1,821 1,482
------------- ---------------
$ 41,430 $ 36,742
============= ===============
See notes to consolidated financial statements.
3
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, December 31,
2002 2001
-------------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 518 $ 539
Accrued expenses 2,611 2,453
Estimated third-party payor
(Medicare) settlements 33 113
Notes payable 4 701
----------- ------------
Total current liabilities 3,166 3,806
Notes payable - long-term portion 19 21
Convertible subordinated notes payable 2,333 3,000
Minority interests in subsidiary
limited partnerships 3,328 3,249
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, $.01 par value,
500,000 shares authorized, -0-
shares outstanding
Common stock, $.01 par value,
20,000,000 shares authorized,
11,726,510 and 10,688,321 shares
issued at September 30, 2002 and
December 31, 2001, respectively 117 107
Additional paid-in capital 22,729 15,429
Retained earnings 19,550 13,120
Treasury stock at cost, 699,700 shares
held at September 30, 2002 and 149,700
at December 31, 2001
(9,812) (1,990)
----------- ------------
Total shareholders' equity 32,584 26,666
----------- ------------
$ 41,430 $ 36,742
=========== ===========
See notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
September 30,
-------------------------------------------
2002 2001
------------------ -----------------
(unaudited)
Net patient revenues $ 23,232 $ 19,943
Management contract revenues 552 586
Other revenues 27 53
------------------ -----------------
Net revenues 23,811 20,582
Clinic operating costs:
Salaries and related costs 10,490 9,046
Rent, clinic supplies and other 5,332 4,394
Provision for doubtful accounts 373 484
------------------ -----------------
16,195 13,924
Corporate office costs 2,970 2,323
------------------ -----------------
Operating income before non-
operating expenses 4,646 4,335
Interest expense 47 62
Minority interests in subsidiary
limited partnerships 1,315 1,308
------------------ -----------------
Income before income taxes 3,284 2,965
Provision for income taxes 1,266 1,140
------------------ -----------------
Net income $ 2,018 $ 1,825
================== =================
Basic earnings per common share $ .18 $ .18
================== =================
Diluted earnings per common share $ .16 $ .14
================== =================
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended
September 30,
-------------------------------------------
2002 2001
------------------ -----------------
(unaudited)
Net patient revenues $ 68,317 $ 57,531
Management contract revenues 1,710 1,728
Other revenues 85 119
------------------ ----------------
Net revenues 70,112 59,378
Clinic operating costs:
Salaries and related costs 30,828 25,966
Rent, clinic supplies and other 15,095 12,856
Provision for doubtful accounts 1,315 1,435
------------------ ----------------
47,238 40,257
------------------ ----------------
Corporate office costs 8,338 6,642
------------------ ----------------
Operating income before non-
operating expenses 14,536 12,479
Interest expense 167 206
Minority interests in subsidiary
limited partnerships 3,946 3,942
------------------ ----------------
Income before income taxes 10,423 8,331
Provision for income taxes 3,993 3,207
------------------ ----------------
Net income $ 6,430 $ 5,124
================== ================
Basic earnings per common share $ .58 $ .51
================== ================
Diluted earnings per common share $ .50 $ .40
================== ================
See notes to consolidated financial statements.
6
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
September 30,
-------------------------------------------
2002 2001
------------------ -----------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 6,430 $ 5,124
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 2,145 1,939
Minority interests in
earnings of subsidiary
limited partnerships 3,946 3,942
Provision for doubtful accounts 1,315 1,435
Loss on disposal of fixed
assets - 3
Tax benefit from exercise
of stock options 3,969 2,520
Deferred taxes 225 315
Changes in operating assets and liabilities:
Increase in patient accounts
receivable (1,715) (3,130)
Decrease in accounts receivable -
other 306 13
Increase in other assets (1,180) (1,356)
Increase in accounts payable
and accrued expenses 137 1,395
Decrease in estimated third-party
payor (Medicare) settlements (80) (61)
------------------- -----------------
Net cash provided by operating
activities 15,498 12,139
------------------- ----------------
See notes to consolidated financial statements.
7
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine months ended
September 30,
-------------------------------------------
2002 2001
------------------ -----------------
(unaudited)
INVESTING ACTIVITIES
Purchase of fixed assets (3,867) (2,344)
Purchase of intangibles (1,062) (30)
Proceeds on sale of fixed assets 1 4
------------------ ----------------
Net cash used in investing
activities (4,928) (2,370)
------------------ ----------------
FINANCING ACTIVITIES
Payment of notes payable (697) (910)
Purchase of common stock (7,821) -
Purchase of fractional shares on
three-for-two stock split - (11)
Proceeds from investment of
minority investors in subsidiary
limited partnerships - 3
Proceeds from exercise of stock
options 2,671 1,935
Distributions to minority investors
in subsidiary limited
partnerships (3,867) (3,072)
------------------ ----------------
Net cash used in financing
activities (9,714) (2,055)
------------------ ----------------
Net increase in cash and cash
equivalents 856 7,714
Cash and cash equivalents -
beginning of period 8,121 2,071
------------------ ----------------
Cash and cash equivalents -
end of period $ 8,977 $ 9,785
================== ================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 707 $ 909
================== ================
Interest $ 167 $ 207
================== ================
See notes to consolidated financial statements.
8
11
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Our consolidated financial statements include the accounts of our company, U.S.
Physical Therapy, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated. We do business through our
subsidiary clinic partnerships, in which we generally owned a 1% general
partnership interest and a 64% limited partnership interest in our clinics. The
managing therapist of each clinic owns the remaining limited partnership
interest in the majority of our clinics. In some instances, we have developed
satellite clinic facilities as extensions of existing clinics, with the result
that some of our clinic partnerships operate more than one clinic location. The
minority interests of our partner therapists in the equity and earnings of our
clinic limited partnerships are presented separately in the consolidated
financial statements.
The accompanying unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions for Form 10-Q. However, the statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements.
We believe, and our President and our Chief Financial Officer have certified,
that the financial statements included in this report contain all necessary
adjustments (consisting only of normal recurring adjustments) to present fairly
our financial position, results of operations and cash flows for the interim
periods presented. For further information regarding our accounting policies,
please read our audited financial statements included in our Form 10-K for the
year ended December 31, 2001.
Operating results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results we expect for the entire year.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
We primarily bill third-party payors for services at standard rates. Actual
payments received from the payors vary based upon the payor's fee schedules,
contracts we have signed with the payor, or limits on usual and customary
charges. Based upon historical payment data, we record a contractual allowance
to reduce gross revenues to the estimated net realizable amount we expect to
ultimately collect from payors. The accuracy of our revenue recognition improves
with the
9
timely collection of billed amounts, that is, the longer it takes to collect
billed revenues the more difficult it is to predict ultimate collectibility.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We review the aging of our accounts and our experience with particular payors at
each clinic in determining an appropriate accrual for doubtful accounts.
Historically, clinics that have large amounts of older accounts generally have
less favorable collection experience, resulting in a higher allowance for
doubtful accounts. Accounts that are ultimately determined to be uncollectible
are written off against the bad debt allowance.
RESERVE FOR HEALTH INSURANCE
We self-insure our employee health and dental benefits, with reinsurance
agreements in place to cover specific claims or total claims exceeding
predetermined amounts in the aggregate. Based upon our recent historical trends,
estimates of incurred but unpaid claims are recorded in a reserve account within
accrued expenses in the balance sheets.
ACCOUNTING FOR INCOME TAXES
We are required to estimate our federal and state income tax liability as well
as assess temporary differences between our tax and accounting treatment of some
of our expenses, such as bad debt expense and amortization of leasehold
improvements. The differences result in deferred tax assets and liabilities,
which are included in the consolidated balance sheets. We also assess the
likelihood that deferred tax assets will be recovered from future taxable
income, and if not recoverable, establish a valuation reserve.
USE OF ESTIMATES
In preparing our financial statements, management makes certain estimates and
assumptions that affect the amounts reported in the financial statements and
related disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
COMMON STOCK
On June 28, 2001, we effected a three-for-two common stock split in the form of
a 50% stock dividend to stockholders. All share and per share information
included in our financial statements and related notes have been adjusted to
reflect this stock split.
10
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
(in thousands, except per share data)
Numerator:
Net income $ 2,018 $ 1,825 $ 6,430 $ 5,124
------- ------- ------- -------
Numerator for basic
earnings per share $ 2,018 $1,825 $6,430 $5,124
Effect of dilutive
securities:
Interest on convertible
subordinated notes payable 31 40 108 125
------- ------- ------- -------
Numerator for diluted earnings
per share-income available
to common stockholders after
assumed conversions $ 2,049 $ 1,865 $ 6,538 $ 5,249
======= ======= ======= =======
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 11,178 10,270 10,990 9,997
Effect of dilutive securities:
Stock options 1,002 2,017 1,308 2,087
Convertible subordinated
notes payable 700 900 748 945
------- ------- ------- -------
Dilutive potential common
shares 1,702 2,917 2,056 3,032
------- ------- ------- -------
Denominator for diluted
earnings per share--adjusted
weighted-average shares
and assumed conversions 12,880 13,187 13,046 13,029
======= ======= ======= =======
Basic earnings per common share $ .18 $ .18 $ .58 $ .51
======= ======= ======= =======
Diluted earnings per common share $ .16 $ .14 $ .50 $ .40
======= ======= ======= =======
3. INCOME TAXES
Significant components of our provision for income taxes were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------
2002 2001 2002 2001
-------- ------- -------- --------
(in thousands)
Current:
Federal $ 1,144 $ 1,272 $ 3,630 $ 3,006
State 193 183 588 516
-------- ------- -------- --------
Total current 1,337 1,455 4,218 3,522
-------- ------- -------- --------
Deferred:
Federal (71) (315) (225) (315)
State - - - -
-------- ------- -------- --------
Total deferred (71) (315) (225) (315)
-------- ------- -------- --------
Total income tax provision $ 1,266 $ 1,140 $ 3,993 $ 3,207
======== ======= ======== ========
11
4. CONVERTIBLE SUBORDINATED DEBT
In May 1994 we issued $3,000,000 of 8% Convertible Subordinated Notes, Series C
due June 30, 2004 (the "Series C Note"). The Series C Note is convertible at the
option of the holder into shares of our common stock determined by dividing the
principal amount of the Notes being converted by $3.33. In June 2002, $667,000
of the Series C Notes were converted by a note holder into 200,100 shares of
common stock. The remaining principal amount under the Series C Note was
$2,333,000 at September 30, 2002 and $3,000,000 at December 31, 2001.
In January 2001, $650,000 of an earlier series of notes was converted into
195,000 shares of common stock; at that time we exercised our right to require
conversion of the remaining balance of $3,550,000 of several outstanding series
of notes into 1,002,500 shares of common stock.
The debt conversions increased our shareholders' equity by the carrying amount
of the debt converted less unamortized deferred financing costs, thus improving
our debt to equity ratio and favorably impacting results of operations and cash
flow due to the interest savings in 2001 before income taxes of approximately
$400,000.
5. PURCHASE OF COMMON STOCK
In September 2001 the Board of Directors authorized us to purchase, in the open
market or in privately negotiated transactions, up to 1,000,000 shares of our
common stock. Any shares purchased will be held as treasury shares and may be
used for such valid corporate purposes or retired as the Board deems advisable.
As of December 31, 2001, we had purchased 135,000 shares of our common stock on
the open market for a total of $1,943,000. In July and August 2002, we purchased
a total of 550,000 shares of our common stock on the open market for $7,821,000.
6. GOODWILL-ADOPTION OF STATEMENT 142
In January 2002, we adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets," ("SFAS 142"), which requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS 142 further requires that the fair value of goodwill and other
intangible assets with indefinite lives be tested for impairment upon adoption
of this statement, annually, and upon the occurrence of certain events; such
assets must be written down to fair value if considered impaired. We completed
our initial impairment review upon adoption and determined that there was no
impairment. We plan to perform our annual impairment review during the fourth
quarter of each year, commencing this year. At September 30, 2002, we had
$5,582,000 of unamortized goodwill.
12
Net income excluding goodwill amortization expense is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands)
Net income as reported $ 2,018 $ 1,825 $ 6,430 $ 5,124
Add back:
Goodwill amortization,
net of tax - 13 - 32
-------- -------- -------- --------
Adjusted net income $ 2,018 $ 1,838 $ 6,430 $ 5,156
======== ======== ======== ========
The exclusion of goodwill amortization had no material effect on basic or
diluted earnings per common share.
7. ACQUISITION OF EQUITY INTERESTS
On December 31, 2001, we purchased a 35% minority interest in a limited
partnership that owns four clinics in Michigan for consideration aggregating
$1,511,000 in the form of 67,100 shares of restricted stock and a note for
$435,000, which note was paid in January 2002. Additional consideration may be
paid in the future based upon performance of the clinics. As part of the
purchase, we paid the minority partner $261,000 in undistributed earnings, which
amount was also paid in January 2002.
On January 31, 2002, we purchased a 10% minority interest in a limited
partnership that owns four clinics in Michigan for $447,000. As part of the
purchase, we paid the minority partner $65,000 in undistributed earnings.
On June 1, 2002, we purchased a 35% minority interest in a limited partnership
for $220,000. Additional consideration may be paid in the future based upon
clinic performance. Like the other purchases we paid the minority partner
$73,000 in undistributed earnings. In July we sold 17.5% of the purchased
interest to another therapist for $220,000, payable from future profits of the
partnership. The Company is recognizing the gain based upon the installment
method.
On June 1, 2002, we purchased a 5% minority interest in a limited partnership
for $95,000 and as part of the purchase paid the minority partner $8,000 in
undistributed earnings.
On August 31, 2002, we purchased the 30% minority interest in a limited
partnership for $244,000 cash plus forgiveness of a $75,000 note receivable from
the minority partner. We also paid the minority partner $19,000 in undistributed
earnings.
On September 1, 2002, we purchased the 35% minority interest in a limited
partnership for $54,000. Also on September 1, 2002, the Company purchased 65% of
a speech therapy company for $26,000.
8. SUBSEQUENT EVENT
In October 2002, we purchased 100,000 shares of our common stock on the open
market at an aggregate cost of $1,012,000. To date, we
13
have purchased a total of 785,000 shares of the 1,000,000 shares originally
authorized for purchase by our Board of Directors in September 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We operate outpatient physical and occupational therapy clinics which provide
post-operative care and treatment for a variety of orthopedic-related disorders
and sports-related injuries. At September 30, 2002, we operated 190 outpatient
physical and occupational therapy clinics in 31 states. The average age of the
190 clinics in operation at September 30, 2002 was 4.14 years.
In addition to the facilities we own, in whole or in part, at September 30, 2002
we also managed six physical therapy facilities for third parties, including
physicians.
SELECTED OPERATING AND FINANCIAL DATA
The following table presents selected operating and financial data:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- ---------
Working days 64 63 191 191
Average visits per day per clinic 21.7 22.9 22.7 22.8
Total patient visits 252,000 221,000 745,000 640,000
Per visit:
Net revenues $ 94.49 $ 93.13 $ 94.11 $ 92.78
Salaries and related costs (41.63) (40.93) (41.38) (40.57)
Rent, clinic supplies and other (21.16) (19.88) (20.26) (20.09)
Provision for doubtful accounts (1.48) (2.19) (1.77) (2.24)
-------- -------- -------- --------
Contribution from clinics 30.22 30.13 30.70 29.88
Corporate office costs (11.79) (10.51) (11.19) (10.38)
-------- -------- -------- --------
Operating income $ 18.43 $ 19.62 $ 19.51 $ 19.50
======== ======== ======== ========
Because many expenses are not affected by the number of working days, expenses
on a per visit basis generally decline as the number of working days in a period
increases.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
NET PATIENT REVENUES
o Net patient revenues increased to $23,232,000 for the three months
ended September 30, 2002 ("2002 Third Quarter") from $19,943,000 for
the three months ended September 30, 2001 ("2001 Third Quarter"), an
increase of $3,289,000, or 16%.
14
o Total patient visits increased 31,000, or 14%, to 252,000 for the
2002 Third Quarter from 221,000 for the 2001 Third Quarter. We
believe that the growth in visits for the quarter was negatively
impacted by the economy.
o Net patient revenues from the 36 clinics developed since the 2001
Third Quarter (the "New Clinics") accounted for approximately 44% of
the increase, or $1,449,000.
o The remaining increase of $1,840,000 in net patient revenues was from
the 154 clinics opened before the end of the 2001 Third Quarter (the
"Mature Clinics"). Of the $1,840,000 increase in net patient revenues
from the Mature Clinics, $1,420,000 was due to a 7% increase in the
number of patient visits, while $420,000 was due to a 2% increase in
the average net revenue per visit.
Net patient revenues are based on established billing rates less allowances and
discounts for patients covered by worker's compensation programs and other
contractual programs. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of
the clinics. Net patient revenues reflect contractual and other adjustments,
which we evaluate quarterly, relating to patient discounts from certain payors.
CLINIC OPERATING COSTS
Clinic operating costs as a percent of revenues were 68% for both the 2002 Third
Quarter and the 2001 Third Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $10,490,000 for the 2002 Third Quarter
from $9,046,000 for the 2001 Third Quarter, an increase of $1,444,000, or 16%.
Approximately 54% of the increase, or $783,000, was incurred at the New Clinics.
The remaining 46% increase, or $661,000, was due principally to increased
staffing to meet the increase in patient visits for the Mature Clinics, coupled
with an increase in bonuses earned by the clinic directors at the Mature
Clinics. Such bonuses are based on the net revenues or operating profit
generated by the individual clinics. Salaries and related costs as a percent of
revenues remained unchanged at 44% for the 2002 and 2001 Third Quarters.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $5,332,000 for the 2002 Third
Quarter from $4,394,000 for the 2001 Third Quarter, an increase of $938,000, or
21%. Approximately 65% of the increase, or $609,000, was incurred at the New
Clinics, while 35%, or $329,000, of the increase was incurred at the Mature
Clinics. Rent, clinic
15
supplies and other as a percent of revenues increased to 22% for the 2002 Third
Quarter from 21% for the 2001 Third Quarter.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $373,000 for the 2002 Third
Quarter from $484,000 for the 2001 Third Quarter, a decrease of $111,000, or
23%. This decrease was due to a $24,000 increase generated at the New Clinics,
offset by a $135,000 decrease at the Mature Clinics as a result of better
collection efforts. The provision for doubtful accounts as a percent of net
patient revenues decreased to 1.6% for the 2002 Third Quarter from 2.4% for the
2001 Third Quarter. The Company's allowance for bad debts as a percent of total
patient accounts receivable was 24% at September 30, 2002, as compared to 23% at
September 30, 2001.
CORPORATE OFFICE COSTS
Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting fees,
increased to $2,970,000 for the 2002 Third Quarter from $2,323,000 for the 2001
Third Quarter, an increase of $647,000, or 28%. Corporate office costs increased
primarily as a result of increased salaries and benefits related to additional
personnel hired to support an increasing number of clinics. Corporate office
costs as a percent of revenues increased to 12.5% for the 2002 Third Quarter
from 11.3% for the 2001 Third Quarter.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships increased
$7,000, or 1%, to $1,315,000 for the 2002 Third Quarter from $1,308,000 for the
2001 Third Quarter. As a percentage of operating income, minority interest
declined to 28% from 30% primarily because of our purchase of limited
partnership interests from minority partners.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1,266,000 for the 2002 Third
Quarter from $1,140,000 for the 2001 Third Quarter, an increase of $126,000, or
11%. During the 2002 Third Quarter, we accrued state and federal income taxes at
an effective tax rate of 38.6% as compared to 38.4% in the 2001 Third quarter.
16
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
NET PATIENT REVENUES
o Net patient revenues increased to $68,317,000 for the nine months ended
September 30, 2002 ("2002 Nine Months") from $57,531,000 for the nine
months ended September 30, 2001 ("2001 Nine Months"), an increase of
$10,786,000, or 19%.
o Total patient visits increased 105,000, or 16%, to 745,000 for the 2002
Nine Months from 640,000 for the 2001 Nine Months. We believe that the
growth in visits in the first quarter of 2002 was negatively impacted
by the very mild winter in the north and northeast where we have many
clinics, resulting in fewer winter sports and weather related injuries
in such areas than occur when there is more snow and ice. Beginning in
the third quarter of 2002, we believe that the growth in visits was
unfavorably impacted by the economy.
o Net patient revenues from the 36 clinics developed since the 2001 Nine
Months (the "New Clinics") accounted for approximately 26% of the
increase, or $2,803,000.
o The remaining increase of $7,983,000 in net patient revenues comes from
those 154 clinics opened before the 2001 Nine Months (the "Mature
Clinics"). Of the $7,983,000 increase in net patient revenues from the
Mature Clinics, $6,755,000 was due to an 11.7% increase in the number
of patient visits, while $1,228,000 was due to a 2% increase in the
average net revenue per visit.
CLINIC OPERATING COSTS
Clinic operating costs as a percent of revenues decreased to 67% for the 2002
Nine Months from 68% for the 2001 Nine Months.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $30,828,000 for the 2002 Nine Months
from $25,966,000 for the 2001 Nine Months, an increase of $4,862,000, or 19%.
Approximately 33% of the increase, or $1,594,000, was due to the New Clinics.
The remaining 67% increase, or $3,268,000, was due principally to increased
staffing to meet the increase in patient visits for the Mature Clinics, coupled
with an increase in bonuses earned by the clinic directors at the Mature
Clinics. Such bonuses are based on the net revenues or operating profit
generated by the individual clinics. Salaries and related costs as a percent of
revenues remained unchanged at 44% for the 2002 and 2001 Nine Months.
17
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $15,095,000 for the 2002 Nine
Months from $12,856,000 for the 2001 Nine Months, an increase of $2,239,000, or
17%. Approximately 53% of the increase, or $1,187,000, was due to the New
Clinics, while 47%, or $1,052,000, of the increase was due to the Mature
Clinics. The increase in rent, clinic supplies and other for the Mature Clinics
related primarily to an increase in rent and group insurance during the 2002
Nine Months. Rent, clinic supplies and other as a percent of revenues was 22%
for both the 2002 Nine Months and the 2001 Nine Months.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $1,315,000 for the 2002 Nine
Months from $1,435,000 for the 2001 Nine Months, a decrease of $120,000, or 8%.
This decrease was due to a $173,000 decrease in the Mature Clinics, offset by an
increase of $53,000 related to the New Clinics. The provision for doubtful
accounts as a percent of net patient revenues decreased to 1.9% for the 2002
Nine Months from 2.5% for the 2001 Nine Months. The Company's allowance for bad
debts as a percent of total patient accounts receivable was 24% at September 30,
2002, as compared to 23% at September 30, 2001.
CORPORATE OFFICE COSTS
Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting fees,
increased to $8,338,000 for the 2002 Nine Months from $6,642,000 for the 2001
Nine Months, an increase of $1,696,000, or 26%. Corporate office costs increased
primarily as a result of increased salaries and benefits related to additional
personnel hired to support an increasing number of clinics. Corporate office
costs as a percent of revenues increased to 12% for the 2002 Nine Months from
11% for the 2001 Nine Months.
INTEREST EXPENSE
Interest expense decreased $39,000, or 19%, to $167,000 for the 2002 Nine Months
from $206,000 for the 2001 Nine Months. This decrease in interest was primarily
due to the conversion of $5,050,000 of convertible subordinated debt into shares
of our common stock.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
As a percentage of operating income, minority interest declined to 27% from 32%
primarily as a result of the purchase of limited partnership interests from
minority partners.
18
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $3,993,000 for the 2002 Nine Months
from $3,207,000 for the 2001 Nine Months, an increase of $786,000, or 25%.
During the 2002 Third Quarter, we accrued state and federal income taxes at an
effective tax rate of 38.3% as compared to 38.5% in the 2001 Third quarter.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had $8,977,000 in cash and cash equivalents available
to fund the working capital needs of our operating subsidiaries, future clinic
developments, acquisitions and investments. Included in cash and cash
equivalents at September 30, 2002 was $3,515,000 in money market funds invested
in short-term debt instruments issued by an agency of the U.S. Government.
The increase in cash of $856,000 from December 31, 2001 to September 30, 2002
was due primarily to cash provided by operating activities of $15,498,000 and
proceeds from the exercise of stock options of $2,671,000, offset in part by (a)
our payment of notes in the amount of $698,000, (b) funding capital expenditures
for physical therapy equipment and leasehold improvements in the amount of
$3,867,000, (c) distributing $3,867,000 to minority investors in subsidiary
limited partnerships, (d) purchasing intangibles of $1,062,000, primarily
relating to the buying out of minority partners, and (e) purchasing of 550,000
of the Company's common stock for $7,821,000.
Our current ratio increased to 7.74 to 1.00 at September 30, 2002 from 6.03 to
1.00 at December 31, 2001. The increase in the current ratio was due primarily
to the increase in cash and cash equivalents, an increase in patient accounts
receivable, an increase in other current assets, a decrease in estimated
third-party payor (Medicare) settlements and notes payable.
At September 30, 2002, we had a debt-to-equity ratio of 0.07 to 1.00 compared to
0.14 to 1.00 at December 31, 2001, such decrease resulting from an increase in
equity from net income of $6,430,000 for the 2002 Nine Months; the proceeds of
$2,671,000 and tax benefit of $3,969,000 from the exercise of stock options; the
conversion of $667,000 subordinated notes payable into common stock; and a
decrease in notes payable of $698,000.
In September 2001 the Board of Directors authorized us to purchase, in the open
market or in privately negotiated transactions, up to 1,000,000 shares of our
common stock. Any shares purchased will be held as treasury shares and may be
used for such valid corporate purposes or retired as the Board deems advisable.
As of December 31, 2001, we had purchased 135,000 shares of our common stock on
the open market for a total of $1,943,000. In July and August 2002, we purchased
a total of 550,000 shares of our common stock on the open market for $7,821,000.
In October, 2002, we purchased 100,000 shares on the open market for $1,012,000.
19
We do not currently have credit lines or other arrangements for funding with
banks or other institutions. Historically, we have generated cash from
operations sufficient to fund our development activities and meet operational
needs. We do not generally acquire new clinics through acquisitions of existing
clinics; rather we develop new clinics using physical therapists known in a
particular community or market area, which we believe generally requires
substantially less capital. We currently plan to continue adding new clinics,
although this strategy may change from time to time as appropriate opportunities
become available. In selective cases, we have purchased minority interests of
limited partners in clinic partnerships. We may purchase additional minority
interests in the future. Any material purchases of minority interests are
expected to be accomplished using a combination of common stock and cash.
We believe that existing funds, supplemented by cash flows from existing
operations, will be sufficient to meet our current operating needs, development
goals and any purchases of minority interests through at least 2003.
RECENTLY PROMULGATED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 "SFAS 141"), "Business Combinations."
SFAS 141 eliminates the pooling of interests method of accounting and requires
that all business combinations initiated after June 30, 2001 be accounted for
under the purchase method. The adoption of SFAS 141 did not have a material
impact on our business because we had no planned or pending acquisitions that
would have met the requirements for use of the pooling of interests method.
Also in July 2001, the FASB issued SFAS 142. See Note 6.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," ("SFAS 143") which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement applies to all entities
that have legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development or normal use of the
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We
do not expect the adoption of SFAS 143 to have a significant impact on our
financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144") which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes SFAS Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains
many of the fundamental provisions of that statement. SFAS 144 also supersedes
the accounting and reporting provisions of APB Opinion
20
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
SFAS 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. The adoption of SFAS 144 did not have
a material impact on our financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statements No. 13 and Technical Corrections,"
("SFAS 145") which provides guidance for income statement classification of
gains and losses on extinguishments of debt and accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS 145 is effective for us beginning in 2003. We do not expect
the adoption of SFAS 145 to have a material impact on our financial condition or
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities," ("SFAS 146") which addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance set forth in EITF Issue No. 94-3,
"Liability Recognition of Certain Employee Termination Benefits and Other Costs
to Exit an Activity." SFAS 146 is effective for us beginning in 2003. We do not
expect the adoption of SFAS 146 to have a material impact on our financial
condition or results of operations.
FACTORS AFFECTING FUTURE RESULTS
CLINIC DEVELOPMENT
As of September 30, 2002, we had 190 clinics in operation, fourteen of which
opened in the 2002 Third Quarter. Our goal for 2002 is to open between 35 and 40
clinics. The opening of these clinics in the future is dependent upon our
ability to identify suitable geographic locations and physical and occupational
therapists to manage the clinics. Our 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 and the fact
that patient visits and revenues tend to be lower in the first year of a new
clinic's operation and increase significantly over the subsequent two to three
years. Based on historical performance of our new clinics, the clinics opened
since the 2001 Third Quarter are expected to favorably impact our results of
operations for 2002 and beyond.
CONVERTIBLE SUBORDINATED DEBT
See Note 4.
21
MEDICARE REGULATIONS
Reimbursement for outpatient therapy services provided to Medicare beneficiaries
is made pursuant to a fee schedule published by the Department of Health and
Human Services, and the total amount that may be paid by Medicare in any one
year for outpatient physical (including speech-language pathology) or
occupational therapy to any one patient is limited to $1,500, except for
services provided in hospitals. On November 29, 1999, President Clinton signed
into law the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
which, among other provisions, placed a two-year moratorium on the $1,500
reimbursement limit for Medicare therapy services provided in 2000 and 2001. On
December 21, 2000, the President signed into law the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 which, among other
provisions, extended the moratorium for one year through December 31, 2002. We
do not generally treat long-term complicated rehabilitation cases; therefore,
should the $1,500 reimbursement limit become effective in 2003, we do not
anticipate a material impact on revenues in 2003.
FORWARD-LOOKING STATEMENTS
We make statements in this report that are considered to be forward-looking
statements within the meaning of the Securities and Exchange Act of 1934. These
statements involve risks and uncertainties that could cause actual results to
differ materially from those we project. When used in this report, the words
"anticipates," "believes," "estimates," "intends," "expects," "plans," "should",
"appear" and "goal" and similar expressions are intended to identify
forward-looking statements. The forward-looking statements are based on our
current views and assumptions and involve risks and uncertainties that include,
among other things:
o general economic, business, and regulatory conditions
discussed under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Factors Affecting Future Results";
o our competition;
o federal regulations discussed under the heading "Factors
Affecting Future Results - Medicare Regulation";
o the availability of sufficient numbers of physical therapists
with a following in the community for us to realize our plan
to expand the number of our clinics; and
o weather.
Most of these factors are beyond our control.
22
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 Securities and Exchange Commission (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. We
are under no obligation to update any forward-looking statement, regardless of
the reason the statement is no longer accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of September 30, 2002, we had outstanding $2,333,000 in the form of a Series
C Note due June 30, 2004. See Note 4. The Series C Note bears interest at 8% per
annum, payable quarterly, and is convertible at the option of the holder thereof
into our common stock at any time. The conversion price is $3.33 per share,
subject to adjustment as provided in the Note. Based upon the closing price of
our common stock on November 11, 2002 of $10.65, as reported by the National
Market of Nasdaq, the fair value of the Series C Note was $7,461,000.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on the evaluation of our disclosure controls and procedures as of a date
within 90 days of the filing of this quarterly report, the Chief Executive
Officer and Chief Financial Officer of U.S. Physical Therapy, Inc. have
concluded that the disclosure controls and procedures are effective.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
23
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
99.1 Certification of Periodic Report
(B) REPORTS ON FORM 8-K
On August 14, 2002, the Company filed a form 8-K related to the certification
requirements pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: November 14, 2002 By: /s/ J. MICHAEL MULLIN
----------------- -----------------------
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
25
CERTIFICATIONS
- --------------
I, Roy Spradlin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Physical Therapy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying
officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
26
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Roy Spradlin
----------------
Roy Spradlin
Chairman, President and
Chief Executive Officer
27
CERTIFICATIONS
- --------------
I, J. Michael Mullin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Physical Therapy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4.The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
28
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ J. MICHAEL MULLIN
---------------------
J. Michael Mullin
Chief Financial Officer
29
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 99.1 Certification of Periodic Report
30