U S PHYSICAL THERAPY INC /NV - 10-Q Quarterly Report

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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 MARCH 31, 2003

[ ] 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

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.)

1300 WEST SAM HOUSTON PARKWAY SOUTH, SUITE 300, 77042
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

As of May 5, 2003, the number of shares outstanding of the registrant's common
stock, par value $.01 per share, was: 11,878,571.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the three months ended March 31, 2003 and
2002 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and
2002 5
Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 15
Item 4. Controls and Procedures. 15

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K. 15
Signature 16
Certifications 17-18

2

ITEM 1. FINANCIAL STATEMENTS

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

See notes to consolidated financial statements.

3

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)

See notes to consolidated financial statements.

4

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)

See notes to consolidated financial statements.

5

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2003
(unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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 operates through subsidiary
clinic partnerships, in which the Company generally owns a 1% general
partnership interest and a 64% limited partnership interest in the clinics. The
managing therapist of each clinic owns the remaining limited partnership
interest in the majority of the clinics. In some instances, the Company
developed satellite clinic facilities as extensions of existing clinics, with
the result that some existing clinic partnerships operate more than one clinic
location. Due to a recent change in accounting practices, the Company may
increase its development of non-partnership clinics. See Note 7.

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.

The Company believes, and the President and 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 the Company's financial position, results of operations and cash
flows for the interim periods presented. For further information regarding the
Company's accounting policies, please read the audited financial statements
included in the Company's Form 10-K for the year ended December 31, 2002.

Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results the Company expects for the entire year. Please also
review the Risk Factors section included in our Form 10-K for the year ended
December 31, 2002.

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Net patient revenues are reported in the period in which the Company renders
services. Net patient revenues are reported at the estimated net realizable
amounts from insurance companies, third-party payors, patients and others for
services rendered. The Company has agreements with third-party payors that
provide for payments to the Company at amounts different from established rates.
Net patient revenues reflect reserves, evaluated monthly by management for
contractual and other adjustments agreed to or established with payers. Net
accounts receivable includes only those amounts the Company estimates to be
collectible.

Reimbursement rates for outpatient therapy services provided to Medicare
beneficiaries are established pursuant to a fee schedule published by the
Department of Health and Human Services ("HHS"). Under the Balanced Budget Act
of 1997 the total amount 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.
After a three year moratorium, this financial limitation on therapy services is
set to be implemented for services rendered on or after July 1, 2003. The total
amount paid by Medicare in any one year has been adjusted up to $1,590 and the
full amount will be available for the six month period between July 1, 2003 and
December 31, 2003. Effective January 1, 2004 this financial limitation, as
adjusted for inflation, will be an annual limit. See also "Factors Affecting
Future Results" in Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.

Allowance for Doubtful Accounts

We review the accounts receivable aging and rely on prior experiences with
particular payors at each clinic to determine an appropriate reserve for
doubtful accounts. Historically, clinics that have large numbers of aged
accounts generally have less favorable collection experience, and thus they
require a higher allowance. Accounts that are ultimately determined to be
uncollectible are written off against our bad debt allowance. The amount of our
aggregate bad debt allowance is periodically reviewed for adequacy in light of
current and historical experience.

6

Income Taxes

The Company is required to estimate its federal and state income tax liability
as well as account for temporary differences between its tax and accounting
treatment of some of its 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. The Company
must also assess the likelihood that deferred tax assets will be recovered from
future taxable income, and if not recoverable, establish a valuation reserve.

Stock Options

SFAS 123, "Accounting for Stock-Based Compensation," encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related FASB Interpretations, under which no
compensation cost related to stock plans has been recognized in net income.

The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model. 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 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 the quarters ended March 31, 2003 and 2002 is not
representative of the pro forma effect on net income in future periods 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 per share data):

Carrying Value of Long-Lived Assets

Our property and equipment, intangible assets and goodwill (collectively, our
"long-lived assets") comprise a significant portion of our total assets at March
31, 2003 and December 31, 2002. We account for our long-lived assets pursuant to
Statement of Financial Accounting Standards No. 142 and Statement of Financial
Accounting Standards No. 144. These accounting standards require that we
periodically, and upon the occurrence of certain events, assess the
recoverability of our long-lived assets. If the carrying value of our property
and equipment or intangible assets exceeds their undiscounted cash flows, we are
required to write the carrying value down to estimated fair value. Also, if the
carrying value of our goodwill exceeds the estimated fair value, we are required
to allocate the estimated fair value to our assets and liabilities, as if we had
just acquired it in a business combination. We then would write-down the
carrying value of our goodwill to the implied fair value. Any such write-down is
included as an impairment loss in our consolidated statement of operations. A
degree of judgment is required to estimate the fair value of our long-lived
assets. We may use quoted market prices, prices for similar assets, present
value techniques and other valuation techniques to prepare these estimates. In
addition, we may obtain independent appraisals in certain circumstances. We may
need to make estimates of future cash flows and discount rates as well as other
assumptions in order to implement these valuation techniques. Accordingly, any
value ultimately derived from our long-lived assets may differ from our estimate
of fair value.

7

Use of Estimates

In preparing the Company's consolidated financial statements, management makes
certain estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related disclosures. Actual results may
differ from these estimates.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to
current period presentation.

2. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for the three months
ended March 31, 2003 and 2002 are as follows (in thousands, except per share
data):

Options to purchase 446,000 and 43,825 shares for the three months ended March
31, 2003 and March 31, 2002, respectively, were excluded from the diluted
earnings per share calculations for the respective periods because the options'
exercise prices were greater than the average market price of the common shares
during the periods.

3. INCOME TAXES

Significant components of the provision for income taxes for the three months
ended March 31, 2003 and 2002 were as follows (in thousands):

8

4. NOTES PAYABLE

In May 1994, the Company issued a $3 million 8% Convertible Subordinated Note,
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 the Company common stock
determined by dividing the principal amount of the Note being converted by
$3.33. The Series C Note bears interest from the date of issuance at a rate of
8% per annum, payable quarterly. In June 2002, $667,000 of the Series C Note was
converted by the note holder into 200,100 shares of common stock. The remaining
principal amount under the Series C Note was $2.3 million at March 31, 2003 and
December 31, 2002.

The Series C Note is unsecured and subordinated in right of payment to all other
indebtedness for borrowed money incurred by the Company.

5. PURCHASE OF COMMON STOCK

In September 2001, the Board of Directors ("Board") authorized the Company to
purchase, in the open market or in privately negotiated transactions, up to
1,000,000 shares of its common stock. Shares purchased are held as treasury
shares and may be used for such valid corporate purposes or retired as the Board
deems advisable. As of December 31, 2002, the Company purchased an additional
795,600 shares of its common stock on the open market for $10.5 million. During
the quarter ended March 31, 2003, the Company purchased 1,800 shares of its
common stock on the open market for a total of $20,000.

On February 26, 2003, the Board authorized a new share repurchase program of up
to 250,000 additional shares of the Company's outstanding common stock. As there
is no expiration for this Board authorization, additional shares may be
purchased from time to time in the open market or private transactions depending
on price, availability and the Company's cash position.

6. ACQUISITION OF MINORITY INTERESTS

On January 31, 2002, the Company purchased a 10% minority interest in a limited
partnership that owns four clinics in Michigan for $447,000. As part of the
purchase, the Company paid the minority partner $65,000 in undistributed
earnings.

On June 1, 2002, the Company purchased the 35% minority interest in a limited
partnership for $220,000. Additional consideration may be paid in the future
based upon clinic performance. The Company paid the minority partner $73,000 in
undistributed earnings. In July, the Company sold 17.5% of the total limited
partnership interest to another therapist for $220,000, payable from future
profits of the partnership. The Company discounted the note receivable by 50%
and is recognizing the gain as payments are made.

On June 1, 2002, the Company purchased a 5% minority interest in a limited
partnership for $95,000. The Company also paid the minority partner $8,000 in
undistributed earnings.

On August 31, 2002, the Company 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. The Company also paid the minority partner $19,000 in
undistributed earnings.

On September 1, 2002, the Company 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.

The Company's minority interest purchases were accounted for as purchases and
accordingly, the results of operations of the acquired minority interest
percentage are included in the accompanying financial statements from the dates
of purchase. In addition, the Company is permitted to make, and has occasionally
made, changes to preliminary purchase price allocation during the first year
after completing the purchase. Goodwill has been recognized for the amount of
the excess of the purchase price paid over the fair value of the net tangible
assets of the minority interest acquired and accounted for in accordance with
SFAS 142.

9

The changes in the carrying amount of goodwill consisted of the following for
the three months and year ended March 31, 2003 and December 31, 2002,
respectively (in thousands):

Goodwill represents the excess of costs over the fair value of the acquired
business's assets. In July 2001, the FASB issued SFAS No. 142, "Goodwill and
Other Intangible Assets," ("SFAS 142"). Provisions of SFAS 142 that were
effective for the Company January 1, 2002, require that goodwill and other
intangible assets with indefinite lives no longer be amortized. SFAS 142 further
requires 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 and be written down to fair value if
considered impaired. In accordance with SFAS 142, the Company did not have any
amortization expense related to goodwill during 2003 and 2002 and no impairment
of assets was recognized.

7. MINORITY INTEREST

In the majority of the Company's partnership agreements, the therapist partner
begins with a 20% profit interest in his or her clinic partnership, which
increases by 3% at the end of each year until his or her profits interest
reaches 35%. Within the balance sheet and statement of operations the Company
records partner therapist's profit interest in the clinic partnerships as
minority interest in earning of subsidiary limited partnerships. The Emerging
Issues Task Force ("EITF") issued EITF 00-23, "Issues Related to the Accounting
for Stock Compensation under APB No. 25 and FASB Interpretation No. 44", which
provides specific accounting guidance relating to various incentive compensation
issues. The Company has reviewed EITF 00-23 with respect to the partnerships
structure and the accounting for minority interest and concluded that for
partnerships formed after January 18, 2001, EITF 00-23 requires the Company to
expense as compensation rather than as a minority interest in earnings, the
clinic partner's interest in profits. Moreover, EITF 00-23 also requires, for
clinic partnerships formed after January 18, 2001, that the Company expense as
compensation rather than capitalizing as goodwill, the purchase of minority
interest in the partnerships. At this time, the Company operates 45 wholly owned
clinics without any minority interest. It is possible that due to this recent
change in accounting practices the Company will increase its development of
non-partnership clinics, and because of the revised method of accounting for
clinic partnerships, the Company probably will expand the number of wholly owned
clinics.

In accordance with the above, for the quarter ended March 31, 2003 and March 31,
2002, the Company classified $86,000 and $72,000, respectively, of the minority
interest in earnings of subsidiary limited partnerships relating to the 29
partnerships formed after January 18, 2001, as salaries and related costs. As of
March 31, 2003 and December 31, 2002, $295,000 and $273,000, respectively, in
undistributed minority interests related to the 29 partnerships are classified
as other long-term liabilities.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

We operate outpatient physical and occupational therapy clinics that provide
pre- and post-operative care and treatment for a variety of orthopedic-related
disorders and sports-related injuries. At March 31, 2003, we operated 212
outpatient physical and occupational therapy clinics in 34 states. The average
age of our clinics at March 31, 2003, was 4.01 years.

In addition to our owned clinics, we also manage physical therapy facilities for
third parties, primarily physicians, with five third-party facilities under
management as of March 31, 2003.

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SELECTED OPERATING AND FINANCIAL DATA

The following table presents selected operating and financial data:

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002

o Net revenues rose 12% to $25 million from $22.2 million
primarily due to a 12% increase in patient visits to 265,000
and a $0.86 increase in patient revenues per visit to $92.24.

o Net income declined 14% to $1.8 million from $2.1 million.

o Earnings per share decreased 6% to $0.15 per fully diluted
share from $0.16 per fully diluted share.

NET PATIENT REVENUES

o Net patient revenues increased to $24.5 million for the three
months ended March 31, 2003 ("2003 First Quarter") from $21.6
million for the three months ended March 31, 2002 ("2002 First
Quarter"), an increase of $2.9 million, or 13%.

o Total patient visits increased 28,000, or 12%, to 265,000 for
the 2003 First Quarter from 237,000 for the 2002 First
Quarter. We believe that the growth in visits for the quarter
was negatively impacted by the economy and weather conditions
at some of our clinics.

o Net patient revenues from the 45 clinics developed and seeing
patients since the 2002 First Quarter (the "New Clinics")
accounted for approximately 79% of the increase, or $2.3
million.

o The remaining increase of $604,000 in net patient revenues was
from the 167 clinics opened before the end of the 2002 First
Quarter (the "Mature Clinics"). Of the $604,000 increase in
net patient revenues from the Mature Clinics, $368,000 was due
to a 2% increase in the number of patient visits, while
$236,000 was due to an 1% 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 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 71% for the 2003 First
Quarter and 68% the 2002 First Quarter.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $11.5 million for the 2003 First Quarter
from $10 million for the 2002 First Quarter, an increase of $1.5 million, or
15%. Approximately 7% of the increase, or $111,000, was incurred at the New
Clinics. The remaining 93% increase, or $1.4 million, 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 were 46% for the 2003 First Quarter and 45% for the 2002
First Quarter.

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CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other increased to $5.9 million for the 2003 First
Quarter from $4.7 million for the 2002 First Quarter, an increase of $1.2
million, or 25%. Approximately 17% of the increase, or $197,000, was incurred at
the New Clinics, while 83%, or $1 million, of the increase was incurred at the
Mature Clinics. Rent, clinic supplies and other as a percent of revenues
increased to 24% for the 2003 First Quarter from 21% for the 2002 First Quarter.

CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts decreased to $338,000 for the 2003 First
Quarter from $431,000 for the 2002 First Quarter, a decrease of $93,000, or 22%.
This decrease was due to a $94,000 decrease at the Mature Clinics as a result of
better collection efforts, offset by a slight increase generated at the New
Clinics. The provision for doubtful accounts as a percent of net patient
revenues decreased to 1.4% for the 2003 First Quarter from 2% for the 2002 First
Quarter. Our allowance for bad debts as a percent of total patient accounts
receivable was 24% at March 31, 2003, as compared to 25% at December 31, 2002.

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 $3.2 million for the 2003 First Quarter from $2.5 million for the
2002 First Quarter, an increase of $673,000, or 27%. 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 12.7% for the 2003 First
Quarter from 11.3% for the 2002 First Quarter.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships remained
constant at $1.1 million for the 2003 First Quarter and the 2002 First Quarter.
As a percentage of operating income, minority interest increased to 28% for the
2003 First Quarter from 25% for the First Quarter of 2002 primarily as a result
of a decrease in operating income.

PROVISION FOR INCOME TAXES

The provision for income taxes decreased to $1.1 million for the 2003 First
Quarter from $1.3 million for the 2002 First Quarter, a decrease of $180,000, or
14% as a result of lower pre-tax income. During the 2003 First Quarter and the
2002 First Quarter, we accrued state and federal income taxes at an effective
tax rate of 38%.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, we had $10.1 million in cash and cash equivalents compared to
$7.6 million at December 31, 2002. Our cash and cash equivalents are available
to fund the working capital needs of our operating subsidiaries, future clinic
development, acquisitions and investments.

The increase in cash of $2.5 million from December 31, 2002 to March 31, 2003 is
due primarily to cash provided by operating activities of $3.7 million, offset
by $1.5 million of cash used for the purchase of fixed assets. In 2003, we had
$1.1 million of cash provided by minority interest in earnings of subsidiary
limited partnerships and made $852,000 in distributions to minority investors in
subsidiary limited partnerships. In addition, cash of $202,000 was provided by
the exercises of stock options.

Our current ratio decreased to 6.88 to 1.00 at March 31, 2003 from 8.10 to 1.00
at December 31, 2002. The decrease in the current ratio is due primarily to an
increase in accrued expenses at March 31, 2003 from December 31, 2002.

The debt-to-equity ratio of 0.07 to 1.00 remained constant at March 31, 2003
from December 31, 2002. We do not currently have credit lines or other credit
arrangements. Historically, we have generated sufficient cash from operations to
fund our development activities and cover operational needs. We generally do not
acquire new clinics through acquisitions of existing clinics, but prefer
developing and opening new clinics, which we believe generally requires less
capital. We currently plan to continue developing new clinics, although this
strategy may change if attractive opportunities become available. We have from
time to time purchased the minority interests of limited partners in our clinic
partnerships. We may purchase additional minority interests in the future. We
believe that existing funds,

12

supplemented by cash flows from existing operations, will be sufficient to meet
our current operating needs, development plans and any purchases of minority
interests through at least 2004.

In September 2001, the Board of Directors ("Board") authorized us to purchase,
in the open market or in privately negotiated transactions, up to 1,000,000
shares of our common stock. Shares purchased are held as treasury shares and may
be used for such valid corporate purposes or retired as the Board deems
advisable. During the year ended December 31, 2002, we purchased 795,600 shares
of our common stock on the open market for $10.5 million. During the quarter
ended March 31, 2003, we purchased 1,800 shares of its common stock on the open
market for a total of $20,000.

On February 26, 2003, our Board authorized a new share repurchase program of up
to 250,000 additional shares of our outstanding common stock. As there is no
expiration for this Board authorization, additional shares may be purchased from
time to time in the open market or private transactions depending on price,
availability and our cash position.

RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
Financial Accounting Standards 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. The
adoption of SFAS 143 did not have a significant impact on our financial
condition or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission 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. The adoption of
SFAS 145 did not have a significant 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. The
adoption of SFAS 146 did not have a significant impact on our financial
condition or results of operations.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others." FIN 45 requires that a liability be recorded in the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued, including a
reconciliation of charges in the entity's product warranty liabilities. The
initial recognition and initial measurement provision of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a significant impact on our financial condition or results of
operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123," ("SFAS 148") which provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also amends certain disclosures
under SFAS 123 and Accounting Principles Board Opinion No. 28, "Interim
Financial Reporting," to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. SFAS 148 is effective for fiscal years ending
after December 15, 2002. We continue to use the provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") to account for
employee stock options and apply the disclosures required under SFAS 123.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate
a variable interest entity if it is designated as the primary beneficiary of
that entity even if the company does not have a majority of voting interest. A
variable interest entity is generally defined as an entity where its equity is
unable to finance its activities or where the owners of the entity lack the risk
and rewards of ownership. The provisions of FIN 46 apply immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. The
application of this Interpretation is not expected to have a material effect on
the Company's financial statements.

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FACTORS AFFECTING FUTURE RESULTS

Clinic Development

As of March 31, 2003, we had 212 clinics in operation, 13 of which were
completed in the first quarter and 11 were seeing patients. Our goal for 2003 is
to open between 40 and 45 additional clinics if we can identify suitable
geographic locations and physical and occupational therapists to manage the
clinics. We expect to incur initial operating losses from the new clinics, which
will negatively impact our operating results. Operating margins for newly opened
clinics tend to be lower than more seasoned clinics because of start-up costs
and lower patient visits and revenues. Patient visits and revenues gradually
increase in the first year of operation as patients and referral sources become
aware of the new clinic. Revenues tend to increase significantly during the
second and third years following the clinic opening. Based on historical
performance of our clinics, the clinics opened in 2003 should favorably impact
our results of operations beginning in 2004.

Annual Limit on Medicare Reimbursement Claims

For the quarter ended March 31, 2003, approximately 20% of our revenues were
derived from Medicare. We receive payments from the Medicare program under a fee
schedule. These payments will be subject to an annual limit of $1,590 per
patient, effective for services rendered between July 1, 2003 and December 31,
2003. Effective January 1, 2004 this financial limitation, as adjusted for
inflation, will be an annual limit. Legislation has been introduced in both
houses of Congress (S569/HR1125) to permanently repeal this financial limit on
therapy services. We expect that efforts to contain federal spending for
Medicare will continue to seek limitations on Medicare reimbursement for various
services, and we cannot predict whether any of these efforts will be successful
or what effect, if any, such limitations would have on our business.

If the limit had been in effect as of July 1, 2002, we estimate that Medicare
payments exceeding the cap for 2002 would have been $1.2 million. The potential
negative impact on revenue could be reduced by receiving payments from secondary
insurance carriers, patients electing to self-pay, and most importantly by
replacing lost revenues by more aggressive marketing efforts focused on
decreasing Medicare as a percentage of our total business. In the event such
negative impact is not mitigated by such efforts or a repeal of such limitation
is unsuccessful, the limit could have an adverse impact on 2004 income
(potentially as much as a 10% reduction) since the limit will apply for the
entire year.

Convertible Subordinated Debt

In May 1994 we issued $3 million of an 8% Convertible Subordinated Note, Series
C due June 30, 2004 (the "Series C Note"). The Series C Note is convertible at
the option of the holder into the number of shares of our common stock
determined by dividing the principal amount of the Note being converted by $3.33
per share. In June 2002, $667,000 of the Series C Note was converted by the note
holder into 200,100 shares of common stock. The remaining principal amount under
the Series C Note was $2.3 million at March 31, 2003 and December 31, 2002. If
our share price is not at or above $3.33 in June 2004, it is likely that the
note holder would not convert and we would have to use cash to repay the
remaining Series C Note.

FORWARD LOOKING STATEMENTS

We make statements in this report that are considered to be forward-looking
statements within the meaning under Section 21E 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:

- - general economic, business, and regulatory conditions;

- - competition;

- - federal and state regulations;

- - 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

- - weather.

14

These factors are beyond our control.

Given these uncertainties, you should not place undue reliance on our
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. Our forward-looking statements
represent our estimates and assumptions only as of the date of this report.
Except as required by law, 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 DISCLOSURES ABOUT MARKET RISK.

We do not maintain any derivative instruments, interest rate swap arrangements,
hedging contracts, futures contracts or the like. Our only indebtedness as of
March 31, 2003, was $2.3 million in Series C Convertible Subordinated Notes,
described above. Also, see Note 4 of the notes to consolidated financial
statements.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures

Within 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures provide reasonable
assurance that material information required to be included in our periodic SEC
reports is recorded, processed, summarized and reported within the time periods
specified in the relevant SEC rules and forms.

(b) Changes in Internal Controls

In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

* Filed herewith

(b) Reports on Form 8-K

No reports on Form 8-K were filed with the Securities and Exchange Commission
during the quarter ended March 31, 2003.

15

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: May 15, 2003 By: /s/ J. MICHAEL MULLIN
------------ -------------------------
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
and accounting officer)

16

CERTIFICATION

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 officer 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 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 officer 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
functions):

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

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 officer and I have indicated in this
quarterly report whether 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.

/s/ ROY SPRADLIN
--------------------------------------
ROY SPRADLIN
Chairman, President and Chief
Executive Officer
(principal executive officer)

Date: May 15, 2003

17

CERTIFICATION

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 officer 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 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 officer 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
functions):

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

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 officer and I have indicated in this
quarterly report whether 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.

/s/ J. MICHAEL MULLIN
--------------------------------------
J. Michael Mullin
Chief Financial Officer
(principal financial and accounting
officer)

Date: May 15, 2003

18

INDEX OF EXHIBITS

* Filed herewith

19