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 JUNE 30, 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 August 5, 2003, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was: 11,994,376.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3

Consolidated Statements of Operations for the three and six months ended
June 30, 2003 and 2002 4

Consolidated Statements of Cash Flows for the six months ended June 30,
2003 and 2002 5

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 11

Item 3. Quantitative and Qualitative Disclosure About Market Risk. 17

Item 4. Controls and Procedures. 17

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K. 18
Signature 19

2

ITEM 1. FINANCIAL STATEMENTS

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

JUNE 30, DECEMBER 31,
2003 2002
------------------- -------------------
(unaudited)

ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 12,576 $ 7,610
Patient accounts receivable, less allowance for doubtful
accounts of $4,196 and $4,327, respectively.......................... 13,156 13,235
Accounts receivable -- other........................................... 563 443
Other current assets................................................... 742 1,307
------------------- -------------------
Total current assets........................................... 27,037 22,595
Fixed assets:
Furniture and equipment................................................ 19,338 17,796
Leasehold improvements................................................. 10,052 9,310
------------------- -------------------
29,390 27,106
Less accumulated depreciation and amortization......................... 18,173 16,693
------------------- -------------------
11,217 10,413
Goodwill, net of amortization of $335.................................... 5,590 5,590
Other assets, net of amortization of $430 and $505, respectively......... 2,210 2,435
------------------- -------------------
$ 46,054 $ 41,033
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade.............................................. $ 415 $ 624
Accrued expenses....................................................... 2,133 2,188
Estimated third-party payor (Medicare) settlements..................... 33 33
Notes payable.......................................................... 4 4
Convertible subordinated note payable.................................. 2,333 --
------------------- -------------------
Total current liabilities...................................... 4,918 2,849
Notes payable -- long-term portion....................................... 15 17
Other long-term liabilities.............................................. 217 273
Convertible subordinated note payable.................................. -- 2,333
Minority interests in subsidiary limited partnerships.................... 3,275 3,024
Commitments and contingencies Shareholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized, zero
shares issued and outstanding........................................ -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
11,990,674 and 11,818,711 shares issued at June 30, 2003
and December 31, 2002, respectively.................................. 120 118
Additional paid-in capital............................................. 24,423 23,313
Retained earnings...................................................... 25,608 21,608
Treasury stock at cost, 947,100 and 945,300 shares held at
June 30, 2003 and December 31, 2002, respectively.................... (12,522) (12,502)
------------------- -------------------
Total shareholders' equity..................................... 37,629 32,537
------------------- -------------------
$ 46,054 $ 41,033
=================== ===================

See accompanying notes to consolidated financial statements.

3

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

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

THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ -----------

Net patient revenues.............................................. $ 26,382 $ 23,449 $ 50,865 $ 45,085
Management contract revenues...................................... 582 570 1,059 1,158
Other revenues.................................................... 39 32 85 58
------------ ------------ ------------ -----------
Net revenues................................................. 27,003 24,051 52,009 46,301
Clinic operating costs:
Salaries and related costs...................................... 12,092 10,459 23,608 20,461
Rent, clinic supplies and other................................. 6,131 5,022 12,030 9,763
Provision for doubtful accounts................................. 418 511 756 942
------------ ------------ ------------ -----------
18,641 15,992 36,394 31,166

Corporate office costs............................................ 3,344 2,863 6,522 5,368
------------ ------------ ------------ -----------
Operating income.................................................. 5,018 5,196 9,093 9,767
Interest expense.................................................. 48 61 94 120
Minority interests in subsidiary limited partnerships............. 1,404 1,349 2,549 2,508
------------ ------------ ------------ -----------
Income before income taxes........................................ 3,566 3,786 6,450 7,139
Provision for income taxes........................................ 1,353 1,450 2,450 2,727
------------ ------------ ------------ -----------
Net income................................................... $ 2,213 $ 2,336 $ 4,000 $ 4,412
============ ============ ============ ===========

Basic earnings per common share.................................. $ 0.20 $ 0.21 $ 0.37 $ 0.40
============ ============ ============ ===========

Diluted earnings per common share................................ $ 0.18 $ 0.18 $ 0.33 $ 0.34
============ ============ ============ ===========

See accompanying notes to consolidated financial statements.

4

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

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

SIX MONTHS
ENDED JUNE 30,
-----------------------------
2003 2002
------------ ------------

OPERATING ACTIVITIES
Net income............................................................................. $ 4,000 $ 4,412
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................................ 1,722 1,413
Minority interests in earnings of subsidiary limited partnerships........ 2,549 2,508
Provision for doubtful accounts...................................................... 756 942
Tax benefit from exercise of stock options........................................... 525 3,723
Other................................................................................ (35) 154
Changes in operating assets and liabilities:
Increase in patient accounts receivable.............................................. (677) (1,683)
(Increase) decrease in accounts receivable -- other.................................. (120) 353
Decrease (increase) in other assets.................................................. 474 (1,641)
Increase (decrease) in accounts payable and accrued expenses......................... 51 (28)
Increase in (decrease) other liabilities............................................. (56) 123
Decrease in estimated third-party payor (Medicare) settlements....................... -- (80)
------------ ------------
Net cash provided by operating activities.............................................. 9,189 10,196
------------ ------------

INVESTING ACTIVITIES
Purchase of fixed assets............................................................... (2,619) (2,298)
Purchase of intangible assets.......................................................... -- (773)
Other.................................................................................. 129 1
------------ ------------
Net cash used in investing activities.................................................. (2,490) (3,070)
------------ ------------

FINANCING ACTIVITIES
Distributions to minority investors in subsidiary limited partnerships... (2,298) (2,557)
Payment of notes payable............................................................... (2) (698)
Repurchase of common stock............................................................. (20) --
Proceeds from exercise of stock options................................................ 587 2,454
------------ ------------
Net cash used in financing activities.................................................. (1,733) (801)
------------ ------------

Net increase in cash and cash equivalents.............................................. 4,966 6,325
Cash and cash equivalents -- beginning of year......................................... 7,610 8,121
------------ ------------
Cash and cash equivalents -- end of period............................................. $ 12,576 $ 14,446
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes......................................................................... $ 2,012 $ 556
Interest............................................................................. $ 185 $ 120

See accompanying notes to consolidated financial statements.

5

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 primarily 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. Beginning in 2003, the Company ceased its development of new clinic
partnerships. New clinics opened which are not satellite clinics will be wholly
owned by the Company. The clinic directors of such clinics will be compensated
based upon clinic profits. See Note 6.

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 and six months ended June 30, 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 September 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 four month period between September 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

6

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.

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, depreciation
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

Statement of Financial Accounting Standards ("SFAS") No. 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 June 30, 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 June
30, 2003 and December 31, 2002. We account for our long-lived assets pursuant to
SFAS No. 142 and SFAS 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

7

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.

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 computations of basic and diluted earnings per share for the Company are as
follows (in thousands, except per share data):

FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------

Numerator:
Net income.................................................. $ 2,213 $ 2,336 $ 4,000 $ 4,412
--------- --------- --------- ---------
Numerator for basic earnings per share...................... 2,213 2,336 4,000 4,412
Effect of dilutive securities:
Interest on convertible subordinated notes payable........ 31 39 61 78
--------- --------- --------- ---------
Numerator for diluted earnings per share -- income
available to common stockholders after assumed
conversions............................................... $ 2,244 $ 2,375 $ 4,061 $ 4,490
========= ========= ========= =========
Denominator:
Denominator for basic earnings per share --
weighted-average shares................................... 10,956 11,132 10,933 10,894
Effect of dilutive securities:
Stock options............................................. 798 1,307 810 1,471
Convertible subordinated notes payable.................... 700 878 700 889
--------- --------- --------- ---------
Dilutive potential common shares............................ 1,498 2,185 1,510 2,360
--------- --------- --------- ---------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions........... 12,454 13,317 12,443 13,254
========= ========= ========= =========
Basic earnings per common share............................... $ 0.20 $ 0.21 $ 0.37 $ 0.40
========= ========= ========= =========
Diluted earnings per common share............................. $ 0.18 $ 0.18 $ 0.33 $ 0.34
========= ========= ========= =========

Options to purchase 464,240 and 67,615 shares for the three months ended June
30, 2003 and June 30, 2002, respectively, and 454,487 and 33,994 shares for the
six months ended June 30, 2003 and June 30, 2002, respectively, were excluded
from the diluted earnings per share calculations for the respective periods
because the options' exercise prices exceeded the average market price of the
common shares during the periods.

8

3. 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 June 30, 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.

4. 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 had purchased 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 additional 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. As of June 30, 2003, no
shares have been repurchased under the new share repurchase program.

5. 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 six months and year ended June 30, 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.

6. 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 partnership
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 any minority
interest in the partnerships. At this time, the Company operates 52 wholly owned
clinics without any minority interest. Beginning in 2003, the Company ceased its
development of new clinic partnerships. New clinics opened which are not
satellite clinics will be wholly owned by the Company. The clinic directors of
such clinics will be compensated based upon clinic profits.

Pursuant to EITF 00-23, for the three months ended June 30, 2003 and June 30,
2002, the Company classified $42,000 and $51,000, 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 and
for the six months ended June 30, 2003 and June 30, 2002, the Company classified
$128,000 and $123,000, respectively,. As of June 30, 2003 and December 31, 2002,
$217,000 and $273,000, respectively, in undistributed minority interests related
to the 29 partnerships are classified as other long-term liabilities.

10

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 June 30, 2003, we operated 217
outpatient physical and occupational therapy clinics in 34 states. During the
first half of 2003, we opened 23 clinics, 22 of which had treated patients as of
June 30, and closed 7 clinics. The average age of our clinics at June 30, 2003,
was 4.04 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 June 30, 2003.

SELECTED OPERATING AND FINANCIAL DATA

The following table presents selected operating and financial data:

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2002

o Net revenues rose 12% to $27 million from $24.1 million primarily due
to an 11% increase in patient visits to 285,000 and a $1.11 increase in
patient revenues per visit to $92.64.

o Net income declined 5% to $2.2 million from $2.3 million.

o Earnings per share were $0.18 per diluted share for the current and
prior year quarters. Total outstanding shares at June 30, 2003 were 11
million, a reduction of 500,000 shares from 11.5 million at June 30,
2002 primarily due to the repurchase of approximately 800,000 shares in
the second half of 2002.

NET PATIENT REVENUES

o Net patient revenues increased to $26.3 million for the three months
ended June 30, 2003 ("2003 Second Quarter") from $23.4 million for the
three months ended June 30, 2002 ("2002 Second Quarter"), an increase
of $2.9 million, or 13%.

o Total patient visits increased 29,000, or 11%, to 285,000 for the 2003
Second Quarter from 256,000 for the 2002 Second Quarter. The growth in
visits for the quarter was primarily attributable to the clinics opened
subsequent to June 30, 2002.

o Net patient revenues from clinics developed and seeing patients since
the 2002 Second Quarter (the "New Clinics") accounted for approximately
96% of the increase, or $2.8 million.

11

o The remaining increase of $120,000 in net patient revenues was from the
168 clinics opened before the end of the 2002 Second Quarter (the
"Mature Clinics"). Of the $120,000 increase in net patient revenues
from the Mature Clinics, $168,000 was due to a 1% increase in the
average net revenue per visit, offset by a $48,000 decrease related to
a less than 1% decline in patient visits.

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 net revenues were 69% for the 2003 Second
Quarter and 66% the 2002 Second Quarter.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $12.1 million for the 2003 Second
Quarter from $10.5 million for the 2002 Second Quarter, an increase of $1.6
million, or 16%. Approximately 88% of the increase, or $1.4 million, was
incurred at the New Clinics. The remaining 12% increase, or $200,000, was
due principally to Mature Clinics opened in the first half of 2002 that
experienced increases in staffing to meet the increase in patient visits,
coupled with an increase in bonuses earned by the these clinic directors.
Such bonuses are based on the net revenues or operating profit generated by
the individual clinics. Salaries and related costs as a percent of net
revenues were 45% for the 2003 Second Quarter and 43% for the 2002 Second
Quarter.

CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other increased to $6.1 million for the 2003
Second Quarter from $5 million for the 2002 Second Quarter, an increase of
$1.1 million, or 22%. Approximately 91% of the increase, or $1 million, was
incurred at the New Clinics, while 9%, or $100,000, of the increase was
incurred at Mature Clinics opened in the first half of 2002. Rent, clinic
supplies and other as a percent of net revenues increased to 23% for the
2003 Second Quarter from 21% for the 2002 Second Quarter.

CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts decreased to $418,000 for the 2003
Second Quarter from $511,000 for the 2002 Second Quarter, a decrease of
$93,000, or 18%. This decrease was due to a $173,000 decrease at the Mature
Clinics as a result of better collection efforts, offset by an $80,000
increase at the New Clinics. The provision for doubtful accounts as a
percent of net patient revenues decreased to 1.6% for the 2003 Second
Quarter from 2.2% for the 2002 Second Quarter. Our allowance for bad debts
as a percent of total patient accounts receivable was 24% at June 30, 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 $3.3 million for the 2003 Second Quarter from $2.8 million for the
2002 Second Quarter, an increase of $481,000, or 17%. Corporate office costs
increased primarily as a result of the increase in additional personnel to
support the increased number of clinics and an increase in directors and
officer's insurance costs. Corporate office costs as a percent of net revenues
increased to 12.4% for the 2003 Second Quarter from 11.9% for the 2002 Second
Quarter.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships increased to
$1.4 million for the 2003 Second Quarter from $1.3 million for the 2002 Second
Quarter, an increase of $55,000, or 4%. As a percentage of operating income,
minority interest increased to 28% for the 2003 Second Quarter from 26% for the
Second Quarter of 2002. The increase in minority interests in earnings resulted
from an increase in the limited partnerships' profit interest in Mature Clinics
opened prior to January 18, 2001 offset by a decrease in operating income. See
Note 6.

12

PROVISION FOR INCOME TAXES

The provision for income taxes decreased to $1.4 million for the 2003 Second
Quarter from $1.5 million for the 2002 Second Quarter, a decrease of
approximately $100,000, or 7% as a result of lower pre-tax income. During the
2003 Second Quarter and the 2002 Second Quarter, we accrued state and federal
income taxes at an effective tax rate of 38%.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002

o Net revenues rose 12% to $52 million from $46.3 million primarily due
to a 12% increase in patient visits to 550,000 and a $0.97 increase in
patient revenues per visit to $92.43.

o Net income declined 9% to $4 million from $4.4 million.

o Earnings per share decreased 3% to $0.33 per diluted share from $0.34
per diluted share primarily due to a 9% decrease in net income from the
same period in prior year. Total outstanding shares at June 30, 2003
were 11 million, a reduction of 500,000 shares from 11.5 million at
June 30, 2002 primarily due to the repurchase of approximately 800,000
shares in the second half of 2002.

NET PATIENT REVENUES

o Net patient revenues increased to $50.9 million for the six months
ended June 30, 2003 ("2003 Six Months") from $45.1 million for the six
months ended June 30, 2002 ("2002 Six Months"), an increase of $5.8
million, or 13%.

o Total patient visits increased 57,000, or 12%, to 550,000 for the 2003
Six Months from 493,000 for the 2002 Six Months. The growth in visits
for the 2003 Six Months was primarily attributable to the clinics
opened subsequent to June 30, 2002.

o Net patient revenues from clinics developed and seeing patients since
the 2002 Six Months (the "New Clinics") accounted for approximately 79%
of the increase, or $4.6 million.

o The remaining increase of $1.2 million in net patient revenues was from
the 168 clinics opened before the end of the 2002 Six Months (the
"Mature Clinics"). Of the $1.2 million increase in net patient revenues
from the Mature Clinics, $857,000 was due to a 2% increase in the
number of patient visits, while $372,000 was due to a 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 net revenues were 70% for the 2003 Six
Months and 67% the 2002 Six Months.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $23.6 million for the 2003 Six
Months from $20.5 million for the 2002 Six Months, an increase of $3.1
million, or 15%. Approximately 77% of the increase, or $2.4 million, was
incurred at the New Clinics. The remaining 23% increase, or $700,000, 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 net revenues were 45% for the
2003 Six Months and 44% for the 2002 Six Months.

13

CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other increased to $12 million for the 2003 Six
Months from $9.8 million for the 2002 Six Months, an increase of $2.2
million, or 23%. Approximately 82% of the increase, or $1.8 million, was
incurred at the New Clinics, while 18%, or $400,000, of the increase was
incurred at the Mature Clinics. Rent, clinic supplies and other as a
percent of net revenues increased to 23% for the 2003 Six Months from 21%
for the 2002 Six Months.

CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts decreased to $756,000 for the 2003 Six
Months from $942,000 for the 2002 Six Months, a decrease of $186,000, or
20%. This decrease was due to a $307,000 decrease at the Mature Clinics as
a result of better collection efforts, offset by a $121,000 increase at the
New Clinics. The provision for doubtful accounts as a percent of net
patient revenues decreased to 1.5% for the 2003 Six Months from 2.1% for
the 2002 Six Months. Our allowance for bad debts as a percent of total
patient accounts receivable was 24% at June 30, 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 $6.5 million for the 2003 Six Months from $5.4 million for the 2002
Six Months, an increase of $1.1 million, or 22%. Corporate office costs
increased primarily as a result of an increase in additional personnel to
support the increased number of clinics and an increase in directors and
officer's insurance costs. Corporate office costs as a percent of net revenues
increased to 12.6% for the 2003 Six Months from 11.6% for the 2002 Six Months.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships was $2.5
million for both 2003 Six Months and 2002 Six Months. As a percentage of
operating income, minority interest increased to 28% for the 2003 Six Months
from 26% for the Six Months of 2002. The increase in minority interests in
earnings resulted from an increase in the limited partnerships' profit interest
in Mature Clinics opened prior to January 18, 2001 offset by a decrease in
operating income. See Note 6.

PROVISION FOR INCOME TAXES

The provision for income taxes decreased to $2.4 million for the 2003 Six Months
from $2.7 million for the 2002 Six Months, a decrease of approximately $277,000,
or 10% as a result of lower pre-tax income. During the 2003 Six Months and the
2002 Six Months, we accrued state and federal income taxes at an effective tax
rate of 38%.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2003, we had $12.6 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 $5 million from December 31, 2002 to June 30, 2003 is
due primarily to cash provided by operating activities of $9.2 million, offset
by $2.6 million of cash used for the purchase of fixed assets and $1.7 million
of cash used in financing activities. In 2003, we had $2.5 million of cash
provided by minority interest in earnings of subsidiary limited partnerships and
made $2.3 million in distributions to minority investors in subsidiary limited
partnerships. In addition, cash of $587,000 was provided by the exercise of
stock options.

Our current ratio decreased to 5.50 to 1.00 at June 30, 2003 from 7.93 to 1.00
at December 31, 2002. The decrease in the current ratio is due primarily to the
reclassification of $2.3 million in convertible debt to current liabilities at
June 30, 2003.

The debt-to-equity ratio decreased to .06 to 1.00 at June 30, 2003 from .07 to
1.00 at 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 physical and occupational 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 other

14

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, supplemented by cash flows from 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
specific expiration date 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. As of June 30, 2003, no shares
have been repurchased under the new share repurchase program.

RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," 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 was effective for
us on January 1, 2003. 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 was effective for us on January 1, 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 was effective for us on January 1, 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.

15

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. It applies in the interim period beginning
after June 15, 2003 to enterprise that hold a variable interest in variable
interest entities created before February 1, 2003. The application of this
Interpretation is not expected to have a material effect on the Company's
financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," ("SFAS 149") which amends and
clarifies accounting and reporting for certain derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 149 provides greater clarification of the
characteristics of a derivative instrument so that contracts with similar
characteristics will be accounted for consistently. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. We do not expect the adoption of
SFAS 149 to have an impact on our financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," ("SFAS 150")
which establishes standards for the classification and measurement of certain
freestanding financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires companies to classify as liabilities financial
instruments with certain specified characteristics. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for interim periods beginning after June 15, 2003. We have not yet
determined the impact of adopting SFAS 150 on our financial condition or results
of operations.

FACTORS AFFECTING FUTURE RESULTS

Clinic Development

As of June 30, 2003, we had 217 clinics in operation. In the first half of the
year we opened 23 clinics, 22 of which had treated patients as of June 30. Our
goal for 2003 is to open 47 or more 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.

Beginning in 2003, we ceased our development of new clinic partnerships. New
clinics opened which are not satellite clinics will be wholly owned by us. The
clinic directors of such clinics will be compensated based upon clinic profits.
We do not expect the elimination of new clinic partnerships to have an adverse
impact in hiring and retaining qualified physical and occupational therapist
directors to manage our clinics. See Note 6.

Annual Limit on Medicare Reimbursement Claims

For the quarter ended June 30, 2003, approximately 21% of our visits 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 September 1, 2003 and December
31, 2003. We do not expect the annual limit to have a material adverse impact on
2003 income. 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.

Any potential negative impact on 2004 revenues 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 a $3 million 8% Convertible Subordinated Note, Series C
due June 30, 2004 (the "Series C

16

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 June 30, 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 Series C Note. At June 30, 2003, we had
$12.6 million in cash and cash equivalents compared to $7.6 million at December
31, 2002, an increase of $5 million.

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 qualified physical and occupational
therapists for us to realize our plan to expand the number of our clinics; and

- - weather.

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
June 30, 2003, was $2.3 million in Series C Convertible Subordinated Notes,
described in Factors Affecting Future Results. Also, see Note 3 of the notes to
consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures

"For the period ended June 30, 2003" or "As or the last day of the period
covered by 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 are effective in assuring 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 changes
in our internal control over financial reporting that occurred during our most
recent financial quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

17

PART II - OTHER INFORMATION

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

(a) Exhibits

EXHIBIT
NO. DESCRIPTION
------- -----------

31* Certification
32* Certification of Periodic Report

* Filed herewith

(b) Reports on Form 8-K

On May 2, 2003, the Company filed a report on Form 8-K with the Securities and
Exchange Commission related to a press release announcing the Company's earnings
for the quarter ended March 31, 2003.

18

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: August 14, 2003 By: /s/ J. MICHAEL MULLIN
--------------- -------------------------------
J. Michael Mullin
Chief Financial Officer
(duly authorized officer and
principal financial
and accounting officer)

19

INDEX OF EXHIBITS

EXHIBIT
NO. DESCRIPTION
- ------- -----------

31* Certification
32* Certification of Periodic Report

* Filed herewith