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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 Securities and 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 November 5, 2003, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was: 11,221,286.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the nine months ended September
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. 12
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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 14,683 $ 7,610
Patient accounts receivable, less allowance for doubtful
accounts of $3,679 and $4,327, respectively....................... 14,179 13,235
Accounts receivable -- other......................................... 498 443
Other current assets................................................. 631 1,307
------------- -----------
Total current assets......................................... 29,991 22,595
Fixed assets:
Furniture and equipment.............................................. 20,182 17,796
Leasehold improvements............................................... 10,155 9,310
------------- -----------
30,337 27,106
Less accumulated depreciation and amortization....................... 18,717 16,693
------------- -----------
11,620 10,413
Goodwill, net of amortization of $335.................................. 5,685 5,590
Other assets, net of amortization of $431 and $505, respectively...... 1,978 2,435
------------- -----------
$ 49,274 $ 41,033
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade............................................ $ 512 $ 624
Accrued expenses..................................................... 2,079 2,188
Estimated third-party payor (Medicare) settlements................... -- 33
Notes payable........................................................ 38 4
Convertible subordinated notes payable............................... 2,333 --
------------- -----------
Total current liabilities.................................... 4,962 2,849
Notes payable -- long-term portion..................................... 84 17
Other long-term liabilities............................................ 301 273
Convertible subordinated notes payable................................. -- 2,333
------------- -----------
Total liabilities............................................ 5,347 5,472
Minority interests in subsidiary limited partnerships.................. 3,249 3,024
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized, no
shares issued and outstanding................................... -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
12,152,283 and 11,818,711 shares issued at September 30, 2003
and December 31, 2002, respectively............................. 122 118
Additional paid-in capital........................................... 25,569 23,313
Retained earnings.................................................... 27,509 21,608
Treasury stock at cost, 947,100 and 945,300 shares held at
September 30, 2003 and December 31, 2002, respectively............ (12,522) (12,502)
------------- -----------
Total shareholders' equity................................... 40,678 32,537
------------- -----------
$ 49,274 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net patient revenues..................................... $26,224 $ 23,232 $ 77,089 $ 68,317
Management contract revenues............................. 588 552 1,647 1,710
Other revenues........................................... 42 27 127 85
------- --------- -------- --------
Net revenues........................................ 26,854 23,811 78,863 70,112
Clinic operating costs:
Salaries and related costs............................. 12,551 10,578 36,159 31,039
Rent, clinic supplies and other........................ 6,070 5,332 18,100 15,095
Provision for doubtful accounts........................ (45) 373 711 1,315
------- --------- -------- --------
18,576 16,283 54,970 47,449
Corporate office costs................................... 3,806 2,970 10,328 8,338
------- --------- -------- --------
Operating income......................................... 4,472 4,558 13,565 14,325
Interest expense......................................... 47 47 141 167
Minority interests in subsidiary limited partnerships.... 1,370 1,227 3,919 3,735
------- --------- -------- --------
Income before income taxes............................... 3,055 3,284 9,505 10,423
Provision for income taxes............................... 1,154 1,266 3,604 3,993
------- --------- -------- --------
Net income.......................................... $ 1,901 $ 2,018 $ 5,901 $ 6,430
======= ========= ======== ========
Basic earnings per common share.......................... $ 0.17 $ 0.18 $ 0.54 $ 0.58
======= ========= ======== ========
Diluted earnings per common share................... $ 0.15 $ 0.16 $ 0.48 $ 0.50
======= ========= ======== ========
See accompanying notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net income....................................................... $ 5,901 $ 6,430
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................................... 2,636 2,145
Minority interests in earnings of subsidiary limited partnerships..... 3,919 3,735
Provision for doubtful accounts....................................... 711 1,315
Tax benefit from exercise of stock options............................ 1,124 3,969
Deferred income taxes................................................. (453) 225
Other................................................................. (36) --
Changes in operating assets and liabilities:
Increase in patient accounts receivable............................... (1,655) (1,715)
(Increase) decrease in accounts receivable -- other................... (55) 306
Decrease (increase) in other assets................................... 1,132 (1,180)
Increase in accounts payable and accrued expenses..................... 232 137
Increase in other liabilities......................................... 28 211
Decrease in estimated third-party payor (Medicare) settlements........ (33) (80)
--------- ---------
Net cash provided by operating activities............................... 13,451 15,498
--------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets................................................ (3,935) (3,867)
Purchase of intangibles................................................. (31) (1,062)
Other................................................................... 129 1
--------- ---------
Net cash used in investing activities................................... (3,837) (4,928)
--------- ---------
FINANCING ACTIVITIES
Distributions to minority investors in subsidiary limited partnerships.. (3,654) (3,867)
Payment of notes payable................................................ (3) (697)
Repurchase of common stock.............................................. (20) (7,821)
Proceeds from exercise of stock options................................. 1,136 2,671
--------- ---------
Net cash used in financing activities................................... (2,541) (9,714)
--------- ---------
Net increase in cash and cash equivalents............................... 7,073 856
Cash and cash equivalents -- beginning of year.......................... 7,610 8,121
--------- ---------
Cash and cash equivalents -- end of period.............................. $ 14,683 $ 8,977
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes.......................................................... $ 2,453 $ 707
Interest.............................................................. $ 187 $ 167
Non-cash transaction during the period:
Purchase of intangibles / minority interest........................... $ 104 --
See accompanying notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 significantly reduced its development
of new clinic partnerships. New clinics opened which are not satellite clinics
are 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 Chief Executive Officer 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 nine months ended September 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 was
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 an appropriate reserve for
doubtful accounts. Historically, clinics that have large numbers of aged
accounts generally have
6
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 yet require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company accounts 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 periods ended September 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):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Actual net $ 1,901 $ 2,018 $ 5,901 $ 6,430
income.......................................................
Deduct: Total stock based compensation expense determined
under the fair value method, net of taxes................ 260 266 744 626
------- ------- ------- -------
Pro forma net income.......................................... $ 1,641 $ 1,752 $ 5,157 $ 5,804
======= ======= ======= ========
Earnings per share:
Actual basic earnings per common share...................... $ 0.17 $ 0.18 $ 0.54 $ 0.58
Actual diluted earnings per common share.................... $ 0.15 $ 0.16 $ 0.48 $ 0.50
Pro forma basic earnings per common share................... $ 0.15 $ 0.16 $ 0.47 $ 0.53
Pro forma diluted earnings per common share................. $ 0.13 $ 0.14 $ 0.42 $ 0.45
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
September 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 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.
Judgment is required to estimate the fair value of our long-
7
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
the current period presentation.
RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," ("SFAS 143") which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement applies to all entities that have legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development or normal use of the asset. SFAS 143 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 changes 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 in which the equity
is insufficient to finance its activities or an entity in which the owners of
the entity lack the risk and
8
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
adoption of FIN 46 did not have a significant impact on our financial condition
or results of operations.
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. The adoption of SFAS 149 did not
have a significant 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. The adoption of
SFAS 150 did not have a significant impact on our financial condition or results
of operations.
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):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net income.................................................... $ 1,901 $ 2,018 $ 5,901 $ 6,430
-------- -------- -------- --------
Numerator for basic earnings per share........................ $ 1,901 $ 2,018 $ 5,901 $ 6,430
Effect of dilutive securities:
Interest on convertible subordinated notes payable......... 31 31 92 108
-------- -------- -------- --------
Numerator for diluted earnings per share -- income available
to common stockholders after assumed conversions........... $ 1,932 $ 2,049 $ 5,993 $ 6,538
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares........................... 11,088 11,178 10,986 10,990
Effect of dilutive securities:
Stock options.............................................. 737 1,002 784 1,308
Convertible subordinated notes payable..................... 700 700 700 748
-------- -------- -------- --------
Dilutive potential common shares.............................. 1,437 1,702 1,484 2,056
-------- -------- -------- --------
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions............ 12,525 12,880 12,470 13,046
======== ======== ======== ========
Basic earnings per common share................................. $ 0.17 $ 0.18 $ 0.54 $ 0.58
======== ======== ======== ========
Diluted earnings per common share............................... $ 0.15 $ 0.16 $ 0.48 $ 0.50
======== ======== ======== ========
Options to purchase 509,919 and 184,700 shares for the three months ended
September 30, 2003 and September 30, 2002, respectively, and 491,790 and 71,908
shares for the nine months ended September 30, 2003 and September 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.
9
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's 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 September 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 an 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 September 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. On August 6, 2003, the Company paid additional
consideration of $31,000 based on the clinic's performance. In July 2002, 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.
On August 1, 2003, the Company purchased the 35% minority interest in a limited
partnership for $64,000 and agreed to pay the minority partner $75,000 in
undistributed earnings. The purchase was made under a note, which is payable in
three installments. On September 10, 2003, the Company paid the first
installment of $35,000. The remaining principal amount due under the note
payable was $104,000 at September 30, 2003.
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.
10
The changes in the carrying amount of goodwill consisted of the following at
September 30, 2003 and December 31, 2002 (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Beginning balance........................................ $ 5,590 $ 4,519
Goodwill acquired during the period...................... 95 1,052
Purchase accounting adjustments.......................... -- 19
-------- --------
Ending balance........................................... $ 5,685 $ 5,590
======== ========
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 INTERESTS
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 sheets and statements of operations the Company
records partner therapists' 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 interests 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 account for such purchase as an asset purchase under
the standard purchase method, the purchase of any minority interest in the
partnerships. At this time, the Company operates 61 wholly owned clinics without
any minority interest. Beginning in 2003, the Company significantly reduced 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 September 30, 2003 and
September 30, 2002, the Company classified $156,000 and $88,000, respectively,
of the minority interests in earnings of subsidiary limited partnerships
relating to the 31 partnerships formed after January 18, 2001, as salaries and
related costs and for the nine months ended September 30, 2003 and September 30,
2002, the Company classified as salaries and related costs of $285,000 and
$211,000, respectively. As of September 30, 2003 and December 31, 2002, $301,000
and $273,000, respectively, in undistributed minority interests related to the
31 partnerships are classified as other long-term liabilities.
11
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 September 30, 2003, we operated 235
outpatient physical and occupational therapy clinics in 35 states. During the
first nine months of 2003, we opened 40 clinics, 35 of which had treated
patients as of September 30, 2003 and closed 7 clinics. The average age of our
clinics at September 30, 2003, was 3.97 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 September 30, 2003.
SELECTED OPERATING AND FINANCIAL DATA
The following table presents selected operating and financial data:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Working days...................................... 64 64 191 191
Average visits per day per clinic................. 19.6 21.7 20.3 22.7
Total patient visits.............................. 282,000 252,000 832,000 745,000
PER VISIT:
Net revenues.................................... $ 95.23 $ 94.49 $ 94.79 $ 94.11
Salaries and related costs...................... (44.51) (41.97) (43.46) (41.66)
Rent, clinic supplies and other................. (21.52) (21.16) (21.76) (20.26)
Provision for doubtful accounts................. .16 (1.48) (.86) (1.77)
-------- -------- -------- --------
Contribution from clinics.................... 29.36 29.88 28.71 30.42
Corporate office costs.......................... (13.50) (11.79) (12.41) (11.19)
-------- -------- -------- --------
Operating income per visit................... $ 15.86 $ 18.09 $ 16.30 $ 19.23
======== ======== ======== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
- Net revenues rose 13% to $26.9 million from $23.8 million primarily
due to a 12% increase in patient visits to 282,000 and a $.98 increase
in patient revenues per visit to $93.14.
- Net income declined 6% to $1.9 million from $2.0 million.
- Earnings per share were $0.15 and $0.16 per diluted share for the
current and prior year quarters, respectively. Total outstanding
shares at September 30, 2003 were 12.5 million, a reduction of
approximately 400,000 shares from 12.9 million at September 30, 2002
primarily due to a decrease in the dilutive effect on stock options of
approximately 265,000 shares, together with a decrease in the number
of weighted-average shares outstanding of approximately 90,000 shares.
NET PATIENT REVENUES
- Net patient revenues increased to $26.2 million for the three months
ended September 30, 2003 ("2003 Third Quarter") from $23.2 million for
the three months ended September 30, 2002 ("2002 Third Quarter"), an
increase of $3.0 million, or 13%.
- Total patient visits increased 30,000, or 12%, to 282,000 for the 2003
Third Quarter from 252,000 for the 2002 Third Quarter. The growth in
visits for the quarter was primarily attributable to the clinics
opened subsequent to September 30, 2002, together with a full nine
months of operations for clinics opened between January 1, 2002 and
September 30, 2002.
12
- Net patient revenues from clinics developed and seeing patients since
the 2002 Third Quarter (the "New Clinics") accounted for approximately
76% of the increase, or approximately $2.3 million.
- The remaining increase of $711,000 in net patient revenues was from
the 190 clinics opened before the end of the 2002 Third Quarter (the
"Mature Clinics"). Of the $711,000 increase in net patient revenues
from the Mature Clinics, $539,000 of this increase related to a 2%
increase in patient visits, while $172,000 was due to a less than 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 workers' 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 Third
Quarter and 68% the 2002 Third Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $12.6 million for the 2003 Third
Quarter from $10.6 million for the 2002 Third Quarter, an increase of $2
million, or 19%. Approximately 60% of the increase, or $1.2 million, was
incurred at the New Clinics. The remaining 40% increase, or $780,000, was
due principally to Mature Clinics opened in the first nine months of 2002
that experienced increases in staffing to meet the increase in patient
visits, coupled with an increase in bonuses earned by the 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 47% for the 2003 Third Quarter and 44% for the 2002 Third
Quarter.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $6.1 million for the 2003
Third Quarter from $5.3 million for the 2002 Third Quarter, an increase of
$738,000, or 14%. The $738,000 increase was primarily incurred at the New
Clinics. Rent, clinic supplies and other as a percent of net revenues
increased to 23% for the 2003 Third Quarter from 22% for the 2002 Third
Quarter.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased $418,000, or 112%, which
resulted in a $45,000 benefit for the 2003 Third Quarter compared to costs
of $373,000 for the 2002 Third Quarter. This decrease was primarily due to
a $418,000 adjustment to decrease the provision for doubtful accounts as a
result of enhanced collection efforts and a resulting improvement in
experience. The provision for doubtful accounts as a percent of net patient
revenues decreased to negative 0.2% for the 2003 Third Quarter from 1.6%
for the 2002 Third Quarter. Our allowance for bad debts as a percent of
total patient accounts receivable was 21% at September 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 $3.8 million for the 2003 Third Quarter from $3 million for the
2002 Third Quarter, an increase of $836,000, or 28%. Corporate office costs
increased primarily, as a result of an increase in salaries and benefits,
recruitment fees, severance costs, higher legal and accounting fees and an
increase in directors and officer's insurance premiums. Corporate office costs
as a percent of net revenues increased to 14% for the 2003 Third Quarter from
13% for the 2002 Third 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 Third Quarter from $1.2 million for the 2002 Third
Quarter, an increase of $143,000, or 12%. As a percentage of operating income,
minority interest increased to 31% for the 2003 Third Quarter from 27% for the
Third 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
13
January 18, 2001, together with a decrease in the 2003 Third Quarter amount of
minority interest classified as salaries and related costs. See Note 6.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased to $1.2 million for the 2003 Third
Quarter from $1.3 million for the 2002 Third Quarter, a decrease of
approximately $112,000, or 9% as a result of lower pre-tax income. During the
2003 Third Quarter and the 2002 Third Quarter, we accrued state and federal
income taxes at an effective tax rate of 38%.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002
- Net revenues rose 13% to $78.9 million from $70.1 million primarily
due to a 12% increase in patient visits to 832,000 and a $0.98
increase in patient revenues per visit to $92.67.
- Net income declined 8% to $5.9 million from $6.4 million.
- Earnings per share decreased 4% to $0.48 per diluted share from $0.50
per diluted share primarily due to an 8% decrease in net income from
the same period in prior year. Total outstanding shares at September
30, 2003 were 12.5 million, a reduction of 500,000 shares from 13
million at September 30, 2002 primarily due to a decrease in the
dilutive effect on stock options of approximately 520,000 shares.
NET PATIENT REVENUES
- Net patient revenues increased to $77.1 million for the nine months
ended September 30, 2003 ("2003 Nine Months") from $68.3 million for
the nine months ended September 30, 2002 ("2002 Nine Months"), an
increase of $8.8 million, or 13%.
- Total patient visits increased 87,000, or 12%, to 832,000 for the 2003
Nine Months from 745,000 for the 2002 Nine Months. The growth in
visits for clinics opened in 1999 and subsequent years more than
offset a decline in visits for older clinics opened prior to 1999.
- Net patient revenues from clinics developed and seeing patients since
the 2002 Nine Months (the "New Clinics") accounted for approximately
53% of the increase, or $4.6 million.
- The remaining increase of $4.2 million in net patient revenues was
from the 190 clinics opened before the end of the 2002 Nine Months
(the "Mature Clinics"). Of the $4.2 million increase in net patient
revenues from the Mature Clinics, $3.5 million was due to a 5%
increase in the number of patient visits, while $647,000 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 workers' 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 Nine
Months and 68% the 2002 Nine Months.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $36.2 million for the 2003 Nine
Months from $31 million for the 2002 Nine Months, an increase of $5.2
million, or 17%. Approximately 48% of the increase, or $2.5 million, was
incurred at the New Clinics. The remaining 52% increase, or $2.7 million,
was due principally to Mature Clinics opened in the first nine months of
2002 that experienced increases in staffing to meet the increase in patient
visits, coupled with an increase in bonuses earned by the 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 46% for the 2003 Nine Months and 44% for the 2002 Nine
Months.
14
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $18.1 million for the 2003
Nine Months from $15.1 million for the 2002 Nine Months, an increase of $3
million, or 20%. Approximately 67% of the increase, or $2 million, was
incurred at the New Clinics, while 33%, or $1 million, 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 Nine Months from 22%
for the 2002 Nine Months.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $711,000 for the 2003 Nine
Months from $1.3 million for the 2002 Nine Months, a decrease of $604,000,
or 46%. This decrease was primarily due to a $418,000 adjustment to
decrease the provision for doubtful accounts, coupled with a decrease in
the provision at the Mature Clinics as a result of enhanced collection
efforts and a resulting improvement in experience. The provision for
doubtful accounts as a percent of net patient revenues decreased to 1% for
the 2003 Nine Months from 2% for the 2002 Nine Months. Our allowance for
bad debts as a percent of total patient accounts receivable was 21% at
September 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 $10.3 million for the 2003 Nine Months from $8.3 million for the
2002 Nine Months, an increase of $2 million, or 24%. Corporate office costs
increased primarily, as a result of an increase in salaries and benefits,
recruitment fees, severance costs, higher legal and accounting fees and an
increase in directors and officer's insurance premiums. Corporate office costs
as a percent of net revenues increased to 13% for the 2003 Nine Months from 12%
for the 2002 Nine Months.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships was $3.9
million for 2003 Nine Months and $3.7 million for 2002 Nine Months. As a
percentage of operating income, minority interest increased to 29% for the 2003
Nine Months from 26% for the Nine 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, 2002. See Note 6.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased to $3.6 million for the 2003 Nine
Months from $4 million for the 2002 Nine Months, a decrease of approximately
$389,000, or 10% as a result of lower pre-tax income. During the 2003 Nine
Months and the 2002 Nine Months, we accrued state and federal income taxes at an
effective tax rate of 38%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had $14.7 million in cash and cash equivalents
compared to $7.6 million at December 31, 2002. Cash and cash equivalents are
available to fund the working capital needs of operating subsidiaries, future
clinic development, acquisitions and investments.
The increase in cash of $7.1 million from December 31, 2002 to September 30,
2003 is due primarily to cash provided by operating activities of $13.5 million,
offset by $3.9 million of cash used for the purchase of fixed assets and $2.5
million of cash used in financing activities. In 2003, $3.9 million of cash was
provided by minority interest in earnings of subsidiary limited partnerships and
$3.7 million in distributions were made to minority investors in subsidiary
limited partnerships. In addition, cash of $1.1 million was provided from the
exercise of stock options.
Our current ratio decreased to 6.04 to 1.00 at September 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 September 30, 2003, offset by a $7.1 million increase in cash and cash
equivalents.
The debt-to-equity ratio decreased to .06 to 1.00 at September 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
15
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 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 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 September 30, 2003, no
shares have been repurchased under the new share repurchase program.
FACTORS AFFECTING FUTURE RESULTS
Clinic Development
As of September 30, 2003, we had 235 clinics in operation. In the first nine
months of the year we opened 40 clinics, 35 of which had treated patients as of
September 30. Our goal for 2003 is to open a total of at least 47 clinics
provided 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 clinics opened
should favorably impact our results of operations within one year.
Beginning in 2003, we ceased our development of new clinics through
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 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 September 30, 2003, approximately 21% of our visits were
derived from Medicare. We receive payments from the Medicare program under a fee
schedule. These payments are 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 implement a one year moratorium on the
financial limit for 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 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
16
amount under the Series C Note was $2.3 million at September 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 September 30, 2003, we had $14.7 million in cash
and cash equivalents compared to $7.6 million at December 31, 2002, an increase
of $7.1 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;
- - reimbursement rates from third party payors and deductibles and co-pays owed
by patients;
- - 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
September 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 September 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
- ------- -----------
10.1 Employment Agreement, dated September 2, 2003, between U.S. Physical Therapy, Inc. and Lawrance W. McAfee.
10.2 Employment Agreement, dated September 18, 2003, between U.S. Physical Therapy, Inc. and Chris Reading.
10.3 Employment Agreement, dated September 2, 2003, between U.S. Physical Therapy, Inc. and J Michael Mullin.
31* Certification
32* Certification of Periodic Report
* Filed herewith
(b) Reports on Form 8-K
On July 31, 2003, the Company filed a current report on Form 8-K with the
Securities and Exchange Commission related to a press release announcing the
Company's earnings for the quarter and six months ended June 30, 2003.
On September 2, 2003, the Company filed a current report on Form 8-K with the
Securities and Exchange Commission related to announcing that a new chief
financial officer had been retained by the Company.
On September 22, 2003, the Company filed a current report on Form 8-K with the
Securities and Exchange Commission related to announcing updated earnings
guidance for the year ending December 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: November 13, 2003 By: /s/ LAWRANCE W. MCAFEE
------------------------
Lawrance W. McAfee
Chief Financial Officer
duly authorized officer and principal financial
and accounting officer)
19
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.1 Employment Agreement, dated September 2, 2003, between U.S. Physical Therapy, Inc. and Lawrance W. McAfee.
10.2 Employment Agreement, dated September 18, 2003, between U.S. Physical Therapy, Inc. and Chris Reading.
10.3 Employment Agreement, dated September 2, 2003, between U.S. Physical Therapy, Inc. and J Michael Mullin.
31* Certification
32* Certification of Periodic Report
* Filed herewith
20