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

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11151

U.S. PHYSICAL THERAPY, INC.

(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA 76-0364866
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

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

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

Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

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

As of May 5, 2004, the number of shares outstanding of the registrant's common
stock, par value $.01 per share, was: 12,442,892.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 3

Consolidated Statements of Operations for the three months ended March
31, 2004 and 2003 4

Consolidated Statements of Cash Flows for the three months ended March
31, 2004 and 2003 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. 15

Item 4. Controls and Procedures. 15

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K. 16
Signature 17
Certifications 19-21

2

ITEM 1. FINANCIAL STATEMENTS

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

See notes to consolidated financial statements.

3

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

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

See notes to consolidated financial statements.

4

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

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

See notes to consolidated financial statements.

5

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004
(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 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 are partially
compensated based upon clinic profits.

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, 2003.

Operating results for the three months ended March 31, 2004 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, 2003.

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenues are recognized in the period in which services are rendered and are
reported at estimated net realizable amounts. 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 its established rates. The Company determines allowances for
doubtful accounts based on the specific agings and payor classifications at each
clinic, and contractual adjustments based on historical experience and the terms
of payor contracts. 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 (the "Medicare Limit"), except for services
provided in hospitals. After a three-year moratorium, this Medicare Limit on
therapy services was implemented for services rendered on or after September 1,
2003. The Medicare Limit in any one-year has been adjusted up to $1,590 (the
"Adjusted Medicare Limit"). Effective December 8, 2003, a moratorium was placed
on the Adjusted Medicare Limit for the remainder of 2003 and for years 2004 and
2005. 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 experience with
particular payors at each clinic to determine an appropriate reserve for
doubtful accounts. Historically, clinics that have large numbers of aged
accounts generally have less favorable collection experience, and thus they
require a higher allowance. Accounts that are ultimately determined to be
uncollectible are written off against our bad debt allowance. The amount of our
aggregate bad debt allowance is

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periodically reviewed for adequacy in light of current and historical
experience.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

Stock Options

The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, the compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeds the
exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation
and FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123, established accounting
and disclosure requirements using fair-value-based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting
standards, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of Statement 123, as amended. Under APB Opinion No.
25 the Company recaptured $35,000 of compensation cost in net income for the
period ended March 31, 2004. No compensation cost related to stock plans has
been recognized for the quarter ended March 31, 2003.

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 highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The pro forma effect
on net income for the quarters ended March 31, 2004 and 2003 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995. The Company's pro forma information follows (in
thousands except for earnings per share information):

Long-Lived Assets

Fixed assets are stated at cost. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. Estimated useful
lives for furniture and equipment range from three to eight years. Leasehold
improvements are amortized over the estimated useful lives of the assets or the
related lease terms, whichever is shorter.

7

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144") which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many
of the fundamental provisions of that statement. SFAS 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business.

The Company reviews property and equipment and intangible assets for impairment
when events or circumstances indicate that the related amounts might beimpaired.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.

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 December 2003, the Financial Accounting Standards Board ("FASB") issued
Revised Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46R"), which requires the consolidation of variable interest entities. FIN
46R, as revised, was applicable to financial statements of companies that had
interests in "special purpose entities" during 2003. Effective as of the first
quarter of 2004, FIN 46R is applicable to financial statements of companies that
have interests in all other types of entities. Adoption of FIN 46R had no effect
on the Company's financial position, results of operations or cash flows.

FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
statement establishes standards for the classification and measurement of
certain financial instruments of both liabilities and equity. The Statement also
includes disclosures for financial instruments within its scope. For us, the
Statement was effective for instruments entered into or modified after May, 31,
2003 and otherwise was effective as of January 1, 2004, except for mandatorily
redeemable financial instruments. For certain redeemable financial instruments,
the Statement will be effective for us on January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatorily
instruments. The adoption of SFAS 150 did not have an impact on our financial
condition or results of operations.

8

2. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for the three months
ended March 31, 2004 and 2003 are as follows (in thousands, except per share
data):

Options to purchase 649,000 and 446,000 shares for the three months ended March
31, 2004 and 2003, respectively, were excluded from the diluted earnings per
share calculations for the respective periods because the options' exercise
prices were greater than the average market price of the common shares during
the periods.

3. 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. On January 12,
2004, an additional $666,660 of the Series C Notes was converted by the note
holder into 200,000 shares of common stock. The remaining principal amount under
the Series C Note was $1.7 million and $2.3 million at March 31, 2004 and
December 31, 2003, respectively.

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 March 31, 2004, the Company may purchase an additional
67,600 shares under this original Board authorized program.

In February 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.

9

5. ACQUISITION OF MINORITY INTERESTS

On June 1, 2002, the Company purchased a 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 half of the purchased 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 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 December 31, 2003 to be paid in two annual payments of
$34,000 and $70,000.

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.

The changes in the carrying amount of goodwill consisted of the following for
the three months ended March 31, 2004 and the year ended December 31, 2003,
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 2004 and 2003 and no impairment
of goodwill 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 interest reaches 35%.
Within the balance sheet and statement of operations the Company records partner
therapists' profit interest in the clinic partnerships as minority interests in
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" (EITF 00-23), which provides specific
accounting guidance relating to various incentive compensation issues. The
Company reviewed EITF 00-23 with respect to the partnership's 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 minority interest in earnings, the clinic partners'
interest in profits. Moreover, EITF 00-23 also requires that the Company expense
as compensation rather than capitalizing as goodwill, the purchase of minority
interest in the partnerships, of clinic partnerships formed after January 18,
2001. At this time the Company operates 73 wholly-owned clinics without any
minority interest.

Pursuant to EITF 00-23, for the quarters ended March 31, 2004 and March 31,
2003, the Company classified $222,000 and $86,000, respectively, of the minority
interest in earnings of subsidiary limited partnerships relating to the 30
partnerships formed after January 18, 2001, as salaries and related costs. As of
March 31, 2004 and December 31, 2003, $423,000 and $346,000, respectively, in
undistributed minority interests related to the 30 partnerships are classified
as other long-term liabilities.

10

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

EXECUTIVE SUMMARY

OUR BUSINESS

We operate outpatient physical and occupational therapy clinics that provide
pre- and post-operative care and treatment for a variety of orthopedic-related
disorders and sports-related injuries. At March 31, 2004, we operated 244
outpatient physical and occupational therapy clinics in 35 states. The average
age of our clinics at March 31, 2004, was 4.1 years. We have developed 238 of
the clinics and acquired six. To date, we have sold three clinics, closed 24
facilities due to substandard clinic performance, and consolidated three clinics
with other existing clinics. In 2003, we added 48 new clinics and our goal is to
open between 45 and 50 clinics in 2004.

In addition to our owned clinics, we also manage physical therapy facilities for
third parties, primarily physicians, with five third-party facilities under
management as of March 31, 2004.

SELECTED OPERATING AND FINANCIAL DATA

The following table presents selected operating and financial data. We view
these non-financial data points as key indicators of our operating performance.
In particular, we view average visits per day per clinic as a material component
of our operating performance. As indicated below, the number of daily visits to
our clinics has declined from an average of 20.5 per clinic at March 31, 2003 to
an average of 18.7 per clinic at March 31, 2004. The following table presents
selected operating and financial data:

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2003

o Net revenues rose 13% to $28.3 million, from $25 million, due
to a 9% increase in patient visits to 290,000 from 266,000
combined with a 3.6% increase from $92.21 to $95.49 in net
patient revenue per visit.

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o Earnings were $0.13 per diluted share for the three months
ended March 31, 2004 ("2004 First Quarter") as compared to
$0.15 for the three months ended March 31, 2003 ("2003 First
Quarter"). Net income for the 2004 First Quarter was $1.5
million versus $1.8 million for the same period last year. The
decrease in earnings per share was directly related to the 14%
decline in net income. Total diluted shares remained
relatively flat at 12.4 million for the periods ended March
31, 2004 and 2003.

NET PATIENT REVENUES

o Net patient revenues increased to $27.7 million for the 2004
First Quarter from $24.5 million for the 2003 First Quarter,
an increase of $3.2 million, or 13%, primarily due to a 9%
increase in patient visits to 290,000 and a $3.28 increase in
patient revenues per visit to $95.49.

o Total patient visits increased 24,746, or 9%, to 290,000 for
the 2004 First Quarter from 266,000 for the 2003 First
Quarter. The growth in visits was attributable to an increase
of approximately 23,000 visits in clinics opened between April
1, 2003 and March 31, 2004 (the "New Clinics") together with a
2,000 or 1% increase in visits for clinics opened before April
1, 2003 (the "Mature Clinics").

o Net patient revenues from New Clinics accounted for
approximately 69% of the total increase, or approximately $2.2
million. The remaining increase of $1 million in net patient
revenues was from Mature Clinics. Of the $1 million increase,
$1.9 million related to 53 clinics opened between January 1,
2002 and March 31, 2003, offset by a $900,000 decrease in
clinics opened prior to January 1, 2002.

Net patient revenues are based on established billing rates less allowances and
discounts for patients covered by workers' compensation programs and other
contractual programs. Net patient revenues reflect contractual and other
adjustments, which we evaluate quarterly, relating to patient discounts from
certain payors. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of
the clinics.

CLINIC OPERATING COSTS

Clinic operating costs as a percent of net revenues were 74% for the 2004 First
Quarter and 71% the 2003 First Quarter.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $14.6 million for the 2004 First
Quarter from $12.3 million for the 2003 First Quarter, an increase of
$2.3 million, or 19%. Approximately 57% of the increase, or $1.3 million,
was incurred at the New Clinics. The remaining 43% increase, or $1
million, was primarily due to an increase of $316,000 and $137,000
relating to increased group health insurance cost and compensation costs
associated with minority interests in earnings of subsidiary limited
partnerships relating to the 30 partnerships formed after January 18,
2001, respectively. Additionally, salaries and related costs, excluding
group health issuance costs, increased $331,000 for clinics opened in the
first quarter of 2003 which experienced an increase in clinic staff to
meet the increase in patient visits. Bonuses are based on the net
revenues and operating profit generated by the individual clinics.
Salaries and related costs as a percent of revenues were 52% for the 2004
First Quarter and 49% for the 2003 First Quarter.

CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other increased to $6 million for the 2004
First Quarter from $5.1 million for the 2003 First Quarter, an increase
of $900,000 million, or 17%. Approximately 87% of the increase, or
$785,000, was incurred at the New Clinics, while 13%, or $115,000, of the
increase was incurred at the Mature Clinics. Rent, clinic supplies and
other as a percent of revenues remained flat at 21% for the 2004 First
Quarter and 2003 First Quarter.

CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts increased to $397,000 for the 2004
First Quarter from $338,000 for the 2003 First Quarter, an increase of
$59,000, or 17%. This increase was primarily due to the establishment of
reserves for the New Clinics. The provision for doubtful accounts as a
percent of net patient revenues remained flat at 1.4% for the 2004 First
Quarter and 2003 First Quarter. Our allowance for bad debts as a percent
of total patient accounts receivable was 17% at March 31, 2004, compared
to 20% at December 31, 2003. Accounts receivable days outstanding
decreased to 64 days at March 31, 2004 compared to 68 days at December
31, 2003. The provision for doubtful accounts for each period is based on
a detailed, clinic-by-clinic review of overdue accounts.

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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, and recruiting fees, increased to
$3.6 million for the 2004 First Quarter from $3.2 million for the 2003 First
Quarter, an increase of $400,000, or 14%. Corporate office costs increased
primarily as a result of increased salaries and benefits related to additional
personnel hired to support an increasing number of clinics. Corporate office
costs as a percent of revenues were 12.8% for the 2004 First Quarter which was
comparable to 12.7% for the 2003 First Quarter.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships increased
slightly to $1.2 million for the 2004 First Quarter from $1.1 million in the
2003 First Quarter. As a percentage of operating income, minority interest
increased to 32% for the 2004 First Quarter from 28% for the First Quarter of
2003.

PROVISION FOR INCOME TAXES

The provision for income taxes decreased to $926,000 for the 2004 First Quarter
from $1.1 million for the 2003 First Quarter, a decrease of $174,000, or 16% as
a result of lower pre-tax income. During the 2004 First Quarter and the 2003
First Quarter, we accrued state and federal income taxes at an effective tax
rate of 38%.

LIQUIDITY AND CAPITAL RESOURCES

We believe that our business is generating enough cash flow from operating
activities to allow us to meet our normal short-term and long-term cash
requirements. At March 31, 2004, we had $18.4 million in cash and cash
equivalents compared to $16.8 million at December 31, 2003. Although the
start-up costs associated with opening new clinics, and our planned capital
expenditures are significant, we believe that our cash and cash equivalents are
sufficient to fund the working capital needs of our operating subsidiaries and
future clinic development. Included in cash and cash equivalents at March 31,
2004 were $2.7 million in a money market fund and $10 million in a short-term
debt instrument issued by an agency of the U.S. Government.

The increase in cash of $1.6 million from December 31, 2003 to March 31, 2004 is
due primarily to cash provided by operating activities of $3.2 million, offset
by $600,000 of cash used for the purchase of fixed assets. In the 2004 First
Quarter, we had $1.2 million of cash provided by minority interests in earnings
of subsidiary limited partnerships and made $1 million in distributions to
minority investors in subsidiary limited partnerships.

Our current ratio increased to 6.27 to 1.00 at March 31, 2004 from 6.09 to 1.00
at December 31, 2003. The increase in the current ratio is due primarily to the
increased cash and accounts receivable balances at March 31, 2004, together with
the January 2004 conversion of some of our Convertible Subordinated Notes.

At March 31, 2004, we had a debt-to-equity ratio of 0.04 to 1.00 compared to
0.06 to 1.00 at December 31, 2003. The decrease in the debt-to-equity ratio at
March 31, 2004 compared to December 31, 2003 resulted from the January 2004
conversion of some of our Convertible Subordinated Notes.

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
clinics through acquisitions, but rather develop new clinics, which we believe
generally requires less capital. 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 existing operations, will be sufficient
to meet our current operating needs, development plans and any purchases of
minority interests through at least 2005.

In 2002, $667,000 of a convertible subordinated note was converted into common
stock, leaving a remaining balance of $2.3 million at December 31, 2003. On
January 12, 2004, an additional $666,660 of the convertible subordinated note
was converted into common stock leaving a remaining balance of $1.7 million. We
anticipate that the remaining $1.7 million convertible subordinated note will be
converted into common stock at the June 2004 maturity date. However, if our
share price is not at or above $3.33 in June 2004, it is likely that the note
holders would not convert and we would have to use cash to repay the remaining
balance.

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

13

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.

In February 2003, our Board authorized a new share repurchase program of up to
250,000 additional shares of our outstanding common stock. As there is no
expiration for this Board authorization, additional shares may be purchased from
time to time in the open market or private transactions depending on price,
availability and our cash position. As of March 31, 2004, no shares have been
repurchased under the new share repurchase program.

FACTORS AFFECTING FUTURE RESULTS

Clinic Development

As of March 31, 2004, we had 244 clinics in operation, 4 of which were opened in
the first quarter of 2004. Our goal for 2004 is to open between 45 and 50
clinics provided we can identify suitable locations and recruit physical and
occupational therapists to manage the clinics. We expect to incur initial
operating losses from the new clinics, which will impact our operating results.
Generally we experience losses during the initial period of a new clinic's
operation. 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 two years following the first
anniversary of a clinic opening. Based on the historical performance of our new
clinics, generally the clinics opened in 2004 would favorably impact our results
of operations beginning in 2005.

Annual Limit on Medicare Reimbursement Claims

For the quarter ended March 31, 2004, approximately 19% of our revenues were
derived from Medicare. We receive payments from the Medicare program under a fee
schedule. 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 (the
"Medicare Limit"), except for services provided in hospitals. After a three-year
moratorium, this Medicare Limit on therapy services was implemented for services
rendered on or after September 1, 2003 subject to an adjusted total of $1,590
(the "Adjusted Medicare Limit"). Effective December 8, 2003, a moratorium was
placed on the Adjusted Medicare Limit for the remainder of 2003 and for 2004 and
2005. The potential negative impact on revenue resulting from a Medicare limit
could be reduced by receiving payments from secondary insurance carriers and
patients electing to self-pay. In the event the moratorium is not extended after
2005 and such negative impact is not mitigated by such efforts, the Adjusted
Medicare Limit could have an adverse impact on 2006 and later revenue and
income.

Convertible Subordinated Debt

The Series C Convertible Subordinated 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 Notes being converted by $3.33 per share. In June 2002,
$667,000 of the Series C Notes were converted by the note holders into 200,100
shares of common stock. The remaining principal amount under the Series C Note
was $2.3 million at December 31, 2003. During January 2004, $666,660 of the
Series C Notes was converted by the note holders into 200,000 shares of common
stock leaving a remaining balance of $1.7 million at March 31, 2004. If our
share price is not at or above $3.33 in June 2004, it is likely that the note
holder would not convert and we would have to use cash to repay the remaining
balance.

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 Exchange Act
of 1934. These statements (often using words such as "believes," "expects,"
"intends," "plans," "appear," "should" and similar words), which involve
numerous risks and uncertainties. Included among such statements are those
relating to opening of new clinics, availability of personnel and the
reimbursement environment. The forward-looking statements are based on our
current views and assumptions and actual results could differ materially from
those anticipated in such forward-looking statements as a result of certain
risks, uncertainties, and factors, which include, but are not limited to:

o revenue and earnings expectations;

o general economic, business, and regulatory conditions;

o competition;

14

o federal and state regulations;

o acquisitions;

o reimbursement rates from third party payors and deductibles
and co-pays by patients;

o availability, terms, and use of capital;

o availability of qualified physical and occupational
therapists; and

o 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 indebtedness as of March
31, 2004 consisted primarily of $1.7 million in Series C Convertible
Subordinated Notes, described above. 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 March 31, 2004" 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.

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PART II - OTHER INFORMATION

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

(a) Exibits

EXHIBIT
NO. DESCRIPTION
- ------- -----------
31.1* Certification
31.2* Certification
31.3* Certification
32* Certification of Periodic Report

* Filed herewith

(b) Reports on Form 8-K

On January 20, 2004, the Company filed a report on Form 8-K with the Securities
and Exchange Commission related to a press release announcing the Company's
preliminary figures and earnings release date for the fourth quarter and
year-ended December 31, 2003.

On February 4, 2004, the Company filed a report on Form 8-K with the Securities
and Exchange Commission related to a press release announcing that the Company
will present at the UBS Warburg Global Healthcare Services Conference.

On March 4, 2004, 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 fourth quarter and year-ended December 31, 2003.

On March 11, 2004, the Company filed a report on Form 8-K with the Securities
and Exchange Commission related to a press release announcing that the Company
will present at the SG Cowen Healthcare Conference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.

U.S. PHYSICAL THERAPY, INC.

Date: May 7, 2004 By: /s/ LAWRANCE W. MCAFEE
-------------------------------
Lawrance W. McAfee
Chief Financial Officer
(duly authorized officer and
principal financial and
accounting officer)

By: /s/ DAVID RICHARDSON
-------------------------------
David Richardson
Controller

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INDEX OF EXHIBITS

EXHIBIT
NO. DESCRIPTION
- ------- --------------------
31.1* Certification
31.2* Certification
31.3* Certification
32* Certification of Periodic Report

* Filed herewith

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