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

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

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

[x] 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.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

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) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

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

As of August 5, 2004, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 13,394,417.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets as of June 30, 2004 and December 31, 3
2003

Consolidated Statements of Operations for the three and six months ended
June 30, 2004 and 2003 4

Consolidated Statements of Cash Flows for the six months ended June 30,
2004 and 2003 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 4. Submission of Matters to a Vote of Security Holders 18

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

Signatures 20

Index of Exhibits 21

Certifications

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

JUNE 30, 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 (the "Company"). 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.. The
managing therapist(s) 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
of an existing partnership are wholly owned by the Company. The clinic directors
of these new 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 Interim 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, 2003.

Operating results for the six months ended June 30, 2004 are not necessarily
indicative of the results the Company expects for the entire year. Please also
review the risk factors 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 periodically reviewed for adequacy in light of
current and historical experience.

6

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 Financial Accounting Standards
Board ("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 a
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 June 30, 2004. No
compensation cost related to stock plans was recognized for the quarter ended
June 30, 2004. No compensation cost related to stock plans was recognized for
the quarter and period ended June 30, 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 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 and six months ended June 30, 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):

7

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.

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 for 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 be
impaired. 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 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 ("SFAS 150"), was issued in May
2003. SFAS 150 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 the
Company, SFAS 150 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 the Company on January 1, 2005.
The effective date has been deferred indefinitely for certain other types of
mandatory instruments. The adoption of SFAS 150 did not have an impact on the
Company's financial condition or results of operations.

8

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):

Options to purchase 634,245 and 464,240 shares for the three months ended June
30, 2004 and June 30, 2003, respectively, and 634,245 and 454,487 shares for the
six months ended June 30, 2004 and June 30, 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 was
convertible at the option of the holder into shares of Company common stock
determined by dividing the principal amount of the Note being converted by
$3.33. The Series C Note bore 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 principal
amount under the Series C Note was $2.3 million at December 31, 2003. On January
12, 2004, $666,660 of the Series C Note was converted by the note holder into
200,000 shares of common stock. On June 30, 2004, the remaining $1.7 million of
the Series C Note was converted by the note holder into 499,900 shares of common
stock. The Series C Note was unsecured and subordinated in right of payment to
all other indebtedness for borrowed money incurred by the Company.

9

4. PURCHASE OF COMMON STOCK

In September 2001, the Company's Board of Directors (the "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 June 30, 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.

5. ACQUISITIONS AND DISPOSALS

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 on August 1, 2004 and August 1 2005, respectively.

On April 28, 2004, the Company purchased the 17.5% minority interest in a
limited partnership for $138,000 and agreed to pay the minority partner $36,000
in undistributed earnings.

On June 2, 2004, the Company purchased the 17.5% minority interest in a limited
partnership for $25,000 and agreed to pay the minority partner $11,000 in
undistributed earnings.

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 No. 142, Goodwill and Other
Intangible Assets, ("SFAS 142") issued by the FASB in July 2001. 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.

The changes in the carrying amount of goodwill consisted of the following for
the six months ended June 30, 2004 and the year ended December 31, 2003,
respectively (in thousands):

10

SALE OF ASSETS

On June 30, 2004, the Company sold all of its assets in a clinic. Net proceeds
from the sale were $473,000 on assets with a carrying value of $17,000. After
recording certain costs associated with the sale, the Company recorded a gain of
$452,000.

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 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 capitalize as goodwill, the purchase of minority
interest in the partnerships, of clinic partnerships formed after January 18,
2001. At this time, the Company operates 79 wholly-owned clinics without any
minority interest.

Pursuant to EITF 00-23, the Company classified $176,000 and $42,000 for the
quarters ended June 30, 2004 and 2003, 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 and $398,000 and
$128,000 for the six months ended June 30, 2004 and 2003, respectively. As of
June 30, 2004 and December 31, 2003, $451,000 and $346,000, respectively, in
undistributed minority interests related to the 30 partnerships are classified
as other long-term liabilities.

7. EMPLOYEE TERMINATION BENEFITS

As a result of events that occurred during the period relating to the
resignation of Roy Spradlin, former President, Chief Executive Officer and
Chairman of the Board, certain costs were incurred during the quarter ended June
30, 2004. Pursuant to FASB Statement No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Terminations Benefits (SFAS 88), an employer that provides contractual
termination benefits is required to recognize a liability and a loss in
connection with the termination of an employee in the period when that
termination is known, if the amount can be reasonably estimated. In accordance
with SFAS 88, the Company accrued severance of $650,000 in the quarter ended
June 30, 2004 in accordance with Mr. Spradlin's employment contract.
Additionally, recruiting expense of $67,000 was incurred resulting in a
recognized expense of $717,000 in the quarter ended June 30, 2004 related to the
resignation.

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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 June 30, 2004, we operated 254
outpatient physical and occupational therapy clinics in 35 states. The average
age of our clinics at June 30, 2004, was 3.94 years. We have developed 248 of
the clinics and acquired six. Since inception, we have sold four clinics, closed
25 facilities due to substandard clinic performance, and consolidated three
clinics with other existing clinics. In 2003, we opened 48 new clinics. During
the first six months of 2004 we have opened 16 new clinics, with the goal of
opening between 22 and 27 additional clinics during the remainder of 2004.

In addition to our owned clinics, we also manage physical therapy facilities for
third parties, primarily physicians, with three third-party facilities under
management as of June 30, 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.

RECENT DEVELOPMENTS

On July 6, 2004, the Company announced that Roy Spradlin, former
President, Chief Executive Officer and Chairman of the Board, resigned from the
Company to pursue other business and personal interests (the "CEO Resignation").
Company founder J. Livingston Kosberg is now the Interim Chief Executive Officer
and has rejoined the Board. Daniel C. Arnold, who has served on the Board since
1992, is now Chairman of the Board. Chris Reading continues to be the Company's
Chief Operating Officer and Larry McAfee continues to be the Company's Chief
Financial Officer. A search committee of the Board has been established to find
a new Chief Executive Officer and has retained a recruiting firm to aid its
efforts.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2003

o Net revenues rose 13.2% to $30.6 million, from $27.0 million, due to an
8% increase in patient visits to 307,000 from 285,000 combined with a 5%
increase from $92.64 to $97.33 in net patient revenue per visit.

o Earnings were $0.19 per diluted share for the three months ended June
30, 2004 ("2004 Second Quarter") as compared to $0.18 for the three
months ended June 30, 2003 ("2003 Second Quarter"). Net income for the
2004 Second Quarter increased to $2.3 million from $2.2 million, or 3%,
compared to the 2003 Second Quarter. Total diluted shares outstanding
were 12.4 million and 12.5 million for the 2004 Second Quarter and 2003
Second Quarter, respectively.

NET PATIENT REVENUES

o Net patient revenues increased to $29.9 million for the 2004 Second
Quarter from $26.4 million for the 2003 Second Quarter, an increase of
$3.5 million, or 13%, primarily due to an 8% increase in patient visits
to 307,000 and a $4.69 increase in patient revenues per visit to $97.33.
The increase in patient revenues per visit was primarily due to
contractual fee increases.

o Total patient visits increased 22,000, or 8%, to 307,000 for the 2004
Second Quarter from 285,000 for the 2003 Second Quarter. The growth in
visits for the 2004 Second Quarter was attributable to an increase of
approximately 24,000 visits in clinics opened between July 1, 2003 and
June 30, 2004 (the "New Clinics") offset by a 2,000 or 1% decrease in
visits for clinics opened before July 1, 2003 (the "Mature Clinics").

o Net patient revenues from New Clinics accounted for approximately 67% of
the total increase, or approximately $2.4 million. The remaining
increase of $1.1 million in net patient revenues was from Mature
Clinics. Of the $1.1 million increase, $2 million related to 63 clinics
opened between January 1, 2002 and June 30, 2003, offset by a $613,000
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 68% for the 2004 Second
Quarter and 69% for the 2003 Second Quarter.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $14.5 million for the 2004
Second Quarter from $13.0 million for the 2003 Second Quarter, an
increase of $1.5 million, or 11%. Approximately 74% of the increase, or
$1.1 million, was attributable to the New Clinics. The remaining 26%
increase, or $382,000, was attributable to the Mature Clinics. Salaries
and related costs as a percent of revenues were 47% for the 2004 Second
Quarter and 48% for the 2003 Second Quarter.

CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other costs increased to $6.0 million for the
2004 Second Quarter from $5.2 million for the 2003 Second Quarter, an
increase of $815,000, or 16%. Approximately 87% of the increase, or
$707,000, was attributable to the New Clinics. The remaining increase of
13%, or $108,000 was attributable to the Mature Clinics. Rent, clinic
supplies and other costs as a percent of revenues was 20% for the 2004
Second Quarter and 19% for the 2003 Second Quarter.

CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts decreased to $314,000 for the 2004
Second Quarter from $418,000 for the 2003 Second Quarter, a decrease of
$105,000, or 25%. This decrease was primarily as a result of improved
collection experience resulting in a reduction in the average
receivables days outstanding. The provision for doubtful accounts as a
percent of net patient revenues was 1.0% for the 2004 Second Quarter and
1.6% for the

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2003 Second Quarter. The provision for doubtful accounts for each period
is based on a detailed, clinic-by-clinic review of overdue accounts and
is periodically reviewed in the aggregate in light of current and
historical experience.

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
$4.9 million for the 2004 Second Quarter from $3.3 million for the 2003 Second
Quarter, an increase of $1.6 million, or 47%. Corporate office costs increased
primarily due to a charge of $717,000 related to accrued severance for the CEO
Resignation, which accounted for 46% of the increase. Other increases were due
to salaries and benefits for additional personnel hired to support an increasing
number of clinics of $169,000, additional corporate bonus accrual of $300,000,
additional legal fees of $173,000 and accounting fees of $118,000 primarily due
to implementing Sarbanes-Oxley requirements. Corporate office costs as a percent
of net revenues were 16% for the 2004 Second Quarter compared to 12% for the
2003 Second Quarter.

GAIN ON SALE OF CLINIC ASSETS

On June 30, 2004, we recognized a gain of $444,000 primarily related to the sale
of a clinic. See Note 5 for further discussion.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships increased to
$1.5 million for the 2004 Second Quarter from $1.4 million in the 2003 Second
Quarter. As a percentage of operating income, minority interest was essentially
flat at 29% for the 2004 Second Quarter and 28% for the 2003 Second Quarter.

PROVISION FOR INCOME TAXES

The provision for income taxes remained flat at $1.4 million during each of the
2004 Second Quarter and the 2003 Second Quarter. During each of the 2004 Second
Quarter and the 2003 Second Quarter, we accrued state and federal income taxes
at an effective tax rate of 38%.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003

o Net revenues rose 13% to $58.9 million from $52.0 million primarily due
to a 9% increase in patient visits to 598,000 and a 4% increase in net
patient revenues per visit to $96.44.

o Net income declined 5% to $3.8 million from $4.0 million.

o Earnings per share decreased 6% to $0.31 per diluted share from $0.33
per diluted share. Total diluted shares outstanding at June 30, 2004 and
2003 were 12.4 million.

NET PATIENT REVENUES

o Net patient revenues increased to $57.6 million for the six months ended
June 30, 2004 ("2004 Six Months") from $50.9 million for the six months
ended June 30, 2003 ("2003 Six Months"), an increase of $6.8 million, or
13%, primarily due to a 9% increase in patient visits to 598,000 and a
$4.01 increase in patient revenues per visit to $96.44. The increase in
patient revenues per visit was primarily due to contractual fee
increases.

o Total patient visits increased 48,000, or 9%, to 598,000 for the 2004
Six Months from 550,000 for the 2003 Six Months. The growth in visits
for the period was attributable to an increase of approximately 39,000
visits in New Clinics together with an 8,000 or 1% increase in visits
for Mature Clinics.

o Net patient revenues from New Clinics accounted for approximately 56% of
the total increase, or approximately $3.8 million. The remaining
increase of $3.0 million in net patient revenues was from Mature
Clinics.

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

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CLINIC OPERATING COSTS

Clinic operating costs were 71% of net revenues for the 2004 Six Months and 70%
of net revenues for the 2003 Six Months.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $29.1 million for the 2004 Six
Months from $25.3 million for the 2003 Six Months, an increase of $3.8
million, or 15%. Approximately 49% of the increase, or $1.9 million, was
attributable to the New Clinics. The remaining 51% increase, or $1.9, was
due higher costs at various Mature Clinics. Salaries and related costs as a
percent of net revenues was 49% for the 2004 Six Months and the 2003 Six
Months.

CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other costs increased to $12.0 million for the
2004 Six Months from $10.4 million for the 2003 Six Months, an increase of
$1.6 million, or 16%. Approximately 74% of the increase, or $1.2 million,
was attributable to the New Clinics and $400,000 was attributable to
various Mature Clinics. Rent, clinic supplies and other costs as a percent
of net revenues remained flat at 20% for the 2004 Six Months and the 2003
Six Months.

CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts decreased to $711,000 for the 2004 Six
Months from $756,000 for the 2003 Six Months, a decrease of $45,000, or 6%.
This decrease was due to a decrease of $96,000 at the Mature Clinics as a
result of improved collection experience, offset by a $51,000 increase at
the New Clinics. The provision for doubtful accounts as a percent of net
patient revenues decreased to 1.2% for the 2004 Six Months from 1.5% for
the 2003 Six Months. Our allowance for bad debts as a percent of total
patient accounts receivable was 16% at June 30, 2004, as compared to 20% at
December 31, 2003.

CORPORATE OFFICE COSTS

Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting fees,
increased to $8.5 million for the 2004 Six Months from $6.5 million for the 2003
Six Months, an increase of $2.0 million, or 31%. Corporate office costs
increased primarily due to a charge of $717,000 related to the CEO Resignation,
which accounted for 36% of the increase. Other increases were due to additional
salaries and benefits of $770,000, which included a bonus accrual of $300,000,
additional legal expenses of $254,000 and accounting fees of $253,000 primarily
due to implementing Sarbanes-Oxley requirements. Corporate office costs as a
percent of net revenues increased to 15% for the 2004 Six Months from 13% for
the 2003 Six Months.

GAIN ON SALE OF CLINIC ASSETS

On June 30, 2004, we recognized a pretax gain of $441,000 primarily related to
the sale of a clinic. See Note 5 for further discussion.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships increased 7%
to $2.7 million for the 2004 Six Months from $2.5 million for the 2003 Six
Months. As a percentage of operating income, minority interest increased to 31%
for the 2004 Six Months from 28% for the 2003 Six Months.

PROVISION FOR INCOME TAXES

The provision for income taxes decreased to $2.3 million for the 2004 Six Months
from $2.5 million for the 2003 Six Months, a decrease of approximately $118,000,
or 5% as a result of lower pre-tax income. During the 2004 Six Months and the
2003 Six Months, 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 June 30, 2004, we had $21.9 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

15

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 June 30, 2004 were $3.7 million in a money market fund and $12
million in a short-term debt instrument issued by an agency of the U.S.
Government.

The increase in cash of $5.1 million from December 31, 2003 to June 30, 2004 is
due primarily to cash provided by operating activities of $9.3 million, offset
by $2.4 million of cash used for the purchase of fixed and intangible assets.
For the period ended June 30, 2004, we had $2.7 million of cash provided by
minority interests in earnings of subsidiary limited partnerships and made $2.5
million in distributions to minority investors in subsidiary limited
partnerships.

Our current ratio increased to 7.19 to 1.00 at June 30, 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 June 30, 2004, together with
the conversion of the remainder of our Convertible Subordinated Note to equity,
offset by an increase in accrued expenses largely related to severance.

At June 30, 2004, we had a debt-to-equity ratio of 0.0 to 1.00 compared to 0.06
to 1.00 at December 31, 2003. The decrease in the debt-to-equity ratio at June
30, 2004 compared to December 31, 2003 resulted from conversion of our remaining
Convertible Subordinated Note.

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 the principal balance of the convertible subordinated note
was converted into common stock, leaving a remaining balance of $2.3 million at
December 31, 2003. On January 12, 2004, $666,660 of the principal balance of the
convertible subordinated note was converted into common stock and on June 30,
2004 the remaining balance of $1.7 million of the convertible subordinated note
was converted into common stock.

In September 2001, the 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 year ended December 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 June 30, 2004, no shares have been
repurchased under the new share repurchase program.

FACTORS AFFECTING FUTURE RESULTS

Clinic Development

As of June 30, 2004, we had 254 clinics in operation, 12 of which were opened in
the 2004 Second Quarter. In conjunction with the CEO Resignation, our goal for
2004 is to refocus on traditional partner and profit sharing arrangements and to
deemphasize opening as many company stores. We therefore anticipate opening
between 38 and 43 clinics during 2004, rather than the 45 to 50 previously
projected, 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 second 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 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.

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Corporate Recruiting Costs

We expect to incur approximately $250,000 to $350,000 in the second half of 2004
for additional recruiting, severance and relocation costs primarily related to
the search for a Chief Executive Officer.

Annual Limit on Medicare Reimbursement Claims

For the quarter ended June 30, 2004, approximately 21% 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.

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;

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.

Most of 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. Upon the conversion of the
remaining of $1.7 million in Series C Convertible Subordinated Note into common
stock, described above, we have no funded debt. See Note 3 of the notes to
consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of Disclosure Controls and Procedures

As of 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

17

financial officer concluded that our disclosure controls and procedures are
effective in ensuring that information required to be disclosed in our periodic
SEC reports is recorded, processed, summarized and reported within the time
periods specified in the relevant SEC rules and forms. There have been no
material changes in our disclosure controls and procedures that could
significantly affect our disclosure controls and procedures subsequent to the
date of that evaluation.

(b) Changes in Internal Controls

In addition, we reviewed our internal control over financial reporting, 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. There have been no material changes in our internal
controls that could significantly affect our internal controls subsequent to the
date of that evaluation.

PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's annual meeting of shareholders was held on May 25, 2004 with
recess and reconvened session on June 2, 2004. At the May 25, 2004 meeting,
eight directors were elected by a vote of holders of the Company's Common
Shares, par value of $.01 per share, as outlined in the Company's proxy
statement. With respect to the election of directors, (a) proxies were solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934, (b) there
was no solicitation in opposition to management's nominees as listed in the
proxy statement, and (c) all of such nominees were elected.

The election of such directors and the results of those votes were as follows:

The 2003 Stock Incentive Plan was approved at the reconvened meeting on June 2,
2004. The results of those votes were as follows:

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

(a) Exhibits

EXHIBIT
NO. DESCRIPTION
------- -----------
31.1* Rule 13a-14(a)/15d-14(a) Certification of Interim Chief Executive
Officer

31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

31.3* Rule 13a-14(a)/15d-14(a) Certification of Controller

32* Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith

(b) Reports on Form 8-K

On April 29, 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 first quarter ended March
31, 2004.

On May 19, the Company filed a report on Form 8-K with the Securities and
Exchange Commission related to the Company's 2003 Stock Incentive Plan.

On May 26, the Company filed a report on Form 8-K with the Securities and
Exchange Commission related to the timing of the Annual Meeting of the Company's
shareholders.

On June 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
shareholders voted to approve the Company's 2003 Stock Incentive Plan.

On July 7, 2004, the Company filed a report on Form 8-K with the Securities and
Exchange Commission related to a press release announcing the resignation of Roy
Spradlin, President, Chief Executive Officer and Chairman of the Board.

On July 29, 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 first quarter ended June
30, 2004.

19

SIGNATURES

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

U.S. PHYSICAL THERAPY, INC.

Date: August 9, 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

20

INDEX OF EXHIBITS

* Filed herewith

21