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 SEPTEMBER 30, 2004

[ ] 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 November 5, 2004, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 12,439,455.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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

Consolidated Statements of Operations for the Three and Nine Months ended
September 30, 2004 and 2003 4

Consolidated Statements of Cash Flows for the Nine Months ended
September 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. 18

Item 4. Controls and Procedures. 18

PART II - OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18

Item 6. Exhibits. 19

Signatures 20

Index of Exhibits 21

Certifications 22-25

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 SHARE AND 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

SEPTEMBER 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 2003, the Company began to develop
new clinics under profit sharing arrangements with therapists. Such facilities
are operated through wholly owned subsidiaries. The Company recently announced
that it will increase its focus on developing new clinics through partnerships
and reduce its emphasis on profit sharing arrangements. The Company has
developed satellite clinic facilities as extensions of existing clinics, with
the result that some clinic groups operate more than one clinic location.

The accompanying unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions for Form 10-Q. However, the statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements.

The Company believes, and the Chief Executive Officer, Chief Financial Officer
and Controller 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 nine months ended September 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.

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 $26,000 and $61,000 of
compensation cost in net income for the three and nine months ended September
30, 2004, respectively. No compensation cost related to stock plans was
recognized for the quarter ended September 30, 2004. No compensation cost
related to stock plans was recognized for the quarter and period ended September
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.

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 nine months ended September 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

Goodwill

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. During the three and nine months ended September 30, 2004, the
Company recognized an approximate $20,000 in impairment of goodwill related to
the closure of a clinic.

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

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 primarily related to contractual allowances,
bad debt reserves and goodwill recoverability 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

8

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.

On May 19, 2004, the FASB issued FASB Staff Position 106-2, 'Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003' ("FSP 106-2"), which requires measures of the
accumulated postretirement benefit obligation and net periodic postretirement
benefit costs to reflect the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. FSP 106-2 supersedes FSP 106-1 and is
effective for interim or annual reporting periods beginning after June 15, 2004.
The adoption of FSP 106-2 did not have an impact on the Company's financial
condition or results of operations.

2. EARNINGS PER SHARE

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

Options to purchase 606,980 and 509,919 shares for the three months ended
September 30, 2004 and September 30, 2003, respectively, and 445,589 and 491,790
shares for the nine months ended September 30, 2004 and September 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.

9

3. NOTES PAYABLE

In May 1994, the Company issued a $3 million 8% Convertible Subordinated Note,
Series C, due June 30, 2004 (the "Series C Note"). The Series C Note 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.

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. For the three and nine months ending September 30,
2004, the Company purchased 50,000 shares of common stock at a cost of $657,000.
As of September 30, 2004, the Company may purchase an additional 17,600 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. Based on the clinic's having met specified criteria, the
Company paid additional consideration of $31,000 and $41,000 in August 2003 and
2004, respectively. 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 a 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 of which $34,000 was paid on August 1,
2004 and $70,000 is payable on August 1, 2005.

On April 28, 2004, the Company purchased a 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 a 17.5% minority interest in a limited
partnership for $25,000 and agreed to pay the minority partner $11,000 in
undistributed earnings.

On September 30, 2001, the Company purchased a 35% minority interest in a
limited partnership which owns nine clinics in Michigan for consideration
aggregating $2,111,000. Additional purchase consideration was contingent upon
future clinic performance. In September 2004, the Company paid additional
consideration of $105,000 based on the clinics having met specified criteria.
The consideration consisted of $32,000 cash and 5,440 shares of common stock
with a value of $73,000. The common stock consideration is a non-cash investing
and financing transaction and has been excluded from the consolidated statements
of cash flows.

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.

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.

CLOSURE COSTS

During the three months ending September 30, 2004, management decided to close
eight unprofitable clinics after a thorough review of the Company's clinics. The
Company recognized $815,000 in closure costs relating to these clinics. The
breakdown of these charges by major type of cost follows:

Lease obligations represent the future payments remaining under lease agreements
adjusted for estimated early settlements and severance costs primarily represent
the costs associated with the settlement of employment contracts.

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 76 wholly-owned clinics without any
minority interest.

Pursuant to EITF 00-23, the Company classified $201,000 and $156,000 for the
quarters ended September 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
$599,000 and $285,000 for the nine months ended September 30, 2004 and 2003,
respectively. As of September 30, 2004 and December 31, 2003, $530,000 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 $153,000 and $220,000 were recognized for
the three and nine months ending September 30, 2004 relating to a new CEO
search.

11

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 September 30, 2004, we operated 254
outpatient physical and occupational therapy clinics in 35 states. The average
age of our clinics at September 30, 2004, was 4.02 years. We have developed 248
of the clinics and acquired six. Since inception, we have sold four clinics,
closed 33 facilities due to substandard clinic performance, and consolidated
three clinics with other existing clinics. In 2003, we opened 48 new clinics.
During the first nine months of 2004 we have opened 24 new clinics, with the
goal of opening between 34 and 38 clinics by the end of 2004. During 2003, eight
clinics were closed and for the nine months ending September 30, 2004, we closed
12 clinics.

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 September 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 October 13, 2004, the Company's board of directors promoted Chris
Reading to President and Chief Executive Officer and Larry McAfee to Executive
Vice President. Mr. McAfee also remains Chief Financial Officer. Both
appointments were effective November 1, 2004. Messrs. Reading and McAfee have
also been elected to the Company's Board of Directors expanding the board from
eight to ten members.

12

RESULTS OF OPERATIONS

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

o Net revenues rose 10.6% to $29.7 million for the three months ended
September 30, 2004 ("2004 third quarter") from $26.9 million for the
three months ended September 30, 2003 ("2003 third quarter") due to an
8.2% increase in patient visits to 305,000 from 282,000 combined with
a 3.1% increase from $93.14 to $96.06 in net patient revenue per
visit.

o Earnings were $0.08 per diluted share for the 2004 third quarter as
compared to $0.15 for the 2003 third quarter. Net income for the 2004
third quarter decreased to $1.1 million from $1.9 million, or 44.6%
compared to the 2003 third quarter. Total diluted shares outstanding
were 12.5 million for both 2004 third quarter and 2003 third quarter.

NET PATIENT REVENUES

o Net patient revenues increased to $29.3 million for the 2004 third
quarter from $26.2 million for the 2003 third quarter, an increase of
$3.0 million, or 11.5%, primarily due to an 8.2% increase in patient
visits to 305,000 and a $2.92 increase in patient revenues per visit
to $96.06. The increase in patient revenues per visit was primarily
due to contractual fee increases.

o Total patient visits increased 23,000 or 8.2% to 305,000 for the 2004
third quarter from 282,000 for the 2003 third quarter. The growth in
visits for the 2004 third quarter was primarily attributable to an
increase of approximately 15,500 visits in clinics opened between
October 1, 2003 and September 30, 2004 (the "New Clinics") and to an
increase of approximately 7,500, or a 2.7% in visits for clinics
opened before October 1, 2003 (the "Mature Clinics").

o Net patient revenues from New Clinics accounted for approximately 50%
of the total revenue increase, or approximately $1.5 million. The
remaining increase of $1.5 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 contractual programs and workers'
compensation. 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 76% for the 2004 third
quarter and 69% for the 2003 third quarter. Excluding closure costs and gain or
loss on sale or disposal of fixed assets, clinic operating costs were 73% for
the 2004 third quarter and 69% for the 2003 third quarter.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $15.1 million for the 2004 third
quarter from $13.4 million for the 2003 third quarter, an increase of
$1.8 million, or 13%. Approximately 55% of the increase, or $968,000 was
attributable to the New Clinics. The remaining 45% increase, or $832,000
was attributable to the Mature Clinics. Salaries and related costs as a
percent of revenues were 51% for the 2004 third quarter and 50% for the
2003 third quarter.

CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other costs increased to $6.2 million for the
2004 third quarter from $5.3 million for the 2003 third quarter, an
increase of $918,000, or 18%. Approximately 66% of the increase, or
$604,000, was attributable to the New Clinics. The remaining increase of
34%, or $314,000 was attributable to the Mature Clinics. Rent, clinic
supplies and other costs as a percent of revenues was 21% for the 2004
third quarter and 20% for the 2003 third quarter.

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CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts increased to $316,000 for the 2004
third quarter from ($45,000) for the 2003 third quarter, an increase of
$361,000. The bad debt provision was decreased by $340,000 in
September 2003 to reverse previous estimates which were determined to not
be required. Thus the bad debt expense for the third quarter of 2003 was
a net recovery. The provision for doubtful accounts as a percent of net
patient revenues was 1.0% for the 2004 third 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.

CLOSURE COSTS

In the 2004 third quarter, we recognized a loss of $815,000 related to
the closure of eight clinics. See Note 5 of the Notes to Consolidated
Financial Statements for further discussion.

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
$4.2 million for the 2004 third quarter from $3.8 million for the 2003 third
quarter, an increase of $407,000, or 11%. Corporate office costs increased due
to increased recruiting fees of $208,000 primarily related to the CEO search.
There were also increases in legal and accounting fees of $219,000 primarily
due to the implementation of requirements of the Sarbanes-Oxley Act of 2002.
Corporate office costs as a percent of net revenues were 14% for both the 2004
third quarter and the 2003 third quarter.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships were $1.3
million for the 2004 third quarter and $1.4 million for the 2003 third quarter.
As a percentage of operating income, minority interest was 44% for the 2004
third quarter and 31% for the 2003 third quarter. The increase is attributable
to the inclusion of $815,000 in clinic closure costs in the 2004 third quarter.

PROVISION FOR INCOME TAXES

The provision for income taxes was $655,000 for the 2004 third quarter and $1.2
million for the 2003 third quarter. The effective state and federal tax rate
accrued for the 2004 third quarter was 38.3% and 37.8% for the 2003 third
quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003

o Net revenues rose 12% to $88.6 million from $78.9 million primarily
due to an 8% increase in patient visits to 902,000 and a 4% increase
in net patient revenues per visit to $96.31.

o Net income declined 18% to $4.9 million from $5.9 million.

o Earnings per share decreased 17% to $0.40 per diluted share from $0.48
per diluted share. Total diluted shares outstanding at September 30,
2004 and 2003 were 12.4 million and 12.5 million, respectively.

NET PATIENT REVENUES

o Net patient revenues increased to $86.9 million for the nine months
ended September 30, 2004 ("2004 nine months") from $77.1 million for
the nine months ended September 30, 2003 ("2003 nine months"), an
increase of $9.8 million, or 13%, primarily due to an 8% increase in
patient visits to 902,000 and a $3.64 increase in patient revenues per
visit to $96.31. The increase in patient revenues per visit was
primarily due to contractual fee increases.

o Total patient visits increased 70,000, or 8%, to 902,000 for the 2004
nine months from 832,000 for the 2003 nine months. The growth in
visits for the period was attributable to an increase of approximately
29,000 visits in New Clinics together with a 41,000 or 5% increase in
visits for Mature Clinics.

o Net patient revenues from New Clinics accounted for approximately 28%
of the total increase, or approximately $2.8 million. The remaining
increase of $7.0 million in net patient revenues was from Mature
Clinics.

14

CLINIC OPERATING COSTS

Clinic operating costs were 72% of net revenues for the 2004 nine months and 70%
of net revenues for the 2003 nine months. Excluding closure costs and gain or
loss on sale or disposal of fixed assets, clinic operating costs remained the
same for both periods.

CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS

Salaries and related costs increased to $44.2 million for the 2004 Nine
months from $38.7 million for the 2003 Nine months, an increase of $5.6
million, or 14%. Approximately 32% of the increase, or $1.8 million, was
attributable to the New Clinics. The remaining 68% increase, or $3.8
million, was due higher costs at various Mature Clinics. Salaries and
related costs as a percent of net revenues was 50% for the 2004 nine months
and 49% for the 2003 nine months.

CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other costs increased to $18.2 million for the
2004 nine months from $15.6 million for the 2003 nine months, an increase
of $2.6 million, or 16%. Approximately 49% of the increase or $1.3 million,
was attributable to the New Clinics and the other $1.3 million was
attributable to various Mature Clinics. Rent, clinic supplies and other
costs as a percent of net revenues was 21% and 20% for the 2004 nine months
and the 2003 nine months, respectively.

CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts increased to $1 million for the 2004
nine months from $711,000 for the 2003 nine months, an increase of $316,000
or 44%. Approximately 21% of the increase or $67,000 was due to the New
Clinics. The provision for doubtful accounts as a percent of net patient
revenues was 1.2% for the 2004 nine months from 0.9% for the 2003 nine
months. Our allowance for bad debts as a percent of total patient accounts
receivable was 15% at September 30, 2004, as compared to 20% at December
31, 2003.

CLOSURE COSTS

In the 2004 third quarter, we recognized a loss of $815,000 related to the
closure of eight clinics. See Note 5 of the Notes to Consolidated Financial
Statements for further discussion.

GAIN ON SALE OF CLINIC ASSETS

On June 30, 2004, we recognized a gain of $443,000 primarily related to
the sale of a clinic. See Note 5 of the Notes to Consolidated Financial
Statements for further discussion.

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 $12.8 million for the 2004 nine months from $10.3 million for the
2003 nine months, an increase of $2.5 million, or 23%. Salary expense increased
due to a one time charge of $650,000 related the CEO resignation along with
$220,000 in recruiting fees primarily related to the CEO search. Additionally,
there was an increase of $325,000 related to the new Chief Operating and
Financial Officers and corporate bonus accruals of $300,000. There was also
additional legal expense of $394,000 due to the sale of a clinic, a new stock
option plan and billings for various other legal issues. Accounting fees
increased by $333,000 primarily due to implementing requirements of the
Sarbanes-Oxley Act of 2002, increased tax compliance and auditing fees.
Corporate office costs as a percent of net revenues increased to 14% for the
2004 nine months from 13% for the 2003 nine months.

MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS

Minority interests in earnings of subsidiary limited partnerships increased 3.5%
to $4.1 million for the 2004 nine months from $3.9 million for the 2003 nine
months. As a percentage of operating income, minority interest increased to 34%
for the 2004 nine months from 29% for the 2003 nine months.

15

PROVISION FOR INCOME TAXES

The provision for income taxes decreased to $3.0 million for the 2004 nine
months from $3.6 million for the 2003 nine months, a decrease of approximately
$617,000, or 17% as a result of lower pre-tax income. During the 2004 nine
months and the 2003 nine 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 September 30, 2004, we had $24.8 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 September
30, 2004 were $2.0 million in a money market fund and $16.6 million in a
short-term debt instrument issued by an agency of the U.S. Government.

The increase in cash of $8.0 million from December 31, 2003 to September 30,
2004 is due primarily to cash provided by operating activities of $13.9 million,
offset by $3.0 million of cash used for the purchase of fixed and intangible
assets and $2.9 million used in financing activities. For the period ended
September 30, 2004, we had $4.1 million of cash provided by minority interests
in earnings of subsidiary limited partnerships and made $3.9 million in
distributions to minority investors in subsidiary limited partnerships.

Our current ratio increased to 8.52 to 1.00 at September 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 September 30, 2004,
together with the conversion of the remainder of our Series C Convertible
Subordinated Note to equity, offset by an increase in accrued expenses largely
related to the closure of eight clinics.

At September 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
September 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 Series C 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 Series C Convertible Subordinated Note was converted
into common stock and on June 30, 2004, the remaining balance of $1.7 million of
the Series C 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.
There is no expiration for this Board authorization and shares purchased are
held as treasury shares and may be used for valid corporate purposes or retired
as the Board deems advisable. During the years ended December 31, 2002 and 2003,
we purchased 795,600 and 1,800 shares of our common stock on the open market for
$10.5 million and $20,000, respectively. During the nine months ended September
30 2004, we purchased 50,000 shares of common stock on the open market for a
total of $657,000.

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 September 30, 2004, no shares have
been repurchased under the new share repurchase program.

16

FACTORS AFFECTING FUTURE RESULTS

Clinic Development

As of September 30, 2004, we had 254 clinics in operation, 8 of which were
opened in the 2004 third quarter. The Company recently announced that our goal
for 2004 is to refocus on traditional partner and profit sharing and to
deemphasize opening as many 100% owned company clinics. We anticipate opening
between 34 and 38 clinics during 2004, 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.

Annual Limit on Medicare Reimbursement Claims

For the quarter ended September 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 availability of qualified physical and occupational therapists;

o competition;

o federal and state regulations;

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

o availability, terms, and use of capital;

o acquisitions; 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.

17

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 $1.7 million of the 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 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 Control Over Financial Reporting

Beginning in 2003, we initiated a company-wide review of our internal controls
over financial reporting as part of the process of preparing for compliance
with Section 404 and as a complement to our existing overall program of
internal controls over financial reporting. This is an on-going process.

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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In September 2004, the Company issued 5,440 restricted shares of common stock
with a value of $73,000 as part of additional purchase consideration paid in
connection with the Company's purchase on September 30, 2001 of a 35% minority
interest in a limited partnership which owns nine clinics in Michigan. The
Company's obligation to pay the additional consideration was based on the
clinics having met specified criteria. This issuance was part of a privately
negotiated transaction and was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.

The following table provides information regarding shares of the Company's
common stock repurchased by the Company during the quarter ended September 30,
2004.

(1) In the Company's Form 10-K for the year ended December 31, 2001, filed with
the SEC on April 1, 2002, the Company announced that in September 2001 the Board
had authorized the repurchase of up to 1,000,000 shares of the Company's
outstanding common stock. All shares of common stock repurchased by the Company
during the quarter ended September 30, 2004 were purchased under this program.
There are 17,600 shares still available for repurchase

18

under this program and it does not have an expiration date. In the Company's
Form 10-Q for the quarter ended March 31, 2003, filed with the SEC on May 5,
2003, the Company announced that on February 26, 2003 the Board had authorized a
new share repurchase program of up to 250,000 shares of the Company's
outstanding common stock. No shares have yet been purchased under this program
and it does not have an expiration date.

ITEM 6. EXHIBITS.

(a) Exhibits

* Filed herewith

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: November 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