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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO_____
COMMISSION FILE NUMBER 1-11151
U.S. PHYSICAL THERAPY, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 76-0364866
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1300 WEST SAM HOUSTON PARKWAY SOUTH, SUITE 300,
HOUSTON,TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 May 6, 2005, the number of shares outstanding (issued less treasury stock)
of the registrant's common stock, par value $.01 per share, was: 11,884,857.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 3
Consolidated Statements of Net Income for the three months ended March
31, 2005 and 2004 4
Consolidated Statements of Cash Flows for the three months ended March
31, 2005 and 2004 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. 15
Item 4. Controls and Procedures. 15
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
16
Item 6. Exhibits 16
Signatures 17
Certifications 19-22
2
ITEM 1. FINANCIAL STATEMENTS
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2005 2004
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 20,863 $ 20,553
Patient accounts receivable, less allowance for doubtful
accounts of $2,111 and $2,447, respectively................ 17,964 17,669
Accounts receivable -- other.................................. 710 549
Other current assets.......................................... 1,477 1,835
-------- --------
Total current assets.................................. 41,014 40,606
Fixed assets:
Furniture and equipment....................................... 22,668 22,781
Leasehold improvements........................................ 13,966 13,912
-------- --------
36,634 36,693
Less accumulated depreciation and amortization................ 23,473 23,043
-------- --------
13,161 13,650
Goodwill........................................................ 6,640 6,127
Other assets.................................................... 1,407 1,225
-------- --------
$ 62,222 $ 61,608
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade..................................... $ 1,155 $ 1,181
Accrued expenses.............................................. 6,523 4,367
Notes payable................................................. 70 70
-------- --------
Total current liabilities ............................ 7,748 5,618
Deferred rent................................................... 1,421 1,518
Other long-term liabilities..................................... 1,024 982
-------- --------
Total liabilities..................................... 10,193 8,118
Minority interests in subsidiary limited partnerships........... 3,282 3,311
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized, no
shares issued and outstanding............................ -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
13,445,242 and 13,436,557 shares issued at March 31, 2005
and December 31, 2004, respectively....................... 134 134
Additional paid-in capital.................................... 32,646 32,534
Retained earnings............................................. 37,646 35,617
Treasury stock at cost, 1,560,385 and 1,320,503 shares held at
March 31, 2005 and December 31, 2004, respectively......... (21,679) (18,106)
-------- --------
Total shareholders' equity............................ 48,747 50,179
-------- --------
$ 62,222 $ 61,608
======== ========
See notes to consolidated financial statements.
3
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2005 2004
------- -------
Net patient revenues................................... $30,352 $27,715
Management contract revenues........................... 503 566
Other revenues......................................... 23 17
------- -------
Net revenues........................................... 30,878 28,298
Clinic operating costs:
Salaries and related costs........................... 15,800 14,619
Rent, clinic supplies and other...................... 6,336 6,002
Provision for doubtful accounts...................... 312 397
------- -------
22,448 21,018
Loss on sale or disposal of fixed assets............... 42 --
Corporate office costs................................. 4,041 3,623
------- -------
Operating income....................................... 4,347 3,657
Interest (income) expense, net......................... (93) 17
Minority interests in subsidiary limited partnerships.. 1,187 1,182
------- -------
Income before income taxes............................. 3,253 2,458
Provision for income taxes............................. 1,224 926
------- -------
Net income............................................. $ 2,029 $ 1,532
======= =======
Basic earnings per common share........................ $ 0.17 $ 0.13
======= =======
Diluted earnings per common share...................... $ 0.17 $ 0.13
======= =======
Shares used in computation:
Basic earnings per common share..................... 11,963 11,472
======= =======
Diluted earnings per common share................... 12,108 12,364
======= =======
See notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
---- ----
OPERATING ACTIVITIES
Net income................................................................... $ 2,029 $ 1,532
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................................. 1,063 905
Minority interests in earnings of subsidiary limited partnerships.......... 1,187 1,182
Provision for doubtful accounts............................................ 312 397
Loss on sale or abandonment of fixed assets................................ 42 --
Tax benefit from exercise of stock options................................. 16 23
Deferred rent.............................................................. (97) --
Deferred income taxes...................................................... (27) 226
Other...................................................................... -- 3
Changes in operating assets and liabilities:
Increase in patient accounts receivable.................................... (607) (2,052)
Increase in accounts receivable -- other................................... (161) (90)
Decrease (increase) in other assets........................................ 203 (26)
Increase in accounts payable and accrued expenses.......................... 2,130 1,011
Increase in other liabilities.............................................. 42 93
------- -------
Net cash provided by operating activities.................................... 6,132 3,204
INVESTING ACTIVITIES
Purchase of fixed assets..................................................... (629) (591)
Purchase of minority interests, included in goodwill......................... (513) --
Other........................................................................ 13 3
------- -------
Net cash used in investing activities........................................ (1,129) (588)
FINANCING ACTIVITIES
Distributions to minority investors in subsidiary limited partnerships....... (1,216) (1,002)
Repurchase of common stock................................................... (3,573) --
Proceeds from exercise of stock options...................................... 96 3
------- -------
Net cash used in financing activities........................................ (4,693) (999)
Net increase in cash and cash equivalents.................................... 310 1,617
Cash and cash equivalents -- beginning of period............................. 20,553 16,822
------- -------
Cash and cash equivalents - end of period.................................... $20,863 $18,439
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes............................................................... $ 481 $ 120
Interest................................................................... $ -- $ 29
Non-cash transactions during the period:
Conversion of Series C Notes into common stock............................. $ -- $ 667
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of U.S. Physical
Therapy, Inc. and its subsidiaries. All significant intercompany transactions
and balances have been eliminated. The Company primarily operates through
subsidiary clinic partnerships, in which the Company generally owns a 1% general
partnership interest and a 64% limited partnership interest . The managing
therapist of each clinic owns the remaining limited partnership interest in the
majority of the clinics (hereinafter referred to as "Traditional Partnership
Model" or "Clinic Partnership"). To a lesser extent, the Company operates some
clinics, through wholly-owned subsidiaries, under profit sharing arrangements
with therapists (hereinafter referred to as "Wholly-Owned Facilities").
Since mid 2004, we have shifted our focus back to developing new clinics through
our Traditional Partnership Model and reduced our emphasis on Wholly-Owned
Facilities. Primarily due to new therapists partners having existing
relationships in place, clinics formed under the Traditional Partnership Model
typically require less management time, have a faster ramp up and higher average
patient visits per clinic and are more profitable than Wholly-Owned Facilities.
We continue to seek to attract physical and occupational therapists who have
established relationships with physicians by offering therapists a competitive
salary; a bonus based on his or her clinic's net revenue; and a share of the
profits of the clinic operated by that therapist. In addition, we have developed
satellite clinic facilities of existing clinics, with the result that some
clinic groups operate more than one clinic location. In 2005, we intend to
continue to focus on developing new clinics through our Traditional Partnership
Model and on opening satellite clinics where deemed appropriate. In addition, we
will evaluate acquisition opportunities in select markets.
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. 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, 2004.
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.
Operating results for the three months ended March 31, 2005 are not necessarily
indicative of the results the Company expects for the entire year. Please also
review the Risk Factors section included in our Form 10-K for the year ended
December 31, 2004.
SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company, pursuant to its
investment policy, invests its cash primarily in deposits with major financial
institutions, in highly rated commercial paper, short-term United States
treasury obligations, United States and municipal government agency securities
and United States government sponsored enterprises. The Company held
approximately $14.4 million and $15.6 million in highly liquid investments at
March 31, 2005 and December 31, 2004, respectively.
The Company maintains its cash and cash equivalents at financial institutions.
The combined account balances at several institutions typically exceed Federal
Deposit Insurance Corporation ("FDIC") insurance coverage and, as a result,
there is a concentration of credit risk related to amounts on deposit in excess
of FDIC insurance coverage. Management believes that this risk in not
significant.
6
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 shorter of the related lease term or
estimated useful lives of the assets, which is generally five years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews property and equipment and intangible assets for impairment
when certain 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.
GOODWILL
Goodwill represents the excess of costs over the fair value of the acquired
business assets. Historically, goodwill has been derived from the purchase of
minority interests in certain partnerships formed prior to January 18, 2001. See
discussion of minority interests below. Effective January 1, 2002, goodwill and
other intangible assets with indefinite lives are no longer amortized. The fair
value of goodwill and other intangible assets with indefinite lives are tested
for impairment annually and upon the occurrence of certain events, and are
written down to fair value if considered impaired. The Company evaluates
goodwill for impairment on an annual basis by comparing the fair value of its
reporting segment units to their carrying values. At March 31, 2005 and December
31, 2004, the Company had approximately $6.6 million and $6.1 million,
respectively, of unamortized goodwill. During the quarters ended March 31, 2005
and 2004, no charges were recorded related to impairment of goodwill.
MINORITY INTERESTS
In the majority of the Company's partnership agreements, the therapist partner
begins with a 20% profit interest in his or her clinic partnership, which
increases by 3% at the end of each year thereafter up to a maximum of 35%.
Within the balance sheet and statement of net income, the Company records
partner therapists' profit interest in the clinic partnerships as minority
interests in subsidiary limited partnerships. The Emerging Issues Task Force
("EITF") issued EITF 00-23, "Issues Related to the Accounting for Stock
Compensation under APB No. 25 and FASB Interpretation No. 44" (EITF 00-23),
which provides specific accounting guidance relating to various incentive
compensation issues. The Company reviewed EITF 00-23 with respect to the
partnerships' structure and the accounting for minority interests and concluded
that for partnerships formed after January 18, 2001, EITF 00-23 requires the
Company to expense as compensation rather than as a minority interest in
earnings, the clinic partners' interest in profits. Moreover, EITF 00-23
requires that the Company expense as compensation rather than capitalizing as
goodwill, the purchase of minority interests in the partnerships for clinic
partnerships formed after January 18, 2001.
For the quarters ended March 31, 2005 and 2004, the Company expensed $1,446,000
and $1,404,000, respectively, of minority interests. Of the total expensed,
$259,000 and $222,000, respectively, was related to the minority interests in
earnings of subsidiary limited partnerships for certain partnerships formed
after January 18, 2001, and expensed as salaries and related costs pursuant to
EITF 00-23. The remaining $1,187,000 and $1,182,000, respectively, related to
partnerships formed prior to January 18, 2001 and was reported as a separate
line item in our statements of net income. As of March 31, 2005 and December 31,
2004, $566,000 and $490,000, respectively, in undistributed minority interests
related to certain partnerships formed after January 18, 2001 were classified as
other long-term liabilities. The undistributed minority interests related to
certain partnerships formed prior to January 18, 2001 are included in the line
item in our balance sheets entitled minority interest in subsidiary limited
partnerships.
REVENUE RECOGNITION
Revenues are recognized in the period in which services are rendered. 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
the terms of payor contracts and historical experience. Patient revenues are
shown net of contractual adjustments in the statement of net income. The
provision for doubtful accounts is included in clinic operating cost in the
statement of net income. Net accounts receivable includes only those amounts the
Company estimates to be collectible.
7
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 was adjusted up to $1,590 (the
"Adjusted Medicare Limit") and the full amount available for the remaining four
months of 2003. Effective December 8, 2003, a moratorium was placed on the
Adjusted Medicare Limit for the remainder of 2003 and for years 2004 and 2005.
The Medicare Limit is scheduled to be reinstated in 2006 with the amount yet
undetermined.
Laws and regulations governing the Medicare program are complex and subject to
interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing that would have a
material effect on the Company's financial statements as of March 31, 2005.
Compliance with such laws and regulations can be subject to future government
review and interpretation, as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare program.
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.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and notes payable -- current
portion approximate their fair values due to the short-term maturity of these
financial instruments.
SEGMENT REPORTING
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by chief
operating decision makers in deciding how to allocate resources and in assessing
performance. The Company identifies operating segments based on management
responsibility and believes it meets the criteria for aggregating its operating
segments into a single reporting segment.
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.
SELF-INSURANCE PROGRAM
The Company utilizes a self-insurance plan for its employee group health
insurance coverage administered by a third party. Predetermined loss limits have
been arranged with the insurance company to limit the Company's maximum
liability and cash outlay. Accrued expenses include the estimated incurred but
unreported costs to settle unpaid claims and estimated future claims.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
current year presentation. The Consolidated Statement of Net Income for the
three months ended March 31, 2005 reflects a reclassification of interest income
from net revenues to interest income/expense, net.
8
STOCK OPTIONS
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock
options. Under this method, the compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation
and FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123, established accounting
and disclosure requirements using fair-value-based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting
standards, the Company has elected to apply the intrinsic-value-based method of
accounting described above, and has adopted only the disclosure requirements of
Statement 123, as amended.
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 that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. For the three months
ended March 31, 2005 and 2004, the Company's pro forma information follows (in
thousands except for earnings per share information):
2005 2004
---- ----
Net income, as reported $ 2,029 $ 1,532
Deduct: Total stock-based compensation expense
determined under the fair value method, net of taxes (163)
(367)
--------- ---------
Pro forma net income $ 1,866 $ 1,165
========= =========
Earnings per share:
Actual basic earnings per common share $ 0.17 $ 0.13
Actual diluted earnings per common share $ 0.17 $ 0.13
Pro forma basic earnings per common share $ 0.16 $ 0.10
Pro forma diluted earnings per common share $ 0.15 $ 0.10
RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS
In May 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.
In December 2004, the FASB issued Revised SFAS 123, "Share Based Payment" ("SFAS
123R"), which is a revision of SFAS 123 and supersedes APB 25. Among other
items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of
accounting, and requires the Company to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award - the requisite service period (usually the vesting
period). SFAS 123R requires that the grant-date fair value of employee share
options and similar instruments be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). Currently,
SFAS 123R is effective as of the beginning of the first interim or annual period
of the Company's first fiscal year beginning on or after June 15, 2005. For the
Company, SFAS 123R is effective for its first quarter which begins January 1,
2006. SFAS 123R permits companies to adopt its requirements using either a
"modified prospective" method, or a "modified retrospective" method. Under the
"modified prospective" method, compensation cost is recognized in the financial
9
statements beginning with the effective date, based on the requirements of SFAS
123R for all share-based payments granted after that date, and for all unvested
awards granted prior to the effective dated. Under the "modified retrospective"
method, the requirements are the same as under the "modified prospective"
method, but also permits entities to restate financial statements of previous
periods based on proforma disclosures made in accordance with SFAS 123 and SFAS
148.
The Company currently utilizes Black-Scholes, a standard option pricing model,
to measure the fair value of stock options granted to employees. While SFAS 123R
permits entities to continue to use such a model, the standard also permits the
use of a "lattice" model. The Company has not yet determined the model it will
use to measure the fair value of employee stock options upon the adoption of
SFAS 123R. Also, SFAS 123R requires that the benefits associated with the tax
deductions attributable to the grant of stock options that are in excess of
recognized compensation cost be reported as a financing cash flow, rather than
as an operating cash flow as required under current literature. The requirement
will reduce net operating cash flows and increase net financing cash flows in
periods after the effective date. These future amounts cannot be estimated,
because they depend on, among other things, when employees exercise stock
options. The Company currently expects to adopt SFAS 123R effective January 1,
2006; however, the Company is evaluating its method of estimating the grant-date
fair value and which of the aforementioned adoption methods it will use.
2. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the three months
ended March 31, 2005 and 2004 are as follows (in thousands, except per share
data):
FOR THE THREE MONTHS ENDED
MARCH 31,
2005 2004
---- ----
Numerator:
Net income $ 2,029 $ 1,532
------- -------
Numerator for basic earnings per share 2,029 1,532
Effect of dilutive securities:
Interest on convertible subordinated notes payable -- 23
------- -------
Numerator for diluted earnings per share-income available to
common shareholders after assumed conversions $ 2,029 $ 1,555
======= =======
Denominator:
Denominator for basic earnings per share--weighted-average shares 11,963 11,472
Effect of dilutive securities:
Stock options 145 368
Convertible subordinated notes payable -- 524
------- -------
Dilutive potential common shares 145 892
------- -------
Denominator for diluted earnings per share--adjusted weighted-
average shares and assumed conversions 12,108 12,364
======= =======
Basic earnings per common share $ 0.17 $ 0.13
======= =======
Diluted earnings per common share $ 0.17 $ 0.13
======= =======
Options to purchase 177,000 and 649,000 shares for the three months ended March
31, 2005 and 2004, 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.
10
3. PURCHASE OF COMMON STOCK
In September 2001, the Board of Directors ("Board") authorized the Company to
purchase, in the open market or in privately negotiated transactions, up to
1,000,000 shares of its common stock. On February 26, 2003 and on December 8,
2004, the Board authorized share repurchase programs of up to 250,000 and
500,000 additional shares, respectively, of the Company's outstanding common
stock. As of March 31, 2005, there are 204,315 shares remaining that can be
purchased under these programs. As there is no expiration for the Board
authorizations, 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. Shares purchased are held as treasury shares and may be
used for such valid corporate purposes or retired as the Board considers
advisable. During the quarter ended March 31, 2005, the Company purchased
239,882 shares of its common stock on the open market for $3.6 million.
4. ACQUISITIONS
ACQUISITIONS OF MINORITY INTERESTS
During the quarter ended March 31, 2005, the Company purchased a 20% minority
interest in a limited partnership for $53,466 and a 35% minority interest in
another limited partnership for $462,827. The Company paid the minority partners
$14,273 and $37,773, respectively, in undistributed earnings. The $53,466 was
paid during the March 2005 quarter and the $462,827 was paid in April 2005.
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 allocations during the first year
after completing the purchase.
The changes in the carrying amount of goodwill consisted of the following (in
thousands):
QUARTER ENDED MARCH 31,
-----------------------
2005 2004
---- ----
Beginning balance $6,127 $5,685
Goodwill acquired during the period 513 --
------ ------
Ending balance $6,640 $5,685
====== ======
5. CLOSURE COSTS
In the third quarter of 2004, management decided to close eight unprofitable
clinics after a thorough review of the Company's then existing clinics. As of
December 31, 2004, the Company had a remaining accrual related to lease
liabilities on certain of these eight clinics of $250,000. During the quarter
ended March 31, 2005, the Company reduced this liability by $110,000 primarily
due to lease payments being made and settlement of lease agreements. As of March
31, 2005, the Company has $140,000 accrued related to remaining lease
obligations for certain of these eight clinics. Lease obligations represent the
future payments remaining under lease agreements adjusted for estimated early
settlements.
6. 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 Series C 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 and 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 balance of
$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.
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
preventive and post-operative care for a variety of orthopedic-related disorders
and sports-related injuries, treatment for neurologically-related injuries and
rehabilitation of injured workers. At March 31, 2005, we operated 269 outpatient
physical and occupational therapy clinics in 36 states. The average age of our
clinics at March 31, 2005, was 4.6 years. We have developed 263 of the clinics
and acquired six. To date, we have sold five clinics, closed 34 facilities and
consolidated four clinics with other existing clinics. During the first quarter
of 2005, we added six new clinics and dissolved one clinic.
In addition to our owned clinics, we also manage physical therapy facilities for
third parties, primarily physicians, with five third-party facilities under
management as of March 31, 2005.
SELECTED OPERATING AND FINANCIAL DATA
The following table presents selected operating and financial data that we
believe are key indicators of our operating performance:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
-------- --------
Number of clinics at the end of the period 269 244
Working days 64 64
Average visits per day per clinic 18.4 18.7
Total patient visits 313,675 290,248
Net patient revenue per visit $ 96.76 $ 95.49
Statements of operations per visit:
Net revenues $ 98.44 $ 97.50
Salaries and related costs (50.37) (50.37)
Rent, clinic supplies and other (20.20) (20.68)
Provision for doubtful accounts (1.00) (1.37)
Loss on sale or disposal of fixed assets (.13) --
-------- --------
Contribution from clinics 26.74 25.08
Corporate office costs (12.88) (12.48)
-------- --------
Operating income $ 13.86 $ 12.60
======== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2004
- Net revenues rose 9.1% to $30.9 million, from $28.3 million, due to
an 8.1% increase in patient visits from 290,000 to 314,000 combined
with a 1.3% increase from $95.49 to $96.76 in net patient revenue
per visit.
- Earnings were $0.17 per diluted share for the three months ended
March 31, 2005 ("2005 First Quarter") as compared to $0.13 for the
three months ended March 31, 2004 ("2004 First Quarter"). Net income
for the 2005 First Quarter was $2.0 million versus $1.5 million for
the same period last year. Total diluted shares were 12.1 million
for the 2005 First Quarter and 12.4 million for the 2004 First
Quarter.
NET PATIENT REVENUES
- Net patient revenues increased to $30.3 million for the 2005 First
Quarter from $27.7 million for the 2004 First Quarter, an increase
of $2.6 million, or 9.5%, due to a 8.1% increase in patient visits
to 314,000 and a $1.27 increase in net patient revenues per visit to
$96.76.
12
- Total patient visits increased 23,400, or 8.1%, to 314,000 for the
2005 First Quarter from 290,000 for the 2004 First Quarter. The
growth in visits for the year was attributable to an increase of
approximately 19,900 visits or 6.9% in clinics opened between April
1, 2004 and March 31, 2005 (the "New Clinics") together with a 3,500
or 1.2% increase in visits for clinics opened before April 1, 2004
(the "Mature Clinics").
- Net patient revenues from New Clinics accounted for approximately
73% of the total increase, or approximately $1.9 million. The
remaining increase of $700,000 in net patient revenues was from
Mature Clinics. Of the $700,000 increase, $1.7 million related to
clinics opened between January 1, 2003 and March 31, 2004, offset by
a $925,000 decrease in clinics opened prior to January 1, 2003. The
decrease of $925,000 in clinics opened prior to January 1, 2003 was
primarily attributable to the clinics sold and closed during 2004.
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
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 72.8% for the 2005
First Quarter and 74.3% for the 2004 First Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $15.8 million for the 2005
First Quarter from $14.6 million for the 2004 First Quarter, an
increase of $1.2 million, or 8.1%. The $1.2 million increase was
primarily incurred at the New Clinics. Salaries and related costs as
a percent of net revenues were 51.2% for the 2005 First Quarter and
51.7% for the 2004 First Quarter.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $6.3 million for the
2005 First Quarter from $6.0 million for the 2004 First Quarter, an
increase of $300,000, or 5.6%. Approximately $712,000 was incurred
at the New Clinics, while the expense at the Mature Clinics
decreased $412,000. Rent, clinic supplies and other as a percent of
net revenues was 20.5% for the 2005 First Quarter and 21.2% for the
2004 First Quarter.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $312,000 for the
2005 First Quarter from $397,000 for the 2004 First Quarter, a
decrease of $85,000 or 21.4%. The provision for doubtful accounts as
a percent of net patient revenues was 1.0% for the 2005 First
Quarter and 1.4% for the 2004 First Quarter. Our allowance for bad
debts as a percent of total patient accounts receivable was 10.5% at
March 31, 2005, as compared to 12.2% at December 31, 2004. The
provision for doubtful accounts decreased due to increased
collection efforts and reductions in our average days outstanding in
accounts receivable and the percentage of accounts receivable
greater than 120 days.
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
$4.0 million for the 2005 First Quarter from $3.6 million for the 2004 First
Quarter, an increase of $400,000, or 11.5%. Corporate office costs increased
primarily as a result of accounting and legal costs to comply with the
Sarbanes-Oxley Act and increased salaries and benefits related to additional
personnel hired to support an increasing number of clinics. Corporate office
costs as a percent of revenues were 13.1% for the 2005 First Quarter which was
comparable to 12.8% for the 2004 First Quarter.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships remained
relatively the same in absolute dollars. Minority interest as a percentage of
operating income before corporate office costs decreased to 14.2% for the 2005
First Quarter compared to 16.2% for the 2004 First Quarter. The decrease is due
to the Company having acquired additional minority interests during 2004 and
increased profitability from wholly-owned subsidiaries.
13
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1.2 million for the 2005 First
Quarter from $926,000 for the 2004 First Quarter, an increase of $298,000, or
32.2% as a result of higher pre-tax income. During the 2005 First Quarter and
the 2004 First Quarter, we accrued state and federal income taxes at an
effective tax rate of 37.6%.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business is generating enough cash flow from operating
activities to allow us to meet our normal short-term and long-term cash
requirements. At March 31, 2005, we had $20.9 million in cash and cash
equivalents compared to $20.6 million at December 31, 2004. 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,
future clinic development and investments. Included in cash and cash equivalents
at March 31, 2005 were $1.9 million in a money market fund and $12.5 million in
investments with maturities less than 90 days. The investments include
short-term high-grade commercial paper (credit rating of A1/P1 or better),
municipal obligations and government sponsored enterprise investments.
The increase in cash of $310,000 from December 31, 2004 to March 31, 2005 is due
primarily to cash provided by operating activities of $6.1 million, offset by
$3.6 million used for the repurchase of the Company's common stock, $1.2 million
used for distributions to minority investors in subsidiary limited partnerships
and $629,000 used for the purchase of fixed assets. In April 2005, the Company
paid $463,000 for a minority interest purchased in the first quarter of 2005.
Our current ratio decreased to 5.3 to 1.0 at March 31, 2005 from 7.2 to 1.0 at
December 31, 2004. The decrease in the current ratio is due primarily to an
increase in accrued expenses primarily related to the timing of making estimated
tax payments and paying payroll. Beginning January 1, 2005, all employees are
paid every two weeks with a one-week lag which resulted in a larger payroll
accrual at quarter end. Estimated tax payments for the 2005 First Quarter were
paid in April 2005.
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 develop new
clinics rather than acquire them, which requires less capital. We plan to
continue developing new clinics and may also make acquisitions in select
markets. 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. Generally, any acquisition or purchase of minority
interests is expected to be accomplished using a combination of cash, notes or
common stock. 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 September 2001, the Board of Directors authorized the Company to purchase, in
the open market or in privately negotiated transactions, up to 1,000,000 shares
of its common stock. On February 26, 2003 and on December 8, 2004, the Board
authorized share repurchase programs of up to 250,000 and 500,000 additional
shares, respectively, of the Company's outstanding common stock. As of March 31,
2005, there are 204,315 shares remaining that can be purchased under these
programs. As there is no expiration for the Board authorizations, 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.
Shares purchased are held as treasury shares and may be used for such valid
corporate purposes or retired as the Board considers advisable. During the
quarter ended March 31, 2005, the Company purchased 239,882 shares of its common
stock on the open market for $3.6 million.
FACTORS AFFECTING FUTURE RESULTS
Clinic Development
As of March 31, 2005, we had 269 clinics in operation, six of which were opened
in the first quarter of 2005. We expect to incur initial operating losses from
new clinics opened in late 2004 and in 2005, which will impact our operating
results. Generally we experience losses during the initial period of a new
clinic's operation. Operating margins for newly opened clinics tend to be lower
than more seasoned clinics because of start-up costs and lower patient visits
and revenues. Patient visits and revenues gradually increase in the first year
of operation, as patients and referral sources become aware of the new clinic.
Revenues typically continue to increase during the two years following the first
anniversary of a clinic opening. Based on the historical performance of our
newer clinics, generally the clinics opened in early 2004 would favorably impact
our results of operations beginning in 2005.
14
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 contain forward-looking information relating to the
financial condition, results of operations, plans, objectives, future
performance and business of our Company. These statements (often using words
such as "believes", "expects", "intends", "plans", "appear", "should" and
similar words) involve risks and uncertainties that could cause actual results
to differ materially from those we project. Included among such statements are
those relating to opening 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:
- revenue and earnings expectations;
- general economic, business, and regulatory conditions;
- availability of qualified physical and occupational therapists;
- the failure of our clinics to maintain their Medicare certification
status or changes in Medicare guidelines;
- competitive and/or economic conditions in our markets which may
require us to close certain clinics and thereby incur closure costs
and losses including the possible write-off or write-down of
goodwill;
- changes in reimbursement rates or methods from third party payors
including governmental agencies and deductibles and co-pays owed by
patients;
- maintaining adequate internal controls;
- availability, terms, and use of capital;
- future acquisitions; and
- weather.
Many 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. We have no material amount of
debt.
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 the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that
such information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Control
There have been no changes in our internal control over financial reporting
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
15
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The following table provides information regarding shares of the Company's
common stock repurchased by the Company during the quarter ended March 31, 2005.
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED AS OF SHARES THAT MAY
TOTAL NUMBER OF PART OF PUBLICLY YET BE PURCHASED
SHARES AVERAGE PRICE ANNOUNCED PLANS OR UNDER THE PLANS OR
PERIOD PURCHASED PAID PER SHARE PROGRAMS(1) PROGRAMS(1)
------ --------------- -------------- ------------------- ------------------
January 1, 2005 through
January 31, 2005 164,532 $15.33 164,532 N/A
February 1, 2005 through
February 28, 2005 50,350 $14.06 50,350 N/A
March 1, 2005 through
March 31, 2005 25,000 $13.70 25,000 204,315
------- ------ ------- -------
Total 239,882 $14.90 239,882 204,315
======= ====== ======= =======
(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. 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. In the Company's
Form 8-K filed on December 9, 2004, the Company announced that on December 8,
2004, the Board had authorized a new share repurchase program of up to 500,000
shares of the Company's outstanding common stock. All shares of common stock
repurchased by the Company during the quarter ended March 31, 2005 were
purchased under these programs.
ITEM 6. EXHIBITS.
(a) Exibits
EXHIBIT
NO. DESCRIPTION
- ------- -----------
31.1* Rule 13a-14(a)/15d-14(a) Certification of 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
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: May 6, 2005 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
17
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
31.1* Rule 13a-14(a)/15d-14(a) Certification of 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
18