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, 2001
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11151
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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.)
3040 Post Oak Blvd., Suite 222, Houston, Texas 77056
- ------------------------------------------------ ---------------------------
(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 [ ]
As of November 9, 2001, the number of shares outstanding of the
registrant's common stock, par value $.01 per share, was:
10,505,671
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000 7
Notes to Consolidated Financial Statements 9
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,785 $ 2,071
Patient accounts receivable, less
allowance for doubtful accounts
of $3,732 and $2,780,
respectively 12,396 10,701
Accounts receivable - other 439 452
Other current assets 543 519
------------- -------------
Total current assets 23,163 13,743
Fixed assets:
Furniture and equipment 13,584 12,141
Leasehold improvements 7,180 6,313
------------- -------------
20,764 18,454
Less accumulated depreciation
and amortization 13,311 11,463
------------- -------------
7,453 6,991
Goodwill, net of amortization of
$337 and $291, respectively 2,982 897
Other assets, net of amortization
of $501 and $483, respectively 1,568 1,339
------------- -------------
$ 35,166 $ 22,970
============= =============
</Table>
See notes to consolidated financial statements.
3
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
September 30, December 31,
2001 2000
------------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 344 $ 434
Accrued expenses 2,510 1,622
Estimated third-party payor
(Medicare) settlements 294 355
Notes payable 636 912
------------- -------------
Total current liabilities 3,784 3,323
Notes payable - long-term portion 22 26
Convertible subordinated notes
payable 3,000 7,200
Minority interests in subsidiary
limited partnerships 3,731 2,858
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $.01 par value,
500,000 shares authorized, -0-
shares outstanding -- --
Common stock, $.01 par value,
20,000,000 shares authorized,
10,484,347 and 8,548,374 shares
issued at September 30, 2001 and
December 31, 2000, respectively 105 85
Additional paid-in capital 13,398 3,476
Retained earnings 11,173 6,049
Treasury stock at cost, 14,700
shares held at September 30, 2001
and December 31, 2000 (47) (47)
------------- -------------
Total shareholders' equity 24,629 9,563
------------- -------------
$ 35,166 $ 22,970
============= =============
</Table>
See notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
Three Months Ended
September 30,
-------------------------
2001 2000
---------- ----------
(unaudited)
Net patient revenues $ 19,943 $ 15,455
Management contract revenues 586 620
Other revenues 53 54
---------- ----------
Net revenues 20,582 16,129
Clinic operating costs:
Salaries and related costs 9,046 7,287
Rent, clinic supplies and other 4,394 3,770
Provision for doubtful accounts 484 425
---------- ----------
13,924 11,482
Corporate office costs 2,323 1,802
---------- ----------
Operating income before non-
operating expenses 4,335 2,845
Interest expense 62 207
Minority interests in subsidiary
limited partnerships 1,308 897
---------- ----------
Income before income taxes 2,965 1,741
Provision for income taxes 1,140 674
---------- ----------
Net income $ 1,825 $ 1,067
========== ==========
Basic earnings per common share $ .18 $ .12
========== ==========
Diluted earnings per common share $ .14 $ .10
========== ==========
</Table>
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
Nine Months Ended
September 30,
-------------------------
2001 2000
---------- ----------
(unaudited)
Net patient revenues $ 57,531 $ 44,807
Management contract revenues 1,728 1,819
Other revenues 119 150
---------- ----------
Net revenues 59,378 46,776
Clinic operating costs:
Salaries and related costs 25,966 21,067
Rent, clinic supplies and other 12,856 11,176
Provision for doubtful accounts 1,435 1,217
---------- ----------
40,257 33,460
Corporate office costs 6,642 5,710
---------- ----------
Operating income before non-
operating expenses 12,479 7,606
Interest expense 206 569
Minority interests in subsidiary
limited partnerships 3,942 2,640
---------- ----------
Income before income taxes 8,331 4,397
Provision for income taxes 3,207 1,721
---------- ----------
Net income $ 5,124 $ 2,676
========== ==========
Basic earnings per common share $ .51 $ .28
========== ==========
Diluted earnings per common share $ .40 $ .25
========== ==========
</Table>
See notes to consolidated financial statements.
6
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
Nine Months Ended
September 30,
--------------------------
2001 2000
---------- ----------
(unaudited)
OPERATING ACTIVITIES
Net income $ 5,124 $ 2,676
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,939 1,720
Minority interests in earnings
of subsidiary limited
partnerships 3,942 2,640
Provision for doubtful accounts 1,435 1,217
Loss on disposal of fixed assets 3 46
Tax benefit from exercise of
stock options 2,520 --
Deferred taxes 315 198
Changes in operating assets and liabilities:
Increase in patient accounts
receivable (3,130) (2,221)
Decrease (increase) in accounts
receivable - other 13 (125)
Increase in other assets (759) (62)
Increase in accounts payable
and accrued expenses 798 1,000
Decrease in estimated third-party
payor (Medicare) settlements (61) (97)
---------- ----------
Net cash provided by operating activities 12,139 6,992
---------- ----------
</Table>
See notes to consolidated financial statements.
7
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
Nine Months Ended
September 30,
-----------------------------
2001 2000
----------- -----------
(unaudited)
INVESTING ACTIVITIES
Purchase of fixed assets (2,344) (2,203)
Purchase of intangibles (30) (10)
Proceeds on sale of fixed assets 4 18
----------- -----------
Net cash used in investing
activities (2,370) (2,195)
----------- -----------
FINANCING ACTIVITIES
Proceeds from notes payable -- 2,115
Payment of notes payable (910) (24)
Repurchase common stock -- (6,275)
Purchase of fractional shares on
three-for-two stock split (11) --
Proceeds from investment of
minority investors in subsidiary
limited partnerships 3 78
Proceeds from exercise of
stock options 1,935 --
Distributions to minority investors
in subsidiary limited partnerships (3,072) (2,269)
----------- -----------
Net cash used in financing
activities (2,055) (6,375)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 7,714 (1,578)
Cash and cash equivalents -
beginning of period 2,071 4,030
----------- -----------
Cash and cash equivalents -
end of period $ 9,785 $ 2,452
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 909 $ 1,882
=========== ===========
Interest $ 207 $ 513
=========== ===========
</Table>
See notes to consolidated financial statements.
8
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(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 significant intercompany
transactions and balances have been eliminated. As of September 30, 2001, the
Company, through its wholly-owned subsidiaries, generally owned a 1% general
partnership interest and a limited partnership interest of 64% in the clinics it
operates. For the majority of the clinics, the managing therapist of the clinic
owns the remaining limited partnership interest in the clinic. In some
instances, the Company develops satellite clinic facilities which are extensions
of existing clinics, and thus, clinic partnerships may consist of one or more
clinic locations. The minority interests in the equity and earnings of the
subsidiary clinic limited partnerships are presented separately in the
consolidated financial statements.
The accompanying unaudited consolidated financial statements have been 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. Accordingly, 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.
In the opinion of management, the accompanying unaudited financial statements
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, refer to the audited
financial statements included in the Company's Form 10-K/A for the year ended
December 31, 2000.
Operating results for the three and nine months ended September 30, 2001 are not
necessarily indicative of the results expected for the entire year.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required to carry
all derivative instruments in the statement of financial
9
position at fair value. Adoption of SFAS 133 did not have a material effect on
the Company's financial condition or results of operations because the Company
historically has not entered into derivative or other financial instruments for
trading or speculative purposes nor does it use or intend to use derivative
financial instruments or derivative commodity instruments.
USE OF ESTIMATES
Management is required to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
COMMON STOCK
On January 5, 2001, the Company effected a two-for-one common stock split in the
form of a 100% stock dividend to stockholders of record as of December 27, 2000.
On June 28, 2001, the Company effected a three-for-two common stock split in the
form of a 50% stock dividend to stockholders of record as of June 7, 2001.
Fractional shares resulting from the three-for-two stock split were paid to
shareholders in cash. All share and per share information included in the
accompanying consolidated financial statements and related notes has been
adjusted to reflect these stock splits.
10
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(in thousands, except per share data)
Numerator:
Net income $ 1,825 $ 1,067 $ 5,124 $ 2,676
---------- ---------- ---------- ----------
Numerator for basic
earnings per share $ 1,825 $ 1,067 $ 5,124 $ 2,676
Effect of dilutive
securities:
Interest on convertible
subordinated notes payable 40 120 125 357
---------- ---------- ---------- ----------
Numerator for diluted earnings
per share-income available
to common stockholders after
assumed conversions $ 1,865 $ 1,187 $ 5,249 $ 3,033
========== ========== ========== ==========
Denominator:
Denominator for basic
earnings per share--
weighted-average shares 10,270 8,898 9,997 9,534
Effect of dilutive securities:
Stock options 2,017 759 2,087 360
Convertible subordinated
notes payable 900 2,316 945 2,316
---------- ---------- ---------- ----------
Dilutive potential common
shares 2,917 3,075 3,032 2,676
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share--adjusted
weighted-average shares
and assumed conversions 13,187 11,973 13,029 12,210
========== ========== ========== ==========
Basic earnings per common share $ .18 $ .12 $ .51 $ .28
========== ========== ========== ==========
Diluted earnings per common share $ .14 $ .10 $ .40 $ .25
========== ========== ========== ==========
</Table>
11
3. INCOME TAXES
Significant components of the provision for income taxes were as follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(in thousands)
Current:
Federal $ 1,272 $ 551 $ 3,006 $ 1,615
State 183 113 516 304
---------- ---------- ---------- ----------
Total current 1,455 664 3,522 1,919
---------- ---------- ---------- ----------
Deferred:
Federal (315) 10 (315) (198)
State -- -- -- --
---------- ---------- ---------- ----------
Total deferred (315) 10 (315) (198)
---------- ---------- ---------- ----------
Total income tax provision $ 1,140 $ 674 $ 3,207 $ 1,721
========== ========== ========== ==========
</Table>
4. BANK LOAN AGREEMENT
In July 2000, the Company entered into a Loan Agreement with a bank providing
for borrowings up to $2,500,000 on a line of credit, convertible to a term loan
on December 31, 2000. The loan bore interest at a rate per annum of prime plus
one-half percentage point and was repayable in quarterly installments of
$250,000 beginning March 2001. The Company borrowed $2,115,000 under the
convertible line of credit in August 2000. In November 2000, the Company repaid
$1,215,000 of the $2,115,000 borrowed under the convertible line of credit. In
March 2001, the Company repaid the remaining principal balance of $900,000.
The Company also had a revolving line of credit with a bank which provided for
borrowings up to $500,000, as needed, at a rate of prime. The Company did not
borrow under this line of credit, which expired on July 1, 2001.
5. CONVERTIBLE SUBORDINATED DEBT
In June 1993, the Company completed the issuance and sale at par in a private
placement of $3,050,000 of 8% Convertible Subordinated Notes due June 30, 2003
(the "Initial Series Notes"). In May 1994, the Company completed the issuance
and sale at par in a private placement of $2,000,000 of 8% Convertible
Subordinated Notes, Series B due June 30, 2004 (the "Series B Notes") and
$3,000,000 of 8% Convertible Subordinated Notes, Series C due June 30, 2004 (the
"Series C Notes" and collectively, the Initial Series Notes, the Series B Notes
and the Series C Notes are hereinafter referred to as the "Convertible
Subordinated Notes").
The Convertible Subordinated Notes are convertible at the option of the holders
thereof into the number of whole shares of Company
12
common stock determined by dividing the principal amount of the Notes so
converted by $3.33 in the case of the Initial Series Notes and the Series C
Notes or $4.00 in the case of the Series B Notes. During 2000, $100,000 of the
Initial Series Notes and $750,000 of the Series B Notes were converted by the
note holders into 30,000 and 187,500 shares of common stock, respectively. This
resulted in balances of $2,950,000, $1,250,000 and $3,000,000 for the Initial
Series Notes, the Series B Notes and the Series C Notes, respectively, at
December 31, 2000.
In January 2001, an additional $650,000 of the Initial Series Notes was
converted by a note holder into 195,000 shares of common stock. In addition, the
Company exercised its right to convert the remaining balances of $2,300,000 of
the Initial Series Notes and $1,250,000 of the Series B Notes into 690,000 and
312,500 shares of common stock, respectively.
6. NON-CASH TRANSACTION
On September 30, 2001, the Company purchased the 35% minority interest in a
limited partnership which owns nine clinics in Michigan for consideration
aggregating $2,111,000. At closing the Company delivered 95,000 shares of
restricted stock vesting over five years and a note payable for $630,000 which
was paid in October.
Additional consideration of up to $525,000 may be paid over five years subject
to maintenance of future earnings and up to an additional $900,000 may be paid
at the end of five years based upon earnings growth. Acquisition of the minority
interest had no impact on income for the nine months ended September 30, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company operates outpatient physical and/or occupational therapy clinics
which provide post-operative care and treatment for a variety of
orthopedic-related disorders and sports-related injuries. At September 30, 2001,
the Company operated 157 outpatient physical and occupational therapy clinics in
31 states. The average age of the 157 clinics in operation at September 30, 2001
was 4.02 years.
In addition to the facilities in which the Company has ownership, it also
manages physical therapy facilities for third parties, including physicians,
with six such third-party facilities under management as of September 30, 2001.
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
NET PATIENT REVENUES
Net patient revenues increased to $19,943,000 for the three months ended
September 30, 2001 ("2001 Third Quarter") from $15,455,000 for the three months
ended September 30, 2000 ("2000 Third Quarter"), an increase of $4,488,000, or
29%. Total patient visits increased 44,000, or 25%, to 221,000 for the 2001
Third Quarter from 177,000 for the 2000 Third Quarter. Net patient revenues from
the 30 clinics developed since the 2000 Third Quarter (the "New Clinics")
accounted for approximately 32% of the increase, or $1,422,000. The remaining
increase of $3,066,000 in net patient revenues was from the 127 clinics opened
before the 2000 Third Quarter (the "Mature Clinics"). Of the $3,066,000 increase
in net patient revenues from the Mature Clinics, $2,340,000 was due to a 15%
increase in the number of patient visits, while $726,000 was due to a 4.1%
increase in the average net revenue per visit.
Net patient revenues are based on established billing rates less allowances and
discounts for patients covered by worker's compensation programs and other
contractual programs. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of
the clinics. Net patient revenues reflect contractual and other adjustments,
which are evaluated quarterly by management, relating to patient discounts from
certain payors.
MANAGEMENT CONTRACT REVENUES
Management contract revenues decreased $34,000, or 5%, to $586,000 for the 2001
Third Quarter from $620,000 for the 2000 Third Quarter. This decrease was
primarily due to the termination of a third-party management contract in
February 2001.
CLINIC OPERATING COSTS
Clinic operating costs as a percent of net patient revenues and management
contract revenues combined decreased to 68% for the 2001 Third Quarter from 71%
for the 2000 Third Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $9,046,000 for the 2001 Third Quarter
from $7,287,000 for the 2000 Third Quarter, an increase of $1,759,000, or 24%.
Approximately 49% of the increase, or $858,000, was due to the New Clinics. The
remaining 51% increase, or $901,000, was due principally to increased staffing
to meet the increase in patient visits for the Mature Clinics, coupled with an
increase in bonuses earned by the clinic directors at the Mature Clinics. Such
bonuses are based on the net revenues or
14
operating profit generated by the individual clinics. Salaries and related costs
as a percent of net patient revenues and management contract revenues combined
decreased to 44% for the 2001 Third Quarter from 45% for the 2000 Third Quarter.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $4,394,000 for the 2001 Third
Quarter from $3,770,000 for the 2000 Third Quarter, an increase of $624,000, or
17%. Approximately 86% of the increase, or $540,000, was due to the New Clinics,
while 14%, or $84,000, of the increase was due to the Mature Clinics. The
increase in rent, clinic supplies and other for the Mature Clinics was primarily
due to increased rent expense. Rent, clinic supplies and other as a percent of
net patient revenues and management contract revenues combined declined to 21%
for the 2001 Third Quarter from 23% for the 2000 Third Quarter.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased to $484,000 for the 2001 Third
Quarter from $425,000 for the 2000 Third Quarter, an increase of $59,000, or
14%. Approximately 67% of the increase, or $39,000, was due to the New Clinics.
The remaining 33% increase, or $20,000, was due to the Mature Clinics. The
provision for doubtful accounts as a percent of net patient revenues decreased
slightly to 2.4% for the 2001 Third Quarter from 2.7% for the 2000 Third
Quarter.
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 $2,323,000 for the 2001 Third Quarter from $1,802,000 for the 2000
Third Quarter, an increase of $521,000, or 29%. Corporate office costs increased
primarily as a result of increased legal fees, travel, recruiting fees and
salaries and benefits related to additional personnel hired to support an
increasing number of clinics. Corporate office costs as a percent of net patient
revenues and management contract revenues combined remained unchanged at 11% for
the 2001 and 2000 Third Quarters.
INTEREST EXPENSE
Interest expense decreased $145,000, or 70%, to $62,000 for the 2001 Third
Quarter from $207,000 for the 2000 Third Quarter. This decrease in interest was
primarily due to the conversion of $850,000 and $4,200,000 of convertible
subordinated debt into shares of Company common stock in 2000 and 2001,
respectively. See "Factors Affecting Future Results - Convertible Subordinated
Debt."
15
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships increased
$411,000, or 46%, to $1,308,000 for the 2001 Third Quarter from $897,000 for the
2000 Third Quarter due to the increase in aggregate profitability of those
clinics in which partners have achieved positive retained earnings and are
accruing partnership income.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1,140,000 for the 2001 Third
Quarter from $674,000 for the 2000 Third Quarter, an increase of $466,000, or
69%. During the 2001 and 2000 Third Quarters, the Company accrued income taxes
at effective tax rates of 38% and 39%, respectively. These rates exceeded the
U.S. statutory tax rate of 34% due primarily to state income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
NET PATIENT REVENUES
Net patient revenues increased to $57,531,000 for the nine months ended
September 30, 2001 ("2001 Nine Months") from $44,807,000 for the nine months
ended September 30, 2000 ("2000 Nine Months"), an increase of $12,724,000, or
28%. Total patient visits increased 125,000, or 24%, to 640,000 for the 2001
Nine Months from 515,000 for the 2000 Nine Months. Net patient revenues from the
30 clinics developed since the 2000 Nine Months (the "New Clinics") accounted
for approximately 25% of the increase, or $3,184,000. The remaining increase of
$9,540,000 in net patient revenues comes from those 127 clinics opened before
the 2000 Nine Months (the "Mature Clinics"). Of the $9,540,000 increase in net
patient revenues from the Mature Clinics, $7,611,000 was due to a 17% increase
in the number of patient visits, while $1,929,000 was due to a 4% increase in
the average net revenue per visit.
Net patient revenues are based on established billing rates less allowances and
discounts for patients covered by worker's compensation programs and other
contractual programs. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of
the clinics. Net patient revenues reflect contractual and other adjustments,
which are evaluated quarterly by management, relating to patient discounts from
certain payors.
MANAGEMENT CONTRACT REVENUES
Management contract revenues decreased $91,000, or 5%, to $1,728,000 for the
2001 Nine Months from $1,819,000 for the 2000 Nine Months. This decrease was
primarily due to the termination of a third-party management contract in
February 2001.
16
OTHER REVENUES
Other revenues, consisting of interest and real estate commission
income, decreased $31,000, or 21%, to $119,000 for the 2001 Nine Months from
$150,000 for the 2000 Nine Months. This decrease was due to a decrease in
interest income as a result of both lower average amounts of cash and cash
equivalents available for investment and lower interest rates earned on invested
cash for the 2001 Nine Months compared to the 2000 Nine Months, offset, in part,
by a $37,000 increase in real estate commission income to $46,000 for the 2001
Nine Months from $9,000 for the 2000 Nine Months.
CLINIC OPERATING COSTS
Clinic operating costs as a percent of net patient revenues and management
contract revenues combined decreased to 68% for the 2001 Nine Months from 72%
for the 2000 Nine Months.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $25,966,000 for the 2001 Nine Months
from $21,067,000 for the 2000 Nine Months, an increase of $4,899,000, or 23%.
Approximately 33% of the increase, or $1,634,000, was due to the New Clinics.
The remaining 67% increase, or $3,265,000, was due principally to increased
staffing to meet the increase in patient visits for the Mature Clinics, coupled
with an increase in bonuses earned by the clinic directors at the Mature
Clinics. Such bonuses are based on the net revenues or operating profit
generated by the individual clinics. Salaries and related costs as a percent of
net patient revenues and management contract revenues combined decreased to 44%
for the 2001 Nine Months from 45% for the 2000 Nine Months.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $12,856,000 for the 2001 Nine
Months from $11,176,000 for the 2000 Nine Months, an increase of $1,680,000, or
15%. Approximately 71% of the increase, or $1,189,000, was due to the New
Clinics, while 29%, or $491,000, of the increase was due to the Mature Clinics.
The increase in rent, clinic supplies and other for the Mature Clinics related
primarily to an increase in rent expense during the 2001 Nine Months. Rent,
clinic supplies and other as a percent of net patient revenues and management
contract revenues combined declined to 22% for the 2001 Nine Months from 24% for
the 2000 Nine Months.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased to $1,435,000 for the 2001 Nine
Months from $1,217,000 for the 2000 Nine Months, an increase of $218,000, or
18%. Approximately 32% of the increase, or $70,000, was due to the New Clinics.
The remaining 68% increase, or $148,000, was due to the Mature Clinics. The
provision for doubtful accounts as a percent of net patient revenues decreased
slightly to 2.5% for the 2001 Nine Months from 2.7% for the 2000 Nine Months.
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CORPORATE OFFICE COSTS
Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting fees,
increased to $6,642,000 for the 2001 Nine Months from $5,710,000 for the 2000
Nine Months, an increase of $932,000, or 16%. Corporate office costs increased
primarily as a result of increased travel, recruiting fees, legal and
professional fees and salaries and benefits related to additional personnel
hired to support an increasing number of clinics. Corporate office costs as a
percent of net patient revenues and management contract revenues combined
decreased to 11% for the 2001 Nine Months from 12% for the 2000 Nine Months.
INTEREST EXPENSE
Interest expense decreased $363,000, or 64%, to $206,000 for the 2001 Nine
Months from $569,000 for the 2000 Nine Months. This decrease in interest was
primarily due to the conversion of $5,050,000 of convertible subordinated debt
into shares of Company common stock. See "Factors Affecting Future Results -
Convertible Subordinated Debt."
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships increased
$1,302,000, or 49%, to $3,942,000 for the 2001 Nine Months from $2,640,000 for
the 2000 Nine Months due to the increase in aggregate profitability of those
clinics in which partners have achieved positive retained earnings and are
accruing partnership income.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $3,207,000 for the 2001 Nine Months
from $1,721,000 for the 2000 Nine Months, an increase of $1,486,000, or 86%.
During the 2001 and 2000 Nine Months, the Company accrued income taxes at
effective tax rates of 38% and 39%, respectively. These rates exceeded the U.S.
statutory tax rate of 34% due primarily to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had $9,785,000 in cash and cash equivalents
available to fund the working capital needs of its operating subsidiaries,
future clinic developments, acquisitions and investments. Included in cash and
cash equivalents at September 30, 2001 was $6,224,000 in money market funds
invested in short-term debt instruments issued by an agency of the U.S.
Government.
The increase in cash and cash equivalents of $7,714,000 from December 31, 2000
to September 30, 2001 was due primarily to cash provided by operating activities
of $9,619,000 and proceeds and tax
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benefits from the exercise of stock options of $4,455,000, offset,
in part, by the payment of notes payable of $910,000, capital expenditures for
physical therapy equipment and leasehold improvements in the amount of
$2,344,000, distributions of $3,072,000 to minority investors in subsidiary
limited partnerships and the purchase of intangibles of $30,000.
The Company's current ratio increased to 6.12 to 1.00 at September 30, 2001 from
4.14 to 1.00 at December 31, 2000. The increase in the current ratio was due
primarily to the increase in cash and cash equivalents, an increase in net
patient revenues, which, in turn, caused an increase in patient accounts
receivable and a decrease in accounts payable - trade, estimated third-party
payor (Medicare) settlements and notes payable.
At September 30, 2001, the Company had a debt-to-equity ratio of 0.15 to 1.00
compared to 0.85 to 1.00 at December 31, 2000. The decrease in the
debt-to-equity ratio from December 31, 2000 to September 30, 2001 resulted from
net income of $5,124,000, the conversion of $4,200,000 subordinated notes
payable into common stock and the proceeds and tax benefits from the exercise of
stock options of $4,455,000.
In August 2000, the Company completed the purchase of 1,695,000 shares for a
total aggregate cost of $6,275,000 (including expenses). The Company utilized
cash on hand and a bank loan in the amount of $2,115,000 to fund the purchase of
the stock.
In conjunction with the stock purchase, the Company entered into a Loan
Agreement with a bank to borrow up to $2,500,000 on a line of credit,
convertible to a term loan on December 31, 2000. The loan bore interest at a
rate per annum of prime plus one-half percentage point and was repayable in
quarterly installments of $250,000 beginning March 2001.
In November 2000, the Company repaid $1,215,000 of the $2,115,000 borrowed under
the convertible line of credit. In March 2001, the Company repaid the remaining
balance of $900,000 on the bank loan.
Management believes that existing funds, supplemented by cash flows from
operations, will be sufficient to meet its current operating needs and its
development plans through at least 2002.
RECENTLY PROMULGATED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 eliminates the pooling of interests method of accounting and requires
that all business combinations initiated after September 30, 2001 be accounted
for under the purchase method. The Company does not expect the adoption of SFAS
141 to have a material impact on its business because it currently has no
planned or pending acquisitions.
19
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets," ("SFAS 142") which will be
effective for our company as of the beginning of fiscal 2002. SFAS 142 requires
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. Our management estimates the
adoption of SFAS 142 will result in the elimination of annual amortization
expense related to goodwill and other intangible assets, including trademarks,
in the amount of approximately $70,000, or $46,000 net of tax; however, because
of the extensive effort needed to comply with this statement, the impact of
related impairment, if any, on our financial position or results of operations
has not been determined.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations," ("SFAS 143") which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement applies to all entities that have legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development or normal use of the asset. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. We do not expect the
adoption of SFAS 143 to have a significant impact on our financial condition or
results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards 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 Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," it retains many of the fundamental provisions of that
statement. SFAS 144 also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. We do not expect SFAS
144 to have a significant impact on our financial condition or results of
operations.
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FACTORS AFFECTING FUTURE RESULTS
CLINIC DEVELOPMENT
As of September 30, 2001, the Company had 157 clinics in operation, 22 of which
opened in the 2001 Nine Months. The Company's goal for 2001 is to open between
30 and 35 clinics. The opening of these clinics is subject to, among other
things, the Company's ability to identify suitable geographic locations and
physical therapy clinic partners. The Company's operating results will be
impacted by initial operating losses from the new clinics. During the initial
period of operation, operating margins for newly opened clinics tend to be lower
than more seasoned clinics due to the start-up costs of newly opened clinics
(including, without limitation, salaries and related costs of the physical
therapist and other clinic personnel, rent and equipment and other supplies
required to open the clinic) and the fact that patient revenues tend to be lower
in the first year of a new clinic's operation and increase significantly over
the subsequent two to three years. Based on historical performance of the
Company's new clinics, the clinics opened since the 2000 Third Quarter are
expected to favorably impact the Company's results of operations for 2001 and
beyond.
CONVERTIBLE SUBORDINATED DEBT
In June 1993, the Company completed the issuance and sale at par in a private
placement of $3,050,000 of 8% Convertible Subordinated Notes due June 30, 2003
(the "Initial Series Notes"). In May 1994, the Company completed the issuance
and sale at par in a private placement of $2,000,000 of 8% Convertible
Subordinated Notes, Series B due June 30, 2004 (the "Series B Notes") and
$3,000,000 of 8% Convertible Subordinated Notes, Series C due June 30, 2004 (the
"Series C Notes" and collectively, the Initial Series Notes, the Series B Notes
and the Series C Notes are hereinafter referred to as the "Convertible
Subordinated Notes").
The Convertible Subordinated Notes are convertible at the option of the holders
thereof into the number of whole shares of Company common stock determined by
dividing the principal amount of the Notes so converted by $3.33 in the case of
the Initial Series Notes and the Series C Notes or $4.00 in the case of the
Series B Notes. Holders of Series B Notes were entitled to receive an interest
enhancement payable in shares of Company common stock based upon the market
value of the Company's common stock at June 30, 1996. In July 1996, the Company
issued 213,000 shares of its common stock in connection with the interest
enhancement provision.
During 2000, $100,000 of the Initial Series Notes and $750,000 of the Series B
Notes were converted by the note holders into 30,000 and 187,500 shares of
common stock, respectively. This resulted in a balance of $2,950,000, $1,250,000
and $3,000,000 for the Initial Series Notes, the Series B Notes and the Series C
Notes, respectively, at December 31, 2000.
21
In January 2001, an additional $650,000 of the Initial Series Notes was
converted by a note holder into 195,000 shares of common stock. In addition, the
Company exercised its right to require conversion of the remaining balances of
$2,300,000 of the Initial Series Notes and $1,250,000 of the Series B Notes into
690,000 and 312,500 shares of common stock, respectively.
The debt conversions increased the Company's shareholders' equity by the
carrying amount of the debt converted, thus improving the Company's debt to
equity ratio and will favorably impact results of operations and cash flow due
to the interest savings of approximately $400,000 per year, before income tax,
on the debt.
FORWARD-LOOKING STATEMENTS
We make statements in this report that are considered to be forward-looking
statements within the meaning of the Securities and Exchange Act of 1934. Such
statements involve risks and uncertainties that could cause actual results to
differ materially from those we project. When used in this report, the words
"anticipates", "believes", "estimates", "intends", "expects", "plans", "should"
and "goal" and similar expressions are intended to identify such forward-looking
statements. The forward-looking statements are based on the Company's current
views and assumptions and involve risks and uncertainties that include, among
other things, general economic, business, and regulatory conditions,
competition, federal and state regulations, availability, terms, and use of
capital and weather. Some or all of these factors are beyond the Company's
control.
Given these uncertainties, you should not place undue reliance on these
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. These forward-looking statements
represent our estimates and assumptions only as of the date of this report. The
Company undertakes no obligation to update any forward-looking statement,
whether as the result of actual results, changes in assumptions, new
information, future events, or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of September 30, 2001, the Company had outstanding $3,000,000 of 8%
Convertible Subordinated Notes, Series C, due June 30, 2004 (the "Series C
Notes"). The Series C Notes, which were issued in private placement
transactions, bear interest at 8% per annum, payable quarterly, and are
convertible at the option of the holders thereof into common stock of the
Company at any time during the term of the Series C Notes. The conversion price
is $3.33 per share, subject to adjustment as provided in the Notes. Based upon
the closing price of the Company's common stock on November 9, 2001 of $15.50,
as reported by the National Market of Nasdaq, the fair value of the Series C
Notes was $13,950,000.
23
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS
10.1 Partnership Interest Purchase Agreement between the Company and John
Cascardo.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: November 14, 2001 By: /s/ J. MICHAEL MULLIN
------------------- ----------------------------------
J. Michael Mullin
Chief Financial Officer
(duly authorized officer
and principal financial
officer)
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