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, 2002
--------------
[ ] 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 May 10, 2002, the number of shares outstanding of the
registrant's common stock, par value $.01 per share, was: 11,068,157
----------
<Table>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 3
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
</Table>
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,267 $ 8,121
Patient accounts receivable, less
allowance for doubtful accounts
of $3,935 and $3,805,
respectively 13,800 12,769
Accounts receivable - other 759 878
Other current assets 653 646
--------- ---------
Total current assets 25,479 22,414
Fixed assets:
Furniture and equipment 14,777 14,214
Leasehold improvements 7,823 7,389
--------- ---------
22,600 21,603
Less accumulated depreciation
and amortization 14,490 13,798
--------- ---------
8,110 7,805
Goodwill, net of amortization of
$335 and $335, respectively 4,978 4,519
Other assets, net of amortization
of $502 and $501, respectively 1,550 1,482
--------- ---------
$ 40,117 $ 36,220
========= =========
</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>
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 328 $ 539
Accrued expenses 1,166 1,931
Estimated third-party payor
(Medicare) settlements 33 113
Notes payable 4 701
--------- ---------
Total current liabilities 1,531 3,284
Notes payable - long-term portion 21 21
Convertible subordinated notes
payable 3,000 3,000
Minority interests in subsidiary
limited partnerships 3,435 3,249
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,
11,137,457 and 10,688,321 shares
issued at March 31, 2002 and
December 31, 2001, respectively 111 107
Additional paid-in capital 18,813 15,429
Retained earnings 15,196 13,120
Treasury stock at cost, 149,700
shares held at March 31, 2002
and December 31, 2001 (1,990) (1,990)
--------- ---------
Total shareholders' equity 32,130 26,666
--------- ---------
$ 40,117 $ 36,220
========= =========
</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
March 31,
----------------------------------
2002 2001
--------- ----------
(unaudited)
Net patient revenues $ 21,636 $ 18,332
Management contract revenues 588 565
Other revenues 26 33
--------- ---------
Net revenues 22,250 18,930
Clinic operating costs:
Salaries and related costs 9,930 8,373
Rent, clinic supplies and other 4,741 4,175
Provision for doubtful accounts 431 449
--------- ---------
15,102 12,997
Corporate office costs 2,505 2,119
--------- ---------
Operating income before non-
operating expenses 4,643 3,814
Interest expense 59 84
Minority interests in subsidiary
limited partnerships 1,231 1,264
--------- ---------
Income before income taxes 3,353 2,466
Provision for income taxes 1,277 954
--------- ---------
Net income $ 2,076 $ 1,512
========= =========
Basic earnings per common share $ .19 $ .15
========= =========
Diluted earnings per common share $ .16 $ .12
========= =========
</Table>
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
Three Months Ended
March 31,
-----------------------------------
2002 2001
---------- ---------
(unaudited)
OPERATING ACTIVITIES
Net income $ 2,076 $ 1,512
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 699 637
Minority interests in earnings
of subsidiary limited
partnerships 1,231 1,264
Provision for doubtful accounts 431 449
Loss on sale of fixed assets - 3
Tax benefit from exercise of
stock options 2,024 355
Deferred income taxes 67 -
Changes in operating assets and liabilities:
Increase in patient accounts
receivable (1,462) (1,534)
Decrease in accounts receivable -
other 119 32
Increase in other assets (142) (126)
Increase (decrease) in accounts
payable and accrued expenses (976) 791
Decrease in estimated third-party
payor (Medicare) settlements (80) (72)
--------- ---------
Net cash provided by operating
activities 3,987 3,311
--------- ---------
</Table>
See notes to consolidated financial statements.
6
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
Three Months Ended
March 31,
-------------------------------------
2002 2001
---------- ----------
(unaudited)
INVESTING ACTIVITIES
Purchase of fixed assets $ (1,004) $ (753)
Purchase of intangibles (12) -
Acquisition of minority interest
in subsidiary limited partnership (447) -
Proceeds on sale of fixed assets - 3
-------- --------
Net cash used in investing
activities (1,463) (750)
-------- --------
FINANCING ACTIVITIES
Payment of notes payable (697) (903)
Proceeds from investment of
minority investors in subsidiary
limited partnerships - 1
Proceeds from exercise of stock options 1,364 626
Distributions to minority investors
in subsidiary limited partnerships (1,045) (825)
-------- ---------
Net cash used in financing
activities (378) (1,101)
-------- ---------
Net increase in cash and
cash equivalents 2,146 1,460
Cash and cash equivalents -
beginning of period 8,121 2,071
-------- ---------
Cash and cash equivalents -
end of period $ 10,267 $ 3,531
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 213 $ 96
======== =========
Interest $ 61 $ 86
======== =========
</Table>
See notes to consolidated financial statements.
7
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 March 31, 2002, 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 for the year ended
December 31, 2001.
Operating results for the three months ended March 31, 2002 are not necessarily
indicative of the results expected for the entire year.
8
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company bills primarily third-party payors for services at standard rates.
Actual payments received from the payors vary based upon the payor's fee
schedules, contracts the Company may have signed with the payor or limits on
usual and customary charges. Based upon historical payment data, the Company
records a contractual allowance to reduce gross revenues to the estimated net
realizable amount expected to be ultimately collected from payors. The accuracy
of revenue recognition improves with the timeliness of collections.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company reviews account agings and experience with particular payors at each
clinic in determining an appropriate accrual for doubtful accounts.
Historically, clinics that have large numbers of older accounts generally have
less favorable collection experience, and thus, require a higher allowance.
Accounts that are ultimately determined to be uncollectible are written off
against the bad debt allowance.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing the consolidated financial statements, the
Company is required to estimate its federal income tax liability and income
taxes in the states in which it operates, as well as assessing temporary
differences resulting from differing treatment of items, such as bad debt
expense and amortization of leasehold improvements, for tax and accounting
purposes. The differences result in deferred tax assets and liabilities, which
are included in the consolidated balance sheets. Management then must assess the
likelihood that deferred tax assets will be recovered from future taxable
income, and if not, establish a valuation allowance.
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.
9
COMMON STOCK
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.
All share and per share information included in the accompanying consolidated
financial statements and related notes have been adjusted to reflect this stock
split.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
Three Months Ended
March 31,
------------------------------------
2002 2001
---------- ----------
Numerator:
Net income $2,076,000 $1,512,000
---------- ----------
Numerator for basic earnings
per share $2,076,000 $1,512,000
Effect of dilutive securities:
Interest on convertible subordinated
notes payable 39,000 46,000
---------- ----------
Numerator for diluted earnings per
share-income available to common
stockholders after assumed
conversions $2,115,000 $1,558,000
========== ==========
Denominator:
Denominator for basic earnings
per share--weighted-average shares 10,654,000 9,695,000
Effect of dilutive securities:
Stock options 1,626,000 2,070,000
Convertible subordinated notes
payable 900,000 1,038,000
---------- ----------
Dilutive potential common shares 2,526,000 3,108,000
---------- ----------
Denominator for diluted earnings
per share--adjusted weighted-
average shares and assumed
conversions 13,180,000 12,803,000
========== ==========
Basic earnings per common share $ 0.19 $ 0.15
========== ==========
Diluted earnings per common share $ 0.16 $ 0.12
========== ==========
</Table>
10
3. INCOME TAXES
Significant components of the provision for income taxes for the three months
ended March 31, were as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Current:
Federal $1,158,000 $ 795,000
State 186,000 159,000
---------- ----------
Total current 1,344,000 954,000
---------- ----------
Deferred:
Federal (67,000) -
State - -
---------- ----------
Total deferred (67,000) -
---------- ----------
Total income tax provision $1,277,000 $ 954,000
========== ==========
</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 plus one-half
percentage point. The Company did not borrow under this line of credit, which
expired on July 1, 2001.
5. CONVERTIBLE SUBORDINATED DEBT
In a June 1993 private placement, the Company issued $3,050,000 of 8%
Convertible Subordinated Notes due June 30, 2003 (the "Initial Series Notes").
In a May 1994 private placement, the Company issued $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 were 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
11
and the Series C Notes or $4.00 in the case of the Series B Notes. Only the
$3,000,000 Series C Notes remain outstanding at March 31, 2002 and December
31, 2001.
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 187,497 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. In January 2001, an additional
$650,000 of the Initial Series Notes were 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 balance 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. GOODWILL-ADOPTION OF STATEMENT 142
In January 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets," ("SFAS 142"), which requires
that goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS 142 further requires that 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. The Company completed its
initial impairment review upon adoption and determined that there was no
impairment. The Company plans to perform its annual impairment review during the
fourth quarter of each year, commencing in the fourth quarter of 2002. At March
31, 2002, the Company had $4,978,000 of unamortized goodwill.
Net income excluding goodwill amortization expense for the three months ended
March 31, is as follows:
<Table>
<Caption>
2002 2001
---------- ----------
Net income as reported $2,076,000 $1,512,000
Add back:
Goodwill amortization, net of tax - 10,000
---------- ----------
Adjusted net income $2,076,000 $1,522,000
========== ==========
</Table>
The exclusion of goodwill amortization had no effect on basic or diluted
earnings per common share.
7. ACQUISITION OF MINORITY INTERESTS
On December 31, 2001, the Company purchased the 35% minority interest in a
limited partnership which owns four clinics in Michigan for consideration
aggregating $1,511,000. At closing, the Company delivered 67,100 shares of
restricted stock and a note payable for $435,000 which was paid in January 2002.
12
Additionally, as part of the purchase, the Company agreed to pay the minority
partner $261,000 of undistributed earnings which was paid in January 2002.
On January 31, 2002, the Company purchased the 10% minority interest in a
limited partnership which owns four clinics in Michigan for $447,000.
Additionally as part of the purchase price, the Company agreed to pay the
minority partner $65,000 of undistributed earnings.
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 March 31, 2002, the
Company operated 168 outpatient physical and occupational therapy clinics in 31
states. The average age of the 168 clinics in operation at March 31, 2002 was
4.17 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 March 31, 2002.
SELECTED OPERATING AND FINANCIAL DATA
The following table presents certain operating and financial data:
<Table>
<Caption>
Three Months Ended
March 31,
-------------------------------
2002 2001
-------- ---------
Working days 63 64
Average visits per day per clinic 23.0 22.8
Total patient visits 237,000 205,000
Per visit:
Net revenues $ 93.88 $ 92.34
Salaries and related costs (41.90) (40.84)
Rent, clinic supplies and other (20.00) (20.37)
Provision for doubtful accounts (1.82) (2.19)
-------- --------
Contribution from clinics 30.16 28.94
Corporate office costs (10.57) (10.34)
-------- --------
Operating income $ 19.59 $ 18.60
======== ========
</Table>
Because many expenses are not affected by the number of working days, expenses
on a per visit basis generally decline as the number of working days in a period
increases.
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2001
NET PATIENT REVENUES
Net patient revenues increased to $21,636,000 for the three months ended March
31, 2002 ("2002 First Quarter") from $18,332,000 for the three months ended
March 31, 2001 ("2001 First Quarter"), an increase of $3,304,000, or 18%. Total
patient visits increased approximately 32,000, or 15%, to 237,000 for the 2002
First Quarter from 205,000 for the 2001 First Quarter. The Company believes that
the growth in visits was negatively impacted by the very mild winter in the
north and northeast where the Company has many clinics, as there were fewer
winter sports and weather related injuries in such areas than occur when there
is more snow and ice. Net patient revenues from the 30 clinics developed since
the 2001 First Quarter (the "New Clinics") accounted for 64% of the increase, or
$2,103,000. The remaining increase of $1,201,000 in net patient revenues comes
from those 138 clinics opened before the 2001 First Quarter (the "Mature
Clinics"). Of the $1,201,000 increase in net patient revenues from the Mature
Clinics, $686,000 was due to a 4% increase in the number of patient visits to
213,000, while $515,000 was due to a 3% 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 estimated contractual and other
adjustments, which are evaluated quarterly by management, relating to patient
discounts from certain payors.
MANAGEMENT CONTRACT REVENUES
Management contract revenues increased $23,000, or 4%, to $588,000 for the 2002
First Quarter from $565,000 for the 2001 First Quarter. This increase was
primarily due to a new management contract entered into in the 2001 First
Quarter, coupled with an increase of 4% in patient visits.
OTHER REVENUES
Other revenues, consisting of interest and real estate commission income,
decreased $7,000, or 21%, to $26,000 for the 2002 First Quarter from $33,000 for
the 2001 First Quarter. The decrease was due to a decrease in real estate
commission income.
14
CLINIC OPERATING COSTS
Clinic operating costs as a percent of combined net patient revenues and
management contract revenues decreased to 68% for the 2002 First Quarter from
69% for the 2001 First Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $9,930,000 for the 2002 First Quarter
from $8,373,000 for the 2001 First Quarter, an increase of $1,557,000, or 19%.
Approximately 62% of the increase, or $968,000, was due to the New Clinics. The
remaining 38% increase, or $589,000, 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 combined net
patient revenues and management contract revenues increased to 45% for the 2002
First Quarter from 44% for the 2001 First Quarter.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $4,741,000 for the 2002 First
Quarter from $4,175,000 for the 2001 First Quarter, an increase of $566,000, or
14%. Approximately 104% of the increase, or $589,000, was due to the New
Clinics, offset by a 4%, or $23,000, decrease for the Mature Clinics. Rent,
clinic supplies and other as a percent of combined net patient revenues and
management contract revenues decreased to 21% for the 2002 First Quarter from
22% for the 2001 First Quarter.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $431,000 for the 2002 First
Quarter from $449,000 for the 2001 First Quarter, a decrease of $18,000, or 4%.
This decrease was due to a $63,000 decrease in the Mature Clinics, offset by an
increase of $45,000 related to the New Clinics. The provision for doubtful
accounts as a percent of net patient revenues remained unchanged at 2% for the
2002 and 2001 First Quarters.
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 $2,505,000 for the 2002 First Quarter from $2,119,000 for the 2001
First Quarter, an increase of $386,000, or 18%. Corporate office costs increased
primarily as a result of increased salaries and benefits related to additional
personnel hired to support an increasing number of clinics and an increase in
rent expense associated with additional space leased during 2001 at the
Company's corporate office. Corporate office costs as a percent of combined net
patient
15
revenues and management contract revenues remained unchanged at 11% for the 2002
and 2001 First Quarters.
INTEREST EXPENSE
Interest expense decreased $25,000, or 30%, to $59,000 for the 2002 First
Quarter from $84,000 for the 2001 First Quarter. 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 decreased
$33,000, or 3%, to $1,231,000 for the 2002 First Quarter from $1,264,000 for the
2001 First Quarter primarily due to the purchase of minority partners interests
in several Michigan clinics in late 2001 and the 2002 First Quarter. The
interests purchased contributed approximately $200,000 in pretax income to the
Company for the 2002 First Quarter.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1,277,000 for the 2002 First
Quarter from $954,000 for the 2001 First Quarter, an increase of $323,000, or
34%. During the 2002 and 2001 First 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had $10,267,000 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 March 31, 2002 was $6,011,000 in a money market fund
invested in short-term debt instruments issued by an agency of the U.S.
Government.
The increase in cash of $2,146,000 from December 31, 2001 to March 31, 2002 was
due primarily to cash provided by operating activities of $3,987,000 and
proceeds from the exercise of stock options of $1,364,000, offset in part by the
Company's use of cash to pay notes payable of $697,000, fund capital
expenditures for physical therapy equipment and leasehold improvements in the
amount of $1,004,000, distribute $1,045,000 to minority investors in subsidiary
limited partnerships and buyout a 10% minority investor in four Michigan clinics
for $447,000.
The Company's current ratio increased to 16.64 to 1.00 at March 31, 2002 from
6.83 to 1.00 at December 31, 2001. The increase in the current ratio was due
primarily to an increase in cash and cash equivalents, an increase in patient
accounts receivable, a decrease in accounts payable and a decrease in accrued
expenses.
16
At March 31, 2002, the Company had a debt-to-equity ratio of 0.09 to 1.00
compared to 0.14 to 1.00 at December 31, 2001. The decrease in the
debt-to-equity ratio from December 31, 2001 to March 31, 2002 resulted from net
income of $2,076,000, the proceeds and tax benefit from the exercise of stock
options of $1,364,000 and $2,024,000, respectively, and the decrease in notes
payable of $697,000.
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.
In September 2001, the Board of Directors authorized the purchase, in the open
market or in privately negotiated transactions, up to 1,000,000 shares of the
Company's common stock. Any shares purchased will be held as treasury shares and
may be used for such valid corporate purposes or retired as the Board of
Directors, in its discretion, may deem advisable. As of December 31, 2001, the
Company had purchased 135,000 shares of its common stock on the open market for
a total of $1,943,000. No shares were purchased during the three months ended
March 31, 2002.
The Company does not have credit lines or other arrangements for funding with
banks or other institutions. Historically, the Company has generated cash from
operations sufficient to fund its development activities and cover operational
needs. The Company does not generally acquire new clinics through acquisitions
of existing clinics, but develops clinics in a de novo fashion, which management
believes generally requires substantially less capital. The Company currently
plans to continue adding new clinics on a de novo basis, although this strategy
may change from time to time as appropriate opportunities become available. The
Company has from time to time purchased minority interests of limited partners
in clinic partnerships, including the minority interests purchased in the
Michigan clinics referred to previously. In selective cases, the Company may
purchase additional minority interests in the future. Generally, any material
purchases of minority interests are expected to be accomplished using a
combination of common stock and cash.
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Management believes that existing funds, supplemented by cash flows from
existing operations, will be sufficient to meet its current operating needs,
development plans and any purchases of minority interests 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 June 30, 2001 be accounted for
under the purchase method. The adoption of SFAS 141 did not have a material
impact on the Company's business because it had no planned or pending
acquisitions that would have met the requirements for use of the pooling of
interests method.
Also in July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets," ("SFAS 142") which is effective
for the Company beginning in 2002 except for certain provisions that were
effective July 1, 2001. 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. At
March 31, 2002, the Company had approximately $4,978,000 of unamortized
goodwill. The adoption of SFAS 142 did not have a material impact on the
Company's financial condition or results of operation because the Company
determined that there was no impairment of goodwill upon adoption of the
statement.
In June 2001, the FASB issued SFAS 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 the
Company's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144") which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes SFAS 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
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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. The adoption of SFAS 144 did not have a
material impact on the Company's financial condition or results of operations.
FACTORS AFFECTING FUTURE RESULTS
CLINIC DEVELOPMENT
As of March 31, 2002, the Company had 168 clinics in operation, six of which
opened in the 2002 First Quarter. The Company's goal for 2002 is to open between
35 and 40 additional clinics. The opening of these clinics is subject to the
Company's ability to identify suitable geographic locations and physical and
occupational therapists to manage the clinics. 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 and/or occupational therapist and other clinic personnel, rent and
equipment and other supplies required to open the clinic) and the fact that
patient visits and 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 2001 First Quarter are expected to favorably impact the Company's
results of operations for 2002 and beyond.
CONVERTIBLE SUBORDINATED DEBT
In a June 1993 private placement, the Company issued $3,050,000 of 8%
Convertible Subordinated Notes due June 30, 2003 (the "Initial Series Notes").
In a May 1994 private placement, the Company issued $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 were 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. Only the $3,000,000 Series C Notes remain outstanding at
March 31, 2002 and December 31, 2001.
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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 187,497 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. 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 balance 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 fair value of the debt converted in 2001 and 2000 was
approximately $11,161,000 and $1,380,000, respectively, based upon the closing
price of the Company's common stock on the day before conversion as reported by
the National Market of Nasdaq.
The debt conversions increased the Company's shareholders' equity by the
carrying amount of the debt converted less unamortized deferred financing costs,
thus improving the Company's debt to equity ratio and favorably impacted results
of operations and cash flow due to the interest savings in 2001 before income
taxes of approximately $400,000.
MEDICARE REGULATIONS
Reimbursement for outpatient therapy services provided to Medicare beneficiaries
is pursuant to a fee schedule published by the Department of Health and Human
Services ("HHS"), and the total amount that may be 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, except for
services provided in hospitals. On November 29, 1999, President Clinton signed
into law the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
("BBRA") which, among other provisions, placed a two-year moratorium on the
$1,500 reimbursement limit for Medicare therapy services provided in 2000 and
2001. On December 21, 2000, the President signed into law the Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA")
which, among other provisions, extended the moratorium for one year through
December 31, 2002. The Company does not generally treat long-term complicated
rehabilitation cases, therefore, should the $1,500 reimbursement limit become
effective in 2003, the Company does not anticipate a material impact on revenues
in 2003.
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
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"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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As of March 31, 2002, 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 May 9, 2002 of $17.24, as reported by the National
Market of Nasdaq, the fair value of the Series C Notes was $15,516,000.
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U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended March 31, 2002.
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SIGNATURE
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: May 15, 2002 By: /s/ J. MICHAEL MULLIN
-------------- ----------------------------
J. Michael Mullin
Chief Financial Officer
(duly authorized officer and
principal financial officer)
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