UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11151
U.S. PHYSICAL THERAPY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 76-0364866
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1300 WEST SAM HOUSTON PARKWAY SOUTH, SUITE 300, 77042
HOUSTON,TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of August 2, 2005, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 11,975,398.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 3
Consolidated Statements of Net Income for the three and six months ended 4
June 30, 2005 and 2004
Consolidated Statements of Cash Flows for the six months ended June 30, 5
2005 and 2004
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 14
Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 21
Signatures 22
Certifications 24-27
2
ITEM 1. FINANCIAL STATEMENTS.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents........................................ $ 18,164 $ 20,553
Patient accounts receivable, less allowance for doubtful
accounts of $1,937 and $2,447, respectively................... 18,684 17,669
Accounts receivable --other...................................... 1,010 549
Other current assets............................................. 968 1,835
----------- ------------
Total current assets..................................... 38,826 40,606
Fixed assets:
Furniture and equipment.......................................... 22,742 22,781
Leasehold improvements........................................... 13,850 13,912
----------- ------------
36,592 36,693
Less accumulated depreciation and amortization................... 23,296 23,043
----------- ------------
13,296 13,650
Goodwill........................................................... 12,754 6,127
Other assets....................................................... 1,762 1,225
----------- ------------
$ 66,638 $ 61,608
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade........................................ $ 1,285 $ 1,181
Accrued expenses................................................. 6,787 4,367
Notes payable.................................................... 237 70
----------- ------------
Total current liabilities................................ 8,309 5,618
Notes Payable - long-term portion.................................. 333 --
Deferred rent...................................................... 1,330 1,518
Other long-term liabilities........................................ 1,217 982
----------- ------------
Total liabilities........................................ 11,189 8,118
Minority interests in subsidiary limited partnerships.............. 2,838 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,
13,560,693 and 13,436,557 shares issued at June 30, 2005
and December 31, 2004, respectively........................... 135 134
Additional paid-in capital....................................... 33,746 32,534
Retained earnings................................................ 40,409 35,617
Treasury stock at cost, 1,560,385 and 1,320,503 shares held at
June 30, 2005 and December 31, 2004, respectively............. (21,679) (18,106)
----------- ------------
Total shareholders' equity............................... 52,611 50,179
----------- ------------
$ 66,638 $ 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
Net patient revenues........................................ $33,065 $29,914 $63,417 $57,629
Management contract revenues................................ 509 602 1,012 1,168
Other revenues.............................................. 2 1 25 18
------- ------- ------- -------
Net revenues........................................... 33,576 30,517 64,454 58,815
Clinic operating costs:
Salaries and related costs................................ 16,532 14,498 32,332 29,117
Rent, clinic supplies and other........................... 6,859 6,020 13,195 12,019
Provision for doubtful accounts........................... 350 314 662 711
------- ------- ------- -------
23,741 20,832 46,189 41,847
Gain on sale or disposal of fixed assets................... 83 444 41 441
Closure costs.............................................. (84) -- (84) --
Corporate office costs...................................... 4,156 4,917 8,197 8,540
------- ------- ------- -------
Operating income............................................ 5,678 5,212 10,025 8,869
Other income (expense)
Interest income (expense), net............................ 94 17 187 --
Minority interests in subsidiary limited partnerships...... (1,296) (1,544) (2,483) (2,726)
------- ------- ------- -------
(1,202) (1,527) (2,296) (2,726)
Income before income taxes.................................. 4,476 3,685 7,729 6,143
Provision for income taxes.................................. 1,714 1,406 2,937 2,332
------- ------- ------- -------
Net income............................................. $ 2,762 $ 2,279 $ 4,792 $ 3,811
======= ======= ======= =======
Basic earnings per common share............................. $ 0.23 $ 0.20 $ 0.40 $ 0.33
======= ======= ======= =======
Diluted earnings per common share........................... $ 0.23 $ 0.19 $ 0.40 $ 0.31
======= ======= ======= =======
See notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
SIX MONTHS ENDED JUNE 30,
2005 2004
------- -------
OPERATING ACTIVITIES
Net income...................................................................... $ 4,792 $ 3,811
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................................. 2,142 1,874
Gain on sale of assets........................................................ (41) (441)
Minority interests in earnings of subsidiary limited partnerships............. 2,483 2,726
Provision for doubtful accounts............................................... 662 711
Tax benefit from exercise of stock options.................................... 570 176
Deferred rent................................................................. (188) --
Deferred income taxes......................................................... 222 --
Other......................................................................... 26 --
Changes in operating assets and liabilities:
Increase in patient accounts receivable....................................... (1,677) (2,783)
Increase in accounts receivable -- other...................................... (461) (80)
Decrease in other assets...................................................... 229 731
Increase in accounts payable and accrued expenses............................. 2,466 2,395
Increase in other liabilities................................................. 235 165
------- -------
Net cash provided by operating activities....................................... 11,460 9,285
INVESTING ACTIVITIES
Purchase of fixed assets........................................................ (1,838) (2,185)
Acquisition of business......................................................... (5,000) --
Acquisitions of minority interests, included in goodwill........................ (1,319) (174)
Proceeds on sale of fixed assets................................................ 194 482
------- -------
Net cash used in investing activities........................................... (7,963) (1,877)
FINANCING ACTIVITIES
Distributions to minority investors in subsidiary limited partnerships.......... (2,956) (2,505)
Payment of notes payable........................................................ -- (3)
Repurchase of common stock...................................................... (3,573) --
Proceeds from exercise of stock options......................................... 643 150
------- -------
Net cash used in financing activities........................................... (5,886) (2,358)
Net increase in cash and cash equivalents....................................... (2,389) 5,050
Cash and cash equivalents -- beginning of period................................ 20,553 16,822
------- -------
Cash and cash equivalents -- end of period...................................... $18,164 $21,872
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes.................................................................. $ 3,024 $ 1,441
Interest...................................................................... $ -- $ 68
Non-cash transactions during the period:
Purchase of business - seller financing portion............................... $ 500 $ --
Conversion of Series C Note into common stock ................................ $ -- $ 2,333
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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").
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 and on opening satellite clinics
where deemed appropriate. We will also evaluate acquisition opportunities in
select markets. In May 2005, we acquired a majority interest in Hamilton
Physical Therapy Services, an operator of three physical and occupational
therapy clinics located in central New Jersey ("Hamilton Acquisition").
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 six months ended June 30, 2005 are not necessarily
indicative of the results the Company expects for the entire year. Physical
therapy is somewhat seasonal and traditionally the second quarter has been among
our better revenue and earnings quarters. 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. Based upon its investment policy,
the Company 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 $11.0 million and $15.6 million in highly liquid investments at
June 30, 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 is 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 may 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. In 2005, the goodwill increase was
primarily derived from the Hamilton Acquisition. See Acquisition of a Business
in Note 5. 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 June 30,
2005 and December 31, 2004, the Company had approximately $12.8 million and $6.1
million, respectively, of unamortized goodwill. During the six months ended June
30, 2005, a charge of $26,000 was recorded related to impairment of goodwill. No
goodwill impairment charges were recorded for the comparable 2004 period.
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. 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 quarter and six months ended June 30, 2005, the Company expensed $1.6
million and $3.0 million, respectively, of minority interests. Of the total
expensed, $287,000 and $546,000, respectively, related to the minority interests
in earnings of subsidiary limited partnerships for certain partnerships formed
after January 18, 2001, and was expensed as salaries and related costs pursuant
to EITF 00-23. The remaining $1.3 million and $2.5 million, respectively,
related to partnerships formed prior to January 18, 2001, and was reported as a
separate line item in our statements of net income. For the quarter and six
months ended June 30, 2004, the Company expensed $1.7 million and $3.1 million,
respectively, of minority interests. Of the total expensed, $175,000 and
$398,000, respectively, related to the minority interests in earnings of
subsidiary limited partnerships for certain partnerships formed after January
18, 2001, and was expensed as salaries and related costs pursuant to EITF 00-23.
The remaining $1.5 million and $2.7 million, 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 June 30, 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.
7
Patient revenues are shown net of contractual adjustments in the statement of
net income. The provision for doubtful accounts is included in clinic operating
costs in the statement of net income. Net accounts receivable includes only
those amounts the Company estimates to be collectible.
Reimbursement rates for outpatient therapy services provided to Medicare
beneficiaries are established pursuant to a fee schedule published by the
Department of Health and Human Services ("HHS"). Under the Balanced Budget Act
of 1997, the total amount paid by Medicare in any one year for outpatient
physical (including speech-language pathology) or occupational therapy to any
one patient is limited to $1,500 (the "Medicare Limit"), except for services
provided in hospitals. After a three-year moratorium, this Medicare Limit on
therapy services was implemented for services rendered on or after September 1,
2003. The Medicare Limit in any one-year 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 June 30, 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 for 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 and six months ended June 30, 2004 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 the 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 and six
months ended June 30, 2005 and 2004, the Company's pro forma information follows
(in thousands except for earnings per share information):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
------ ------ ------ ------
Actual net income.................................................. $2,762 $2,279 $4,792 $3,811
Deduct: Total stock based compensation expense determined
under the fair value method, net of taxes..................... 208 464 371 831
------ ------ ------ ------
Pro forma net income............................................... $2,554 $1,815 $4,421 $2,980
====== ====== ====== ======
Earnings per share:
Actual basic earnings per common share........................... $ 0.23 $ 0.20 $ 0.40 $ 0.33
Actual diluted earnings per common share......................... $ 0.23 $ 0.19 $ 0.40 $ 0.31
Pro forma basic earnings per common share........................ $ 0.21 $ 0.16 $ 0.37 $ 0.26
Pro forma diluted earnings per common share...................... $ 0.21 $ 0.15 $ 0.37 $ 0.25
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
statements beginning
9
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 date. Under the "modified retrospective" method,
the requirements are the same as under the "modified prospective" method, but
also permit 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 adoption methods it will use.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which replaces Accounting Principles Board Opinion
No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company expects that the adoption of this statement
will not have a material effect on our financial condition or results of
operations.
In June 2005, the EITF issued EITF Issue No. 05-6, "Determining the Amortization
Period for Leasehold Improvements Purchased after Lease Inception or Acquired in
a Business Combination." This accounting guidance states that leasehold
improvements that are placed in service significantly after, and not
contemplated at or near, the beginning of the lease term should be amortized
over the shorter of the useful life of the assets or a term that includes
required lease periods and renewals that are deemed to be reasonably assured at
the date the leasehold improvements are purchased. Leasehold improvements
acquired in a business combination should be amortized over the shorter of the
useful life of the assets or a term that includes required lease periods and
renewals that are deemed to be reasonably assured at the date of acquisition.
The Company is required to apply EITF Issue No. 05-6 to leasehold improvements
that are purchased or acquired in reporting periods beginning after June 29,
2005. The Company is determining the impact of the adoption of EITF Issue No.
05-6. However, the Company does not expect that the adoption of this issue will
have a material impact on its consolidated statement of net income or
consolidated balance sheet in the reporting period in which adopted or for those
periods following adoption.
10
2. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the Company are as
follows (in thousands, except per share data):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
2005 2004 2005 2004
--------- ------- ------- -------
Numerator:
Net income..................................................... $ 2,762 $ 2,279 $ 4,792 $ 3,811
Numerator for basic earnings per share.......................... 2,762 2,279 4,792 3,811
--------- ------- ------- -------
Effect of dilutive securities:
Interest on convertible subordinated note payable.............. -- 22 -- 45
--------- ------- ------- -------
-- -- -- --
Numerator for diluted earnings per share --- income available
to common stockholders after assumed conversions............... $ 2,762 $ 2,301 $ 4,792 $ 3,856
========= ======= ======= =======
Denominator:
Denominator for basic earnings per share ---
weighted average shares...................................... 11,913 11,509 11,938 11,490
Effect of dilutive securities:
Stock options................................................ 152 361 144 365
Convertible subordinated note payable........................ -- 495 -- 509
--------- ------- ------- -------
Dilutive potential common shares................................ 152 856 144 874
--------- ------- ------- -------
Denominator for diluted earnings per share --- adjusted
weighted average shares and assumed conversions.............. 12,065 12,365 12,082 12,364
Basic earnings per common share................................. $ 0.23 $ 0.20 $ 0.40 $ 0.33
========= ======= ======= =======
Diluted earnings per common share............................... $ 0.23 $ 0.19 $ 0.40 $ 0.31
========= ======= ======= =======
Options to purchase 74,300 and 634,245 shares for the three months ended June
30, 2005 and June 30, 2004, respectively, and 81,800 and 634,245 shares for the
six months ended June 30, 2005 and June 30, 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.
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 June 30, 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 six months ended June 30, 2005, the Company purchased
239,882 shares of its common stock in the open market for an aggregate of $3.6
million.
11
4. NOTES PAYABLE
Notes payable as of June 30, 2005 and December 31, 2004 consist of the following
(in thousands):
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
Promissory note payable in quarterly principal installments of $41,667 plus
accrued interest through May 18, 2008, interest accrues
at 6% per annum $ 500 $ --
Promissory note payable (paid in full in July 2005) 70 70
-------- ------------
570 70
Less current portion (237) (70)
-------- ------------
$ 333 $ --
======== ============
In conjunction with the Hamilton Acquisition, we entered into a note payable in
the amount of $500,000 payable in equal quarterly principal installments of
$41,667 beginning September 1, 2005 plus any accrued and unpaid interest.
Interest accrues at a fixed rate of 6% per annum. All outstanding principal and
any accrued and unpaid interest then outstanding is due and payable on the third
anniversary of the note, May 18, 2008.
In May 1994, the Company issued a $3 million 8% Convertible Subordinated Note,
Series C, due June 30, 2004 (the "Series C Note"). The Series C Note was
convertible at the option of the holder into shares of Company common stock
determined by dividing the principal amount of the Note being converted by
$3.33. The Series C Note bore interest from the date of issuance at a rate of 8%
per annum, payable quarterly. In June 2002, $667,000 of the Series C Note was
converted by the note holder into 200,100 shares of common stock. The principal
amount under the Series C Note was $2.3 million at December 31, 2003. On January
12, 2004, $666,660 of the Series C Note was converted by the note holder into
200,000 shares of common stock. On June 30, 2004, the remaining $1.7 million of
the Series C Note was converted by the note holder into 499,900 shares of common
stock. The Series C Note was unsecured and subordinated in right of payment to
all other indebtedness for borrowed money incurred by the Company.
5. ACQUISITIONS AND DISPOSALS
ACQUISITION OF A BUSINESS
On May 18, 2005, the Company acquired a majority interest in Hamilton Physical
Therapy, an operator of three physical and occupational therapy clinics located
in central New Jersey. The Company acquired a 75% interest with existing
partners retaining 25%. The Company paid $5,425,000, consisting of a three-year
note payable in the amount of $500,000 and cash of $4,925,000. In addition, the
Company incurred $75,000 of capitalized acquisition costs. The purchase
agreement also provides for possible contingent consideration of up to $650,000
based on the achievement of a certain designated level of operating results
within a three-year period following the acquisition. Any contingent payment
made will increase goodwill.
The acquisition resulted in approximately $5.3 million of goodwill. Other assets
related to the acquisition included furniture and equipment and non-competition
agreements valued at $103,000 and $121,000, respectively, and the Company
assumed certain employee benefits of approximately $58,000.
ACQUISITIONS OF MINORITY INTERESTS
During the quarter ended June 30, 2005, the Company purchased a 15% interest
from a limited partner who owned a 20.5% interest in a limited partnership for
$774,473. The limited partner retained a 5.5% interest. In addition, during the
second quarter of 2005, the Company paid additional consideration in the amount
of $32,360 related to the purchase of a 35% minority interest in June 2002.
Additional consideration was based upon the performance of the clinic.
During the quarter ended March 31, 2005, the Company purchased the 20% minority
interest in a limited partnership for $53,966 and the 35% minority interest in
another limited partnership for $462,827. The Company also paid the minority
partners $14,273 and $37,773, respectively, in undistributed earnings.
The Company's minority interest purchases were accounted for as purchases and
accordingly, the results of operations of the acquired minority interest
percentage are included in the accompanying financial statements from the dates
of purchase. In addition, the Company is permitted to make, and has occasionally
made, changes to preliminary purchase price allocations during the first year
after completing the purchase.
12
The changes in the carrying amount of goodwill consisted of the following for
the six months ended June 30, 2005 (in thousands):
2005
---------
Beginning balance $ 6,127
Goodwill acquired during the period 6,653
Goodwill written-off (26)
---------
Ending balance $ 12,754
=========
SALE OF ASSETS
On June 30, 2004, the Company sold all of its assets in a clinic. Net proceeds
from the sale were $473,000 on assets with a carrying value of $17,000. After
recording certain costs associated with the sale, the Company recorded a gain of
$452,000.
6. 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 six months
ended June 30, 2005, the Company reduced this liability by $111,000 primarily
due to lease payments being made and settlement of lease agreements offset by a
$50,000 additional accrual required on two leases. As of June 30, 2005, the
Company has $139,000 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. In
addition, closure costs for the three months ended June 30, 2005 includes a
$26,000 charge related to the write-off of goodwill for a clinic closed during
that period.
7. EMPLOYEE TERMINATION BENEFITS
As a result of events that occurred during the 2004 period relating to the
resignation of the former President, Chief Executive Officer and Chairman of the
Board, certain costs were incurred during the quarter ended June 30, 2004.
Pursuant to FASB Statement No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Terminations Benefits
("SFAS 88"), an employer that provides contractual termination benefits is
required to recognize a liability and a loss in connection with the termination
of an employee in the period when that termination is known, if the amount can
be reasonably estimated. In accordance with SFAS 88, the Company accrued
severance of $650,000 in the quarter ended June 30, 2004 in accordance with an
employment contract. Additionally, recruiting expense of $67,000 was incurred
resulting in a recognized expense of $717,000 in the quarter ended June 30, 2004
related to the resignation.
13
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 June 30, 2005, we operated 277 clinics in
36 states. The average age of our clinics at June 30, 2005, was 4.7 years. We
have developed 268 of the clinics and acquired nine. Since inception, we have
sold six clinics, closed 35 facilities due to substandard clinic performance,
and consolidated four clinics with other existing clinics. In 2004, we opened 35
new clinics. During the first six months of 2005, we have opened 13 new clinics,
acquired three, closed one and sold two.
In addition to our owned clinics, we also manage physical therapy facilities for
third parties, primarily physicians, with six third-party facilities under
management as of June 30, 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 FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
--------- --------- --------- --------
Number of clinics 277 254 277 254
Working days 64 64 127 128
Average visits per day per clinic 19.6 19.3 19.0 19.0
Total patient visits 342,002 307,335 655,677 597,583
Net patient revenue per visit $ 96.68 $ 97.33 $ 96.72 $ 96.44
Statements of operations per visit:
Net revenues $ 98.17 $ 99.30 $ 98.30 $ 98.42
Salaries and related costs (48.34) (47.17) (49.31) (48.73)
Rent, clinic supplies and other (20.06) (19.59) (20.12) (20.11)
Provision for doubtful accounts (1.02) (1.02) (1.01) (1.19)
Gain on sale or disposal of fixed assets 0.24 1.44 0.06 0.74
Closure costs (0.24) -- (0.13) --
-------- -------- -------- --------
Contribution from clinics 28.75 32.96 27.79 29.13
Corporate office costs (12.15) (16.00) (12.50) (14.29)
------- -------- -------- --------
Operating income $ 16.60 $ 16.96 $ 15.29 $ 14.84
======== ======== ======== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2004
- Net revenues rose 10% to $33.6 million, from $30.5 million, due to
an 11% increase in patient visits to 342,000 from 307,000, offset by
a decrease in net patient revenue per visit from $97.33 to $96.68.
14
- Earnings were $0.23 per diluted share for the three months ended
June 30, 2005 ("2005 Second Quarter") as compared to $0.19 for the
three months ended June 30, 2004 ("2004 Second Quarter"). Net income
for the 2005 Second Quarter increased to $2.8 million from $2.3
million, or 21%, compared to the 2004 Second Quarter. Total diluted
shares outstanding were 12.1 million and 12.4 million for the 2005
Second Quarter and 2004 Second Quarter, respectively. Physical
therapy is somewhat seasonal and traditionally the second quarter
has been among our better revenue and earnings quarters.
NET PATIENT REVENUES
- Net patient revenues increased to $33.1 million for the 2005 Second
Quarter from $29.9 million for the 2004 Second Quarter, an increase
of $3.2 million, or 11%, primarily due to an 11% increase in patient
visits to 342,000 offset by a $0.65 decrease in net patient revenues
per visit to $96.68.
- Total patient visits increased 35,000, or 11%, to 342,000 for the
2005 Second Quarter from 307,000 for the 2004 Second Quarter. The
growth in visits for the 2005 Second Quarter was attributable to an
increase of approximately 26,000 visits in clinics opened between
July 1, 2004 and June 30, 2005 (the "New Clinics") and by a 9,000
visit increase for clinics opened before July 1, 2004 (the "Mature
Clinics").
- Net patient revenues from New Clinics accounted for approximately
78% of the total increase, or approximately $2.5 million. The
remaining increase of $0.7 million in net patient revenues was from
Mature Clinics. Of the $0.7 million increase, $1.7 million related
to clinics opened between January 1, 2003 and June 30, 2004, offset
by a $935,000 million decrease in clinics opened prior to January 1,
2003. The decrease of $935,000 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 71% for the 2005 Second
Quarter and 67% for the 2004 Second Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $16.5 million for the 2005
Second Quarter from $14.5 million for the 2004 Second Quarter, an
increase of $2.0 million, or 14%. Approximately 75% of the increase,
or $1.5 million, was attributable to the New Clinics. The remaining
25% increase, or $522,000, was attributable to the Mature Clinics.
Salaries and related costs as a percent of revenues were 49% for the
2005 Second Quarter and 48% for the 2004 Second Quarter.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other costs increased to $6.9 million for
the 2005 Second Quarter from $6.0 million for the 2004 Second
Quarter, an increase of $900,000, or 15%. Approximately 78% of the
increase, or $700,000, was attributable to the New Clinics. The
remaining increase of 22%, or $200,000 was attributable to the
Mature Clinics. Rent, clinic supplies and other costs as a percent
of revenues was 20% for each of the 2005 Second Quarter and the 2004
Second Quarter.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased to $350,000 for the
2005 Second Quarter from $314,000 for the 2004 Second Quarter, an
increase of $36,000, or 11%. The provision for doubtful accounts as
a percent of net patient revenues was 1% for the 2005 Second Quarter
and for the 2004 Second Quarter. Our allowance for bad debts as a
percent of total patient accounts receivable was 9% at June 30, 2005
compared to 12% at December 31, 2004. The provision for doubtful
accounts decreased due to increased collections efforts and
reductions in our average days outstanding in accounts receivable
and the percentage of accounts receivable greater than 120 days. The
provision for doubtful accounts for each period is based on a
detailed, clinic-by-clinic review of overdue accounts and is
periodically reviewed in the aggregate in light of current and
historical experience.
15
GAIN ON SALE OR DISPOSAL OF FIXED ASSETS
For the 2005 Second Quarter, a net gain on the sale of fixed assets
of $83,000 was recognized primarily related to the sale of a
building, which generated a gain of approximately $100,000 before
taxes and minority interest. The building was previously used by a
clinic closed in August 2004. For the 2004 Second Quarter, a gain on
the sale of the assets in a clinic was recognized in the amount of
$452,000. Net proceeds from the sale were $473,000 on assets with a
carrying value of $17,000. Costs related to the sale of the clinic
assets were $4,000.
CLOSURE COSTS
For the 2005 Second Quarter, a charge of $84,000 was taken related
to clinic closure costs. The charge primarily consisted of $50,000
additional accrual for lease commitments related to the clinics
closed in the third quarter of 2004 and $26,000 related to the
write-off of goodwill for a clinic closed in the 2005 Second
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, and recruiting fees, decreased to
$4.2 million for the 2005 Second Quarter from $4.9 million for the 2004 Second
Quarter, a decrease of $0.7 million, or 14%. Corporate office costs decreased
primarily due to a charge in the 2004 Second quarter of $717,000 related to
accrued severance for the CEO resignation. Corporate office costs as a percent
of net revenues were 12% for the 2005 Second Quarter compared to 16% for the
2004 Second Quarter.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships decreased to
$1.3 million for the 2005 Second Quarter from $1.5 million in the 2004 Second
Quarter. Minority interest as a percentage of operating income before corporate
office costs decreased to 13% for the 2005 Second Quarter compared to 15% for
the 2004 Second Quarter. This decrease is partially due to the Company's
purchases of additional minority interests during 2004 and 2005. In addition,
during the 2005 Second Quarter, there has been significant improvement in the
earnings of our profit sharing and other wholly owned clinics where clinic
directors' incentive compensation is reflected in clinic operating costs rather
than in minority interest as for the limited partnership clinics formed prior to
January 2001.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1.7 million for the 2005 Second
Quarter from $1.4 million for the 2004 Second Quarter as a result of higher
pre-tax income. During each of the 2005 Second Quarter and the 2004 Second
Quarter, we accrued state and federal income taxes at an effective tax rate of
38%.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004
- Net revenues rose 10% to $64.5 million from $58.8 million primarily
due to a 10% increase in patient visits to 656,000 and a slight
increase in net patient revenue per visit to $96.72 from $96.44.
- Net income increased 26% to $4.8 million from $3.8 million.
- Earnings per share increased to $0.40 per diluted share from $0.31
per diluted share. Total diluted shares outstanding during the June
30, 2005 and 2004 periods were 12.1 million and 12.4 million,
respectively.
NET PATIENT REVENUES
- Net patient revenues increased to $63.4 million for the six months
ended June 30, 2005 ("2005 Six Months") from $57.6 million for the
six months ended June 30, 2004 ("2004 Six Months"), an increase of
$5.8 million, or 10%, primarily due to a 10% increase in patient
visits to 656,000 and a $0.28 increase in patient revenues per visit
to $96.72.
- Total patient visits increased 58,000, or 10%, to 656,000 for the
2005 Six Months from 598,000 for the 2004 Six Months. The growth in
visits for the period was attributable to an increase of
approximately 38,000 visits in New Clinics together with a 20,000
visit increase in visits for Mature Clinics.
- Net patient revenues from New Clinics accounted for approximately
62% of the total increase, or approximately $3.6 million. The
remaining increase of $2.2 million in net patient revenues was from
Mature Clinics.
16
CLINIC OPERATING COSTS
Clinic operating costs were 72% of net revenues for the 2005 Six Months and 70%
of net revenues for the 2004 Six Months.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $32.3 million for the 2005
Six Months from $29.1 million for the 2004 Six Months, an increase
of $3.2 million, or 11%. Approximately 72% of the increase, or $2.3
million, was attributable to the New Clinics. The remaining 28%
increase, or $0.9, was due to higher costs at various Mature
Clinics. Salaries and related costs as a percent of net revenues
were 50% for the 2005 Six Months and the 2004 Six Months.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other costs increased to $13.2 million for
the 2005 Six Months from $12.0 million for the 2004 Six Months, an
increase of $1.2 million, or 10%. The $1.2 million was attributable
to the New Clinics. Rent, clinic supplies and other cost for Mature
Clinics remained essentially flat for the 2005 Six Months as
compared to the 2004 Six Months. Rent, clinic supplies and other
costs as a percent of net revenues remained flat at 20% for the 2005
Six Months and the 2004 Six Months.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $662,000 for the
2005 Six Months from $711,000 for the 2004 Six Months, a decrease of
$49,000, or 7%. This decrease was due to a decrease of $113,000 at
the Mature Clinics as a result of improved collection experience,
offset by an increase of $64,000 for New Clinics. The provision for
doubtful accounts as a percent of net patient revenues remained flat
for the 2005 Six Months from the 2004 Six Months. Our allowance for
bad debts as a percent of total patient accounts receivable was 9%
at June 30, 2005 compared to 12% at December 31, 2004. The provision
for doubtful accounts decreased due to increased collections efforts
and reductions in our average days outstanding in accounts
receivable and the percentage of accounts receivable greater than
120 days. The provision for doubtful accounts for each period is
based on a detailed, clinic-by-clinic review of overdue accounts and
is periodically reviewed in the aggregate in light of current and
historical experience.
GAIN ON SALE OR DISPOSAL OF FIXED ASSETS
For the 2005 Six Months, a net gain on the sale of fixed assets of
$41,000 was recognized primarily related to the sale of a building,
which generated a gain of approximately $100,000 before taxes and
minority interest. The building was previously used by a clinic
closed in August 2004. The gain was offset by losses on the sale and
disposal of fixed assets. For the 2004 Six Months, a gain on the
sale of the assets in a clinic was recognized in the amount of
$452,000. Net proceeds from the sale were $473,000 on assets with a
carrying value of $17,000. Costs related to the sale of the clinic
assets amounted to $4,000.
CLOSURE COSTS
For the 2005 Six Months, a charge of $84,000 was taken related to
clinic closure costs. The charge primarily consisted of $50,000
additional accrual for lease commitments related to the clinics
closed in the third quarter of 2004 and $26,000 related to the
write-off of goodwill for a clinic closed in the 2005 Second
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,
decreased to $8.2 million for the 2005 Six Months from $8.5 million for the 2004
Six Months, a decrease of $0.3 million, or 4%. Corporate office costs decreased
primarily due to a charge in the 2004 Second Quarter of $717,000 related to
accrued severance for the CEO resignation. Without the effects of the costs
related to the CEO Resignation, corporate office costs would have increased by
$0.4 million 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 net revenues decreased to 13% for the 2005 Six Months from
15% for the 2004 Six Months.
17
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships decreased to
$2.5 million for the 2005 Six Months from $2.7 million in the 2004 Six Months.
Minority interest as a percentage of operating income before corporate office
costs decreased to 14% for the 2005 Six Months compared to 16% for the 2004 Six
Months. This decrease is partially due to the Company's purchases of additional
minority interests during 2004 and 2005. In addition, during the 2005 Six
Months, there has also been significant improvement in the earnings of our
profit-sharing and other wholly-owned clinics where clinic directors' incentive
compensation is reflected in clinic operating costs rather than in minority
interest as for the limited partnership clinics formed prior to January 2001.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $2.9 million for the 2005 Six Months
from $2.3 million for the 2004 Six Months, an increase of approximately $0.6
million, or 26% as a result of higher pre-tax income. During the 2005 Six Months
and the 2004 Six Months, we accrued state and federal income taxes at an
effective tax rate of 38%.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business is generating enough cash flow from operating
activities to allow us to meet our normal short-term and long-term cash
requirements. At June 30, 2005, we had $18.2 million in cash and cash
equivalents, after giving effect to $5.0 million paid in connection with the
Hamilton Acquisition, 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 and
future clinic development. Included in cash and cash equivalents at June 30,
2005 were $2.2 million in a money market fund and $8.8 million in investments
with maturities less than 90 days when purchased. The investments include
short-term high-grade commercial paper (credit rating of A1/P1 or better),
municipal obligations and government sponsored enterprise investments.
The decrease in cash of $2.4 million from December 31, 2004 to June 30, 2005 is
due primarily to cash used by investing ($8.0 million) and financing ($5.9
million) activities offset by cash provided by operating activities of $11.5
million. Our primary uses of cash included: $5.0 for the Hamilton Acquisition
(excluding seller financing of $500,000); $1.8 million for the purchase of fixed
assets; $1.3 million for the purchase of minority interests of limited partners
in our clinic partnerships; $3.6 million for the repurchase of the Company's
common stock; and $3.0 million for distributions to minority investors in
subsidiary limited partnerships.
Our current ratio decreased to 4.7 to 1.00 at June 30, 2005 from 7.2 to 1.00 at
December 31, 2004. The decrease in the current ratio is due primarily to an
increase in accrued expenses related to the timing of payroll payments.
Beginning January 1, 2005, all employees are paid every two weeks with a
one-week lag which resulted in a larger payroll accrual at June 30, 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 additional 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 conjunction with the Hamilton Acquisition, we entered into a note payable
with the sellers in the amount of $500,000 payable in equal quarterly principal
installments of $41,667, beginning September 1, 2005, plus any accrued and
unpaid interest. Interest accrues at a fixed rate of 6% per annum. All
outstanding principal and any accrued and unpaid interest then outstanding is
due and payable on the third anniversary of the note, May 18, 2008. The purchase
agreement also provides for possible contingent consideration of up to $650,000
based on the achievement of a certain designated level of operating results
within a three-year period following the acquisition. In addition, we entered
into a 5-year lease for each of the three facilities.
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 June 30,
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
18
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 six months ended June 30, 2005, the
Company purchased 239,882 shares of its common stock in the open market for an
aggregate of $3.6 million.
FACTORS AFFECTING FUTURE RESULTS
Clinic Development
As of June 30, 2005, we had 277 clinics in operation, 7 of which were opened and
3 acquired in the 2005 Second Quarter. We also closed 1 clinic and sold 1 clinic
during the 2005 Second Quarter. 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.
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 and other seasonal factors.
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.
19
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.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of shareholders was held on May 25, 2005. At the
meeting, ten directors were elected by a vote of holders of the Company's Common
Shares, par value of $.01 per share, as outlined in the Company's proxy
statement. With respect to the election of directors, (a) proxies were solicited
pursuant to Regulation 14A under the Securities Exchange Act of 1934, (b) there
was no solicitation in opposition to management's nominees as listed in the
proxy statement, and (c) all of such nominees were elected.
The election of such directors and the results of those votes were as follows:
Votes Votes
For Withheld
---------- --------
Daniel C. Arnold 10,960,928 221,363
Christopher J. Reading 11,146,282 36,009
Lawrance W. McAfee 11,106,282 76,009
Mark J. Brookner 11,046,013 136,278
Bruce D. Broussard 11,103,466 78,825
Marlin W. Johnston 11,094,291 88,000
J. Livingston Kosberg 11,018,865 163,426
Jerald L. Pullins 11,103,466 78,825
Albert L. Rosen 10,964,628 217,663
Clayton K. Trier 11,129,310 52,981
The appointment of Grant Thornton LLP as our independent registered public
accounting firm for 2005 was ratified at the meeting with the following votes:
Votes Votes Votes
For Against Abstaining
- --------- --------- ----------
6,692,726 1,996,699 19,502
20
ITEM 6. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------
31.1* Rule 13a-14(a)/15d-14(a) Certification of Interim Chief Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
31.3* Rule 13a-14(a)/15d-14(a) Certification of Controller
32* Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: August 9, 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
22
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------
31.1* Rule 13a-14(a)/15d-14(a) Certification of Interim Chief Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
31.3* Rule 13a-14(a)/15d-14(a) Certification of Controller
32* Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
23