UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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,
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of November 3, 2005, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was 11,960,146.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004 3
Consolidated Statements of Net Income for the three and
nine months ended September 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 22
Item 6. Exhibits 22
Signatures 23
Certifications 25-28
2
ITEM 1. FINANCIAL STATEMENTS.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 18,525 $ 20,553
Patient accounts receivable, less allowance for doubtful
accounts of $1,794 and $2,447, respectively .................... 19,378 17,669
Accounts receivable -- other ...................................... 829 549
Other current assets .............................................. 1,132 1,835
-------- --------
Total current assets ........................................... 39,864 40,606
Fixed assets:
Furniture and equipment ........................................... 22,961 22,781
Leasehold improvements ............................................ 14,126 13,912
-------- --------
37,087 36,693
Less accumulated depreciation and amortization .................... 23,756 23,043
-------- --------
13,331 13,650
Goodwill ............................................................. 12,609 6,127
Other assets ......................................................... 1,643 1,225
-------- --------
$ 67,447 $ 61,608
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade ......................................... $ 1,131 $ 1,181
Accrued expenses .................................................. 6,414 4,367
Notes payable ..................................................... 167 70
-------- --------
Total current liabilities ...................................... 7,712 5,618
Notes payable - long-term portion .................................... 292 --
Deferred rent ........................................................ 1,392 1,518
Other long-term liabilities .......................................... 1,163 982
-------- --------
Total liabilities .............................................. 10,559 8,118
Minority interests in subsidiary limited partnerships ................ 2,788 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,
13,602,823 and 13,436,557 shares issued at September 30, 2005
And December 31, 2004, respectively ............................ 136 134
Additional paid-in capital ........................................ 34,390 32,534
Retained earnings ................................................. 42,786 35,617
Treasury stock at cost, 1,643,885 and 1,320,503 shares held at
September 30, 2005 and December 31, 2004, respectively ......... (23,212) (18,106)
-------- --------
Total shareholders' equity .................................. 54,100 50,179
-------- --------
$ 67,447 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2005 2004 2005 2004
------- ------- ------- -------
Net patient revenues ........................................ $33,645 $29,253 $97,062 $86,882
Management contract revenues ................................ 502 379 1,514 1,547
Other revenues .............................................. 25 7 50 24
------- ------- ------- -------
Net revenues .......................................... 34,172 29,639 98,626 88,453
Clinic operating costs:
Salaries and related costs ............................... 17,558 15,140 49,890 44,253
Rent, clinic supplies and other .......................... 6,895 6,176 20,090 18,207
Provision for doubtful accounts .......................... 363 316 1,025 1,027
------- ------- ------- -------
24,816 21,632 71,005 63,487
Loss (gain) on sale or disposal of fixed assets .......... 64 7 23 (443)
Closure costs and impairment charge ...................... 182 815 266 815
Corporate office costs ...................................... 4,072 4,213 12,269 12,752
------- ------- ------- -------
Operating income ............................................ 5,038 2,972 15,063 11,842
Other income (expense)
Interest income (expense), net ........................... 84 65 271 65
Loss in unconsolidated joint venture ..................... (18) -- (18) --
Minority interests in subsidiary limited partnerships .... (1,180) (1,328) (3,663) (4,055)
------- ------- ------- -------
(1,114) (1,263) (3,410) (3,990)
Income before income taxes .................................. 3,924 1,709 11,653 7,852
Provision for income taxes .................................. 1,547 655 4,484 2,987
------- ------- ------- -------
Net income ............................................ $ 2,377 $ 1,054 $ 7,169 $ 4,865
======= ======= ======= =======
Basic earnings per common share ............................. $ 0.20 $ 0.09 $ 0.60 $ 0.41
======= ======= ======= =======
Diluted earnings per common share ........................... $ 0.20 $ 0.08 $ 0.59 $ 0.40
======= ======= ======= =======
See notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
------- -------
OPERATING ACTIVITIES
Net income .............................................................. $ 7,169 $ 4,865
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................................ 3,213 2,873
Loss (gain) on sale of assets ........................................ 23 (261)
Minority interests in earnings of subsidiary limited partnerships .... 3,663 4,055
Provision for doubtful accounts ...................................... 1,025 1,027
Tax benefit from exercise of stock options ........................... 650 1,550
Impairment charge - goodwill ......................................... 145 --
Recognition of deferred rent subsidies ............................... (280) --
Deferred income taxes ................................................ 76 (136)
Other ................................................................ 44 --
Changes in operating assets and liabilities:
Increase in patient accounts receivable .............................. (2,734) (3,121)
Increase in accounts receivable -- other ............................. (280) (201)
Decrease in other assets ............................................. 303 935
Increase in accounts payable and accrued expenses .................... 1,939 2,016
Increase in other liabilities ........................................ 335 264
------- -------
Net cash provided by operating activities ............................... 15,291 13,866
INVESTING ACTIVITIES
Purchase of fixed assets................................................. (3,006) (3,307)
Acquisition of business ................................................. (5,000) --
Acquisitions of minority interests, included in goodwill ................ (1,319) (253)
Proceeds on sale of fixed assets ........................................ 201 499
------- -------
Net cash used in investing activities ................................... (9,124) (3,061)
FINANCING ACTIVITIES
Distributions to minority investors in subsidiary limited partnerships .. (4,186) (3,859)
Payment of notes payable ................................................ (111) (39)
Repurchase of common stock .............................................. (5,106) (657)
Proceeds from exercise of stock options ................................. 1,208 1,704
------- -------
Net cash used in financing activities ................................... (8,195) (2,851)
Net (decrease) increase in cash and cash equivalents .................... (2,028) 7,954
Cash and cash equivalents -- beginning of period ........................ 20,553 16,822
------- -------
Cash and cash equivalents -- end of period .............................. $18,525 $24,776
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes ......................................................... $ 3,756 $ 1,796
Interest ............................................................. $ 9 $ 69
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
SEPTEMBER 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 many
clinic groups operate more than one clinic location. In 2005, we continue to
focus on developing new clinics and on opening satellite clinics where deemed
appropriate. We will also evaluate acquisition opportunities in selected
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 nine months ended September 30, 2005 are not
necessarily indicative of the results the Company expects for the entire year as
physical therapy is somewhat seasonal. 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 $13.1 million and $15.6 million in highly liquid investments at
September 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
annually and upon the occurrence of certain events or circumstances that
indicate 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
the 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 each reporting segment unit to the carrying value of the related
goodwill.
MINORITY INTERESTS
In the majority of the Company's partnership agreements, the therapist partner
begins with a 20% profit interest in his or her clinic partnership, which
increases by 3% at the end of each year thereafter up to a maximum of 35%.
Within the balance sheet and statement of net income, historically, the Company
has recorded therapist partner's 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 therapist 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 nine months ended September 30, 2005, the Company expensed
$1.5 million and $4.5 million, respectively, of minority interests. Of the total
expensed, $270,000 and $816,000, 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 $1.2 million and $3.7 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. For the quarter and nine
months ended September 30, 2004, the Company expensed $1.5 million and $4.7
million, respectively, of minority interests. Of the total expensed, $201,000
and $599,000, 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 $4.1 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 September 30, 2005 and December 31, 2004, undistributed minority interests
related to certain partnerships formed after January 18, 2001 in the amount of
$644,000 and $490,000 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.
7
REVENUE RECOGNITION
Revenues are recognized in the period in which services are rendered. Net
patient revenues (patient revenues less estimated contractual adjustments) 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 allowance for estimated
contractual adjustments is based on terms of payor contracts and historical
collection and write-off experience.
The Company determines allowances for doubtful accounts based on the specific
agings and payor classifications at each clinic. 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 therapy or occupational therapy to any one patient was initially
limited to $1,500, subject to annual adjustment (the "Medicare Limit"). For
purposes of the Medicare Limit, the aggregate charges for outpatient physical
therapy and speech language pathology incurred by one beneficiary cannot exceed
the Medicare Limit. After a three-year moratorium, the Medicare Limit on therapy
services was initially implemented for services rendered on or after September
1, 2003. The Medicare Limit for FY 2003 was adjusted up to $1,590 (the "Adjusted
Medicare Limit"). Effective December 8, 2003, a second moratorium was placed on
the Adjusted Medicare Limit for the remainder of 2003 and for years 2004 and
2005.
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
the Adjusted Medicare Limit will be reinstated effective as of January 1, 2006.
A recent Senate budget reconciliation proposal would extend the moratorium for
an additional year. If such a proposal is not enacted then outpatient therapy
services rendered to Medicare beneficiaries by the Company's therapists will be
subject to these caps, except to the extent these services are rendered pursuant
to certain management and professional services agreements with inpatient
facilities, in which case the caps would not apply. The Medicare Limit, if any,
for 2006 is expected to be $1,750. Any potential negative impact on the
Company's revenue could be reduced by replacing lost revenues by more marketing
efforts to non-Medicare sources or through staffing reductions. If such negative
impact is not mitigated, the scheduled 2006 Medicare Limit could have an adverse
impact on 2006 net income.
Laws and regulations governing the Medicare program are complex and subject to
interpretation. The Company believes that it is in compliance in all material
respects 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 September 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 current portion of notes
payable 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.
8
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 nine months ended September 30, 2004 reflects a reclassification of
interest income from net revenues to interest income/expense, net.
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 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 nine
months ended September 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 NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
-------------------- -------------------
2005 2004 2005 2004
------ ------ ------ ------
Actual net income ....................................... $2,377 $1,054 $7,169 $4,865
Deduct: Total stock based compensation expense determined
under the fair value method, net of taxes ............ 268 733 633 1,496
------ ------ ------ ------
Pro forma net income .................................... $2,109 $ 321 $6,536 $3,369
====== ====== ====== ======
Earnings per share:
Actual basic earnings per common share ............... $ 0.20 $ 0.09 $ 0.60 $ 0.41
Actual diluted earnings per common share ............. $ 0.20 $ 0.08 $ 0.59 $ 0.40
Pro forma basic earnings per common share ............ $ 0.18 $ 0.03 $ 0.55 $ 0.29
Pro forma diluted earnings per common share .......... $ 0.17 $ 0.03 $ 0.54 $ 0.28
9
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 post-retirement benefit obligation and net periodic post-retirement
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 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. Using the
Black-Scholes method of valuing stock options and based on stock options granted
to employees and directors through September 30, 2005, the Company estimates
that the adoption of SFAS 123R would reduce 2006 net earnings by approximately
$500,000.
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
In October 2005, the FASB issued FASB Staff Position No. 13-1 ("FAS 13-1")
"Accounting for Rental Costs Incurred during a Construction Period". FAS 13-1
requires rental costs associated with ground or building operating leases that
are incurred during a construction period to be recognized as rental expense.
The rental costs shall be included in income from operations. FAS 13-1 is
effective for the first reporting period beginning after December 15, 2005.
Early adoption is permitted for financial statements or interim financial
statements that have not yet been issued. The Company does not believe that the
adoption of FAS 13-1 will have a material effect on its consolidated financial
position, results of operations or cash flows.
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 NINE MONTHS
ENDED SEPT 30, ENDED SEPT 30,
-------------------- -------------------
2005 2004 2005 2004
------- ------- ------- -------
Numerator:
Net income ...................................................... $ 2,377 $ 1,054 $ 7,169 $ 4,865
------- ------- ------- -------
Numerator for basic earnings per share ............................. 2,377 1,054 7,169 4,865
Effect of dilutive securities:
Interest on convertible subordinated note payable ............... -- -- -- 45
------- ------- ------- -------
Numerator for diluted earnings per share --- income available
to common stockholders after assumed conversions ................ $ 2.377 $ 1,054 $ 7,169 $ 4,910
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share --- weighted average
shares .......................................................... 11,982 12,328 11,953 11,772
Effect of dilutive securities:
Stock options ................................................... 158 202 151 310
Convertible subordinated note payable ........................... -- -- -- 338
------- ------- ------- -------
Dilutive potential common shares ................................... 158 202 151 648
Denominator for diluted earnings per share --- adjusted
weighted average shares and assumed conversions ................. 12,140 12,530 12,104 12,420
======= ======= ======= =======
Basic earnings per common share .................................... $ 0.20 $ 0.09 $ 0.60 $ 0.41
======= ======= ======= =======
Diluted earnings per common share .................................. $ 0.20 $ 0.08 $ 0.59 $ 0.40
======= ======= ======= =======
Options to purchase 606,980 common shares for the three months ended September
30, 2004, and 127,150 and 445,589 common shares for the nine months ended
September 30, 2005 and September 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. For the three months ended September 30, 2005,
there were no option exercise prices greater than the average market price of
the common shares during this period.
11
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. On August 23, 2005, the Board authorized an additional share repurchase
program of up to 500,000 additional shares of the Company's outstanding common
stock. As of September 30, 2005, there are 620,815 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 three and nine months ended September 30, 2005, the
Company purchased 83,500 and 323,382 shares, respectively, of its common stock
in the open market for an aggregate of $1.5 million and $5.1 million,
respectively.
Subsequent to September 30, 2005 through October 27, 2005, the Company purchased
163,800 shares of its common stock in the open market, therefore as of October
27, 2005, there were 457,015 shares available for purchase under these programs.
4. NOTES PAYABLE
Notes payable as of September 30, 2005 and December 31, 2004 consist of the
following (in thousands):
SEPTEMBER 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 $ 459 $ --
Promissory note payable (paid in full in July 2005) -- 70
----- ----
459 70
Less current portion (167) (70)
----- ----
$ 292 $ --
===== ====
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 May 18,
2008.
Effective September 30, 2005, the Company entered into an unsecured Credit
Agreement ("Credit Agreement"). The Credit Agreement, which matures on September
30, 2007, allows the Company to borrow, repay and reborrow funds not to exceed
at any one time an outstanding balance of $5,000,000 ("Commitment"). The
outstanding balance shall bear interest, at the Company's option, at a rate per
annum equal to either the prime rate, as defined in the agreement, or the
adjusted LIBOR rate, as defined in the agreement, plus three-quarters of one
percent. The Company will pay a commitment fee, which is paid quarterly in
arrears, of 0.20% per annum on the daily average difference between the
Commitment and the outstanding balance. As of the date of this report, there
were no funds advanced to the Company under this credit agreement.
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.
12
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 a 25% interest. 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 preestablished criteria related to 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.
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. GOODWILL
The changes in the carrying amount of goodwill consisted of the following for
the nine months ended September 30, 2005 (in thousands):
2005
-------
Beginning balance $ 6,127
Goodwill acquired during the period 6,653
Goodwill written-off (171)
-------
Ending balance $12,609
=======
During the quarter ended September 30, 2005, the Company performed its annual
test related to the impairment of goodwill based on the present value of
forecasted operating cash flows compared to the carrying value of goodwill for
each reporting unit. Based on the results of the test, goodwill in the amount of
$145,000 was written off for a clinic. The remaining $26,000 of goodwill written
off related to a separate clinic closed in the second quarter of 2005.
13
7. 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 nine
months ended September 30, 2005, the Company reduced this liability by $125,000
primarily due to lease payments being made and settlement of lease agreements
but this amount was offset by an additional $83,000 accrual required primarily
related to two leases. As of September 30, 2005, the Company has $125,000
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 nine months ended September 30, 2005 include a $26,000 charge related to
the write-off of goodwill for a clinic closed during the period.
8. 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 $153,000 and $220,000
were recognized for the three and nine months ending September 30, 2004 relating
to a new CEO search.
14
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 September 30, 2005, we operated 282
clinics in 36 states. The average age of our clinics at September 30, 2005 was
4.9 years. We have developed 273 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 nine months of 2005, we
opened 18 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 eight third-party facilities under
management agreements as of September 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
2005 2004 2005 2004
-------- -------- ---------- --------
Number of clinics, at end of period 282 254 282 254
Working days 64 64 192 192
Average visits per day per clinic 19.5 18.7 19.4 19.1
Total patient visits 348,200 304,500 1,004,000 902,000
Net patient revenue per visit $ 96.64 $ 96.07 $ 96.69 $ 96.31
Statements of operations per visit:
Net revenues $ 98.15 $ 97.33 $ 98.25 $ 98.05
Salaries and related costs (50.43) (49.72) (49.70) (49.06)
Rent, clinic supplies and other (19.81) (20.28) (20.01) (20.18)
Provision for doubtful accounts (1.04) (1.04) (1.02) (1.14)
(Loss) gain on sale or disposal of fixed assets (0.18) (0.02) (0.02) 0.49
Closure costs and impairment charge (0.52) (2.67) (0.27) (0.90)
-------- -------- ---------- --------
Contribution from clinics 26.17 23.60 27.23 27.26
Corporate office costs (11.70) (13.84) (12.22) (14.13)
-------- -------- ---------- --------
Operating income $ 14.47 $ 9.76 $ 15.01 $ 13.13
======== ======== ========== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
- Net revenues rose 15% to $34.2 million, from $29.6 million, due to a
14% increase in patient visits to 348,200 from 304,500 and an increase
of $0.58 in net patient revenue per visit from $96.06 to $96.64.
15
- Earnings were $0.20 per diluted share for the three months ended
September 30, 2005 ("2005 Third Quarter") as compared to $0.08 for the
three months ended September 30, 2004 ("2004 Third Quarter"). Net
income for the 2005 Third Quarter increased to $2.4 million from $1.1
million, or 126%, compared to the 2004 Third Quarter. Total diluted
shares outstanding were 12.1 million and 12.5 million for the 2005
Third Quarter and 2004 Third Quarter, respectively. The 2004 Third
Quarter included pre-tax charges totaling $1.2 million related to
clinic closure costs, operating losses from closed clinics and CEO
recruiting fees.
NET PATIENT REVENUES
- Net patient revenues increased to $33.6 million for the 2005 Third
Quarter from $29.3 million for the 2004 Third Quarter, an increase of
$4.3 million, or 15%, primarily due to a 14% increase in patient
visits to 348,200 and an increase of $0.58 in net patient revenues per
visit to $96.64.
- Total patient visits increased 43,700, or 14%, to 348,200 for the 2005
Third Quarter from 304,500 for the 2004 Third Quarter. The growth in
visits for the 2005 Third Quarter was attributable to an increase of
approximately 35,000 visits in clinics opened and acquired between
October 1, 2004 and September 30, 2005 (the "New Clinics") and by a
8,700 visit increase for clinics opened before October 1, 2004 (the
"Mature Clinics").
- Net patient revenues from New Clinics accounted for approximately 76%
of the total increase, or approximately $3.3 million. The remaining
increase of $1.0 million in net patient revenues was from Mature
Clinics. Of the $1.0 million increase, $1.3 million related to clinics
opened between January 1, 2003 and September 30, 2004, offset by a
$0.3 million decrease in clinics opened prior to January 1, 2003. The
decrease of $0.3 million 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 73% for the 2005 Third
Quarter and 76% for the 2004 Third Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $17.6 million for the 2005
Third Quarter from $15.1 million for the 2004 Third Quarter, an
increase of $2.5 million, or 16%. Approximately 77% of the increase,
or $1.9 million, was attributable to the New Clinics. The remaining
23% of the increase, or $0.6 million, was attributable to the Mature
Clinics. Salaries and related costs as a percent of revenues were 51%
for the 2005 Third Quarter and 2004 Third Quarter.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other costs increased to $6.9 million for
the 2005 Third Quarter from $6.2 million for the 2004 Third Quarter,
an increase of $0.7 million, or 12%. Approximately 92% of the
increase, or $660,000, was attributable to the New Clinics. The
remaining 8% of the increase, or $59,000 was attributable to the
Mature Clinics. Rent, clinic supplies and other costs as a percent of
revenues was 20% for the 2005 Third Quarter and 21% for the 2004 Third
Quarter.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased to $363,000 for the 2005
Third Quarter from $316,000 for the 2004 Third Quarter, an increase of
$47,000, or 15%. The provision for doubtful accounts as a percent of
net patient revenues was 1% for the 2005 Third Quarter and for the
2004 Third Quarter. Our allowance for doubtful accounts as a percent
of total patient accounts receivable was 8% at September 30, 2005
compared to 12% at December 31, 2004. The allowance 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 allowance
for doubtful accounts at the end of 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.
16
LOSS ON SALE OR DISPOSAL OF FIXED ASSETS
For the 2005 Third Quarter, a net loss on the sale or disposal of
fixed assets of $64,000 was recognized primarily due to the write off
of leasehold improvements for three clinics which relocated.
CLOSURE COSTS AND IMPAIRMENT CHARGE
For the 2005 Third Quarter, a charge of $37,000 was taken related to
clinic closure costs. The charge primarily consisted of additional
accrual for lease commitments related to the clinics closed in the
third quarter of 2004. For the 2005 Third Quarter, goodwill in the
amount of $145,000 was written off. The Company performed its annual
test related to the impairment of goodwill based on the present value
of forecasted operating cash flows compared to the carrying value of
goodwill for each reporting unit. Based on the results of the test,
goodwill was written-off for one of the Company's reporting units.
During the 2004 Third Quarter, management decided to close eight
unprofitable clinics after a thorough review of the Company's clinics.
The Company recognized $815,000 in closure costs relating to these
clinics.
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
$4.1 million for the 2005 Third Quarter from $4.2 million for the 2004 Third
Quarter, a decrease of $100,000. Corporate office costs decreased primarily due
to a charge in the 2004 Third quarter of $200,000 for recruiting costs.
Corporate office costs as a percent of net revenues were 12% for the 2005 Third
Quarter compared to 14% for the 2004 Third Quarter.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships decreased to
$1.2 million for the 2005 Third Quarter from $1.3 million in the 2004 Third
Quarter. Minority interest as a percentage of operating income before corporate
office costs decreased to 13% for the 2005 Third Quarter compared to 18% for the
2004 Third Quarter. This decrease is partially due to the Company's purchases of
additional minority interests during 2004 and 2005. In addition, during the 2005
Third 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 $1.5 million for the 2005 Third
Quarter from $0.7 million for the 2004 Third Quarter as a result of higher
pre-tax income. We accrued state and federal income taxes at an effective tax
rate of 39% during the 2005 Third Quarter versus 38% for the 2004 Third Quarter
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2004
- Net revenues rose 12% to $98.6 million from $88.5 million primarily
due to an 11% increase in patient visits to 1,004,000 and a slight
increase in net patient revenue per visit to $96.69 from $96.31.
- Earnings were $0.59 per diluted share for the nine months ended
September 30, 2005 ("2005 Nine Months") as compared to $0.40 for the
nine months ended September 30, 2004 ("2004 Nine Months"). Net income
for the 2005 Nine Months increased to $7.2 million from $4.9 million,
or 47%, compared to the 2004 Nine Months. Total diluted shares
outstanding were 12.1 million and 12.4 million for the 2005 Nine
Months and 2004 Nine Months, respectively. The 2004 Nine Months
included pre-tax charges totaling $1.7 million related to clinic
closure costs, operating losses from closed clinics and CEO severance
and recruiting fees.
NET PATIENT REVENUES
- Net patient revenues increased to $97.1 million for the 2005 Nine
Months from $86.9 million for the 2004 Nine Months, an increase of
$10.2 million, or 12%, primarily due to an 11% increase in patient
visits to 1,004,000 and a $0.38 increase in patient revenues per visit
to $96.69.
- Total patient visits increased 102,000, or 11%, to 1,004,000 for the
2005 Nine Months from 902,000 for the 2004 Nine Months. The growth in
visits for the period was attributable to an increase of approximately
64,000 visits for New Clinics together with a 38,000 increase in
visits for Mature Clinics.
17
- Net patient revenues from New Clinics accounted for approximately 60%
of the total increase, or approximately $6.1 million. The remaining
increase of $4.1 million in net patient revenues was from Mature
Clinics.
CLINIC OPERATING COSTS
Clinic operating costs were 72% of net revenues for the 2005 Nine Months and
2004 Nine Months.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $49.9 million for the 2005
Nine Months from $44.3 million for the 2004 Nine Months, an increase
of $5.6 million, or 13%. Approximately 61% of the increase, or $3.4
million, was attributable to the New Clinics. The remaining 39% of the
increase, or $2.2 million, was due to higher costs at various Mature
Clinics. Salaries and related costs as a percent of net revenues were
51% for the 2005 Nine Months and 50% for the 2004 Nine Months.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other costs increased to $20.1 million for
the 2005 Nine Months from $18.2 million for the 2004 Nine Months, an
increase of $1.9 million, or 10%. Of the $1.9 million increase, $1.4
million was attributable to the New Clinics and the remaining $0.5
million was attributable to Mature Clinics. Rent, clinic supplies and
other costs as a percent of net revenues was 20% for the 2005 Nine
Months and 21% for the 2004 Nine Months.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $1,025,000 for the
2005 Nine Months from $1,027,000 for the 2004 Nine Months, a decrease
of $2,000. This decrease was due to a decrease of $92,000 at the
Mature Clinics as a result of improved collection experience, offset
by an increase of $90,000 for New Clinics. The provision for doubtful
accounts as a percent of net patient revenues remained flat at 1% for
the 2005 Nine Months from the 2004 Nine Months. Our allowance for
doubtful accounts as a percent of total patient accounts receivable
was 8% at September 30, 2005 compared to 12% at December 31, 2004. The
allowance 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 allowance for doubtful accounts at the end of 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.
LOSS/GAIN ON SALE OR DISPOSAL OF FIXED ASSETS
For the 2005 Nine Months, a net loss on the sale or disposal of fixed
assets of $23,000 was recognized. This net loss included a gain of
approximately $100,000 before taxes and minority interest primarily
related to the sale of a building. The building was previously used by
a clinic closed in August 2004. For the 2004 Nine 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 AND IMPAIRMENT CHARGE
For the 2005 Nine Months, a charge of $121,000 was taken related to
clinic closure costs. The charge primarily consisted of an additional
$83,000 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 second quarter of 2005. For the
2005 Nine Months, goodwill in the amount of $145,000 was written off.
The Company performed its annual test related to the impairment of
goodwill based on the present value of forecasted operating cash flows
compared to the carrying value of goodwill for each reporting unit.
Based on the results of the test, goodwill was written-off for one of
the Company's reporting units.
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 $12.3 million for the 2005 Nine Months from $12.8 million for the
2004 Nine Months, a decrease of $0.5 million, or 4%. Corporate office costs
decreased primarily due to charges in the 2004 Nine Months of $925,000 related
to accrued severance for the CEO resignation and recruiting fees. Without the
effects of the costs related to the CEO Resignation, corporate office costs
18
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 12%
for the 2005 Nine Months from 14% for the 2004 Nine Months.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships decreased to
$3.7 million for the 2005 Nine Months from $4.1 million in the 2004 Nine Months.
Minority interest as a percentage of operating income before corporate office
costs decreased to 13% for the 2005 Nine Months compared to 16% for the 2004
Nine Months. This decrease is partially due to the Company's purchases of
additional minority interests during 2004 and 2005. In addition, during the 2005
Nine 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 $4.5 million for the 2005 Nine
Months from $3.0 million for the 2004 Nine Months, an increase of approximately
$1.5 million, or 50%, as a result of higher pre-tax income. We accrued state and
federal income taxes at an effective tax rate of 39% during the 2005 Nine Months
compared to 38% for the 2004 Nine Months.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business is generating sufficient cash flow from operating
activities to allow us to satisfy our normal short-term and long-term cash
requirements. At September 30, 2005, we had $18.5 million in cash and cash
equivalents compared to $20.6 million at December 31, 2004. Although the
start-up costs associated with opening new clinics and our planned capital
expenditures are significant, we believe that our cash and cash equivalents are
sufficient to fund the working capital needs of our operating subsidiaries and
future clinic development. Included in cash and cash equivalents at September
30, 2005 were $3.9 million in a money market fund and $9.2 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 $2.0 million from December 31, 2004 to September 30,
2005 is due primarily to cash used by investing ($9.1 million) and financing
($8.2 million) activities offset by cash provided by operating activities of
$15.3 million. Our primary uses of cash included: $5.0 for the Hamilton
Acquisition (excluding seller financing of $500,000); $3.0 million for the
purchase of fixed assets; $1.3 million for the purchase of minority interests of
limited partners in our clinic partnerships; $5.1 million for the repurchase of
the Company's common stock; and $4.2 million for distributions to minority
investors in subsidiary limited partnerships.
Our current ratio decreased to 5.2 to 1.00 at September 30, 2005 from 7.2 to
1.00 at December 31, 2004. The decrease in the current ratio is due primarily to
funds being used for an acquisition, the repurchase of the Company's common
stock and 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 September 30, 2005.
Effective September 30, 2005, the Company entered into an unsecured Credit
Agreement. The Credit Agreement, which matures on September 30, 2007, allows the
Company to borrow, repay and reborrow funds not to exceed at any one time an
outstanding balance of $5,000,000 ("Commitment"). The outstanding balance shall
bear interest, at the Company's option, at a rate per annum equal to either the
prime rate, as defined in the agreement, or the adjusted LIBOR rate, as defined
in the agreement, plus three-quarters of one percent. The Company will pay a
commitment fee, which is paid quarterly in arrears, of 0.20% per annum on the
daily average difference between the Commitment and the outstanding balance. As
of the date of this report, there were no funds advanced to the Company under
this credit agreement.
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 and the availability of funds on
the Credit Agreement, 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 2006.
19
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 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. On August 23, 2005, the
Board authorized an additional share repurchase program of up to 500,000
additional shares of the Company's outstanding common stock. As of September 30,
2005, there are 620,815 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 nine
months ended September 30, 2005, the Company purchased 323,382 shares of its
common stock in the open market for an aggregate of $5.1 million. Subsequent to
September 30, 2005 through October 27, 2005, the Company purchased 163,800
shares of its common stock in the open market, therefore as of October 27, 2005,
there were 457,015 shares available for purchase under these programs.
FACTORS AFFECTING FUTURE RESULTS
Clinic Development
As of September 30, 2005, we had 282 clinics in operation, five of which were
opened in the 2005 Third 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.
Reimbursement Rates - Medicare
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 therapy or occupational therapy to any one patient was initially
limited to $1,500, subject to annual adjustment (the "Medicare Limit"). For
purposes of the Medicare Limit, the aggregate charges for outpatient physical
therapy and speech language pathology incurred by one beneficiary cannot exceed
the Medicare Limit. After a three-year moratorium, the Medicare Limit on therapy
services was initially implemented for services rendered on or after September
1, 2003. The Medicare Limit for FY 2003 was adjusted up to $1,590 (the "Adjusted
Medicare Limit"). Effective December 8, 2003, a second moratorium was placed on
the Adjusted Medicare Limit for the remainder of 2003 and for years 2004 and
2005.
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
the Adjusted Medicare Limit will be reinstated effective as of January 1, 2006.
A recent Senate budget reconciliation proposal would extend the moratorium for
an additional year. If such a proposal is not enacted then outpatient therapy
services rendered to Medicare beneficiaries by the Company's therapists will be
subject to these caps, except to the extent these services are rendered pursuant
to certain management and professional services agreements with inpatient
facilities, in which case the caps would not apply. The Medicare Limit, if any,
for 2006 is expected to be $1,750. Any potential negative impact on the
Company's revenue could be reduced by replacing lost revenues by more marketing
efforts to non-Medicare sources or through staffing reductions. If such negative
impact is not mitigated, the scheduled 2006 Medicare Limit could have an adverse
impact on 2006 net income.
20
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 September 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.
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.
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.
21
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding shares of the Company's
common stock repurchased by the Company during the quarter ended September 30,
2005.
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED AS OF SHARES THAT MAY
PART OF PUBLICLY YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS OR UNDER THE PLANS OR
PERIOD SHARES PURCHASED PAID PER SHARE PROGRAMS(1) PROGRAMS(1)
------ ---------------- -------------- ------------------- ------------------
July 1, 2005 through
July 31, 2005 25,000 $18.35 25,000 N/A
August 1, 2005 through
August 31, 2005 35,000 $18.33 35,000 N/A
September 1, 2005 through
September 30, 2005 23,500 $18.42 23,500 620,815
------ ------ ------ -------
Total 83,500 $18.36 83,500 620,815
====== ====== ====== =======
(1) In the Company's Form 10-K for the year ended December 31, 2001, filed with
the SEC on April 1, 2002, the Company announced that in September 2001 the Board
had authorized the repurchase of up to 1,000,000 shares of the Company's
outstanding common stock. In the Company's Form 10-Q for the quarter ended March
31, 2003, filed with the SEC on May 5, 2003, the Company announced that on
February 26, 2003 the Board had authorized a new share repurchase program of up
to 250,000 shares of the Company's outstanding common stock. In the Company's
Form 8-K filed on December 9, 2004, the Company announced that on December 8,
2004, the Board had authorized a new share repurchase program of up to 500,000
shares of the Company's outstanding common stock. In the Company's Form 8-K
filed on August 24, 2005, the Company announced that on August 23, 2005, the
Board had authorized a new share repurchase program of up to 500,000 shares of
the Company's outstanding common stock. All shares of common stock repurchased
by the Company during the quarter ended September 30, 2005 were purchased under
these programs. Of the 620,815 shares yet to be purchased under these programs,
an additional 163,800 shares were purchased between September 30, 2005 and
October 27, 2005, leaving an aggregate of 457,015 shares available for purchase
under these programs.
ITEM 6. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
31.3* Rule 13a-14(a)/15d-14(a) Certification of Controller
32* Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: November 8, 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
23
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
31.3* Rule 13a-14(a)/15d-14(a) Certification of Controller
32* Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
24