UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X
EXCHANGE ACT OF 1934
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
For the fiscal year ended December 31, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11151
U.S. PHYSICAL THERAPY, INC.
(Name of registrant as specified in its charter)
Nevada 76-0364866
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3040 Post Oak Blvd., Suite 222, Houston, Texas 77056
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (713) 297-7000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 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 No
X
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
As of March 22, 2002, the aggregate market value of the voting
stock held by non-affiliates of the registrant was:
$105,009,790
As of March 22, 2002, the number of shares outstanding of the
registrant’s common stock, par value $.01 per share, was:
10,946,594
DOCUMENTS INCORPORATED BY REFERENCE
Document
Part of Form 10-K
Portions of Definitive Proxy
PART III
Statement for the 2002 Annual
Meeting of Shareholders
Forward Looking Statements
We make statements in this report that are considered to be
forward-looking statements within the meaning of the Securities and
Exchange Act of 1934. Such statements involve risks and uncertainties
that could cause actual results to differ materially from those we
project.
words
“anticipates,”“believes,”“estimates,”“intends,”“expects,”“plans,”
“should”, “appear” and “goal” and similar expressions are intended to
identify such forward-looking statements. The forward-looking
statements are based on the Company’s current views and assumptions and
involve risks and uncertainties that include, among other things:
report,
When
used
this
the
in
• general economic, business, and regulatory conditions discussed
under the headings “Sources of Revenue/Reimbursement” and
“Factors Affecting Future Results” below;
• competition discussed under the heading “Competition” below;
• federal and state regulations discussed under the heading
“Regulation and Healthcare Reform” below;
• availability, terms, and use of capital discussed under the
heading “Managment’s Discussion and Analysis of Financial
Condition and Results of Operations” below; and
• weather.
Some or all of these factors are beyond the Company’s control.
Given these uncertainties, you should not place undue reliance on
these forward-looking statements. Please see the other sections of
this report and our other periodic reports filed with the Securities
and Exchange Commission (the “SEC”) for more information on these
factors. These forward-looking statements represent our estimates and
assumptions only as of the date of this report. The Company undertakes
no obligation to update any forward-looking statement, whether as the
result of actual results, changes in assumptions, new information,
future events, or otherwise.
PART I
Item 1. Business.
General
U.S. Physical Therapy, Inc. (the “Company”) operates outpatient
physical and occupational therapy clinics which provide post-
2
operative care and treatment for a variety of orthopedic-related
disorders and sports-related injuries. At December 31, 2001, the
Company operated 162 outpatient physical and occupational therapy
clinics in 31 states. The average age of the 162 clinics in operation
at December 31, 2001 was 4.08 years. Since the inception of the
Company, 176 clinics have been developed and six clinics have been
acquired by the Company. To date, the Company has sold one clinic,
closed 14 facilities due to clinic performance, consolidated the
operations of three of its clinics with other existing clinics to more
efficiently serve various geographic markets and sold certain fixed
assets at two of the Company’s clinics, which facilities it then
closed. The Company added 30 new clinics in 2001. Management’s goal
for 2002 is to open between 35 and 40 clinics.
The clinics provide post-operative care and treatment for a variety
of orthopedic-related disorders and sports-related injuries, treatment
for neurologically-related injuries, rehabilitation of injured workers
and preventative care. Each clinic's staff typically includes one or
more physical and/or occupational therapists and office personnel, and
may also include physical and/or occupational therapy assistants,
aides, exercise physiologists and athletic trainers. The clinics
perform a tailored and comprehensive evaluation of each patient which
is followed by a treatment plan specific to the injury. The treatment
plan may include the use of modalities and procedures such as
ultrasound, electrical stimulation, hot packs, iontophoresis,
therapeutic exercise, manual therapy techniques, education on
management of daily life skills and home exercise programs. The
clinics' business primarily originates from physician referrals. The
principal sources of payment for the clinics' services are commercial
health insurance, workers' compensation insurance, managed care
programs, Medicare and proceeds from personal injury cases. The
Company's strategy is to develop and acquire outpatient clinics on a
national basis.
The Company's development strategy is to attract physical and
occupational therapists who have established relationships with
physicians by offering them the opportunity to acquire a partnership
interest in a new clinic to be developed by the Company. In addition,
the therapist partner receives a competitive salary and bonus based on
his or her clinic's net revenue and profitability. The Company is
presently engaged in discussions with several prospective therapist
partners.
In addition to the Company’s partnership program, it also manages
physical therapy facilities for third parties, including physicians.
3
Six of such third-party facilities were under the Company’s management
as of December 31, 2001.
In March 2000, the Company decided to discontinue its surgery
center initiative which originally began in 1999. Costs incurred
related to the surgery center initiative, including severance benefits
for terminated employees, totaled $369,000 and $384,000 for the years
ended December 31, 2000 and 1999, respectively.
On January 5, 2001, the Company effected a two-for-one common stock
split in the form of a 100% stock dividend to stockholders of record as
of December 27, 2000. On June 28, 2001, the Company effected a three-
for-two common stock split in the form of a 50% stock dividend to
stockholders of record as of June 7, 2001. Fractional shares resulting
from the three-for-two stock split were paid to shareholders in cash.
All share and per share amounts contained herein have been adjusted to
reflect the effect of the stock splits.
The Company was formed in June 1990 and operated as a Subchapter
S corporation until August 1991 when it reorganized into a limited
partnership. In May 1992, in connection with the Company's initial
public offering, the Company was reorganized into its present form as
a Nevada corporation with operating subsidiaries organized in the form
of limited partnerships.
In a June 1993 private placement, the Company issued $3,050,000 of
8% Convertible Subordinated Notes due June 30, 2003 (the “Initial
Series Notes”). In a May 1994 private placement, the Company issued
$2,000,000 of 8% Convertible Subordinated Notes, Series B due June 30,
2004 (the “Series B Notes”) and $3,000,000 of 8% Convertible
Subordinated Notes, Series C due June 30, 2004 (the “Series C Notes,”
and collectively, the Initial Series Notes, the Series B Notes and the
Series C Notes are hereinafter referred to as the "Convertible
Subordinated Notes").
The Convertible Subordinated Notes are convertible at the option
of the holders thereof into the number of whole shares of Company
common stock determined by dividing the principal amount of
the notes so converted by $3.33 (in the case of the Initial Series
Notes and the Series C Notes) or $4.00 (in the case of the Series B
Notes), subject to adjustment under certain circumstances.
During 2000, $850,000 of the Convertible Subordinated Notes were
converted by the note holders into 217,497 shares of common stock,
resulting in a balance of $7,200,000 in Convertible Subordinated Notes
4
at December 31, 2000. In January 2001, an additional $650,000 was
converted by a note holder into 195,000 shares of common stock and the
Company exercised its right under the Initial Series Notes and the
Series B Notes to require conversion of the remaining $3,550,000 into
1,002,498 shares of common stock.
Unless the context otherwise requires, references in this Form 10-K
to the Company include the Company and all its subsidiaries. The
Company's principal executive offices are located at 3040 Post Oak
Blvd., Suite 222, Houston, Texas 77056, and its telephone number is
(713) 297-7000.
The Company's Clinics
In general, the managing physical and/or occupational therapist of
each clinic owns a partnership interest in the clinic he or she
operates. For the majority of the clinics, this is accomplished by
structuring the clinic as a separate limited partnership (the "Clinic
Partnerships"). As of December 31, 2001, the Company, through wholly-
owned subsidiaries, owned a 1% general partnership interest, with the
exception of one clinic in which the Company owned a 6% general
partnership interest, and limited partnership interests ranging from
49% to 99% in the clinics it operates (with respect to 80% of the
Company’s clinics, the Company owned a limited partnership interest of
64% as of December 31, 2001). For the majority of the clinics, the
managing therapist of each such clinic, along with other therapists at
the clinic in several of the partnerships, own the remaining limited
partnership interests in the clinic. In some instances, the Company
develops satellite clinic facilities which are extensions of existing
clinics, and thus, Clinic Partnerships may consist of one or more
clinic locations.
In the majority of the 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 until his or
her interest reaches 35%. The therapist partners have no
interest in net losses of Clinic Partnerships, except to the extent of
their capital accounts. The Company presently anticipates that future
clinics developed by the Company will be structured in a comparable
manner.
5
In addition, typically each therapist partner enters into an
employment agreement with the Company providing for a covenant not to
compete during his or her employment with the Company plus one to two
years thereafter. The terms of the employment agreements range from
one to five years. Pursuant to each employment agreement, the
therapist partner receives a base salary and a bonus based on the net
revenues or operating profit generated by his or her Clinic
Partnership. Each employment agreement provides that the therapist
partner can be required to sell his or her partnership interest in the
Clinic Partnership for the amount of his or her capital account upon
termination of employment with the Clinic Partnership before the
expiration of the initial term of employment. The employment
agreements contain no provisions requiring the purchase by the Company
of the therapist partner’s interest in the Clinic Partnership in the
event of death or disability, or after the initial term of employment.
Each clinic maintains an independent local identity, while at the
same time enjoying the benefits of national purchasing, third-party
payor contracts and centralized management controls. Pursuant to a
management agreement, U.S. PT Management, Ltd. ("USPTM"), a Texas
limited partnership whose general and limited partnership interests are
held by the Company, provides a variety of services to each clinic,
including supervision of site selection, construction, clinic design
and equipment selection, establishment of accounting systems and
procedures and training of office support personnel, operational
direction, ongoing accounting services and marketing support.
The Company's typical clinic occupies approximately 1,500 to 3,000
square feet of space under a lease in an office building or shopping
center. The Company seeks to obtain leases for its clinics at ground
level (although it may not always be successful in obtaining such
leases) in order to make access to its clinics as easy as possible for
patients. The Company also attempts to make the decor in its clinics
less institutional and more aesthetically pleasing than hospital
clinics. The typical staff needed to operate a clinic in its initial
stages is a licensed physical and/or occupational therapist and an
office manager. Staffing may
also include physical and/or occupational therapy assistants, aides,
exercise physiologists and athletic trainers. As patient
visits grow, the staffing may be increased to include two or more
additional licensed physical and/or occupational therapists and one or
two additional office personnel. All therapy services provided are
performed under the direct supervision of a licensed physical and/or
occupational therapist.
6
The Company currently provides its services at its clinics only on
an outpatient basis. Patients requiring these types of services are
usually treated for approximately one hour per day, two to five times
a week. This form of treatment typically lasts two to six weeks. The
Company's charge for the treatment is generally on a per procedure
basis. In addition to the services mentioned, the clinics will, when
appropriate, develop individual maintenance exercise programs to be
continued after treatment. Advice on postural improvements and changes
in work habits or lifestyle is provided to promote self-management of
the patient's condition. The Company continues to assess the potential
for developing new services and expanding the method of providing its
current services, with an emphasis on health insurance and workers'
compensation insurance cost containment.
Industry Background
Physical and occupational therapy is the process of aiding in the
rehabilitation of individuals disabled by injury or disease or
recovering from surgery. Management believes that the following
factors are influencing the growth of outpatient physical and
occupational therapy services:
Economic Benefits of Physical and Occupational Therapy Services.
Purchasers and providers of healthcare services, such as insurance
companies, health maintenance organizations, businesses
and industries, are seeking ways to save on traditional healthcare
services. Management believes physical and occupational therapy
services are cost-effective by helping to prevent short-term
disabilities from becoming chronic conditions and by speeding the
recovery from surgery and musculoskeletal injuries.
Earlier Hospital Discharge. Changes in health insurance
reimbursement, both public and private, have encouraged the early
discharge of patients in order to contain and reduce costs. Management
believes early hospital discharge practices foster greater numbers of
individuals requiring outpatient physical and occupational therapy
services.
Aging Population. The elderly population, which has experienced
rapid growth over the past several decades, has a greater incidence of
major disability. This growth has fueled the demand for rehabilitation
services.
Marketing
7
On a local basis, the Company focuses its marketing efforts on
physicians, mainly orthopedic surgeons, neurosurgeons, physiatrists,
occupational medicine and general practitioners, which generally
account for the majority of physical and occupational therapy
referrals. In marketing to the physician community, the clinics
emphasize their commitment to quality patient care and communication
e m p l o y s
with physicians regarding patient progress. On a national level, the
C o m p a n y
m a r k e t i n g
personnel to assist the clinic directors in establishing referral
relationships with health maintenance organizations, preferred provider
organizations, industry and case managers and insurance companies for
clinic therapy services, as well as to develop and implement marketing
plans
Sources of Revenue/Reimbursement
community.
marketing
physician
for
the
to
Payor sources for clinic services are primarily commercial health
insurance, managed care programs, workers' compensation insurance,
Medicare and proceeds from personal injury cases. Commercial health
insurance and managed care programs generally provide outpatient
services coverage to patients utilizing the clinics, and the patient is
normally required to pay an annual deductible and a co-insurance
payment. Workers' compensation is a statutorily defined employee
benefit which varies on a state-by-state basis. Workers' compensation
laws generally require employers to pay for employees' costs of medical
rehabilitation, lost wages, legal fees and other costs associated with
work-related
injuries and disabilities and, in certain jurisdictions, mandatory
vocational rehabilitation. These statutes generally require that these
benefits be offered to employees without any deductibles, co-payments
or cost sharing. Companies may provide such coverage to their
employees through either the purchase of insurance from private
insurance companies, participation in state-run funds or through self-
insurance. Treatments for patients who are parties to personal injury
cases are generally paid for from the proceeds of
settlements with insurance companies or from favorable judgements. If
an unfavorable judgement is received, collection efforts are generally
not pursued against the patient and the patient's account is written
off against established reserves. Bad debt reserves
relating to personal injury accounts receivable are regularly reviewed
and adjusted as appropriate.
The Company's business depends to a significant extent on its
relationships with physicians, commercial health insurers, workers'
8
compensation insurers, and other referral sources, such as health
maintenance organizations and preferred provider organizations. If
clinics are located in certain geographical areas, it is important for
them to be approved as providers by certain key health maintenance
organizations and preferred provider plans. If these clinics do not
obtain such approval, or if they cannot maintain such approval, the
Company could be adversely affected.
Approximately 20% of the Company’s patient visits are from patients
with Medicare insurance coverage. In order to receive Medicare
reimbursement, a rehabilitation agency or the individual therapist
must meet the applicable conditions of participation set forth by HHS
relating to the type of facility, its equipment, record keeping,
personnel and standards of medical care, as well as compliance with all
state and local laws. Clinics are subject to periodic inspections or
surveys to determine compliance. As of December 31, 2001, 130 of the
Company's clinics have been certified as rehabilitation agencies by
Medicare and 20 additional clinics not certified as rehabilitation
agencies have individual therapists certified by Medicare to provide
services as physical therapists in private practice. Management
anticipates that, in the future, newly developed clinics will generally
elect to become certified as Medicare providers. No assurance can be
given that the newly developed clinics will be successful in becoming
certified as Medicare providers.
Prior to 1999, Medicare reimbursement for outpatient physical and
occupational therapy services furnished by a Medicare-certified
rehabilitation agency was based on a cost reimbursement methodology.
The Company was reimbursed at a tentative rate with final settlement
determined after submission of an annual cost report by the Company and
audits thereof by the Medicare fiscal intermediary. Effective in 1999,
the Balanced Budget Act of 1997 (“BBA”) provides that reimbursement for
outpatient therapy services provided to Medicare beneficiaries is
pursuant to a fee schedule published by the Department of Health and
Human Services (“HHS”),
and the total amount paid by Medicare in any one year for outpatient
physical (including speech-language pathology) or occupational therapy
to any one patient is limited to $1,500, except for services provided
in hospitals. On November 29, 1999, President Clinton signed into law
the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
(“BBRA”) which, among other provisions, placed a two-year moratorium on
the $1,500 reimbursement limit for therapy services provided in 2000
and 2001. On December 21, 2000, the President signed into law the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000
9
(“BIPA”) which, among other provisions, extended the moratorium for one
year through December 31, 2002. Should the $1,500 reimbursement limit
become effective in 2003, the Company does not anticipate that the
change will have a material impact on revenues in 2003.
Medicare regulations require that a physician certify the need for
physical and/or occupational therapy services for each patient
and that these services be provided in accordance with an
established plan of treatment which is periodically revised. State
Medicaid programs generally do not provide coverage for outpatient
physical or occupational therapy, and, therefore, Medicaid is not, nor
is it expected to be, a material payor for the Company.
Regulation and Healthcare Reform
The healthcare industry is subject to numerous federal, state and
local regulations. Certain states into which the Company may expand
have laws that require facilities that employ health professionals and
provide health-related services to be licensed and, in some cases, to
obtain a certificate of need. Pursuant to certificate of need laws,
the affected entity is required to demonstrate to a state regulatory
authority the need for and financial feasibility of certain
expenditures related to such activities as the construction of new
facilities or the commencement of new healthcare services. Based on
its operating experience to date, the Company believes that its
business, as presently conducted, does not require certificates of need
or other facility approvals or licenses. There can be no assurance,
however, that existing laws or regulations will not be interpreted or
modified to require the Company to obtain such approvals or licenses
and, if so, that such approvals or licenses could be obtained. Failure
to obtain any required certificates, approvals or licenses could have
a material adverse effect on the Company’s business, financial
condition and results of operations.
under
Various Federal and state laws regulate the relationships between
providers of healthcare services and physicians. These laws include
Section 1128B(b) of the Social Security Act (the “Fraud and Abuse
Law”),
penalties
can be imposed upon persons who pay or receive remuneration in return
for referrals of patients who are eligible for reimbursement under the
Medicare or Medicaid programs. The Company does not
believe its business arrangements are out of compliance with these
provisions. The provisions are broadly written and the full extent
of their application is not currently known. In 1991, the Office
criminal
civil
which
and
10
of the Inspector General ("OIG") of the United States Department of
Health and Human Services issued regulations describing compensation
arrangements which are not viewed as illegal remuneration under the
Fraud and Abuse Law (the "1991 Safe Harbor Rules"). The 1991 Safe
Harbor Rules created certain standards ("Safe Harbors") which, if fully
complied with, assure participants that a particular business
arrangement is not: (a) a criminal offense under the Fraud and Abuse
Law, (b) the basis for an exclusion from the Medicare and Medicaid
programs or (c) the basis for imposition of civil sanctions. Failure
to fall within a Safe Harbor does not constitute a violation of the
Fraud and Abuse Law; however, the OIG has indicated that failure to
fall within a Safe Harbor may subject an arrangement to increased
scrutiny.
The Fraud and Abuse Law limits the relationships which the Company
may have with referral sources. The Company’s business of managing
physician-owned physical therapy facilities is subject to Fraud and
Abuse Law issues. According to the OIG’s advisory opinion No. 98-4,
these business arrangements fall outside the scope of the Safe Harbors.
Currently, federal courts provide little guidance as to the application
of the Fraud and Abuse Law to such arrangements. Management considers
these issues in planning its clinics, marketing and other activities,
and believes its operations are in compliance with applicable law, but
no assurance can be given regarding compliance in any particular
factual situation. In the event that management contracts of the type
to which the Company is a party are held to violate the Fraud and Abuse
Law, such holding could have a material adverse effect on the Company’s
business, financial condition and results of operations.
In February 2000, the OIG issued a special fraud alert regarding
the rental of space in physician offices by persons or entities to
which the physicians refer. The OIG is concerned that in such
arrangements, the rental payments may be disguised kickbacks to the
physician-landlords to induce referrals. The Fraud and Abuse Law
prohibits knowingly and willfully soliciting, receiving, offering or
paying anything of value to induce referrals of items or services
payable by a federal healthcare program. Currently, eight clinics rent
space from referring physicians. The Company has taken the steps that
t o
a r e
i t
assure that all leases comply with the space rental Safe Harbor to the
Fraud and Abuse Law. When the lease meets all of the criteria of a
Safe Harbor, the arrangement is immune from prosecution under the Fraud
and Abuse Law.
n e c e s s a r y
b e l i e v e s
11
The Company believes its operations are in compliance with the
current requirements of applicable federal and state law, but no
assurances can be given that a federal or state agency charged with
enforcement of the Fraud and Abuse Law and similar laws might not
assert an adverse position or new interpretation of existing laws that
could have a material adverse effect on its business.
The federal law known as the "Stark II" provisions of the Omnibus
Budget Reconciliation Act of 1993 (the “Stark Law”) amended the federal
Medicare statute to prohibit referrals by a physician for “designated
health services,” including physical therapy and occupational therapy,
to an entity in which the physician (or family member) has an
investment interest or other financial relationship, subject to certain
exceptions. This prohibition took effect on January 1, 1995.
This law also prohibits billing for services rendered pursuant to
a prohibited referral. Penalties for violation include denial of
payment for the services, significant civil monetary penalties, and
exclusion from the Medicare and Medicaid programs. Several states have
enacted laws similar to the Stark Law, but these state laws cover all
(not just Medicare and Medicaid) patients; and many healthcare reform
proposals in the last few years would have expanded the Stark Law to
cover all patients as well. The Stark Law covers a management contract
with a physician group and any financial relationship between the
Company and referring physicians, including any financial transaction
resulting from a clinic acquisition. As with the Fraud and Abuse Law,
management considers the Stark Law in planning its clinics, marketing
and other activities, and believes that its operations are in
compliance with applicable law. However, as noted above, no assurance
can be given regarding compliance in any particular factual situation.
healthcare
In an effort to combat healthcare fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). HIPAA amends existing criminal
legislation and criminal penalties for Medicare fraud and enacts new
HIPAA
federal
creates a source of funding for fraud control divided between HHS and
the Department of Justice and is used to coordinate federal, state and
local healthcare law enforcement programs, conduct investigations,
provide guidance to the healthcare industry on fraudulent healthcare
practices, and establish a national data bank
to receive and report final adverse actions. The Company cannot
predict what effect, if any, these expanded enforcement authorities
legislation.
anti-fraud
12
will have on the healthcare industry generally or on the Company’s
business.
Additionally, HIPAA mandates the adoption of certain standards
regarding the exchange of electronic healthcare information in an
effort to ensure the privacy and security of patient information.
HIPAA's security and privacy final regulations were released on
December 28, 2000 and became effective April 14, 2001. The Company
must fully comply with the final regulations by April 14, 2003.
Sanctions for failing to comply with HIPAA include criminal penalties
and civil sanctions.
The Company is evaluating the impact of HIPAA. At this time, the
Company anticipates that it will be able to fully comply with the HIPAA
requirements that have been adopted. Based on its current knowledge,
the Company believes that the cost of its compliance will not have a
material adverse effect on its business, financial condition or results
of operations.
Political, economic and regulatory influences are subjecting the
healthcare industry in the United States to fundamental change. The
Company anticipates that Congress, state legislatures and the private
sector will continue to review and assess alternative healthcare
delivery and payment systems. Potential approaches that have been
considered include mandated basic healthcare benefits, controls on
healthcare spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups, price controls and other fundamental
changes to the healthcare delivery system. Managed care entities,
which represent an ever-growing percentage of healthcare payors, are
demanding lower costs from healthcare providers, and in many cases,
requiring or encouraging providers to accept capitated payments that
may not be adequate to allow providers to cover their full costs or may
reduce their profitability. Legislative debate is expected to continue
in the future and market forces are expected to demand reduced costs.
The
Company cannot predict what impact the adoption of any federal or state
healthcare reform measures or future private sector reform may have on
its business.
Competition
The healthcare industry generally and the physical and occupational
therapy businesses in particular are highly competitive and subject to
continual changes in the manner in which
services are delivered and in which providers are selected. The
13
competitive factors in the physical and occupational therapy businesses
include, without limitation, quality of care, cost, treatment outcomes,
convenience of location, and relationships with and ability to meet the
needs of referral and payor sources. The Company's clinics compete
directly or indirectly with the physical and occupational therapy
departments of acute care hospitals, physician-owned therapy clinics,
private therapy clinics and chiropractors.
The Company believes that its main sources of competition are acute
care hospital outpatient therapy clinics and private therapy clinic
organizations that provide therapy services. The Company will face
further competition as consolidation of the therapy industry continues
through the acquisition of physician-owned and other privately-owned
therapy practices.
Management believes that providing key therapists in a community
or neighborhood with an opportunity to participate in clinic ownership
is a competitive advantage because it helps to ensure commitment by
local management to the success of the clinic and minimizes turnover of
managing therapists.
The Company also believes its competitive position is enhanced by
its strategy of locating its clinics, when possible, on the ground
floor in office buildings and shopping centers with nearby parking,
thereby making the clinics more easily accessible to patients. The
Company attempts to make the decor in its clinics less institutional
hospital
and
clinics. Management also believes it can generally provide its
services at a lesser cost than comparable services of hospitals due to
hospitals' higher overhead.
aesthetically
pleasing
more
than
Employees
At December 31, 2001, the Company employed 1,122 total employees,
of which 675 were full-time employees. At that date,
none of the Company's employees were subject to collective bargaining
agreements or were members of unions. Management considers the
relations between the Company and its employees to be good.
In the states in which the Company's current clinics are located,
persons performing physical and occupational therapy services are
required to be licensed by the state. All persons currently employed
by the Company and its clinics who are required to be licensed are
all
licensed,
Company
intends
that
and
the
future employees who are required to be licensed will be licensed.
Management is not aware of any federal licensing requirements
applicable to its employees.
14
Insurance
The Company maintains professional liability coverage on
professionals employed in each of its clinics, in addition to general
liability insurance and coverage for the customary risks inherent in
the operation of healthcare facilities and businesses in general.
Management believes insurance policies in force are adequate in amount
and coverage for its current operations.
Item 2. Properties.
The Company presently leases, under noncancellable operating leases
with terms ranging from one to five years, all of the properties used
for its clinics with the exception of two clinics located in Brownwood,
Texas and Mineral Wells, Texas, for which the Company owns. The
Company also owns a building in Clovis, New Mexico, which it intends to
sell or lease, related to a clinic that has been closed. The Company
intends, where feasible, to lease the premises in which new clinics
will be located. The Company's typical clinic occupies 1,500 to 3,000
square feet of space.
The Company also leases, under a noncancellable operating lease
expiring in July 2003, its executive offices located in Houston, Texas.
The executive offices currently occupy approximately 23,000 square feet
of space (including allocations for common areas).
Item 3. Legal Proceedings.
The Company is subject to litigation and other proceedings arising
in the ordinary course of business. While the ultimate outcome of
lawsuits or other proceedings cannot be predicted with
certainty, management does not believe the impact of such lawsuits or
other proceedings, if any, would be material to the Company's business,
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the
Company, through solicitation of proxies or otherwise, during the
fourth quarter of 2001.
15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Price Quotations
The Company’s common stock trades on the Nasdaq Stock Market, Inc.
(“Nasdaq”) National Market under the symbol “USPH.” The range of
Nasdaq reported trading prices for each quarterly period, as set forth
below, reflect the two-for-one stock split effected in the form of a
100% stock dividend, payable on January 5, 2001, to holders of record
as of December 27, 2000 and the three-for-two stock split effected in
the form of a 50% stock dividend, payable on June 28, 2001, to holders
of record as of June 7, 2001. The reported quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions.
2001
HIGH
LOW
2000
HIGH
LOW
QUARTER
First
$ 15.250
$ 7.042
$ 3.323
$ 2.750
Second
21.367
8.583
3.583
2.917
Third
19.750
11.210
5.250
3.458
Fourth
20.470
13.850
8.458
4.583
Record Holders
As of March 26, 2002, there were 40 holders of record of the
Company’s outstanding common stock.
Dividends
Since inception, the Company has not declared or paid cash
dividends or made distributions on its equity securities (other than as
described in the next paragraph), and the Company does not
anticipate that it will pay cash dividends or make distributions in the
foreseeable future.
On January 5, 2001, the Company effected a two-for-one stock split
in the form of a 100% stock dividend to stockholders of record as of
December 27, 2000.
On June 28, 2001, the Company effected a three-for-two stock split
in the form of a 50% stock dividend to stockholders of record as of
June 7, 2001. Fractional shares resulting from the three-for-two stock
split were paid to shareholders in cash.
16
Recent Sales of Unregistered Securities
On September 30, 2001, the Company purchased the 35% minority
interest in a limited partnership which owns nine clinics in Michigan
for consideration aggregating $2,111,000. The Company issued 95,000
shares of common stock and a note payable of $630,000. The securities
were issued in reliance on the exemption from registration set forth in
Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933, as amended.
On December 31, 2001, the Company purchased the 35% minority
interest in a limited partnership which owns four clinics in Michigan
for consideration aggregating $1,511,000. The Company issued 67,100
shares of common stock and a note payable of $435,000. The securities
were issued in reliance on the exemption from registration set forth in
Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933, as amended.
17
Item 6. Selected Financial Data.
Year Ended December 31,
2001
1998 1997
1999
(in thousands, except per share data)
2000
Net revenues (1)
$80,948 $63,222 $51,368 $44,837 $38,807
Income before
income taxes
$11,503 $ 6,138 $ 3,962 $ 2,704 $ 2,481
Net income (2)
$ 7,071 $ 3,735 $ 2,394 $ 1,596 $ 2,426
Earnings per common share:
Basic (3)
Diluted (3)
$ 0.70 $ 0.40 $ 0.23 $ 0.15 $ 0.23
$ 0.55 $ 0.34 $ 0.23 $ 0.14 $ 0.22
Total assets (1)
$36,220 $22,970 $23,346 $24,362 $22,548
Long-term debt, less
current portion
$ 3,021
$ 7,226 $ 8,087 $ 8,126 $ 8,239
Working capital (1)
$19,130
$10,420 $12,493 $12,832 $11,204
Current ratio (1)6.83
4.14
6.79
5.45
5.07
Total long-term debt to
total capitalization
0.12
0.46
0.43
0.41
0.45
(1) Certain amounts for 1999 and 1998 have been reclassified to conform
to the presentation used for 2001 and 2000. The reclassifications had
no effect on net income.
(2) Prior to 1998, net operating loss carryforwards were utilized to
offset any federal income tax liability.
(3) All per share information has been adjusted to reflect the two-for-
one stock split effected in the form of a 100% stock dividend, payable
on January 5, 2001 to holders of record as of December 27, 2000 and the
three-for-two stock split effected in the form of a 50% stock dividend
payable on June 28, 2001 to holders of record as of June 7, 2001.
Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
18
Overview
The Company operates outpatient physical and/or occupational therapy
clinics which provide post-operative care and treatment for
a variety of orthopedic-related disorders and sports-related injuries.
At December 31, 2001, the Company operated 162 outpatient physical
and/or occupational therapy clinics in 31 states. The average age of
the 162 clinics in operation at December 31, 2001 was 4.08 years.
Since the inception of the Company, 176 clinics have been developed and
six clinics have been acquired by the Company. To date, the Company
has sold one clinic, closed 14 facilities due to negative clinic
performance, consolidated the operations of three of its clinics with
other existing clinics to more efficiently serve various geographic
markets and closed two of the Company’s clinics after selling certain
fixed assets at such facilities. During 1999, three clinics were
closed with no loss being recognized related to these closures. These
three clinics combined accounted for net patient revenues and clinic
operating costs for the year ended December 31, 1999 of $263,000 and
$333,000, respectively. Two clinics were closed in 2000 with no loss
being recognized. These two clinics combined accounted for net patient
revenues and clinic operating costs for the year ended December 31,
2000 of $97,000 and 221,000, respectively, for the year ended December
31, 1999 of $222,000 and $328,000, respectively. During 2001, six
clinics were closed with no loss being recognized. These six clinics
combined accounted for net patient revenues and clinic operating costs
for the year ended December 31, 2001 of $393,000 and $513,000,
respectively, for the year ended December 31, 2000 of $738,000 and
$606,000, respectively, and for the year ended December 31, 1999 of
$353,000 and $219,000, respectively.
The Company also sold one clinic during 2001. This clinic accounted
for net patient revenues and clinic operating costs for the year ended
December 31, 2001 of $122,000 and $148,000, respectively, for the year
ended December 31, 2000 of $162,000 and $172,000, respectively, and for
the year ended December 31, 1999 of $167,000 and $177,000,
respectively.
In addition to the Company’s owned clinics, it also manages physical
therapy facilities for third parties, including physicians, with six
such third-party facilities under management as of December 31, 2001.
19
Critical Accounting Policies
Critical accounting policies are those that have a significant impact
on the results of operations and financial position of the Company
involving significant estimates requiring judgment by Management. The
Company’s critical accounting policies are:
Revenue Recognition. The Company bills primarily third-party payors
for services at standard rates. Actual payments received from the
payors vary based upon the payor’s fee schedules, contracts the Company
may have signed with the payor or limits on usual and customary
charges. Based upon historical payment data, the Company records a
contractual allowance to reduce gross revenues to the estimated net
realizable amount expected to be ultimately collected from payors. The
accuracy of revenue recognition improves with the timeliness of
collections.
Allowance for Doubtful Accounts. The Company reviews account agings
and experience with particular payors at each clinic in determining an
appropriate accrual for doubtful accounts. Historically, clinics that
have large numbers of older accounts generally have less favorable
collection experience, and thus, require a higher allowance. Accounts
that are ultimately determined to be uncollectible are written off
against the bad debt allowance.
Accounting for Income Taxes. As part of the process of preparing the
consolidated financial statements, the Company is required to estimate
its federal income tax liability and income taxes in the states in
which it operates, as well as assessing temporary differences resulting
from differing treatment of items, such as bad debt expense and
amortization of leasehold improvements, for tax and accounting
purposes. The differences result in deferred tax assets and
liabilities, which are included in the consolidated balance sheets.
Management then must assess the likelihood that deferred tax assets
will be recovered from future taxable income, and if not, establish a
valuation allowance.
Fiscal Year 2001 Compared to Fiscal Year 2000
20
Net Patient Revenues
Net patient revenues increased to $78,450,000 for 2001 from $60,667,000
for 2000, an increase of $17,783,000, or 29%, on a 25% increase in
patient visits to 871,000. Net patient revenues from the 30 clinics
opened during 2001 (the “2001 New Clinics”) accounted for 21% of the
increase, or $3,703,000. The remaining increase of $14,080,000 in net
patient revenues is attributable to the 132 clinics opened before 2001
(the “Mature Clinics”). Of the $14,080,000 increase in net patient
r e v e n u e s
M a t u r e
Clinics, $11,444,000 was due to a 19% increase in the number of patient
visits to 829,000, while $2,636,000 was due to a 4% increase in the
average net revenue per visit to $90.19.
f r o m
t h e
Net patient revenues are based on established billing rates less
allowances and discounts for patients covered by worker's compensation
programs and other contractual programs. Payments received under these
programs are based on predetermined rates and are generally less than
the established billing rates of the clinics. Net patient revenues
reflect reserves, which are evaluated quarterly by management, for
contractual and other adjustments relating to patient discounts from
certain payors. Reimbursement for outpatient therapy services provided
to Medicare beneficiaries is pursuant to a fee schedule published by
the Department of Health and Human Services, and the total amount that
may be paid by Medicare in any one year for outpatient physical
(including speech-language pathology) or occupational therapy to any
one patient is limited to $1,500, except for services provided in
hospitals. On November 29, 1999, President Clinton signed into law the
Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
which, among other provisions, placed a two-year moratorium on the
$1,500 reimbursement limit for therapy services provided in 2000 and
2001. On December 21, 2000, the President signed into law the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 which, among other provisions, extended the moratorium for one
year through December 31, 2002. The Company does not generally treat
long-term complicated rehabilitation cases; therefore, should the
$1,500 reimbursement limit become effective in 2003, the Company does
not anticipate a material impact on revenues in 2003.
Management Contract Revenues
Management contract revenues decreased to $2,311,000 for 2001 from
$2,369,000 for 2000, a decrease of $58,000, or 2%. This decrease was
primarily due to the termination at the end of the contract of
21
a third-party management contract with a hospital in February 2001.
Currently, the Company is not expecting significant expansion of the
management contracting business.
Clinic Operating Costs
Clinic operating costs as a percent of combined net patient revenues
and management contract revenues decreased to 68% in 2001 from 72% in
2000.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $35,351,000 for 2001 from
$28,683,000 for 2000, an increase of $6,668,000, or 23%. Approximately
26% of the increase, or $1,715,000, was due to the 2001 New Clinics.
The remaining 74% increase, or $4,953,000, was due principally to
increased staffing to meet the increase in patient visits for the
Mature Clinics, coupled with an increase in bonuses earned by the
clinic directors at the Mature Clinics. Such bonuses are based on the
net revenues or operating profit generated by the individual clinics.
Salaries and related costs as a percent of combined net patient
revenues and management contract revenues decreased to 44% in 2001 from
46% in 2000.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $17,599,000 for 2001 from
$14,952,000 for 2000, an increase of $2,647,000, or 18%. Approximately
49% of the increase, or $1,310,000, was due to the 2001 New Clinics,
while 51%, or $1,337,000, of the increase was due
to the Mature Clinics. The increase in rent, clinic supplies and other
for the Mature Clinics was primarily due to the fact that for the 28
clinics opened during 2000, 32% opened in the fourth quarter.
Accordingly, 2001 was the first year in which they incurred a full year
of expenses. Rent, clinic supplies and other as a percent of net
patient revenues and management contract revenues combined decreased to
22% for 2001 from 24% for 2000.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $1,930,000 for 2001
from $1,596,000 for 2000, an increase of 21%, or $334,000.
Approximately 24% of the increase, or $81,000, was due to the 2001
New Clinics. The remaining 76% increase, or $253,000, was due to the
Mature Clinics. The provision for doubtful accounts as a percent of
net patient revenues was 2.5% for 2001 compared to 2.6% for 2000.
22
Corporate Office Costs
Corporate office costs, consisting primarily of salaries and benefits
of corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting
fees increased to $9,120,000 for 2001 from $7,607,000 for 2000, an
increase of $1,513,000, or 20%. Corporate
office costs increased primarily as a result of increased legal fees,
travel, recruiting fees and salaries and benefits related to additional
personnel hired to support an increasing number of clinics. Corporate
office costs as a percent of combined net patient revenues and
management contract revenues decreased to 11% in 2001 from 12% in 2000.
Corporate office expense in 2000 included $369,000 related to the
Company’s discontinued surgery center initiative.
Interest Expense
Interest expense decreased $514,000, or 66%, to $266,000 for 2001 from
$780,000 for 2000. This decrease was primarily due to the conversion
of $850,000 and $4,200,000 of convertible subordinated debt into shares
of Company common stock in the last quarter of 2000 and the first
quarter of 2001, respectively. See “Factors Affecting Future Results -
Convertible Subordinated Debt.”
Minority Interests in Earnings of Subsidiary Limited Partnerships
Minority interests in earnings of subsidiary limited partnerships
increased $1,713,000, or 49%, to $5,179,000 for 2001 from $3,466,000
for 2000 due to the increase in aggregate profitability of those
clinics in which partners have achieved positive retained earnings and
are accruing partnership income.
Provision for Income Taxes
The provision for income taxes increased to $4,432,000 for 2001 from
$2,403,000 for 2000, an increase of $2,029,000, or 84%. During 2001
and 2000, the Company accrued income taxes at an effective tax rate of
39%. The 2001 and 2000 rate exceeded the U.S. statutory tax rate of
35% due primarily to state income taxes.
Fiscal Year 2000 Compared to Fiscal Year 1999
Net Patient Revenues
Net patient revenues increased to $60,667,000 for 2000 from $49,056,000
for 1999, an increase of $11,611,000, or 24%, on a 23% increase in
patient visits to 697,000. Net patient revenues from the 28 clinics
opened during 2000 (the “2000 New Clinics”) accounted for 27% of the
increase, or $3,144,000. The remaining increase of $8,467,000 in net
t o
p a t i e n t
a t t r i b u t a b l e
r e v e n u e s
i s
23
the 111 clinics opened before 2000 (the “Mature Clinics”). Of the
$8,467,000 increase in net patient revenues from the Mature Clinics,
$8,215,000 was due to a 17% increase in the number of patient visits to
661,000, while $252,000 was due to a $0.36 increase in the average net
revenue per visit to $87.03.
See the discussion on accounting for and regulatory initiatives related
to patient billing under the heading “Fiscal Year 2001 Compared to
Fiscal Year 2000 - Net Patient Revenues.”
Management Contract Revenues
Management contract revenues increased to $2,369,000 for 2000 from
$2,112,000 for 1999, an increase of $257,000, or 12%. Approximately
$117,000 of the increase, or 46%, was due to a new management contract
entered into in March 2000. The remaining 54% increase, or $140,000,
was primarily due to a 9% increase in patient visits for management
contracts entered into prior to 2000.
Other Revenues
Other revenues, consisting of interest, sublease and real estate
commission income, decreased to $186,000 for 2000 from $200,000 for
1999, a decrease of $14,000, or 7%. The decrease was primarily due to
a sublease agreement that was terminated in 1999, offset in part by an
increase in real estate commission income.
Clinic Operating Costs
Clinic operating costs as a percent of combined net patient revenues
and management contract revenues decreased to 72% for 2000 from 74% for
1999.
Clinic Operating Costs - Salaries and Related Costs
Salaries and related costs increased to $28,683,000 for 2000 from
$23,995,000 for 1999, an increase of $4,688,000, or 20%.
Approximately 37% of the increase, or $1,748,000, was due to the 2000
New Clinics. The remaining 63% increase, or $2,940,000, was due
principally to increased staffing to meet the increase in patient
visits for the Mature Clinics, coupled with an increase in bonuses
earned by the clinic directors at the Mature Clinics. Such bonuses are
based on the net revenues or operating profit generated by the
individual clinics. Salaries and related costs as a percent of net
patient revenues and management contract revenues combined decreased to
46% for 2000 from 47% for 1999.
Clinic Operating Costs - Rent, Clinic Supplies and Other
Rent, clinic supplies and other increased to $14,952,000 for 2000 from
$12,455,000 for 1999, an increase of $2,497,000, or 20%.
24
Approximately 57% of the increase, or $1,415,000, was due to the 2000
New Clinics, while 43%, or $1,082,000, of the increase was due
to the Mature Clinics. The increase in rent, clinic supplies and other
for the Mature Clinics related to the fact that of the 17 clinics
opened during 1999, 59% were opened during the second half of the year.
Accordingly, 2000 was the first year in which they incurred a full year
of expenses. Rent, clinic supplies and other as a percent of net
patient revenues and management contract revenues combined remained
unchanged at 24% for 2000 and 1999.
Clinic Operating Costs - Provision for Doubtful Accounts
The provision for doubtful accounts increased to $1,596,000 for 2000
from $1,165,000 for 1999, an increase of 37%, or $431,000.
Approximately 16% of the increase, or $70,000, was due to the 2000
New Clinics. The remaining 84% increase, or $361,000, was due to the
Mature Clinics. The provision for doubtful accounts as a percent of
net patient revenues was 2.6% for 2000 compared to 2.4% for 1999.
Corporate Office Costs
Corporate office costs, consisting primarily of salaries and benefits
of corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting
fees increased to $7,607,000 for 2000 from $6,487,000 for 1999, an
increase of $1,120,000, or 17%. Corporate office costs increased
primarily as a result of increased travel, recruiting fees, marketing
expenses and salaries and benefits related to additional personnel
hired to support an increasing number of clinics. Corporate office
costs for 2000 and 1999 included $369,000 and $384,000, respectively,
related to the discontinued surgery center initiative. Excluding
expenses related to the surgery centers, corporate office costs as a
percent of net patient revenues and management contract revenues
combined decreased to 11% for 2000 from 12% for 1999.
Interest Expense
Interest expense increased $53,000, or 7%, to $780,000 for 2000 from
$727,000 for 1999. This increase in interest was due to
$2,115,000 borrowed by the Company to help finance the repurchase of
1,695,000 shares of its common stock. In November 2000, the
Company repaid $1,215,000 of this loan, leaving a balance of $900,000
at December 31, 2000. The loan bore interest at a rate per annum of
prime plus one-half percentage point and the balance was repaid in
March 2001. See “Liquidity and Capital Resources.”
25
Minority Interests in Earnings of Subsidiary Limited Partnerships
Minority interests in earnings of subsidiary limited partnerships
increased $889,000, or 34%, to $3,466,000 for 2000 from $2,577,000 for
1999 due to the increase in aggregate profitability of those clinics in
which partners have achieved positive retained earnings and are
accruing partnership income.
Provision for Income Taxes
The provision for income taxes increased to $2,403,000 for 2000 from
$1,568,000 for 1999, an increase of $835,000, or 53%. During 2000 and
1999, the Company accrued income taxes at effective tax rates of 39%
and 40%, respectively. The 2000 and 1999 rates exceeded the U.S.
statutory tax rate of 34% due primarily to state income taxes.
Liquidity and Capital Resources
At December 31, 2001, the Company had $8,121,000 in cash and cash
equivalents available to fund the working capital needs of its
operating subsidiaries, future clinic developments, acquisitions and
investments. Included in cash and cash equivalents at December 31,
2001 was $4,525,000 in a money market fund invested in short-term debt
instruments issued by an agency of the U.S. Government.
The increase in cash of $6,050,000 from December 31, 2000 to December
31, 2001 is due primarily to cash provided by operating activities of
$15,172,000 and proceeds from the exercise of stock options of
$2,279,000, offset in part by the Company’s use of cash to repurchase
135,000 shares of common stock for $1,943,000, pay notes payable of
$1,542,000, fund capital expenditures for physical therapy equipment
and leasehold improvements in the amount of $3,344,000, distribute
$4,530,000 to minority investors in subsidiary limited partnerships and
to purchase intangibles of $53,000.
The Company’s current ratio increased to 6.83 to 1.00 at December 31,
2001 from 4.14 to 1.00 at December 31, 2000. The increase in
the current ratio was due primarily to an increase in cash and cash
equivalents and an increase in net patient revenues, which in turn
caused an increase in patient accounts receivable.
At December 31, 2001, the Company had a debt-to-equity ratio of 0.14 to
1.00 compared to 0.85 to 1.00 at December 31, 2000. The decrease in
the debt-to-equity ratio from December 31, 2000 to December 31, 2001
resulted from net income of $7,071,000, the conversion of $4,200,000
s u b o r d i n a t e d
c o m m o n
stock, the issuance of 162,100 shares of common stock valued at
p a y a b l e
n o t e s
i n t o
26
$2,557,000 associated with the purchase of the 35% minority interest in
thirteen Michigan clinics and the proceeds of and tax benefit from the
exercise of stock options of $2,279,000 and $3,134,000, respectively.
In August 2000, the Company completed the repurchase of 1,695,000
shares for a total aggregate cost of $6,275,000 (including expenses).
The Company utilized cash on hand and a bank loan in the amount of
$2,115,000 to fund the purchase of the stock.
In conjunction with the stock purchase, the Company entered into a loan
agreement with a bank to borrow up to $2,500,000 on a line of credit,
convertible to a term loan on December 31, 2000. The loan bore
interest at a rate per annum of prime plus one-half percentage point
and was repayable in quarterly installments of $250,000 beginning March
2001. In November 2000, the Company repaid $1,215,000 of the
$2,115,000 borrowed under the convertible line of credit. In March
2001, the Company repaid the remaining balance of $900,000 on the bank
loan.
In September 2001, the Board of Directors authorized the purchase, in
the open market or in privately negotiated transactions, up to
1,000,000 shares of the Company’s common stock. Any shares purchased
will be held as treasury shares and may be used for such valid
corporate purposes or retired as the Board of Directors, in its
discretion, may deem advisable. As of December 31, 2001, the Company
had purchased 135,000 shares of its common stock on the open market for
a total of $1,943,000.
The Company does not have credit lines or other arrangements for
funding with banks or other institutions. Historically, the Company
has generated cash from operations sufficient to fund its development
and
cover
needs.
operational
The
activities
Company does not generally acquire new clinics through acquisitions of
existing clinics, but develops clinics in a de novo fashion, which
management believes generally requires substantially less capital. The
Company currently plans to continue adding new clinics on a de novo
basis, although this strategy may change from time to time as
appropriate opportunities become available. The Company has from time
to time purchased minority interests of limited partners in clinic
partnerships, including the minority interests purchased in the
thirteen Michigan clinics referred to above. In selective cases, the
Company may purchase additional minority interests in the future.
Generally, any material purchases of minority interests are expected to
be accomplished using a combination of common stock and cash.
27
Management believes that existing funds, supplemented by cash flows
from existing operations, will be sufficient to meet its current
operating needs, development plans and any purchases of minority
interests through at least 2002.
Recently Promulgated Accounting Standards
In July 2001, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 141 (“SFAS 141”),
“Business Combinations.” SFAS 141 eliminates the pooling of interests
method of accounting and requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase
method. The adoption of SFAS 141 did not have a material impact on the
Company’s business because it had no planned or pending acquisitions
that would have met the requirements for use of the pooling of
interests method.
Also in July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 “Goodwill and Other Intangible Assets,” (“SFAS 142“)
which is effective for the Company beginning in 2002 except for certain
provisions that were effective July 1, 2001. SFAS 142 requires
goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS 142 further requires the fair value of goodwill and
other intangible assets with indefinite lives be tested for impairment
upon adoption of this statement, annually and upon the occurrence of
certain events and be written down to fair value if considered
impaired. At December 31, 2001, the Company had approximately
$4,519,000 of unamortized goodwill. Amortization expense related to
goodwill was $44,000, $61,000 and $61,000 for the years ended December
31, 2001, 2000 and 1999, respectively. The Company does not believe
the adoption of SFAS 142 will have a material impact on its financial
condition or results of operations.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset
Retirement Obligations,” (“SFAS 143“) which addresses financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement
costs. This statement applies to all entities that have legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development
or normal use of the asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. We do not expect the adoption of SFAS
143 to have a significant impact on the Company’s financial condition
or results of operations.
28
In October 2001, the FASB issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” (“SFAS 144“) which
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS 144 supersedes SFAS
Statement No. 121, “Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of,” it retains many of the
fundamental provisions of that statement. SFAS 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, “Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions,” for the disposal of a segment of a
business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
Company does not expect SFAS 144 to have a significant impact on the
Company’s financial condition or results of operations.
Factors Affecting Future Results
Clinic Development
As of December 31, 2001, the Company had 162 clinics in operation, 30
of which opened in 2001. Management’s goal for 2002 is to open between
35 and 40 additional clinics. The opening of these clinics
is subject to the Company’s ability to identify suitable geographic
locations and physical and occupational therapists to manage the
clinics. The Company’s operating results will be impacted by initial
operating losses from the new clinics. During the initial period of
operation, operating margins for newly opened clinics tend to be lower
than more seasoned clinics due to the start-up costs of newly opened
clinics (including, without limitation, salaries and related costs of
the physical and/or occupational therapist and other clinic personnel,
rent and equipment and other supplies required to open the clinic) and
the fact that patient visits and revenues tend to be lower in the first
year of a new clinic's operation and increase significantly over the
subsequent two to three years. Based on historical performance of the
Company’s new clinics, the clinics opened in 2001 should favorably
impact the Company’s results of operations for 2002 and beyond.
Convertible Subordinated Debt
In a June 1993 private placement, the Company issued $3,050,000 of 8%
Convertible Subordinated Notes due June 30, 2003 (the “Initial
Series Notes”). In a May 1994 private placement, the Company issued
$2,000,000 of 8% Convertible Subordinated Notes, Series B due June 30,
2004 (the “Series B Notes”) and $3,000,000 of 8% Convertible
Subordinated Notes, Series C due June 30, 2004 (the
29
“Series C Notes” and collectively, the Initial Series Notes, the
Series B Notes and the Series C Notes are hereinafter referred to
as the “Convertible Subordinated Notes”).
The Convertible Subordinated Notes were convertible at the option of
the holders thereof into the number of whole shares of Company common
stock determined by dividing the principal amount of the Notes so
converted by $3.33 in the case of the Initial Series Notes and the
Series C Notes or $4.00 in the case of the Series B Notes. Only the
$3,000,000 Series C Notes remain outstanding.
During 2000, $100,000 of the Initial Series Notes and $750,000 of the
Series B Notes were converted by the note holders into 30,000 and
187,497 shares of common stock, respectively. This resulted in a
balance of $2,950,000, $1,250,000 and $3,000,000 for the Initial Series
Notes, the Series B Notes and the Series C Notes, respectively, at
December 31, 2000. In January 2001, an additional $650,000 of the
Initial Series Notes was converted by a note holder into 195,000 shares
of common stock. In addition, the Company exercised its right to
require conversion of the remaining balance of $2,300,000 of the
Initial Series Notes and $1,250,000 of the Series B Notes into 690,000
and 312,498 shares of common stock, respectively. The fair value of
the debt converted in 2001 and 2000 was approximately $11,161,000 and
$1,380,000, respectively, based upon the closing price of the Company’s
common stock on the day before conversion as reported by the National
Market of Nasdaq.
The debt conversions increased the Company’s shareholders’ equity by
the carrying amount of the debt converted less unamortized deferred
financing costs, thus improving the Company’s debt to equity ratio and
favorably impacted results of operations and cash flow due to the
interest savings in 2001 before income taxes of approximately $400,000.
Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2000, the Company had outstanding $2,950,000
aggregate principal of the Initial Series Notes, $1,250,000 aggregate
principal of the Series B Notes and $3,000,000 aggregate principal
amount of the Series C Notes. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Factors
Affecting Future Results - Convertible Subordinated Debt.”
As of December 31, 2001, the Company had outstanding $3,000,000
aggregate principal amount of the Series C Notes.
30
Based upon the closing price of the Company’s common stock on March 25,
2002 of $17.85, as reported by the National Market of Nasdaq, the fair
value of the Series C Notes was $16,065,000. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations - Convertible Subordinated Debt.”
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Quantitative and Qualitative Disclosures About
Market Risk.”
Item 8. Financial Statements and Supplementary Data.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Audited Financial Statements:
Consolidated Balance Sheets as of
December 31, 2001 and 2000
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2001, 2000 and 1999
32
34
36
37
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999
38
Notes to Consolidated Financial Statements 40
31
INDEPENDENT AUDITORS’ REPORT
Board of Directors and Shareholders
U.S. Physical Therapy, Inc.
We have audited the accompanying consolidated balance sheets of U.S.
Physical Therapy, Inc. and subsidiaries (the “Company”) as of December
31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2001. In connection with
our audits of the consolidated financial statements, we have also
audited the related consolidated financial statement schedule for each
of the years in the three-year period ended December 31, 2001. These
consolidated financial statements and the consolidated financial
statement schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
U.S. Physical Therapy, Inc. and subsidiaries as of December 31, 2001
and 2000, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in note 2 to the consolidated financial statements,
effective July 1, 2001, the Company adopted the provisions of Statement
141,
of
Accounting
Standards
Financial
(“SFAS”)
No.
32
“Business Combinations,” and certain provisions of SFAS No. 142,
“Goodwill and Other Intangible Assets,” as required for goodwill and
intangible assets resulting from business combinations consummated
after June 30, 2001.
Houston, Texas
February 27, 2002
KPMG LLP
33
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Patient accounts receivable, less
allowance for doubtful accounts
of $3,805 and $2,780,
respectively
Accounts receivable - other
Other current assets
Total current assets
Fixed assets:
Furniture and equipment
Leasehold improvements
Less accumulated depreciation
and amortization
Goodwill, net of amortization of
$335 and $291, respectively
Other assets, net of amortization
of $501 and $483, respectively
December 31,
2000
2001
$ 8,121
$ 2,071
12,769
878
646
22,414
14,214
7,389
21,603
13,798
7,805
10,701
452
519
13,743
12,141
6,313
18,454
11,463
6,991
4,519
897
1,482
1,339
$ 36,220
$ 22,970
See notes to consolidated financial statements.
34
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
2000
2001
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade
Accrued expenses
Estimated third-party payor
(Medicare) settlements
Notes payable
Total current liabilities
$ 539
1,931
113
701
3,284
$ 434
1,622
355
912
3,323
Notes payable - long-term portion
Convertible subordinated notes
payable
Minority interests in subsidiary
limited partnerships
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value,
500,000 shares authorized, -0-
shares outstanding
Common stock, $.01 par value,
20,000,000 shares authorized,
10,688,321 and 8,548,374 shares
issued at December 31, 2001
and 2000, respectively
Additional paid-in capital
Retained earnings
Treasury stock at cost, 149,700 and
21
3,000
3,249
-
26
7,200
2,858
-
-
-
107
15,429
13,120
85
3,476
6,049
14,700 shares held at December 31,
2001 and 2000, respectively
Total shareholders' equity
(1,990)
26,666
(47)
9,563
$ 36,220
$ 22,970
See notes to consolidated financial statements.
35
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2001 2000 1999
Net patient revenues
Management contract revenues
Other revenues
Net revenues
Clinic operating costs:
2,311
$ 78,450 $ 60,667 $ 49,056
2,112
187 186 200
51,368
63,222
80,948
2,369
23,995
Salaries and related costs
Rent, clinic supplies and other
12,455
Provision for doubtful accounts 1,930 1,596 1,165
37,615
35,351
17,599
28,683
14,952
45,231
54,880
Corporate office costs
9,120 7,607 6,487
Operating income before non-
operating expenses
16,948
10,384
7,266
Interest expense
266
780
727
Minority interests in subsidiary
limited partnerships
5,179 3,466 2,577
Income before income taxes
11,503
6,138
3,962
Provision for income taxes
4,432 2,403 1,568
Net income
$ 7,071 $ 3,735 $ 2,394
Basic earnings per common share
$ .70 $ .40 $ .23
Diluted earnings per common share $ .55 $ .34 $ .23
See notes to consolidated financial statements.
36
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Common Stock
Shares Amount
Add’l
Paid-In
Capital
Accumu-
lated
Earnings/
(Deficit)
Treasury Stock
Shares Amount
Total
Share-
holders’
Equity
-
-
1
1
-
-
-
60
393
217
154
(15)
394
-
-
-
-
-
-
-
-
($80)
($47) $11,605
2,314 (15)
10,850 $108 $11,624
255
-
- (6,275)
255
(1,695) (17) (6,258)
134
-
135
- (3,414)
(1,038) (10) (3,404)
- - - 2,394 - - 2,394
(47) 10,720
Balance January 1, 1999
Proceeds from exercise
of stock options
Repurchase common stock
Net income
Balance December 31, 1999 9,872 99 8,354
Proceeds from exercise
of stock options
Tax benefit from
exercise of stock
options
Repurchase common stock
8% convertible
subordinated notes
converted to common
stock
Net income
Balance December 31, 2000 8,548
Proceeds from exercise
of stock options
Tax benefit from
exercise of stock
options
8% convertible
subordinated notes
converted to common
stock
Repurchase treasury stock
Common stock issued in
purchase of minority
interests
Purchase of fractional
shares on three-for-two
(12)
common stock split
Net income
- - - 7,071 - - 7,071
Balance December 31, 2001 10,688 $107 $15,429 $13,120 (150) ($1,990) $26,666
734
- - - 3,735 - - 3,735
9,563
-
4,017
- (135) (1,943) (1,943)
1,198
-
4,005
-
6,049 (15)
12
-
2,555
3,134
2,271
3,134
2,279
2,557
3,476
162
(12)
780
(47)
732
85
-
-
-
-
2
8
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2
-
See notes to consolidated financial statements.
37
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities
Net income
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization
Minority interests in earnings
of subsidiary limited
partnerships
Provision for doubtful accounts
Loss on sale of fixed assets
Tax benefit from exercise of
stock options
Deferred income taxes
Changes in operating assets and
liabilities:
Increase in patient accounts
Year Ended December 31,
2001 2000 1999
$ 7,071
$ 3,735 $ 2,394
2,566
2,331
2,090
5,179
1,930
3
3,466
1,596
35
2,577
1,165
9
3,134
(351)
255
(294)
-
(109)
receivable
(3,998)
(2,692) (2,265)
Increase in accounts receivable-
other
(426)
Decrease (increase) in other assets (108)
Increase (decrease) in accounts
payable and accrued expenses
414
(68)
203
(114)
15
378
(207)
Decrease in estimated third-party
payor (Medicare) settlements (242) (84) (505)
Net cash provided by operating
activities
15,172
8,861 5,050
See notes to consolidated financial statements.
38
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2001 2000 1999
Investing activities
Purchase of fixed assets
Purchase of intangibles
Proceeds on sale of fixed assets
Net cash used in investing
($3,344) ($2,827) ($2,097)
(24)
(10)
(53)
21
35 25
activities
(3,376) (2,802) (2,096)
Financing activities
Proceeds from notes payable
Payment of notes payable
Repurchase of common stock
Proceeds from investment of minority
investors in subsidiary limited
partnerships
-
(1,542)
(1,943)
-
2,115
(1,253)
(32)
(6,275) (3,414)
29
-
135
-
Purchase of fractional shares
Proceeds from exercise of stock options2,279
Conversion of notes payable into
2
(12)
81
-
394
common stock
Distributions to minority investors
-
(8)
in subsidiary limited partnerships (4,530) (3,072) (1,970)
Net cash used in financing
activities
Net increase (decrease) in cash
and cash equivalents
Cash and cash equivalents -
beginning of year
Cash and cash equivalents -
(5,746) (8,018) (5,252)
6,050
(1,959) (2,298)
2,071
4,030 6,328
end of year
$ 8,121
$ 2,071 $ 4,030
Supplemental disclosures of cash
flow information
Cash paid during the year for:
Income taxes
Interest
$ 1,957
$ 268
$ 2,639 $ 1,763
$ 709 $ 651
See notes to consolidated financial statements.
39
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. Organization, Nature of Operations and Basis of Presentation
U.S. Physical Therapy, Inc. and its subsidiaries (the "Company")
develops, owns and operates outpatient physical and occupational
therapy clinics. As of December 31, 2001, the Company owned and
operated 162 clinics in 31 states. The clinics provide post-operative
care and treatment for a variety of orthopedic-related disorders and
sports-related injuries, treatment for neurologically-related injuries,
rehabilitation of injured workers and preventative care. The clinics'
business primarily originates from physician referrals. The principal
sources of payment for the clinics' services are commercial health
insurance, workers' compensation insurance, managed care programs,
Medicare and proceeds from personal injury cases.
In addition to the Company’s ownership of clinics, it also manages
physical therapy facilities for third parties, including physicians,
with six such third-party facilities under management as of December
31, 2001.
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, through its wholly-owned subsidiaries, currently owns a 1%
general partnership interest, with the exception of one clinic in which
the Company owns a 6% general partnership interest, and limited
partnership interests ranging from 49% to 99% in the clinics it owns
and operates (with respect to 80% of the Company’s clinics, the Company
owned a limited partnership interest of 64%). For the majority of the
clinics, the managing therapist of each such clinic, along with other
therapists at the clinic in several of the partnerships, own the
remaining limited partnership interests in the clinic. In some
instances, the Company develops satellite clinic facilities which are
extensions of existing clinics, and thus, clinic partnerships may
consist of one or more clinic locations. In the majority of the
partnership agreements the therapist partner begins with a 20% profit
interest in his or her clinic limited partnership which increases by 3%
at the end of each year until his or her interest reaches 35%. The
minority interest in the equity and earnings of the clinic limited
40
partnerships is presented separately in the consolidated financial
statements.
2. Significant Accounting Policies
Common Stock
On January 5, 2001, the Company effected a two-for-one common stock
split in the form of a 100% stock dividend to stockholders of record as
of December 27, 2000.
On June 28, 2001, the Company effected a three-for-two common stock
split in the form of a 50% stock dividend to stockholders of record as
of June 7, 2001.
All share and per share information included in the accompanying
consolidated financial statements and related notes have been adjusted
to reflect these stock splits.
Accounting Change
Effective July 1, 2001, the Company adopted the provisions of Statement
of Financial Accounting Standards (“SFAS”) No. 141, “Business
Combinations,” and certain provisions of SFAS No. 142, “Goodwill and
Other Intangible Assets,” as required for goodwill and intangible
assets resulting from business combinations consummated after June 30,
2001.
On September 30, 2001, the Company purchased the 35% minority interest
in a limited partnership which owns nine clinics in Michigan and on
December 31, 2001, the Company purchased the 35% minority interest in
a limited partnership which owns four clinics in Michigan (see Note 3).
SFAS No. 141 requires the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 also
specifies criteria which intangible assets acquired in a purchase
method business combination must meet to be recognized and reported
apart from goodwill. The SFAS No. 142 provisions adopted require that
goodwill and intangible assets with indefinite useful lives acquired in
a business combination completed after June 30, 2001 no longer be
amortized, but instead be tested for impairment in accordance with pre-
SFAS No. 142 accounting literature.
Goodwill associated with the purchase of minority interests in
September and December 2001 totaled $3,622,000. This goodwill has
41
not been amortized and will be tested for impairment upon adoption of
certain provisions of SFAS No. 142 that are effective for the Company
effective January 1, 2002. If the goodwill associated with the
September and December 2001 acquisitions of minority interests had been
amortized in accordance with the Company’s pre-SFAS No. 142 policy,
additional amortization expense for the year ended December 31, 2001
would have been $26,000.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents. The
Company, pursuant to its investment policy, invests its cash in
deposits with major financial institutions, in highly rated commercial
paper and short-term treasury and United States government agency
securities. Included in cash and cash equivalents at December 31, 2001
and 2000 was $4,525,000 and $710,000, respectively, in a money market
fund invested in short-term debt instruments issued by an agency of the
U.S. Government.
Long-Lived Assets
Fixed assets are stated at cost. Depreciation is provided using 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
estimated useful lives of the assets or the related lease terms,
whichever is shorter.
Non-compete agreements are being amortized on a straight-line basis
over their respective terms, ranging from two to seven years.
Goodwill
“Old goodwill” is amortized using the straight-line method over twenty
years.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other
Intangible Assets,” (“SFAS 142“). Provisions of SFAS 142 that are
effective for the Company January 1, 2002, require that goodwill and
other intangible assets with indefinite lives no longer be amortized.
SFAS 142 further requires the fair value of goodwill and other
intangible assets with indefinite lives be tested for impairment upon
adoption of this statement, annually and upon the occurrence of certain
events and be written down to fair value if considered impaired. At
C o m p a n y
D e c e m b e r
2 0 0 1 ,
3 1 ,
t h e
42
had approximately $4,519,000 of unamortized goodwill. Amortization
expense related to goodwill was $44,000, $61,000 and $61,000 for the
years ended December 31, 2001, 2000 and 1999, respectively. The
Company does not believe the adoption of SFAS 142 will have a material
impact on its financial condition or results of operations.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards (“SFAS”) No.
121, “Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of.” This statement requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” (“SFAS 144“) which
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121,
it retains many of the fundamental provisions of that statement. SFAS
144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, “Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions,” for the
disposal of a segment of a business. SFAS 144 is effective for the
Company January 1, 2002. The Company does not expect adoption of SFAS
144 will have a significant impact on its financial condition or
results of operations.
Net Patient Revenues
43
Net patient revenues are reported at the estimated net realizable
amounts from patients, insurance companies, third-party payors, 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
historical experience and the terms of payor contracts. Net accounts
receivable includes only those amounts the Company estimates to be
collectible.
Reimbursement for outpatient therapy services provided to Medicare
beneficiaries is pursuant to a fee schedule published by the Department
of Health and Human Services (“HHS”), and the total
amount that may be paid by Medicare in any one year for outpatient
physical (including speech-language pathology) or occupational therapy
to any one patient is limited to $1,500, except for services provided
in hospitals. On November 29, 1999, President Clinton signed into law
the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
(“BBRA”) which, among other provisions, placed a two-year moratorium on
the $1,500 reimbursement limit for Medicare therapy services provided
in 2000 and 2001. On December 21, 2000, the President signed into law
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
Act of 2000 (“BIPA”) which, among other provisions, extended the
moratorium for one year through December 31, 2002. The Company does
not generally treat long-term complicated rehabilitation cases,
therefore, should the $1,500 reimbursement limit become effective in
2003, the Company does not anticipate a material impact on revenues in
2003.
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 December 31, 2001. 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
44
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 (“SFAS 133"), “Accounting for Derivative
Instruments and Hedging Activities,” as amended by SFAS No. 138. SFAS
133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative instruments in
the statement of financial position at fair value. Adoption of SFAS
1
material effect on the Company’s financial condition or results of
operations because the Company historically has not entered into
derivative or other financial instruments for trading or speculative
purposes nor does it use or intend to use derivative financial
instruments or derivative commodity instruments.
a
3
3
t
e
a
h
v
n
d
d
o
i
Fair Values
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. The fair values of the long-
term convertible subordinated notes are based on the Company’s stock
price and the number of shares that would be acquired upon conversion.
Based upon the closing price of the Company’s common stock on December
31, 2001 of $16.16, the fair value of the convertible subordinated
notes was $14,544,000.
Use of Estimates
Management is required to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
45
Certain amounts presented in the accompanying consolidated financial
statements for 1999 have been reclassified to conform with the
presentation used for 2001 and 2000.
Revenue Recognition
Revenues are recognized in the period in which services are rendered
and are reported at estimated net realizable amounts.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related
interpretations in accounting for its employee stock options. Pro
forma information regarding net income and earnings per share is
required by FASB Statement No. 123, “Accounting and Disclosure of
Stock-Based Compensation,” and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing
model. All of the Company’s stock option plans are administered by a
committee comprised of selected members of the Board of Directors (the
“Stock Option Committee”).
3. Non-Cash Transactions
Conversion of Subordinated Notes to Common Stock
In June 1993, the Company issued $3,050,000 aggregate principal amount
of 8% Convertible Subordinated Notes (the “Initial Series Notes”).
In May 1994, the Company issued $2,000,000 aggregate principal amount
of 8% Convertible Subordinated Notes, Series B (the “Series B Notes”).
The Series B Notes contained a Contingent Interest Enhancement
provision which allowed the Series B Note Holders to receive an
interest enhancement payable in shares of Company common stock based
upon the market value of the Company’s shares for the
month of June 1996. In 1996, a total of 212,895 shares of the
Company’s common stock were issued in connection with the Contingent
Interest Enhancement provision. Deferred financing costs, included in
“Other Assets” on the balance sheet and being amortized over the life
of the Series B Notes, totaling $765,000 were recorded in connection
with the issuance of the 212,895 shares.
46
During 2000, $100,000 of the Initial Series Notes and $750,000 of the
Series B Notes were converted by the note holders into 30,000 and
187,497 shares of Company common stock, respectively.
During 2001, an additional $650,000 of the Initial Series Notes was
converted by a note holder into 195,000 shares of common stock. In
addition, the Company exercised its right to convert the remaining
balances of $2,300,000 of the Initial Series Notes and $1,250,000 of
the Series B Notes into 690,000 and 312,500 shares of common stock,
respectively.
In conjunction with the conversion of the Series B Notes, the
unamortized portion of the deferred financing costs related to the
converted notes was taken to additional paid-in capital. Interest
expense for 2001, 2000 and 1999 included $-0-, $71,000 and $75,000,
respectively, of amortization relating to the deferred financing costs.
Acquisition of Minority Interests
On September 30, 2001, the Company purchased the 35% minority interest
in a limited partnership which owns nine clinics in Michigan for
consideration aggregating $2,111,000. At closing, the Company
delivered 95,000 shares of restricted stock and a note
payable for $630,000 which was paid in October 2001. This non-cash
investing and financing transaction has been excluded from the
consolidated statements of cash flows.
On December 31, 2001, the Company purchased the 35% minority interest
in a limited partnership which owns four clinics in Michigan for
consideration aggregating $1,511,000. At closing, the Company
delivered 67,100 shares of restricted stock and a note payable for
$435,000 which was paid in January 2002. This non-cash investing and
financing transaction has been excluded from the consolidated
statements of cash flows. Additionally, as part of the purchase, the
Company agreed to pay the minority partner $261,000 of undistributed
earnings which was paid in January 2002.
4. Notes Payable
On June 2, 1993, the Company completed the issuance and sale of
$3,050,000 aggregate principal amount of 8% Convertible Subordinated
Notes due June 30, 2003 (the “Notes”). The Notes, which were
subordinated to any indebtedness for borrowed money, were issued at par
in a private placement transaction to a total of six investors,
of
including
directors
purchased
total
two
who
a
47
$175,000 of the Notes and a company controlled by one of the Company's
directors which purchased $2,000,000 of the Notes. The Notes bore
interest at 8% per annum, payable quarterly, and were convertible at
the option of the note holders into common stock of
the Company at any time during the life of the Notes. The conversion
price was $3.33 per share (subject to adjustment as provided in the
Notes). The Company could require the note holders to convert the
Notes into shares of common stock at any time that the average trading
price of the Company's common stock equaled or exceeded $6.67 per share
(subject to adjustment as provided in the Notes) during the immediately
preceding 90-day period. During 2000, $100,000 of the Notes were
converted into 30,000 shares of common stock and during 2001, $650,000
of the Notes were converted into 195,000 shares of common stock of the
Company voluntarily, and the Company exercised its right to convert the
remaining balance of $2,300,000 of the Notes into 690,000 shares of
common stock.
On May 5, 1994, the Company completed the issuance and sale of the
Series B Notes. The Series B Notes were issued at par in a private
placement. The Series B Notes were convertible, at the option of the
holder, into the number of whole shares of the Company's common
stock determined by dividing the principal amount so converted by
$4.00, (the "Conversion Price"), subject to adjustment upon the
occurrence of certain events. The Company could require the note
holders to convert the Notes into shares of common stock at any time
that the average trading price of the Company's common stock
equaled or exceeded $6.67 per share (subject to adjustment as provided
in the Notes) during the immediately preceding 90-day period. The
Series B Notes bore interest from the date of issuance at a rate of 8%
per annum, payable quarterly. Holders of Series B Notes were entitled
to receive an interest enhancement payable in shares of Company common
stock based upon the market value of the Company's common stock at June
30, 1996, which was two years from the date of issuance of the Series
B Notes. In July 1996, the Company issued 212,895 shares of its common
stock in connection with the interest enhancement provision. During
2000, $750,000 of the Series B Notes were converted into 187,497 shares
of common stock of the Company voluntarily, and during 2001, the
Company exercised its right to convert the remaining balance of
$1,250,000 of the Series B Notes into 312,500 shares of common stock of
the Company.
The Company also completed on May 5, 1994, the issuance and sale of
$3,000,000 aggregate principal amount of 8% Convertible Subordinated
Notes, Series C due June 30, 2004 (the "Series C
Notes"). The Series C Notes were issued at par in a private
48
placement to a company controlled by one of the Company's then
directors who no longer serves. The Series C Notes are convertible, at
the option of the holder, into the number of whole shares of common
stock determined by dividing the principal amount
so converted by $3.33, subject to adjustment upon the occurrence of
certain events. The Series C Notes bear interest from the date of
issuance at a rate of 8% per annum, payable quarterly. Based upon
current market prices of the Company’s common stock, Management expects
the $3,000,000 of Series C Notes due June 30, 2004 to be converted to
common stock on or prior to the maturity date.
The Series C Notes are unsecured and subordinated in right of payment
to all other indebtedness for borrowed money incurred by the Company.
The holder of the Series C Notes has piggy-back registration rights as
set forth in the Registration Agreement relating to the Notes and
demand and piggy-back registration rights as set forth in the
Registration Agreement related to the Notes.
In July 2000, the Company’s Board of Directors authorized the
repurchase for cash of up to 1,500,000 shares of its issued and
outstanding common stock for a price of $3.67 per share (the “Offer”).
Pursuant to the terms of the Offer, the Company could
buy up to an additional 2% of its outstanding shares without amending
or extending the Offer. The Company completed the repurchase of
1,695,000 shares in August 2000 for a total aggregate
cost of $6,275,000 (including expenses). The Company utilized cash on
hand and a convertible line of credit in the amount of $2,115,000 to
fund the repurchase of the stock.
In conjunction with the Offer, the Company entered into an agreement
with a bank wherein the bank agreed to lend the Company up to
$2,500,000 on a convertible line of credit, convertible to a term loan
on December 31, 2000, to purchase stock tendered pursuant to the Offer.
The loan bore interest at a rate per annum of prime plus one-half
percentage point and was repayable in quarterly installments of
$250,000 beginning March 2001. During 2000, the Company had borrowed
$2,115,000 under the $2,500,000 convertible line of credit. In
November 2000, the Company repaid $1,215,000 of the $2,115,000 borrowed
under the convertible line of credit. In March 2001, the Company
repaid the remaining balance of $900,000 on the bank loan.
The Company also had a revolving line of credit with a bank which
provided for borrowings up to $500,000, as needed, at a rate of
49
prime plus one-half percentage point. The revolving line of credit
expired in July 2001 and was not renewed.
Notes payable as of December 31, 2001 and 2000 consist of the
following:
2001
2000
Promissory note at a floating interest rate
of 1% above prime, payable in monthly
installments through November 1, 2001.
This note is secured by the facility, with
a net book value of approximately $59,000,
of one of the Company’s clinics.
$ -
$ 9,000
Promissory note with an 8% interest rate
payable in equal monthly installments
through March 19, 2007. This note is
secured by the facility, with a net book
value of approximately $41,000, of one of
the Company’s clinics.
25,000
29,000
8% Convertible Subordinated Notes due
June 30, 2003 with interest payable
quarterly.
8% Convertible Subordinated Notes,
Series B, due June 30, 2004 with
interest payable quarterly.
8% Convertible Subordinated Notes,
Series C, due June 30, 2004 with
interest payable quarterly.
Letter Loan Agreement with interest
at a rate per annum of prime plus
one-half percentage point and is
repayable in quarterly installments
of $250,000 beginning March 2001.
Note payable to Peter Gennrich for
purchase of 35% minority interest in
four Michigan clinics.
-
2,950,000
-
1,250,000
3,000,000
3,000,000
-
900,000
697,000
-
3,722,000
8,138,000
Less current portion
(701,000) (912,000)
50
Scheduled maturities for the next five years and thereafter as of
December 31, 2001 are as follows:
$3,021,000
$7,226,000
2002
2003
2004
2005
2006
Thereafter
$ 701,000
4,000
3,005,000
5,000
5,000
2,000
$3,722,000
5. Related Party Transactions
During 2001, 2000 and 1999, the Company recognized interest expense of
$6,000, $415,000 and $414,000, respectively, relating to Convertible
Subordinated Notes held by directors of the Company.
See Note 3 and 4 for additional information on related party
transactions.
6. Income Taxes
Significant components of deferred tax assets, included in other assets
on the balance sheet at December 31, 2001 and 2000, were as follows:
Deferred tax assets:
Vacation accrual
Allowance for doubtful accounts
Depreciation
Net deferred tax assets
2001
2000
$ 69,000
854,000
518,000
$1,441,000
$ 81,000
624,000
386,000
$1,091,000
The differences between the federal tax rate and the Company’s
effective tax rate for the years ended December 31, 2001, 2000 and 1999
were as follows:
U.S. tax at
statutory rate
$3,911,000 34.00% $2,087,000 34.00% $1,347,000 34.00%
2001 2000 1999
State income taxes
Nondeductible
expenses
Other - net
476,000
4.13
280,000
4.56
197,000
4.98
45,000
0.59
0.40
- -
- -
$4,432,000 38.53% $2,403,000 39.15% $1,568,000 39.58%
0.55
2,000 0.05
36,000
22,000
51
Significant components of the provision for income taxes for the years
ended December 31, 2001, 2000 and 1999 were as follows:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
2001 2000 1999
$4,067,000 $2,273,000 $1,378,000
716,000 424,000 299,000
4,783,000 2,697,000 1,677,000
(351,000)
(294,000)
(109,000)
- - -
(351,000) (294,000) (109,000)
Total income tax provision
$4,432,000 $2,403,000 $1,568,000
The Company is required to establish a valuation allowance for deferred
tax assets if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income in
the periods which the deferred tax assets are deductible, management
believes that a valuation allowance is not required, as it is more
likely than not that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets.
7. Stock Option Plans
The Company has in effect the following stock option plans:
The 1992 Stock Option Plan, as amended (the "1992 Plan") which permits
the Company to grant to key employees and outside directors of the
Company incentive and non-qualified options to purchase up to 3,495,000
shares of common stock (subject to proportionate adjustments in the
event of stock dividends, splits, and similar corporate transactions).
Incentive stock options (those intended to satisfy the requirements of
the Internal Revenue Code) granted under the 1992 Plan are
granted at an exercise price not less than the fair market value of the
shares of common stock on the date of grant. The exercise
52
prices of options granted under the 1992 Plan are determined by the
Stock Option Committee. The period within which each option will be
exercisable is determined by the Stock Option Committee (in no event
may the exercise period of an incentive stock option extend beyond 10
years from the date of grant).
The Executive Option Plan (the "Executive Plan") which permitted the
Company to grant to any officer of the Company or its affiliates,
options to purchase up to 255,000 shares of common stock (subject to
adjustments in the event of stock dividends, splits and similar
corporate transactions). No further grants of options will be made
under the Executive Plan. The exercise prices of the options granted
under the Executive Plan were determined by the Stock Option Committee,
and in the case of both incentive and non-qualified options, could not
be less than the greater of 175% of the fair market value of a share of
common stock on the date of grant or the par value per share of the
stock. The period within which each option is exercisable was
determined by the Stock Option Committee to be ten years from the date
of grant.
The 1999 Employee Stock Option Plan (the "1999 Plan") permits the
Company to grant to certain non-officer employees of the Company up to
300,000 non-qualified options to purchase shares of common stock
(subject to proportionate adjustments in the event of stock dividends,
splits, and similar corporate transactions). The exercise prices of
options granted under the 1999 Option Plan are determined by the Stock
Option Committee. The period within which each option will be
exercisable is determined by the Stock Option Committee.
During 2001, 2000 and 1999, the Board of Directors of the Company
granted non-plan, non-qualifying option agreements (the “Inducements”)
covering 30,000, 30,000 and 225,000 options, respectively (subject to
proportionate adjustments in the event of stock dividends, splits and
similar corporate transactions) to four individuals in connection with
their offers of employment. During 2000 and 1999, 150,000 and 75,000
were forfeited, respectively. The period within which each option will
be exercisable is 10 years from the date of grant.
53
A cumulative summary of stock options as of December 31, 2001 follows:
Stock
Option
Plans
Exercise
Price per
Share
$2.08-$16.34
1992 Plan
Executive
$4.23-$ 4.96
Plan
1999 Plan
$2.81-$16.34
Inducements $2.83-$13.58
Author-
ized standing Exercised cisable
Exer-
Out-
Available
for
Grant
3,495,000 2,162,644
1,003,118 1,196,746
329,238
255,000
300,000
218,250
95,451
60,000 60,000
36,750
4,874
218,250
12,282
0 0
0
199,675
0
Totals
4,110,000 2,536,345
1,044,742 1,427,278
528,913
A summary of the status of the Company’s stock option plans as of
December 31, 2001, 2000 and 1999 and the changes during the years then
ended is presented below:
Number of
Shares
Average
Exercise
Price
Outstanding at January 1, 1999
Granted
Exercised
Forfeited
Outstanding at December 31, 1999
Granted
Exercised
Forfeited
Outstanding at December 31, 2000
Granted
Exercised
Forfeited
Outstanding at December 31, 2001
2,706,525
426,750
(60,000)
(191,250)
2,882,025
442,137
(154,350)
(188,025)
2,981,787
363,825
(780,142)
(29,125)
2,536,345
$ 3.30
2.83
2.26
3.54
3.23
3.33
2.71
2.86
3.35
15.37
3.06
3.81
$ 5.10
54
The following tables summarize information about the Company’s stock
options outstanding as of December 31, 2001, 2000 and 1999,
respectively:
Options
Outstanding
Option
Weighted
Average
Remaining
as of 12/31/01 Exercise Price Contractual Life
1992 Plan
Executive Plan
1999 Plan
Inducements
2,162,644
218,250
95,451
60,000
2,536,345
$2.08-$16.34
$4.23-$ 4.96
$2.81-$16.34
$2.83-$13.58
$2.08-$16.34
Options
Outstanding
Option
(in years)
6.33
1.92
8.30
8.60
6.08
Weighted
Average
Remaining
as of 12/31/00 Exercise Price Contractual Life
1992 Plan
Executive Plan
1999 Plan
Inducements
2,597,037
255,000
99,750
30,000
$2.08-$ 4.15
$4.23-$ 4.96
$2.81-$ 4.15
$2.83-$ 2.83
(in years)
6.36
2.82
9.06
9.13
2,981,787
$2.08-$ 4.96
6.18
Options
Outstanding
Option
Weighted
Average
Remaining
as of 12/31/99 Exercise Price Contractual Life
1992 Plan
Executive Plan
1999 Plan
Inducements
2,410,275
255,000
66,750
150,000
2,882,025
$2.08-$ 4.06
$4.23-$ 4.96
$2.81-$ 2.81
$2.81-$ 2.81
$2.08-$ 4.96
(in years)
6.67
3.82
9.63
9.63
6.68
The weighted-average fair value per share of options granted during the
years ended December 31, 2001, 2000 and 1999 follows:
December 31,
2001
December 31,
2000
December 31,
1999
1992 Plan
1999 Plan
Inducements
$9.07
$9.57
$7.95
$1.41
$1.89
$1.29
$1.31
$1.31
$1.31-$1.36
55
The weighted-average assumptions for 2001, 2000 and 1999 were used in
estimating the fair value per share of the options granted under the
stock option plans and the non-plan, non-qualifying option agreements:
risk-free interest rates ranging from 4.65% to 6.45%; dividend yield
rate of 0%; volatility factors of the expected market price of the
Company’s common stock ranging from .245 to .459; and a weighted-
average expected life of eight years for those options that do not vest
upon issuance and weighted-average expected lives of five to eight
years for the remaining options.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which 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.
The pro forma effect on net income for 2001, 2000 and 1999 is not
representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation
expense related to grants made prior to 1995. The Company’s pro forma
information follows (in thousands except for earnings per share
information):
Actual net income
Actual basic earnings per common share
Actual diluted earnings per common share
2001 2000 1999
$7,071 $3,735 $2,394
$ 0.70 $ 0.40 $ 0.23
$ 0.55 $ 0.34 $ 0.23
Pro forma net income$6,563
Pro forma basic earnings per common share $ 0.65 $ 0.37 $ 0.21
Pro forma diluted earnings per common share$ 0.51 $ 0.31 $ 0.21
$3,393 $2,117
In total, the Company has 3,965,258 shares which are reserved for
issuance under the 1992 Stock Option Plan, the Executive Option Plan,
the 1999 Employee Stock Option Plan, two non-plan, non-qualifying
option agreements and the Series C Notes.
8. Preferred Stock
56
The Board of Directors of the Company is empowered, without approval of
the stockholders, to cause shares of preferred stock to
be issued in one or more series and to establish the number of shares
to be included in each such series and the rights, powers,
preferences and limitations of each series. There are no provisions in
the Company's Articles of Incorporation specifying the vote required by
the holders of preferred stock to take action.
All such provisions would be set out in the designation of any series
of preferred stock established by the Board of Directors.
The bylaws of the Company specify that, when a quorum is present at any
meeting, the vote of the holders of at least a majority of the
outstanding shares entitled to vote who are present, in person or by
proxy, shall decide any question brought before the meeting,
unless a different vote is required by law or the Company's
Articles of Incorporation. Because the Board of Directors has the
power to establish the preferences and rights of each series, it may
afford the holders of any series of preferred stock, preferences,
powers, and rights, voting or otherwise, senior to the
right of holders of common stock. The issuance of the preferred stock
could have the effect of delaying or preventing a change in control of
the Company.
9. Defined Contribution Plan
The Company has a 401(k) profit sharing plan covering all employees
with three months of service. The Company may make discretionary
contributions of up to 50% of employee contributions. The Company
recognized no contribution expense for the years ended December 31,
2001, 2000 and 1999.
10. Commitments and Contingencies
Operating Leases
clinic
facilities.
The Company has entered into operating leases for its executive offices
and
these
agreements, the Company incurred rent expense of $5,422,000, $4,546,000
and $3,815,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. Several of the leases provide for an annual increase in
the rental payment based upon the Consumer Price Index for each
particular year. The majority of the leases provide for renewal
periods ranging from one to five years. The agreements
connection
with
In
57
to extend the leases specify that rental rates would be adjusted to
market rates as of each renewal date.
The future minimum lease commitments for the next five years and in the
aggregate as of December 31, 2001 are as follows:
2002
2003
2004
2005
2006
Thereafter
$ 4,765,000
3,906,000
2,963,000
1,885,000
907,000
80,000
$14,506,000
Employment Agreements
At December 31, 2001, the Company had an outstanding employment
agreement with one of its executive officers for $250,000 annually,
subject to adjustment to reflect positive performance, for a term
extending through February 2004. The Company also had an outstanding
consulting agreement with one of its directors for $95,000 annually for
a term extending through May 2006.
In addition, the Company has outstanding employment agreements with the
managing physical therapist partners of the Company's physical therapy
clinics and with certain other clinic employees which
obligate subsidiaries of the Company to pay compensation of $3,889,000
in 2002 and $2,236,000 in the aggregate through 2006. In addition,
each employment agreement with the managing physical therapists
provides for monthly bonus payments calculated as a percentage of each
clinic's net revenues (not in excess of operating profits) or operating
profits. The Company recognized salaries and bonus expense for the
managing physical therapists of $12,322,000, $9,576,000 and $8,073,000
for the years ended December 31, 2001, 2000 and 1999, respectively.
Each employment agreement provides that the therapist partner can be
required to sell his or her partnership interest in the clinic
partnership for the amount of his or her capital account upon
termination of employment with the clinic partnership before the
expiration of the initial term of employment. The employment
agreements contain no provisions requiring the purchase by the Company
of the therapist partner’s interest in the clinic partnership in the
event of death or disability, or after the initial term of employment.
In addition, the employment agreements generally include non-
competition and non-solicitation provisions
58
which extend through the term of the agreement and for one to two years
thereafter.
11. Earnings per Share
The computation of basic and diluted earnings per share for the years
ended December 31, 2001, 2000 and 1999 are as follows:
Numerator:
Net income
Numerator for basic
earnings per share
Effect of dilutive securities:
Interest on convertible
subordinated notes payable
Numerator for diluted earnings
per share-income available
to common stockholders after
assumed conversions
2001 2000 1999
$7,071,000 $3,735,000 $2,394,000
$7,071,000 $3,735,000 $2,394,000
165,000 466,000 475,000
$7,236,000 $4,201,000 $2,869,000
Denominator:
Denominator for basic
earnings per share--
weighted-average shares
10,109,000 9,230,000 10,200,000
Effect of dilutive securities:
Stock options
Convertible subordinated
notes payable
Dilutive potential
common shares
Denominator for diluted
earnings per share--adjusted
weighted-average shares
and assumed conversions
2,025,000
717,000
105,000
934,000 2,282,000 2,316,000
2,959,000 2,999,000 2,421,000
13,068,000 12,229,000 12,621,000
Basic earnings per common share $ 0.70 $ 0.40 $ 0.23
Diluted earnings per common share$ 0.55 $ 0.34 $ 0.23
12. Selected Quarterly Financial Data (Unaudited)
59
Net revenues
Income before income taxes
Net income$ 1,512
Earnings per common share:
2001
(in thousands, except per share data)
Q1 Q2 Q3 Q4
$18,930
$ 2,466
$ 1,787
$19,866 $20,582 $21,570
$ 2,900 $ 2,965 $ 3,172
$ 1,825 $ 1,947
Basic
Diluted
$ 0.15
$ 0.12
$ 0.18 $ 0.18 $ 0.19
$ 0.14 $ 0.14 $ 0.15
Net revenues
Income before income taxes
Net income$ 671
Earnings per common share:
2000
(in thousands, except per share data)
Q1 Q2 Q3 Q4
$14,822
$ 1,114
$ 938
$15,825 $16,129 $16,446
$ 1,542 $ 1,741 $ 1,741
$ 1,067 $ 1,059
Basic
Diluted
$ 0.06
$ 0.06
$ 0.09 $ 0.12 $ 0.13
$ 0.08 $ 0.10 $ 0.10
Item 9.
Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Items 401 and 405 of Regulation S-K is
omitted from this Report as the Company intends to file its definitive
annual meeting proxy materials within 120 days after its fiscal year-
end and the information to be included therein in response to such
Items is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K is omitted from
this Report as the Company intends to file its definitive annual
meeting proxy materials within 120 days after its fiscal
year-end and the information to be included therein in response to such
Item is incorporated herein by reference.
60
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Item 403 of Regulation S-K is omitted from
this Report as the Company intends to file its definitive annual
meeting proxy materials within 120 days after its fiscal year-end and
the information to be included therein in response to such Item is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-K is omitted from
this Report as the Company intends to file its definitive annual
meeting proxy materials within 120 days after its fiscal year-end and
the information to be included therein in response to such Item is
incorporated herein by reference.
61
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a) (1)
The following consolidated financial statements of U.S.
Physical Therapy, Inc. and subsidiaries are included in Item
8:
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Operations - years ended December
31, 2001, 2000 and 1999
Consolidated Statements of Shareholders’ Equity - years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - years ended December
31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements - December 31,
2001
(2)
The following consolidated financial statement schedule of
U.S. Physical Therapy, Inc. is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
(3)
List of Exhibits
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
Articles of Incorporation of the Company (filed as an
exhibit to the Company’s Form 10-Q for the quarterly period
ended June 30, 2001 and incorporated herein by reference).
Amendment to the Articles of Incorporation of the Company
(filed as an exhibit to the Company’s Form 10-Q for the
quarterly period ended June 30, 2001 and incorporated herein
by reference).
62
Bylaws of the Company, as amended (filed as an exhibit to
the Company's Form 10-KSB for the year ended December 31,
1993 and incorporated herein by reference).
Convertible Subordinated Note Purchase Agreement dated June
2, 1993 (filed as an exhibit to the Company's Form 8-K dated
June 10, 1993 and incorporated herein by reference).
Form of U.S. Physical Therapy, Inc. 8% Convertible
Subordinated Notes (filed as an exhibit to the Company's
Form 8-K dated June 2, 1993 and incorporated herein by
reference).
Amendment to Convertible Subordinated Note Purchase
Agreement dated March 10, 1994 (filed as an exhibit to the
Company's Form 8-K dated March 25, 1994 and incorporated
herein by reference).
Form of 8% Convertible Subordinated Notes, Series B (filed
as an exhibit to the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference).
Registration Agreement for Series B Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.6
Form of 8% Convertible Subordinated Notes, Series C (filed
as an exhibit to the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference).
10.7
Registration Agreement for Series C Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.8 + 1992 Stock Option Plan, as amended (filed as an exhibit to
the Company’s Form 10-Q for the quarterly period ended June
30, 2001 and incorporated herein by reference).
10.9 + Executive Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S-8 (33-63444) and
incorporated herein by reference).
10.10+ 1999 Employee Stock Option Plan (filed as an exhibit to the
Company’s Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
10.11 + Non-Statutory Stock Option Agreement (filed as an exhibit to
the Company’s Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
63
10.12+ Second Amended and Restated Employment Agreement between the
Company and Roy W. Spradlin (filed as an exhibit to the
Company’s Form 10-Q for the quarterly period ended June 30,
2001 and incorporated herein by reference).
10.13
10.14
10.15
The Southwest Bank of Texas N.A. Three Year $2.5 million
Letter Loan Agreement, dated July 1, 2000 (filed as an
exhibit to the Company’s Form 10-K/A for the year ended
December 31, 2000 and incorporated herein by reference).
The Southwest Bank of Texas N.A. Convertible Line of Credit
Note, Exhibit A(i) to the Three Year $2.5 million Letter
Loan Agreement dated July 1, 2000 (filed as an exhibit to
the Company’s Form 10-K/A for the year ended December 31,
2000 and incorporated herein by reference).
The Southwest Bank of Texas N.A. Revolving Line of Credit
Note, Exhibit A(ii) to the Three Year $2.5 million Letter
Loan Agreement dated July 1, 2000 (filed as an exhibit to
the Company’s Form 10-K/A for the year ended December 31,
2000 and incorporated herein by reference).
10.16+ Non-Statutory Stock Option Agreement dated February 17,2000
t h e
(filed as an exhibit to the Company’s Form 10-Q for
quarterly period ended June 30, 2001 and incorporated
by reference).
herein
10.17+ Non-Statutory Stock Option Agreement dated February 7, 2001
(filed as an exhibit to the Company’s Form 10-Q for the
quarterly period ended June 30, 2001 and incorporated herein
by reference.)
10.18+ Consulting agreement between the Company and J. Livingston
Kosberg (filed as an exhibit to the Company’s Form 10-Q for
the quarterly period ended June 30, 2001 and incorporated
herein by reference).
10.19
Partnership Interest Purchase Agreement between the Company
and John Cascardo (filed as an exhibit to the Company’s Form
10-Q for the quarterly period ended September 30, 2001 and
incorporated herein by reference).
10.20* Partnership Interest Purchase Agreement between the Company
and Peter Gennrich.
64
21
* Subsidiaries of the Registrant.
23.1 * Consent of KPMG LLP (Registration Nos. 33-63446, 33-63444,
33-91004, 33-93040, 333-30071, 333-64159, 333-67680, 333-
67678 and 333-82932).
(a)
Reports on Form 8-K
No Form 8-K was filed during the quarter ended December 31,
2001.
+
*
Management contract or compensatory plan or arrangement.
Filed herewith.
65
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
COL. A
COL. B
COL. C
COL. D
COL. E
Additions
I
t
e
m
1
4
.
(
d
)
Description
YEAR ENDED DECEMBER 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts
6
6
YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts
Balance at
Beginning
of
Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts-
Describe
Deductions-
Describe
Balance at
End of
Period
$2,780,000
$1,930,000
$ 905,000(1)
$3,805,000
$2,014,000
$1,596,000
$ 830,000(1)
$2,780,000
$1,692,000
$1,165,000
$ 843,000(1)
$2,014,000
(1)Uncollectible accounts written off, net of recoveries.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
By: /s/ J. Michael Mullin
(Registrant)
J. Michael Mullin,
Chief Financial Officer
(principal financial and
accounting officer)
Date: April 1, 2002
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities as of the date indicated above.
By: /s/ Roy W. Spradlin
Roy W. Spradlin, Chairman,
President and Chief
By: /s/ Mark J. Brookner
Mark J. Brookner,
Vice Chairman of the Board
Executive Officer
(principal executive officer)
By: /s/ Eddy J. Rogers, Jr.
Eddy J. Rogers, Jr.,
Director
By: /s/ James B. Hoover
James B. Hoover,
Director
By: /s/ Marlin W. Johnston
By: /s/ Daniel C. Arnold
Marlin W. Johnston,
Director
Daniel C. Arnold,
Director
By: /s/ Bruce D. Broussard
By: /s/ Albert L. Rosen
Bruce D. Broussard,
Director
Albert L. Rosen,
Director
67
EXHIBIT NO.
IDENTITY OF EXHIBIT
PAGE NO.
INDEX OF EXHIBITS
3.1
3.2
3.3
10.1
10.2
10.3
10.4
10.5
Articles of Incorporation of the Company
(filed as an exhibit to the Company’s Form
10-Q for the quarterly period ended June 30,
2001 and incorporated herein by reference).
Amendment to the Articles of Incorporation
of the Company (filed as an exhibit to the
Company’s Form 10-Q for the quarterly period
ended June 30, 2001 and incorporated herein
by reference).
Bylaws of the Company, as amended (filed
as an exhibit to the Company's Form 10-KSB
for the year ended December 31, 1993 and
incorporated herein by reference).
Convertible Subordinated Note Purchase
Agreement dated June 2, 1993 (filed as an
exhibit to the Company's Form 8-K dated
June 10, 1993 and incorporated herein
by reference).
Form of U.S. Physical Therapy, Inc. 8%
Convertible Subordinated Notes (filed as
an exhibit to the Company's Form 8-K
dated June 2, 1993 and incorporated
herein by reference).
Amendment to Convertible Subordinated
Note Purchase Agreement dated March 10, 1994
(filed as an exhibit to the Company's Form
8-K dated March 25, 1994 and incorporated
herein by reference).
Form of 8% Convertible Subordinated Notes,
Series B (filed as an exhibit to the Company’s
Form 8-K dated May 5, 1995 and incorporated
herein by reference).
Registration Agreement for Series B Notes
(filed as an exhibit to the Company's Form
8-K dated May 5, 1995 and incorporated herein
by reference).
68
--
--
--
--
--
--
--
--
EXHIBIT NO.
IDENTITY OF EXHIBIT
PAGE NO.
INDEX OF EXHIBITS
10.6
10.7
10.8 +
10.9 +
10.10+
10.11+
10.12+
10.13
Form of 8% Convertible Subordinated
Notes, Series C (filed as an exhibit to
the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference).
--
Registration Agreement for Series C Notes
(filed as an exhibit to the Company's Form
8-K dated May 5, 1995 and incorporated
herein by reference).
1992 Stock Option Plan, as amended (filed
as an exhibit to the Company’s Form 10-Q
for the quarterly period ended June 30, 2001
and incorporated herein by reference).
--
Executive Option Plan (filed as an
exhibit to the Company's Registration
Statement on Form S-8 (33-63444) and
incorporated herein by reference).
--
--
1999 Employee Stock Option Plan (filed as
an exhibit to the Company’s Form 10-K
for the year ended December 31, 1999 and incorporated
herein by reference).
--
Non-Statutory Stock Option Agreement (filed
as an exhibit to the Company’s Form 10-K
for the year ended December 31, 1999 and incorporated
herein by reference).
--
Second Amended and Restated Employment Agree-
ment between the Company and Roy W. Spradlin
filed as an exhibit to the Company’s Form
10-Q for the quarterly period ended June 30,
2001 and incorporated herein by reference).
The Southwest Bank of Texas N.A. Three Year
$2.5 million Letter Loan Agreement, dated
July 1, 2000 (filed as an exhibit to the
Company’s Form 10-K/A for the year ended
December 31, 2000 and incorporated herein
by reference).
--
--
69
EXHIBIT NO.
IDENTITY OF EXHIBIT
PAGE NO.
INDEX OF EXHIBITS
10.14
10.15
10.16+
10.17+
10.18+
10.19
The Southwest Bank of Texas N.A. Convertible
Line of Credit Note, Exhibit A(i) to the
Three Year $2.5 million Letter Loan Agreement
dated July 1, 2000 (filed as an exhibit to the
Company’s Form 10-K/A for the year ended
December 31, 2000 and incorporated herein
by reference).
The Southwest Bank of Texas N.A. Revolving
Line of Credit Note, Exhibit A(ii) to the
Three Year $2.5 million Letter Loan Agreement
dated July 1, 2000 (filed as an exhibit to the
Company’s Form 10-K/A for the year ended
December 31, 2000 and incorporated herein
by reference).
Non-Statutory Stock Option Agreement Dated
February 17, 2000 (filed as an exhibit to the
Company’s Form 10-Q for the quarterly period
ended June 30, 2001 and incorporated herein
by reference).
Non-Statutory Stock Option Agreement Dated
February 7, 2001 (filed as an exhibit to the
Company’s Form 10-Q for the quarterly period
ended June 30, 2001 and incorporated herein
by reference).
--
--
--
--
Consulting Agreement between the Company and
J. Livingston Kosberg (filed as an exhibit to
the Company’s Form 10-Q for the quarterly period
ended June 30, 2001 and incorporated herein
by reference).
--
Partnership Interest Purchase Agreement between
the Company and John Cascardo (filed as an
exhibit to the Company’s Form 10-Q for the
quarterly period ended September 30, 2001
and incorporated herein by reference).
--
10.20*
Partnership Interest Purchase Agreement between
the Company and Peter Gennrich.
72
70
INDEX OF EXHIBITS
EXHIBIT NO.
IDENTITY OF EXHIBIT
PAGE NO.
21
*
Subsidiaries of the Registrant.
23.1 *
Consent of KPMG LLP (Registration Nos.
33-63446, 33-63444, 33-91004, 33-93040,
333-30071, 333-64159, 333-67680,
333-67678 and 333-82932).
91
100
+
*
Management contract or compensatory plan or arrangement.
Filed herewith.
71
Exhibit 21
STATE OF
INCORPORATION
OR FORMATION
SUBSIDIARIES OF THE REGISTRANT
NAME OF
SUBSIDIARY
TYPE OF
ENTITY
U.S. PT - Delaware, Inc.CorporationDelaware
U.S. Therapy, Inc. dba The
Facilities Group, Inc.CorporationTexas
National Rehab GP, Inc.
National Rehab Delaware, Inc.
U.S. PT - Michigan, Inc.CorporationDelaware
HH Rehab Associates, Inc. dba
Corporation
Corporation
Genesee Valley Physical Therapy
dba Theramax Physical Therapy
Professional Rehab Services, Inc.
dba Northwoods Physical Therapy
dba Thibodeau Physical Therapy
dba Evergreen Physical Therapy Corporation
Corporation
U.S. Physical Therapy, Ltd.
U.S. PT Management, Ltd.Limited Partnership
National Rehab Management
Limited Partnership
GP, Inc.
Rehab Partners #1, Inc.
Rehab Partners #2, Inc.
Rehab Partners #3, Inc.
Rehab Partners #4, Inc.
Rehab Partners #5, Inc.
Rehab Partners #6, Inc.
U.S. PT Payroll, Inc. (formerly
Rehab Partners #7, Inc.)
Rehab Partners Acquisition
#1, Inc.
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Corporation
Texas
Delaware
Michigan
Michigan
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
U.S. PT Therapy Services, Inc.
(formerly U.S. Surgical
Partners, Inc.) dba Cornerstone
Physical Therapy
U.S. Surgical Partners #1, Inc.
Effingham Ambulatory Surgery
Center, L.P. (formerly U.S.
Surgical Partners of College
Park, Limited Partnership
U.S. Surgical Partners #2, Inc.
Midland Surgical Partners, Ltd.
72
Corporation
Corporation
Delaware
Texas
Limited Partnership
Corporation
Limited Partnership
Texas
Texas
Texas
SUBSIDIARIES OF THE REGISTRANT
NAME OF
SUBSIDIARY
TYPE OF
ENTITY
Exhibit 21
STATE OF
INCORPORATION
OR FORMATION
U.S. PT Turnkey Services, Inc.
(formerly Surgical Management
GP, Inc.
U.S. Surgical Partners
Management, Ltd.
Southeastern Hand Rehabilitation,
Inc. dba Reist Hand Therapy
dba Achieve Physical Therapy
Action Physical Therapy
Clinic, Ltd.
Cypresswood Physical
Therapy Centre, Ltd.
Progressive Physical
Therapy Clinic, Ltd.
Virginia Parc Physical
Therapy, Ltd. dba
McKinney Physical Therapy
Associates
Dearborn Physical Therapy,
Ltd. dba Advanced
Physical Therapy
Saline Physical Therapy of
Michigan, Ltd. dba Physical
Therapy in Motion
R. Clair Physical Therapy,
Limited Partnership
Roepke Physical Therapy,
Limited Partnership
Merrill Physical Therapy,
Limited Partnership
Joan Ostermeier Physical
Therapy, Limited
Partnership dba Sport &
Spine Clinic of Wittenberg
Crossroads Physical Therapy,
Corporation
Texas
Limited Partnership
Texas
Corporation
Florida
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
Kelly Lynch Physical Therapy,
Limited Partnership
U.S. PT Michigan #1, Limited
Limited Partnership
Texas
Partnership
Limited Partnership
73
Texas
Exhibit 21
NAME OF
SUBSIDIARY
SUBSIDIARIES OF THE REGISTRANT
TYPE OF
ENTITY
STATE OF
INCORPORATION
OR FORMATION
Spracklen Physical Therapy,
Limited Partnership
Bosque River Physical Therapy
and Rehabilitation, Limited
Partnership
Frisco Physical Therapy, Limited
Partnership
Spinal Therapy Institute,
Limited Partnership
Sport & Spine Clinic of Fort
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Atkinson, Limited Partnership
Limited Partnership
Texas
Sport & Spine Clinic of
Auburndale, Limited Partnership Limited Partnership
Texas
Back in Balance, Limited
Partnership
Kingwood Physical Therapy, Ltd.
Enid Therapy Center,
Limited Partnership
Dynamic Physical Therapy
of Round Rock, Ltd.
Active Physical Therapy,
Limited Partnership
Southwind Physical Therapy,
Limited Partnership
Limited Partnership
Texas
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
Genesis Rehabilitation and
Sports Center - Jackson,
Limited Partnership dba
Genesis Physical Therapy Group Limited Partnership
Cleveland Physical Therapy, Ltd. Limited Partnership
Aquatic and Orthopedic Rehab
Texas
Texas
Specialists, Limited
Partnership dba Oceanside
Physical Therapy
Vileno Therapy of Treasure
Coast, Limited Partnership
Comprehensive Hand & Physical
Therapy, Limited Partnership
Tom Melko Physical Therapy,
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
74
NAME OF
SUBSIDIARY
SUBSIDIARIES OF THE REGISTRANT
TYPE OF
ENTITY
STATE OF
INCORPORATION
OR FORMATION
Exhibit 21
Debra Dent Physical Therapy,
Limited Partnership
Limited Partnership
Texas
Hands Plus Therapy Center,
Limited Partnership
South Tulsa Physical Therapy,
Limited Partnership
Hands On Therapy, Limited
Limited Partnership
Texas
Limited Partnership
Texas
Partnership
Limited Partnership
U.S. PT Michigan #2, Limited
Partnership
Limited Partnership
Texas
Texas
First Choice Physical Therapy,
Limited Partnership
Tupelo Hand Rehabilitation,
Limited Partnership
The Hale Hand Center,
Limited Partnership
Sooner Physical Therapy,
Limited Partnership
Arrow Physical Therapy, Limited
Partnership dba Broken Arrow
Physical Therapy
Achieve Physical Therapy,
Limited Partnership
Melbourne Physical Therapy
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Specialists, Limited PartnershipLimited Partnership
Texas
Maine Physical Therapy,
Limited Partnership
Brentwood Physical Therapy,
Limited Partnership (clinic
sold 12/31/01)
Saginaw Valley Sport and Spine,
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership dba Saginaw
Valley Sport & Spine, Bay City
Sport & Spine and Midland Sport
& Spine
Limited Partnership
Texas
Brazos Valley Physical Therapy,
Limited Partnership
Limited Partnership
Texas
Plymouth Physical Therapy
Specialists, Limited
Partnership
Limited Partnership
75
Texas
NAME OF
SUBSIDIARY
SUBSIDIARIES OF THE REGISTRANT
TYPE OF
ENTITY
STATE OF
INCORPORATION
OR FORMATION
Exhibit 21
Brick Hand & Rehabilitative
Services, Limited PartnershipLimited Partnership Texas
Heartland Physical Therapy,
Limited Partnership
Bay View Physical Therapy, Ltd.
Limited PartnershipTexas
dba Pine State Physical Therapy Limited PartnershipTexas
Rio Grande Physical Therapy,
Limited Partnership (closed
effective 07/27/2000)
Thomas Hand and Rehabilitation
Specialists, Limited
Partnership dba Thomas Physical
& Hand Therapy dba Thomas Hand
Institute
Limited PartnershipTexas
Limited PartnershipTexas
Excel Occupational and Physical
Therapy, Limited Partnership
(closed effective 01/31/2000)Limited Partnership Texas
Hand Health and Rehabilitation,
Limited Partnership
Flannery Physical Therapy,
Limited Partnership dba
Physical Therapy Plus
Port City Physical Therapy,
Limited Partnership
Proactive Physical Therapy,
Limited Partnership
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
All Brunswick Physical Therapy,
Limited Partnership
Limited PartnershipTexas
Penobscot Sports Associates,
Limited Partnership (clinic
closed 06/01/01)
Mooresville Management,
Limited Partnership
Beaufort Physical Therapy,
Limited Partnership
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
English Creek Hand & Therapy
Center, Limited Partnership
Brownwood Physical Therapy,
Limited Partnership dba
Pecan Valley Physical TherapyLimited Partnership Texas
Limited PartnershipTexas
76
Exhibit 21
NAME OF
SUBSIDIARY
SUBSIDIARIES OF THE REGISTRANT
TYPE OF
ENTITY
STATE OF
INCORPORATION
OR FORMATION
Four Corners Physical Therapy,
Limited Partnership
Limited Partnership
Texas
Wilmington Hand Therapy, Limited
Partnership dba Hand Therapy
of Wilmington
High Point Physical Therapy,
Limited Partnership
Yarmouth Physical Therapy,
Limited Partnership
Quantum Physical Therapy, Limited
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Partnership
Limited Partnership
Texas
Spine & Sport Physical Therapy,
Limited Partnership dba The Hand
Institute of Spine & Sport
Limited Partnership
Texas
Norman Physical Therapy,
Limited Partnership
Rice Rehabilitation Associates,
Limited Partnership
Physical Therapy and Spine
Limited Partnership
Texas
Limited Partnership
Texas
Institute, Limited Partnership Limited PartnershipTexas
Forest City Physical Therapy,
Limited Partnership
Leader Physical Therapy,
Limited Partnership dba
Memphis Physical Therapy
Functions by Fletchall,
Limited Partnership
Coastal Physical Therapy,
Limited Partnership
Greene County Physical Therapy,
Limited Partnership (clinic
closed 02/2001)
Eastgate Physical Therapy,
Limited Partnership dba
Summit Physical Therapy
Tennessee Valley Physical
Therapy, Limited Partnership
(clinic closed 10/31/01)
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
Limited PartnershipTexas
77
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
NAME OF
SUBSIDIARY
Lucasville Therapy Services,
Limited Partnership
C.A.R.E. Physical Therapy
TYPE OF
ENTITY
STATE OF
INCORPORATION
OR FORMATION
Limited Partnership
Texas
Center, Limited Partnership
(closed effective 03/31/99;
partnership canceled 04/15/99) Limited Partnership
Texas
Ankeny Physical & Sports Therapy,
Limited Partnership
Limited PartnershipTexas
Twin Cities Physical Therapy,
Limited Partnership
Limited PartnershipTexas
Brem Physical Therapy Associates,
Limited Partnership (closed
effective 05/31/99)
Penn's Wood Physical Therapy,
Limited Partnership
Regional Physical Therapy
Limited PartnershipTexas
Limited Partnership
Texas
Center, Limited Partnership
Limited Partnership
Texas
Wyman Physical Therapy,
Limited Partnership dba
Precision Physical Therapy
Adams County Physical Therapy,
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
Coppell Spine & Sports Rehab,
Limited Partnership dba Physical
Therapy of Flower Mound dba
Green Oaks Physical Therapy
Julie Emond Physical Therapy,
Limited Partnership
Limited Partnership dba
Maple Valley Physical Therapy Limited Partnership
City of Lakes Physical Therapy,
Texas
Texas
Limited Partnership
Radtke Physical Therapy,
Limited Partnership
Hoeppner Physical Therapy,
Limited Partnership
Des Moines Physical Therapy,
Limited Partnership
Shrewsbury Physical Therapy,
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
78
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
NAME OF
SUBSIDIARY
Heritage Physical Therapy,
Limited Partnership
Mansfield Physical Therapy,
Limited Partnership
Texstar Physical Therapy,
Limited Partnership
Peninsula Physical Therapy,
Limited Partnership
Lake Side Physical Therapy,
Limited Partnership dba
Lakeside Physical Therapy
Flint Physical Therapy,
Limited Partnership
TYPE OF
ENTITY
STATE OF
INCORPORATION
OR FORMATION
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Pelican State Physical Therapy,
Limited Partnership dba
Audubon Physical Therapy
Airpark Physical Therapy,
Limited Partnership dba
Philadelphia Physical Therapy Limited Partnership
Limited Partnership
Texas
Texas
Capital Hand and Physical
Therapy, Limited Partnership
Maines & Dean Physical Therapy,
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
Edge Physical Therapy, Limited
Partnership dba River's Edge
Physical Therapy
Laurel Physical Therapy,
Limited Partnership dba
South Mississippi Physical
Therapy
Riverwest Physical Therapy,
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
Scott Black Physical Therapy,
Limited Partnership dba
Northern Neck Physical Therapy Limited Partnership
Texas
Mountain View Physical Therapy,
Limited Partnership
Limited Partnership
Texas
Intermountain Physical Therapy,
Limited Partnership
Limited Partnership
Texas
79
NAME OF
SUBSIDIARY
SUBSIDIARIES OF THE REGISTRANT
TYPE OF
ENTITY
STATE OF
INCORPORATION
OR FORMATION
Exhibit 21
Staunton Hand & Rehab Services,
Limited Partnership
Limited Partnership
Texas
White Mountain Physical Therapy,
Limited Partnership
Battle Physical Therapy,
Limited Partnership
Covington Rehabilitation and
Limited Partnership
Texas
Limited Partnership
Texas
Hand Therapy, Limited Partnership
dba South Mississippi Physical
Therapy
Limited Partnership
Texas
Crawford Physical Therapy,
Limited Partnership
Mobile Spine and Rehabilitation,
Limited Partnership
University Physical Therapy,
Limited Partnership
Oregon Spine & Physical Therapy,
Limited Partnership
Audubon Physical Therapy,
Limited Partnership
Bow Physical Therapy & Spine
Center, Limited Partnership
Caldwell Management, Limited
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Partnership
Limited Partnership
Texas
Southeast Boise Management,
Limited Partnership
North Shore Sports & Physical
Therapy, Limited Partnership
Performance and Sports Medicine,
L.P, dba Center for Performance
& Sports Medicine Excellence
Physical Therapy Connection of
McLean, Limited Partnership
Royal Physical Therapy,
Limited Partnership
Sport & Spine Clinic, L.P.
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Texas
Limited Partnership
Limited Partnership
Texas
Texas
80
Exhibit 23.1
CONSENT OF KPMG LLP
Board of Directors
U.S. Physical Therapy, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-63446, 33-63444, 33-91004, 33-93040, 333-30071, 333-64159,
333-67680, 333-67678 and 333-82932) on Form S-8 of U.S. Physical
Therapy, Inc. of our report dated February 27, 2002, relating to the
consolidated balance sheets of U.S. Physical Therapy, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders’ equity, and cash
flows for each of the years in the three-year period ended December 31,
2001, and the related consolidated financial statement schedule, which
report appears in the December 31, 2001, annual report on Form 10-K of
U.S. Physical Therapy, Inc.
Our report refers to changes in accounting for business combinations
and resulting goodwill and other intangible assets that were adopted in
2001.
KPMG LLP
Houston, Texas
March 28, 2002
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