FORM 10−K
U S PHYSICAL THERAPY INC /NV − USPH
Filed: March 15, 2004 (period: December 31, 2003)
Annual report which provides a comprehensive overview of the company for the past year
Table of Contents
PART I
ITEM 1. OUR BUSINESS.
ITEM 2. PROPERTIES.
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
ITEM 9A. CONTROLS AND PROCEDURES.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8−K.
SIGNATURES
INDEX TO EXHIBITS
EX−21 (Subsidiaries of the registrant)
EX−23.1 (Consents of experts and counsel)
EX−31.1
EX−31.2
EX−31.3
EX−32.1
.
.
.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549−1004
FORM 10−K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1−11151
U.S. PHYSICAL THERAPY, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76−0364866
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1300 WEST SAM HOUSTON PARKWAY SOUTH, 77042
SUITE 300, (Zip Code)
HOUSTON, TEXAS
(Address of principal executive offices)
(713) 297−7000
(Telephone number)
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 each class)
NASDAQ NATIONAL MARKET
(Name of each exchange on which registered)
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 [X] No [ ]
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b−2 of the Act). Yes [X] No [ ]
As of June 30, 2003, based upon the closing price on such date, the aggregate market value of
the voting stock held by non−affiliates of the registrant was: $90,432,428
As of March 1, 2004, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was: 12,441,955
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10−K
−−−−−−−− −−−−−−−−−−−−−−−−−
Portions of Definitive Proxy Statement for the Part III
2004 Annual Meeting of Shareholders
FORWARD LOOKING STATEMENTS
We make statements in this report that are considered to be forward−looking statements within
the meaning under Section 21E of the Securities Exchange Act of 1934. These statements involve
risks and uncertainties that could cause actual results to differ materially from those we
project. When used in this report, the words "anticipates," "believes," "estimates," "intends,"
"expects," "plans," "should," "appear" and "goal" and similar expressions are intended to
identify forward−looking statements. The forward−looking statements are based on our current
views and assumptions and involve risks and uncertainties that include, among other things:
− general economic, business, and regulatory conditions;
− competition discussed under the heading "Competition" below;
− federal and state regulations discussed under the heading "Regulation and
Healthcare Reform" below;
− reimbursement rates from third party payors and deductibles and co−pays
owed by patients;
− availability, terms, and use of capital;
− the availability of sufficient numbers of qualified physical and
occupational therapists for us to realize our plan to expand the number
of our clinics, discussed under the heading "Factors Affecting Future
Results" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Risk Factors", below; and
− weather.
These factors are beyond our control.
Given these uncertainties, you should not place undue reliance on our forward−looking
statements. Please see the other sections of this report and our other periodic reports filed
with the Securities and Exchange Commission (the "SEC") for more information on these factors.
Our forward−looking statements represent our estimates and assumptions only as of the date of
this report. Except as required by law, we are under no obligation to update any forward−looking
statement, regardless of the reason the statement is no longer accurate.
PART I
ITEM 1. OUR BUSINESS.
GENERAL
Our company, U.S. Physical Therapy, Inc., through our subsidiaries, operates outpatient physical
and occupational therapy clinics. U.S. Physical Therapy, Inc. was formed in April 1992 under the
corporate laws of the state of Nevada. We are organized as a Nevada corporation with operating
subsidiaries organized in the form of limited partnerships and wholly−owned corporations.
Unless the context otherwise requires, references in this Form 10−K to "we", "our" or "us"
includes U.S. Physical Therapy, Inc. and all our subsidiaries. This description of our business
should be read in conjunction with our financial statements and the related notes contained
elsewhere in this Form 10−K.
At December 31, 2003, we operated 242 outpatient physical and occupational
therapy clinics in 35 states. Our strategy is to develop and acquire outpatient
clinics on a national basis. Our clinics are currently concentrated in 8
states −− Texas, Michigan, Wisconsin, Florida, Virginia, Oklahoma, Maine and New
Jersey. The average age of the 242 clinics in operation at December 31, 2003 was
3.96 years. We developed 236 of the clinics and acquired six.
Our clinics provide pre− and post−operative treatment for orthopedic−related disorders,
sports−related injuries, preventative care, rehabilitation of injured workers and
neurological−related injuries. Our clinics
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initially perform a tailored and comprehensive evaluation of each patient, which
is then followed by a treatment plan specific to the injury. The treatment plan
may include a number of procedures, including ultrasound, electrical
stimulation, hot packs, iontophoresis, therapeutic exercise, manual therapy
techniques, education on management of daily life skills and home exercise
programs. A clinic's business primarily comes from referrals by local
physicians. 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.
We continue to seek to attract physical and occupational therapists who have established
relationships with physicians by offering them a competitive salary; a bonus based on his or her
clinic's net revenue and profitability; and a share of the profits of the clinic operated by
that therapist.
In addition to our owned clinics, we also manage five physical therapy
facilities for third parties, including physicians.
Our principal executive offices are located at 1300 West Sam Houston Parkway South, Suite 300,
Houston, Texas 77042, and our telephone number is (713) 297−7000.
OUR CLINICS
Most of our clinics are owned by limited partnerships (the "Clinic Partnerships") in which we
own the general partnership interest, and the managing therapists of the clinics own limited
partnership interests. The therapist partners have no interest in the net losses of Clinic
Partnerships, except to the extent of their capital accounts. Increasingly we have developed
satellite clinic facilities that are extensions of existing clinics; accordingly Clinic
Partnerships may consist of more than one clinic location. As of December 31, 2003, through
wholly−owned subsidiaries, we owned a 1% general partnership interest in all the Clinic
Partnerships, except for one clinic in which we own a 6% general partnership interest. Our
limited partnership interests range from 49% to 99% in the Clinic Partnerships, but with respect
to the majority of our clinics, we own a limited partnership interest of 64%. For the great
majority of the Clinic Partnerships the managing therapist of each clinic (along with other
therapists at the clinic in several of the partnerships) own the remaining limited partnership
interests in the Clinic Partnerships.
In the majority of the Clinic 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%.
In 2002, we revised our accounting for these Clinic Partnership interests owned
by the therapist partners; as to Clinic Partnerships formed after January 18,
2001, whereby profit allocated to therapist partners is treated as compensation
expense. See "Significant Accounting Policies" −− Note 2 in Item 8.
Beginning in 2003, the Company significantly reduced the percentage of new Clinic's structured
as clinic partnerships and increased the percentage of wholly owned clinics. New clinics opened,
which are not satellites of clinic partnerships, are wholly owned by the Company. As of December
31, 2003, 71 clinics have no therapist partner but rather the managing director therapist
participates in a profit sharing and residual interest program similar to our partnership
agreements, without having an equity interest in the clinic. Given the change in accounting for
partners, we expect to continue to expand our number of wholly owned clinics.
Typically each therapist partner or director enters into an employment
agreement for a term ranging from one to two years with his or her Clinic
Partnership. Each agreement provides for a covenant not to compete during his or
her employment and for one or two years thereafter. Under each employment
agreement the therapist partner receives a base salary and may receive a bonus
based on the net revenues or operating profit generated by his or her Clinic
Partnership. Each employment agreement provides that upon termination we can
require the therapist to sell his or her partnership interest in the Clinic
Partnership to us or the Clinic Partnership for the amount of his or her capital
account if the termination is for "cause" or for breach of the employment
agreement; if the termination is occasioned by or because of the therapist's
death or disability, or the expiration of the initial or any extended term of
the
2
employment agreement, the buy−out price is for an amount set in a predetermined
formula based on a multiple of prior profitability.
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
practices. Under a management agreement, one of our subsidiaries provides a variety of services
to each clinic, including supervision of site selection, construction, clinic design and
equipment selection, establishment of accounting systems and billing procedures and training of
office support personnel, processing of accounts payable, operational direction, ongoing
accounting services and marketing support.
Our typical clinic occupies approximately 1,500 to 3,000 square feet of
space under a lease in an office building or shopping center. We attempt to
lease ground level space for patient ease of access to our clinics. We also
attempt to make the decor in our clinics less institutional and more
aesthetically pleasing than hospital clinics. Typical minimum staff at a clinic
consists of a licensed physical or occupational therapist and an office manager.
As patient visits grow, staffing may also include additional physical or
occupational therapists, therapy assistants, aides, exercise physiologists,
athletic trainers and office personnel. All therapy services are performed under
the direct supervision of a licensed therapist.
We provide services at our clinics on an outpatient basis. Patients are usually treated for
approximately one hour per day, two to five times a week, typically for two to six weeks. We
generally charge for treatment on a "per procedure" basis. In addition, our clinics will
develop, when appropriate, individual maintenance and self−management exercise programs to be
continued after treatment. We continually assess the potential for developing new services and
expanding the methods of providing our existing services most efficiently.
RISK FACTORS
Our business, operations and financial condition are subject to various risks. Some of these
risks are described below, and readers of this Annual Report on Form 10−K should take such
risks into account in evaluating our company or making any decision to invest in us. This
section does not describe all risks applicable to our company, our industry or our business, and
it is intended only as a summary of material factors affecting our business.
WE DEPEND UPON REIMBURSEMENT BY THIRD−PARTY PAYORS.
Substantially all of our revenues are derived from private and governmental third−party payors.
In 2003, approximately 79% of our revenues were derived from commercial insurers, managed care
plans, workers' compensation payors and other private pay revenue sources, approximately 20%
from Medicare and approximately 1% from Medicaid. Initiatives undertaken by major insurers and
managed care companies to contain healthcare costs affect the profitability of our clinics.
These payors attempt to control healthcare costs by contracting with healthcare providers to
obtain services on a discounted basis. We believe that this trend will continue and may limit
reimbursements for healthcare services. If insurers or managed care companies from whom we
receive substantial payments were to reduce the amounts they pay for services, our profit
margins may decline, or we may lose patients if we choose not to renew our contracts with these
insurers at lower rates. We also receive payments from the Medicare program under a fee
schedule. Under the Balanced Budget Act of 1997 the total amount paid by Medicare in any one
year for outpatient physical (including speech−language pathology) or occupational therapy to
any one patient was limited. After a three−year moratorium, this financial limitation on therapy
services was implemented for services rendered on or after September 1, 2003. Effective December
8, 2003, a moratorium was placed on the limit for the remainder of 2003 and for years 2004 and
2005. We expect that efforts to contain federal spending for Medicare will continue to seek
limitations on Medicare reimbursement for various services, and we cannot predict whether any
of these efforts will be successful or what effect, if any, such limitations would have on our
business. See "Our Business −− Regulation and Healthcare Reform" in Item 1.
3
WE DEPEND UPON THE CULTIVATION AND MAINTENANCE OF RELATIONSHIPS WITH THE
PHYSICIANS IN OUR MARKETS.
Our success is dependent upon referrals from physicians in the communities our clinics serve and
our ability to maintain good relations with these physicians. Physicians referring patients to
our clinics are free to refer their patients to other providers. If we are unable to
successfully cultivate and maintain strong relationships with these physicians, our business may
decrease and our net operating revenues may decline.
WE ALSO DEPEND UPON OUR ABILITY TO RECRUIT AND RETAIN EXPERIENCED PHYSICAL AND
OCCUPATIONAL THERAPISTS WHO HAVE ESTABLISHED RELATIONSHIPS WITH THE PHYSICIANS
IN OUR MARKETS.
As mentioned above, our revenue generation is dependent upon referrals from physicians in the
communities our clinics serve, and our ability to maintain good relations with these
physicians. Our therapists are the front line for generating these referrals and we are
dependent on their talents and skills to successfully cultivate and maintain strong
relationships with these physicians. If we cannot recruit and retain our base of experienced and
established therapists, our business may decrease and our net operating revenues may decline.
Periodically, we have clinics in isolated communities that are temporarily unable to operate due
to the unavailability to identify a therapist that meet our standards.
OUR REVENUES MAY DECLINE DUE TO WEATHER.
We have a significant number of clinics in states that normally experience snow and ice during
the winter months. Periods of severe snow and ice could cause the inability of our staff or
patients to travel to our clinics, which may cause a decrease in our net operating revenues.
Winter months in which snow is minimal for states in which we have clinics may also result in
reduced revenues because of the lower incident of injuries resulting from winter sports and
accidents.
OUR REVENUES MAY DECLINE DURING PROLONGED ECONOMIC SLOW DOWN OR RECESSION.
Our revenues are a reflection of the number of visits made by patients to our clinics. Some
therapy and some surgical treatments that lead to patient need for therapy are elective or can
be deferred. During periods of high unemployment or relative economic weakness, patient visits
may decline.
CONTINUED DECLINES IN AVERAGE DAILY VISITS COULD NEGATIVELY IMPACT OUR RESULTS
OF OPERATIONS.
The number of daily visits to our clinics has declined from an average of 22.9 per clinic
during 2001 to an average of 19.9 per clinic during 2003. This is partially attributable to the
record number of locations opened in the two year period 2002 and 2003 that are still in the
process of ramping up referrals and patient visits. It is also attributable to a decline in
patient visits in our older clinics. We believe this decline is in part the result of higher
patient co−payments and deductibles which has lead to some softness in the therapy sector in
general. We also believe that in certain markets this decline is attributable to higher
unemployment rates or increased competition levels. A continuation of this trend could lead to a
decline in our revenues and profits.
OUR OPERATIONS ARE SUBJECT TO EXTENSIVE REGULATION.
The healthcare industry is subject to extensive federal, state and local
laws and regulations relating to:
− facility and professional licensure, including certificates of need;
− conduct of operations, including financial relationships among healthcare
providers, Medicare fraud and abuse, and physician self−referral;
− addition of facilities and services; and
− payment for services.
Recently, there have been heightened coordinated civil and criminal enforcement efforts by both
federal and state government agencies relating to the healthcare industry, including our line
of business.
4
We believe we are in substantial compliance with all laws, but differing
interpretations or enforcement of these laws and regulations could subject our
current practices to allegations of impropriety or illegality or could require
us to make changes in our methods of operations, facilities, equipment,
personnel, services and capital expenditure programs and increase our operating
expenses. If we fail to comply with these extensive laws and government
regulations, we could become ineligible to receive government program
reimbursement, suffer civil or criminal penalties or be required to make
significant changes to our operations. In addition, we could be forced to expend
considerable resources responding to an investigation or other enforcement
action under these laws or regulations. See "Our Business −− Regulation and
Healthcare Reform" in Item 1.
HEALTHCARE REFORM LEGISLATION MAY AFFECT OUR BUSINESS.
In recent years, many legislative proposals have been introduced or proposed in Congress and in
some state legislatures that would effect major changes in the healthcare system, either
nationally or at the state level. At the federal level, Congress has continued to propose or
consider healthcare budgets that substantially reduce payments under the Medicare programs.
There can be no assurance as to the ultimate content, timing or effect of any healthcare reform
legislation, nor is it possible at this time to estimate the impact of potential legislation on
us. That impact may be material to our business, financial condition or results of operations.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.
We encounter competition from local, regional or national entities, some of which have superior
resources or other competitive advantages. This competition includes both publicly and privately
held businesses including hospitals, physician owned practices and clinics owned by therapists
or investors. Intense competition may adversely affect our business, financial condition or
results of operations. See "Our Business −− Competition" in Item 1.
FACTORS INFLUENCING DEMAND FOR THERAPY SERVICES
We believe that the following factors, among others, influence the growth
of outpatient physical and occupational therapy services:
− Economic Benefits of Therapy Services. Purchasers and providers of
healthcare services, such as insurance companies, health maintenance
organizations, businesses and industries, continuously seek ways to save
on the cost of traditional healthcare services. We believe that our
therapy services provide a cost−effective way to prevent short−term
disabilities from becoming chronic conditions and to speed 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
to reduce costs. We believe that early hospital discharge practices
foster greater demand for outpatient physical and occupational therapy
services.
− Aging Population. The elderly population has a greater incidence of
major disability. As this segment of the population grows, we believe
that demand for rehabilitation services will expand.
MARKETING
We focus our marketing efforts primarily on physicians, mainly orthopedic surgeons,
neurosurgeons, physiatrists, occupational medicine physicians and general practitioners. In
marketing to the physician community, we emphasize our commitment to quality patient care and
communication with physicians regarding patient progress. We employ personnel to assist clinic
directors in developing and implementing marketing plans for the physician community and to
assist in establishing referral relationships with health maintenance organizations, preferred
provider organizations, industry and case managers and insurance companies.
5
SOURCES OF REVENUE
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, Medicare and managed care programs generally provide coverage to
patients utilizing our clinics after payment of normal deductibles and co−insurance payments.
Workers' compensation laws generally require employers to provide, directly or indirectly
through insurance, for their employees' costs of medical rehabilitation from work−related
injuries and disabilities and, in some jurisdictions, mandatory vocational rehabilitation,
usually without any deductibles, co−payments or cost sharing. Treatments for patients who are
parties to personal injury cases are generally paid from the proceeds of settlements with
insurance companies or from favorable judgments. If an unfavorable judgment 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 all receivable types are
regularly reviewed and adjusted as appropriate.
The following table shows our payor mix for the years ended:
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
−−−−−−−−−−−−−−−−−−−−−− −−−−−−−−−−−−−−−−−−−−−− −−−−−−−−−−−−−−−−−−−−
PAYOR MIX PAYOR MIX PAYOR MIX
PAYOR VISITS PERCENTAGE VISITS PERCENTAGE VISITS PERCENTAGE
−−−−− −−−−−−−−− −−−−−−−−−− −−−−−−−−− −−−−−−−−−− −−−−−−− −−−−−−−−−−
Commercial Health Insurance... 307,895 27.7% 278,379 27.7% 242,124 27.8%
Managed Care Programs......... 337,794 30.4% 288,950 28.8% 239,357 27.5%
Workers' Compensation
Insurance................... 182,137 16.4% 175,658 17.5% 177,008 20.3%
Medicare/Medicaid............. 233,368 21.0% 212,800 21.2% 165,214 19.0%
Other......................... 50,658 4.5% 48,650 4.8% 46,875 5.4%
−−−−−−−−− −−−−−− −−−−−−−−− −−−−−− −−−−−−− −−−−−−
Total....................... 1,111,852 100.0% 1,004,437 100.0% 870,578 100.0%
========= ====== ========= ====== ======= ======
Our business also depends to a significant extent on our relationships with commercial health
insurers, workers' compensation insurers, and health maintenance organizations and preferred
provider organizations. In some geographical areas, our clinics must be approved as providers
by key health maintenance organizations and preferred provider plans to obtain payments. As to
these clinics, failure to obtain or maintain these approvals would adversely affect their
financial results.
Approximately 20% of our visits are from patients with Medicare insurance
coverage. To receive Medicare reimbursement, a rehabilitation agency or the
individual therapist must meet applicable participation conditions set by HHS
(the Health and Human Services Department of the federal government) relating to
the type of facility, equipment, record keeping, personnel and standards of
medical care, and also must comply with all state and local laws. HHS through
Centers for Medicare and Medicaid Service ("CMS") and designated agencies
periodically inspects or surveys clinics for compliance. As of December 31,
2003, 181 of our clinics have been certified as rehabilitation agencies by
Medicare and an additional 48 clinics, not certified as rehabilitation agencies,
have individual therapists certified by Medicare to provide services as physical
therapists in private practice. We anticipate that newly developed clinics will
generally become certified as Medicare providers. No assurance can be given that
the newly developed clinics will be successful in becoming certified as Medicare
providers.
Since 1999, reimbursement for outpatient therapy services has been made according to a fee
schedule published by the HHS. Under the Balanced Budget Act of 1997 the total amount paid by
Medicare in any one year for outpatient physical (including speech−language pathology) or
occupational therapy to any one patient is limited to $1,500 (the "Medicare Limit"), except for
services provided in hospitals. After a three−year moratorium, this Medicare Limit on therapy
services was implemented for services rendered on or after September 1, 2003 subject to an
adjusted total of $1,590 (the "Adjusted Medicare Limit"). Effective December 8, 2003, a
moratorium was placed on the Adjusted Medicare Limit for the remainder of 2003 and for years
2004 and 2005. The potential negative impact on revenue resulting from a Medicare limit could
be reduced by receiving payments from secondary insurance carriers, patients electing to self−
6
pay, and most importantly by replacing lost revenues by more aggressive
marketing efforts focused on decreasing Medicare as a percentage of our total
business. In the event the moratorium is not extended after 2005 and such
negative impact is not mitigated by such efforts, the Adjusted Medicare Limit
could have an adverse impact on 2006 and later revenue and income since the
limit scheduled to apply for the entire year.
Medicare regulations require that a physician certify the need for therapy services for each
patient and that these services be provided under an established plan of treatment, which is
periodically revised.
State Medicaid programs generally do not provide coverage for outpatient
physical or occupational therapy; thus Medicaid is not, nor is it expected to
be, a material payor for us.
REGULATION AND HEALTHCARE REFORM
Numerous federal, state and local regulations regulate healthcare services. Some states into
which we may expand have laws requiring facilities employing health professionals and providing
health−related services to be licensed and, in some cases, to obtain a certificate of need
(that is, demonstrating to a state regulatory authority the need for and financial feasibility
of new facilities or the commencement of new healthcare services). Based on our operating
experience to date, we believe that our business as presently conducted does not require
certificates of need or other facility approvals or licenses. Our therapists, however, are
required to be licensed. Failure to obtain or maintain any required certificates, approvals or
licenses could have a material adverse effect on our business, financial condition and results
of operations.
Regulations Controlling Fraud and Abuse. 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"), under which civil and criminal 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. We
believe that our billing procedures and business arrangements are in compliance
with these provisions. However, the provisions are broadly written and the full
extent of their specific application is not currently known. Several states have
enacted state laws similar to the Fraud and Abuse law.
In 1991, the Office of the Inspector General ("OIG") of the United States Department of Health
and Human Services issued regulations describing compensation arrangements that fall within a
"Safe Harbor" and, therefore, are not viewed as illegal remuneration under the Fraud and Abuse
Law. Failure to fall within a Safe Harbor does not mean that the Fraud and Abuse Law has been
violated; however, the OIG has indicated that failure to fall within a Safe Harbor may subject
an arrangement to increased scrutiny.
Our business of managing physician−owned physical therapy facilities is
regulated by the Fraud and Abuse Law and falls outside the scope of the Safe
Harbors. Nonetheless, we believe that these arrangements comply with the Fraud
and Abuse Law, even though federal courts provide little guidance as to the
application of the Fraud and Abuse Law to these arrangements. If our management
contracts are held to violate the Fraud and Abuse Law, it could have a material
adverse effect on our 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 patients. The OIG's
stated concern in these arrangements is that, 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. We rent clinic space for a number of
our clinics from referring physicians and have taken the appropriate steps that we believe are
necessary to assure that all leases comply with the space rental Safe Harbor to the Fraud and
Abuse Law.
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Stark II. Provisions of the Omnibus Budget Reconciliation Act of 1993 (the
"Stark Law") prohibits referrals by a physician for "designated health services"
to an entity in which the physician or family member has an investment interest
or other financial relationship, with several exceptions.
The Stark Law covers a management contract with a physician group and any financial
relationship between us and referring physicians, including any financial transaction resulting
from a clinic acquisition. This law also prohibits billing for services rendered from a
prohibited referral. Several states have enacted laws similar to the Stark Law, but these state
laws may cover all (not just Medicare and Medicaid) patients. Many federal healthcare reform
proposals in the past few years have expanded the Stark Law to cover all patients as well. As
with the Fraud and Abuse Law, we consider the Stark Law in planning our clinics, marketing and
other activities, and believe that our operations are in compliance with applicable law. If we
fail to comply with the Stark Law our financial results and operations would be adversely
affected. Penalties for violation include denial of payment for the services, significant civil
monetary penalties, and exclusion from the Medicare and Medicaid programs.
HIPAA. In an effort to further combat healthcare fraud and protect patient
confidentially, Congress included several anti−fraud measures in the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA created a
source of funding for fraud control to coordinate federal, state and local
healthcare law enforcement programs, conduct investigations, provide guidance to
the healthcare industry concerning fraudulent healthcare practices, and
establish a national data bank to receive and report final adverse actions.
Additionally, HIPAA mandates the adoption of standards regarding the exchange of
electronic healthcare information in an effort to ensure the privacy and
security of patient information and standards relating to the privacy of health
information. We believe that our operations fully comply with standards for
privacy of protected healthcare information. We additionally, must comply with
HIPAA standards for the security of electronic health information by April 21,
2005. Sanctions for failing to comply with HIPAA include criminal penalties and
civil sanctions. We cannot predict what effect, if any, the expanded enforcement
authorities will have on our business.
Other Regulatory Factors. Political, economic and regulatory influences are fundamentally
changing the healthcare industry in the United States. Congress state legislatures and the
private sector will continue to review and assess alternative healthcare delivery and payment
systems. Potential alternative approaches 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, and
price controls. Legislative debate is expected to continue in the future and market forces are
expected to demand reduced costs. For instance, managed care entities, which represent an
ever−growing percentage of healthcare payors, are demanding lower reimbursement rates from
healthcare providers and in some cases, are requiring or encouraging providers to accept
captivated payments that may not allow providers to cover their full costs or realize
traditional levels of profitability. We cannot predict what impact the adoption of any federal
or state healthcare reform measures or future private sector reform may have on our business.
COMPETITION
The healthcare industry generally, and the physical and occupational therapy businesses in
particular, are highly competitive and undergo continual changes in the manner in which services
are delivered and in which providers are selected. Competitive factors affecting our business
include quality of care, cost, treatment outcomes, convenience of location, and relationships
with and ability to meet the needs of referral and payor sources. Our clinics compete directly
or indirectly with the physical and occupational therapy departments of hospitals,
physician−owned therapy clinics, other private therapy clinics and chiropractors.
Of these sources, we believe hospital outpatient therapy clinics and
private therapy clinic organizations are our primary competitors. We may face
more intense competition as consolidation of the therapy industry continues
through the acquisition of physician−owned and other privately owned therapy
practices.
8
We believe that our strategy of providing key therapists in a community
with an opportunity to participate in clinic profitability provides us with a
competitive advantage because their participation helps ensure the commitment of
local management to the success of the clinic and reduces turnover of managing
therapists.
We also believe that our competitive position is enhanced by our strategy of locating our
clinics, when possible, on the ground floor of office buildings and shopping centers with
nearby parking, thereby making the clinics more easily accessible to patients. We also attempt
to make the decor in our clinics less institutional and more aesthetically pleasing than
hospital clinics. Finally, we believe that we can generally provide services at a lower cost
than hospitals due to hospitals' higher overhead.
EMPLOYEES
At December 31, 2003, we employed 1,276 total employees, of which 976 were full−time employees.
At that date, none of our employees were governed by collective bargaining agreements or were
members of unions. We consider our relations with our employees to be good. In the states in
which our current clinics are located, persons performing physical and occupational therapy
services are required to be licensed by the state. All persons currently employed by us who are
required to be licensed are licensed. We are not aware of any federal licensing requirements
applicable to our employees.
AVAILABLE INFORMATION
Our annual reports on Form 10−K, quarterly reports on Form 10−Q, current reports on Form 8−K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are made available free of charge on our internet website at http://www.usph.com
as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the Securities and Exchange Commission.
ITEM 2. PROPERTIES.
We lease all of the properties used for our clinics under non−cancelable operating leases with
terms ranging from one to five years, with the exception of one clinic in each of Brownwood,
Texas and Mineral Wells, Texas, which we own. We intend to lease the premises in which new
clinics will be located except in rare instances in which leasing is not a cost effective
alternative. Our typical clinic occupies 1,500 to 3,000 square feet.
We also lease our executive offices located in Houston, Texas, under a
non−cancelable operating lease expiring in June 2010. We currently occupy
approximately 37,537 square feet of space (including allocations for common
areas) at our executive offices.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in 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,
we do not believe the impact of existing lawsuits or other proceedings would have a material
impact on our business, financial condition or results of operations.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
fourth quarter of 2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE QUOTATIONS
Our common stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "USPH." As
of March 1, 2004, there were 37 holders of record of our outstanding common stock. The reported
quotations reflect inter−dealer prices, without retail mark−up, mark−down or commission and may
not represent actual transactions.
2003 2002
−−−−−−−−−−−−−−− −−−−−−−−−−−−−−−
HIGH LOW HIGH LOW
−−−−−− −−−−−− −−−−−− −−−−−−
QUARTER
First.............................................. $13.08 $ 9.65 $19.00 $14.00
Second............................................. 15.15 10.55 20.31 15.25
Third.............................................. 16.03 11.37 20.25 9.69
Fourth............................................. 16.00 12.16 13.31 9.05
Since inception we have not declared or paid cash dividends or made distributions on our equity
securities, and we do not presently anticipate that we will pay cash dividends or make
distributions.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about our common stock that may be issued upon the
exercise of options and rights under all of our existing equity compensation plans as of
December 31, 2003, including the 1992 Stock Option Plan, 1999 Employee Stock Option Plan,
Executive Option Plan and Inducement option agreements.
NUMBER OF SECURITIES
WEIGHTED AVERAGE REMAINING AVAILABLE FOR
NUMBER OF SECURITIES EXERCISE PRICE OF FUTURE ISSUANCE UNDER
TO BE ISSUED UPON OUTSTANDING EQUITY COMPENSATION
EXERCISE OF OUTSTANDING OPTIONS AND PLANS, EXCLUDING SECURITIES
PLAN CATEGORY OPTIONS AND RIGHTS RIGHTS REFLECTED IN 1ST COLUMN
−−−−−−−−−−−−− −−−−−−−−−−−−−−−−−−−−−−− −−−−−−−−−−−−−−−−− −−−−−−−−−−−−−−−−−−−−−−−−−−−
Equity Compensation Plans
Approved by
Stockholders(1).............. 960,708 $ 6.30 −−
Equity Compensation Plans Not
Approved by
Stockholders(2).............. 183,934 $13.00 206,221
Total.......................... 1,144,642 $ 7.37 206,221
−−−−−−−−−−−−−−−
(1) The 1992 Stock Option Plan, as amended (the "1992 Plan") expired in 2002 and
no new option grants can be awarded subsequent to this date.
The Executive Option Plan (the "Executive Plan") permits us to grant to
officers or our affiliates, options to purchase shares of our common stock.
No further grants of options will be made under the Executive Plan.
(2) The 1999 Employee Stock Option Plan (the "1999 Plan") permits us to grant to
certain non−officer employees non−qualified options to purchase shares of
our common stock.
We granted Inducement options to certain individuals in connection with their offers of
employment or initial affiliation with us. Each inducement option was made pursuant to an
option grant agreement.
10
For further descriptions of the 1992 Plan, 1999 Plan and the Inducements,
see Stock Option Plans" in Note 7 of Item 8.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
the description of our critical accounting policies set forth in Item 7.
YEAR ENDED DECEMBER 31,
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
2003 2002 2001 2000 1999
−−−−−−−− −−−−−−− −−−−−−− −−−−−−− −−−−−−−
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues........................ $105,568 $94,739 $80,948 $63,222 $51,368
Income before income taxes.......... $ 11,783 $13,724 $11,503 $ 6,138 $ 3,962
Net income.......................... $ 7,331 $ 8,488 $ 7,071 $ 3,735 $ 2,394
Earnings per common share:
Basic(1).......................... $ 0.66 $ 0.77 $ 0.70 $ 0.40 $ 0.23
Diluted(1)........................ $ 0.61 $ 0.67 $ 0.55 $ 0.34 $ 0.23
Total assets(2)..................... $ 52,473 $41,033 $36,742 $22,970 $23,346
Long−term debt, less current
portion........................... $ 83 $ 2,350 $ 3,021 $ 7,226 $ 8,087
Working capital(2).................. $ 27,606 $19,746 $18,731 $10,086 $12,175
Current ratio(2).................... 6.09 7.93 5.92 4.04 6.65
Total long−term debt to total
capitalization(3)................. −− 0.07 0.12 0.46 0.43
−−−−−−−−−−−−−−−
(1) All per share information has been adjusted to reflect a two−for−one stock
split on January 5, 2001, and a three−for−two stock split on June 28, 2001.
(2) Certain reclassifications have been made to prior year amounts to conform to
the presentation used for 2003. The reclassifications had no effect on net
income.
(3) In 2003, the majority of the Company's outstanding debt was classified as
short−term resulting in total long−term debt to total capitalization to be
less than 0.01.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXECUTIVE SUMMARY
Our Business. We operate outpatient physical and occupational therapy clinics that provide pre−
and post−operative care and treatment for a variety of orthopedic−related disorders and
sports−related injuries. At December 31, 2003, we operated 242 outpatient physical and
occupational therapy clinics in 35 states. The average age of our clinics at December 31, 2003,
was 3.96 years. We have developed 236 of the clinics and acquired six. To date, we have sold
three clinics, closed 22 facilities due to substandard clinic performance, and consolidated
three clinics with other existing clinics. In 2003, we added 48 new clinics and our goal is to
open between 45 and 50 clinics in 2004.
In addition to our owned clinics, we also manage physical therapy
facilities for third parties, primarily physicians, with five third−party
facilities under management as of December 31, 2003.
Principal Economic and Industry−Wide Factors Affecting Our Business. The following factors,
among others, impact the profitability of our business and other physical and occupational
therapy businesses:
− Competition. The healthcare industry generally, and the physical and
occupational therapy business in particular, is highly competitive and
undergoes continual changes in the manner in which services are delivered
and in which providers are selected. Our clinics compete with physical
and occupational therapy departments of hospitals, physician−owned
therapy practices and other private therapy clinics.
11
− Healthcare Regulation. Numerous federal, state and local regulations
impact healthcare services such as the provision of physical and
occupational therapy. The requirement that our therapists be licensed and
other regulations that impact the management of physical and occupational
therapy clinics impose significant direct and indirect costs on our
business.
− Private Health Plan Coverage. The profitability of our business, like
all healthcare services businesses, partially depends on the level of
reimbursement we receive from private health insurers for the services
performed at our clinics.
− Physician Referrals. As a provider of physical and occupational therapy,
we depend on physicians referring their patients to our clinics. The
number of referrals that our clinics receive is a function of physician
awareness and the quality and reputation of our clinics.
− High Operating Costs. Healthcare companies such as ours face significant
operating costs. The start−up costs associated with opening new clinics
can be high, and all clinics face significant costs associated with
hiring and retaining qualified staff, renting appropriate space and
purchasing supplies and equipment.
Revenue Generation and Cost of Revenue. Our clinics generate revenue by billing third−party
payors for services at standard rates. These payor sources primarily consist of commercial
health insurance companies, managed care programs, workers' compensation plans, Medicare and
proceeds from personal injury lawsuits. Our costs in producing revenue include salaries and
related costs associated with staffing our clinics, the cost of renting and supplying clinics
and other costs, such as the acquisition or lease of therapy equipment. In addition, we incur
expenses associated with our collection efforts in respect of delinquent accounts.
Material Opportunities, Challenges and Risks. The growth of our business
depends on our ability to continue opening new clinics while sustaining the
profitability of our existing clinics. Our goal for 2004 is to open between 45
and 50 additional clinics if we can identify appropriate geographic locations
and hire qualified physical and occupational therapists to manage the clinics.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that have a significant impact on our results of
operations and financial position involving significant estimates requiring our judgment. Our
critical accounting policies are:
Revenue Recognition. We bill third−party payors for services at standard
rates. Net patient revenues are based on established billing rates, less
allowances and discounts for patients covered by 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, evaluated monthly by management, for contractual and other
adjustments agreed to or established with payors. Reimbursement for Medicare
beneficiaries is based upon a fee schedule published by HHS. See "Our Business
−− Sources of Revenue" in Item 1.
Allowance for Doubtful Accounts. We review the accounts receivable aging and rely on prior
experiences with particular payors at each clinic to determine an appropriate reserve for
doubtful accounts. Historically, clinics that have large numbers of aged accounts generally have
less favorable collection experience, and thus they require a higher allowance. Accounts that
are ultimately determined to be uncollectible are written off against our bad debt allowance.
The amount of our aggregate bad debt allowance is periodically reviewed for adequacy in light
of current and historical experience.
Accounting for Income Taxes. As part of the process of preparing the
consolidated financial statements, we must estimate our federal and state income
tax liability, as well as assess temporary differences resulting from differing
treatment of items (such as bad debt expense and amortization of leasehold
improvements) for tax and for accounting purposes. The differences result in
deferred tax assets and liabilities, which are included in our consolidated
balance sheets. We must then assess the likelihood
12
that deferred tax assets will be recovered from future taxable income, and if
not, establish a valuation allowance.
Carrying Value of Long−Lived Assets. Our property and equipment, intangible assets and goodwill
(collectively, our "long−lived assets") comprise a significant portion of our total assets at
December 31, 2003 and 2002. We account for our long−lived assets pursuant to Statement of
Financial Accounting Standards No. 144. This accounting standard requires that we periodically,
and upon the occurrence of certain events, assess the recoverability of our long−lived assets.
If the carrying value of our property and equipment or intangible assets exceeds their
undiscounted cash flows, we are required to write the carrying value down to estimated fair
value. Also, if the carrying value of our goodwill exceeds the estimated fair value, we are
required to allocate the estimated fair value to our assets and liabilities, as if we had just
acquired it in a business combination. We then would write−down the carrying value of our
goodwill to the implied fair value. Any such write−down is included as an impairment loss in our
consolidated statement of operations. Judgment is required to estimate the fair value of our
long−lived assets. We may use quoted market prices, prices for similar assets, present value
techniques and other valuation techniques to prepare these estimates. In addition, we may
obtain independent appraisals in certain circumstances. We may need to make estimates of future
cash flows and discount rates as well as other assumptions in order to implement these valuation
techniques. Accordingly, any value ultimately derived from our long−lived assets may differ from
our estimate of fair value.
Accounting for Minority Interests. In the majority of our partnership
agreements, the therapist partner begins with a 20% profit interest in his or
her clinic partnership, which increases by 3% points at the beginning of each
subsequent year until his or her interest reaches 35%. Within the balance sheet
and statement of operations we record partner therapists' profit interest in the
clinic partnerships as minority interest in earnings of subsidiary limited
partnerships. The Emerging Issues Task Force ("EITF") issued EITF 00−23, "Issues
Related to the Accounting for Stock Compensation under APB No. 25 and FASB
Interpretation No, 44", which provides specific accounting guidance relating to
various incentive compensation issues. We reviewed EITF 00−23 with respect to
the partnerships structure and the accounting for minority interest and
concluded that for partnerships formed after January 18, 2001, EITF 00−23
requires us to expense as compensation rather than as a minority interest in
earnings, the clinic partners' interest in profits. Moreover, EITF 00−23 also
requires, as to clinic partnerships formed after January 18, 2001, that we
expense as compensation rather than capitalizing as goodwill, the purchase of
minority interest in the partnerships. At this time we operate 71 wholly owned
clinics without any minority interest. Due to this change in accounting
practice, we have expanded the number of our wholly owned clinics.
In accordance with the above, for the years ended December 31, 2003 and 2002, we have
classified $428,000 and $306,000, respectively, of the minority interests in earnings of
subsidiary limited partnerships relating to the 30 partnerships formed after January 18, 2001,
into salaries and related costs. As of December 31, 2003 and December 31, 2002, $346,000 and
$276,000, respectively, in undistributed minority interests related to the 30 partnerships is
classified as other long−term liabilities. This change in classification had no effect on net
income at December 31, 2003 but rather is a reclassification between minority interests in
earnings and salaries and related costs. No amounts were reclassified in 2001, due to the
insignificant amount of minority interest in the 13 partnerships formed between January 18, 2001
and December 31, 2001. See "Minority Interest" (a subsection of "Significant Accounting
Policies") −− Note 2 in Item 8.
SELECTED OPERATING AND FINANCIAL DATA
The following table presents selected operating and financial data. We view these non−financial
data points as key indicators of our operating performance. As indicated below, the number of
daily visits to our
13
clinics has declined from an average of 22.9 per clinic during 2001 to an
average of 19.9 per clinic during 2003.
FOR THE YEARS ENDED DECEMBER 31,
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
2003 2002 2001
−−−−−−−−−− −−−−−−−−−− −−−−−−−−
Number of clinics................................. 248 202 162
Working days...................................... 254 254 254
Average visits per day per clinic................. 19.9 22.1 22.9
Total patient visits.............................. 1,111,852 1,004,437 870,578
Net patient revenue per visit..................... $ 92.84 $ 91.93 $ 90.11
Statements of operations per visit:
Net revenues.................................... $ 94.94 $ 94.32 $ 92.98
Salaries and related costs...................... (47.13) (44.66) (43.09)
Rent, clinic supplies and other................. (19.12) (17.93) (17.72)
Provision for doubtful accounts................. (0.84) (1.66) (2.22)
−−−−−−−−−− −−−−−−−−−− −−−−−−−−
Contribution from clinics.................... 27.85 30.07 29.95
Corporate office costs.......................... (12.56) (11.28) (10.48)
−−−−−−−−−− −−−−−−−−−− −−−−−−−−
Operating income............................. $ 15.29 $ 18.79 $ 19.47
========== ========== ========
RESULTS OF OPERATIONS
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
− Net revenues rose 11% to $105.6 million from $94.7 million primarily due
to an 11% increase in patient visits to 1,111,852 and a $0.91 increase in
net patient revenues per visit to $92.84.
− Net income declined 14% to $7.3 million from $8.5 million.
− Earnings per share were $0.61 and $0.67 per diluted share for the years
ended December 31, 2003 ("2003") and December 31, 2002 ("2002"),
respectively. The decrease in earnings per share is primarily
attributable to the decrease in net income from $8.5 million in 2002 to
$7.3 million in 2003 offset by a decrease in diluted shares by 708,000
from 2002 to 2003.
Net Patient Revenues
− Net patient revenues increased to $103.2 million for 2003 from $92.3
million for 2002, an increase of $10.9 million, or 12%, primarily due to
an 11% increase in patient visits to 1,111,852 and a $0.91 increase in
patient revenues per visit to $92.84.
− Total patient visits increased 107,415, or 11%, to 1,111,852 for 2003
from 1,004,437 for 2002. The growth in visits for the year was
attributable to an increase of 103,000 visits in clinics opened between
January 1, 2002 and December 31, 2002 and 40,000 visits from clinics
developed during 2003 (the "New Clinics"), offset by a 36,000 decrease in
visits for clinics opened before January 1, 2002. We believe the decrease
in visits for clinics opened before January 1, 2002 is primarily a result
of increases in patient co−payments and deductibles which has contributed
to some softness in the therapy sector. We also believe that in certain
markets this decline is attributable to higher unemployment rates or
increased competition levels.
− Net patient revenues from New Clinics accounted for approximately 36% of
the increase, or approximately $3.9 million. The remaining increase of $7
million in net patient revenues was from clinics opened prior to January
1, 2003 (the "Mature Clinics"). Of the $7 million increase, $10 million
related to 40 clinics opened during 2002, offset by a $3 million decrease
in clinics opened prior to January 1, 2002. In addition, of the $7
million increase in net patient revenues from the Mature Clinics, $6.2
million of this increase related to a 7% increase in patient visits,
while $880,000 was due to a less than 1% increase in the average net
revenue per visit.
14
Net patient revenues are based on established billing rates less allowances
and discounts for patients covered by workers' compensation programs and other
contractual programs. Net patient revenues reflect contractual and other
adjustments, which we evaluate quarterly, relating to patient discounts from
certain payors. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of
the clinics.
Clinic Operating Costs
Clinic operating costs as a percent of net revenues were 71% for 2003 and
68% for 2002.
CLINIC OPERATING COSTS −− SALARIES AND RELATED COSTS
Salaries and related costs increased to $52.4 million for 2003 from $44.9 million for 2002, an
increase of $7.5 million, or 17%. Approximately 34% of the increase, or $2.6 million, was
incurred at the New Clinics. The remaining 66% increase, or $5 million, was due principally to
an increase in salaries and related costs of $4.5 million in Mature Clinics opened in 2002 that
experienced an increase in clinic staff to meet the increase in patient visits. Additionally,
salaries and related costs increased $218,000 and $122,000 relating to increased group health
insurance cost and compensation costs associated with minority interests in earnings of
subsidiary limited partnerships relating to the 30 partnerships formed after January 18, 2001,
respectively. Bonuses are based on the net revenues and operating profit generated by the
individual clinics. Salaries and related costs as a percent of net revenues were 50% for 2003
and 47% for 2002.
CLINIC OPERATING COSTS −− RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $21.3 million for 2003 from $18 million for 2002,
an increase of $3.3 million, or 18%. The $3.3 million consisted of a $2 million increase in
rent, clinic supplies and other at New Clinics with the remaining $1.3 million in our Mature
Clinics. Rent, clinic supplies and other as a percent of net revenues increased to 20% for 2003
from 19% for 2002.
CLINIC OPERATING COSTS −− PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $932,000 for 2003 from $1.7 million for 2002, a
decrease of $737,000 or 44%. This decrease was primarily due to enhanced collection efforts and
a resulting improvement in experience. The provision for doubtful accounts as a percent of net
patient revenues decreased to 0.9% for 2003 from 1.8% for 2002. Our allowance for bad debts as a
percent of total patient accounts receivable was 20% at December 31, 2003, as compared to 25%
at December 31, 2002. Accounts receivable days outstanding decreased to 68 days at December 31,
2003 as compared to 71 days at December 31, 2002. The provision for doubtful accounts for each
period is based on a detailed, clinic−by−clinic review of overdue accounts.
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 $14 million for 2003 from $11.3 million for 2002,
an increase of $2.7 million, or 24%. Corporate office costs increased primarily, as a result of
an increase in salaries and benefits, recruitment fees, severance costs, depreciation expense,
higher legal and accounting fees and an increase in insurance premiums. Corporate office costs
as a percent of net revenues increased to 13% for 2003 from 12% for 2002.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships increased to $5 million for
2003 from $4.9 million for 2002, an increase of $89,000, or 2%. The increase in minority
interests in earnings resulted from an increase in the limited partnerships' profit interest in
Mature Clinics opened prior to January 18,
15
2001, offset by the 2003 amount of minority interest classified as salaries and
related costs. As a percentage of operating income, minority interest increased
to 30% for 2003 from 26% for 2002. See Note 6.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased to $4.5 million for 2003 from $5.2 million for 2002, a
decrease of approximately $0.8 million, or 15% as a result of lower pre−tax income. During 2003
and 2002, we accrued state and federal income taxes at an effective tax rate of 38%.
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
− Net revenues rose 17% to $94.7 million from $80.9 million due to a 15%
increase in patient visits to 1,004,000 and a $1.82 increase in net
patient revenues per visit to $91.93.
− Net income increased 20% to $8.5 million from $7.1 million.
− Earnings per share were $0.67 and $0.55 per diluted share for the year
ended December 31, 2002 ("2002") and December 31, 2001 ("2001"),
respectively. Total diluted shares at December 31, 2002 were
approximately 12.9 million, a reduction of 133,000 shares from
approximately 13.1 million at December 31, 2001 primarily due to a
decrease in the dilutive effect from stock options of approximately
799,000 shares and convertible subordinated notes payable of 200,000
shares, offset by the increase in the number of weighted−average shares
outstanding of approximately 866,000 shares.
Net Patient Revenues
− Net patient revenues increased to $92.3 million for 2002 from $78.5
million for 2001, an increase of 13.8 million, or 18%.
− Total patient visits increased 133,000, or 15%, to 1,004,000 for 2002
from 871,000 for 2001. The growth in visits for the year was primarily
attributable to a full twelve months of operations for clinics opened
between January 1, 2001 and December 31, 2001, together with an increase
in visits for clinics opened in 2002.
− Net patient revenues from the 40 clinics developed and seeing patients
during 2002 (the "2002 New Clinics") accounted for approximately 21% of
the increase, or approximately $2.9 million.
− The remaining increase of $10.9 million in net patient revenues is
attributable to the 162 clinics opened before 2002 (the "2002 Mature
Clinics"). Of the $10.9 million increase in net patient revenues from the
Mature Clinics, $9.1 million was attributable to a 12% increase in the
number of patient visits to 972,000, while $1.8 million was attributable
to a 2% increase in the average net patient revenue per visit to $91.93.
Net patient revenues are based on established billing rates less allowances and discounts for
patients covered by workers' compensation programs and other contractual programs. Net patient
revenues reflect contractual and other adjustments, which we evaluate quarterly, relating to
patient discounts from certain payors. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of the clinics.
Clinic Operating Costs
Clinic operating costs as a percent of net revenues were 68% for 2002 and
2001.
CLINIC OPERATING COSTS −− SALARIES AND RELATED COSTS
Salaries and related costs increased to $44.9 million for 2002 from $37.5
million for 2001, an increase of $7.3 million, or 20%. Approximately 26% of
the increase, or $1.9 million, was incurred at the 2002
16
New Clinics. The remaining 74% increase, or $5.4 million, was due
principally to increased staffing at the 2002 Mature Clinics to meet the
increase in patient visits, coupled with an increase in bonuses earned by
clinic directors at the 2002 Mature Clinics. Bonuses are based on the net
revenues or operating profit generated by the individual clinics. Salaries
and related costs as a percent of net revenues remained constant at 47% for
2002 and 46% for 2001.
CLINIC OPERATING COSTS −− RENT, CLINIC SUPPLIES AND OTHER
Rent, clinic supplies and other increased to $18 million for 2002 from
$15.4 million for 2001, an increase of $2.6 million, or 17%. Approximately
58% of the increase, or $1.5 million, was attributable to the 2002 New
Clinics, while 42%, or $1.1 million, of the increase was incurred at the
2002 Mature Clinics. The increase in rent, clinic supplies and other for
the 2002 Mature Clinics was primarily attributable to the fact that 8 of
the 30 clinics opened during 2001 initiated operations in the fourth
quarter, reflecting that 2002 was the first year in which they incurred a
full year of expenses. Rent, clinic supplies and other as a percent of net
revenues remained constant at 19% for 2002 and 2001.
CLINIC OPERATING COSTS −− PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased to $1.7 million for 2002 from
$1.9 million for 2001, a decrease of 14%, or $261,000. In 2002, the
provision for doubtful accounts for 2002 Mature Clinics decreased $319,000
as a result of our improved collection efforts, which was off−set by an
increase of $58,000 in 2002 New Clinics. The provision for doubtful
accounts as a percent of net revenues decreased to 1.8% in 2002 compared to
2.5% for 2001. The allowance for doubtful accounts as a percentage of total
patient accounts receivable increased from 23% to 25% from December 31,
2001 to December 31, 2002. Gross days in accounts receivable decreased to
71 in December 31, 2002 from 81 in the same period a year earlier. The
provision for doubtful accounts for each period is based on a detailed,
clinic−by−clinic review of overdue accounts.
Corporate Office Costs
Corporate office costs consist primarily of salaries and benefits for corporate office
personnel, rent, insurance costs, depreciation and amortization, travel, legal, professional,
marketing and recruiting fees. These costs increased to $11.3 million for 2002 from $9.1 million
in 2001, an increase of $2.2 million, or 24%. Increases were incurred in salaries, recruiting
fees and benefits related to additional personnel hired to support an increasing number of
clinics, as well as depreciation expense, insurance costs and legal fees. Corporate office
costs as a percent of net revenues increased to 12% in 2002 from 11% in 2001.
Minority Interests in Earnings of Subsidiary Limited Partnerships
Minority interests in earnings of subsidiary limited partnerships decreased $243,000, or 5%, to
$4.9 million for 2002 from $5.2 million in 2001. The decrease primarily related to the
repurchase of minority partners' interests, coupled with a change in accounting that requires
us to record minority interests in earnings of subsidiary limited partnerships opened after
January 18, 2001, as salaries and related costs. See "Acquisition of Minority Interests" and
"Significant Accounting Policies" −− Notes 4 and 2, respectively, in Item 8.
Provision for Income Taxes
The provision for federal and state income taxes increased to $5.2 million for 2002 from $4.4
million for 2001, an increase of $804,000, or 18%, which was directly related to our 19%
increase in current year income before income taxes. During 2002 and 2001, we provided for
income taxes at an effective tax rate of 38% and 39%, respectively.
17
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business is generating enough cash flow from operating activities to allow
us to meet our short−term and long−term cash requirements. At December 31, 2003, we had $16.8
million in cash and cash equivalents compared to $7.6 million at December 31, 2002. Although the
start−up costs associated with opening new clinics, and our planned capital expenditures are
significant, we believe that our cash and cash equivalents are sufficient to fund the working
capital needs of our operating subsidiaries, future clinic development and investments. Included
in cash and cash equivalents at December 31, 2003 were $1.3 million in a money market fund and
$10 million in a short−term debt instrument issued by an agency of the U.S. Government.
The increase in cash of $9.2 million from December 31, 2002 to December 31,
2003 is due primarily to $17.5 million in cash provided by operating activities,
offset by cash used in financing activities of $3.3 million and $5 million in
fixed asset and intangible purchases. In 2003, we made $4.7 million in
distributions to minority investors in subsidiary limited partnerships and used
$3.3 million and $1.8 million in cash to purchase fixed assets and make
leasehold improvements, respectively. Cash was provided by proceeds of $1.5
million and a tax benefit of $2 million from the exercises of stock options.
Our current ratio decreased to 6.09 to 1.00 at December 31, 2003 from 7.93 to 1.00 at December
31, 2002. The decrease in the current ratio is due primarily to the reclassification of
Convertible Subordinated Notes from long−term debt to current liabilities as they will become
due in June 30, 2004.
At December 31, 2003, we had a debt−to−equity ratio of 0.06 to 1.00
compared to 0.07 to 1.00 at December 31, 2002. The decrease in the
debt−to−equity ratio from December 31, 2002 to December 31, 2003 resulted from
the additional note payable entered into during 2003 for the acquisition of
minority interest.
We have future obligations for debt repayments and future minimum rentals under operating
leases. The obligations as of December 31, 2003 are summarized as follows (in thousands):
CONTRACTUAL OBLIGATION TOTAL 2004 2005 2006 2007 2008 THEREAFTER
−−−−−−−−−−−−−−−−−−−−−− −−−−−−− −−−−−−− −−−−−− −−−−−− −−−−−− −−−−−− −−−−−−−−−−
Notes Payable............... $ 2,455 $ 2,372 $ 75 $ 6 $ 2 $ −− $−−
Employee Agreements......... 6,442 4,265 1,513 631 33 −− −−
Operating Leases............ 23,240 7,297 6,351 4,921 3,517 1,066 88
Total..................... $32,137 $13,934 $7,939 $5,558 $3,552 $1,066 $88
In 2002, $667,000 of a convertible subordinated note was converted into common stock, leaving a
remaining balance of $2.3 million at December 31, 2003 and 2002. On January 12, 2004, an
additional $666,660 of the convertible subordinated note was converted into common stock leaving
a remaining balance of $1.7 million. We anticipate that the remaining $1.7 million convertible
subordinated note will be converted into common stock at the June 2004 maturity date. However,
if our share price is not at or above $3.33 in June 2004, it is likely that the note holders
would not convert and we would have to use cash to repay the remaining Series C Note.
We do not currently have a credit line or other credit arrangements.
Historically, we have generated sufficient cash from operations to fund our
development activities and cover operational needs. We generally develop new
clinics rather than acquire them which require less capital. We plan to continue
developing new clinics and may also consider acquisitions in select markets. We
have from time to time purchased the minority interests of limited partners in
our clinic partnerships. We may purchase additional minority interests in the
future. Generally, any purchases of minority interests are expected to be
accomplished using a combination of cash, notes and common stock. We believe
that existing funds, supplemented by cash flows from existing operations, will
be sufficient to meet our current operating needs, development plans and any
purchases of minority interests through at least 2004.
In September 2001, the Board of Directors ("Board") authorized us to purchase, in the open
market or in privately negotiated transactions, up to 1,000,000 shares of our common stock.
Shares purchased are
18
held as treasury shares and may be used for valid corporate purposes or retired
as the Board deems advisable. During the year ended December 31, 2002, we
purchased 795,600 shares of our common stock on the open market for $10.5
million. During January 2003, we purchased an additional 1,800 shares of common
stock on the open market for a total of $20,000.
On February 26, 2003, our Board authorized a new share repurchase program of up to 250,000
additional shares of our outstanding common stock. As there is no specific expiration date for
this Board authorization, additional shares may be purchased from time to time in the open
market or private transactions depending on price, availability and our cash position. As of
December 31, 2003, no shares have been repurchased under the new share repurchase program.
CASH MANAGEMENT
We believe that our business is generating sufficient cash flow to satisfy our short−term and
long−term cash needs, including capital expenditures needed to fund our expected growth in
clinics for 2004. Excess cash is invested in short−term highly liquid investments, primarily
money market funds and debt instruments issued by an agency of the U.S. Government.
RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143") which
addresses financial accounting and reporting for obligations associated with the retirement of
tangible long−lived assets and the associated asset retirement costs. This statement applies to
all entities that have legal obligations associated with the retirement of long−lived assets
that result from the acquisition, construction, development or normal use of the asset. SFAS 143
was effective for us on January 1, 2003. The adoption of SFAS 143 did not have a significant
impact on our financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statements No. 13 and Technical
Corrections," ("SFAS 145") which provides guidance for income statement
classification of gains and losses on extinguishments of debt and accounting for
certain lease modifications that have economic effects that are similar to
sale−leaseback transactions. SFAS 145 was effective for us on January 1, 2003.
The adoption of SFAS 145 did not have a significant impact on our financial
condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities,"
("SFAS 146") which addresses significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the guidance set forth in
EITF Issue No. 94−3, "Liability Recognition of Certain Employee Termination Benefits and Other
Costs to Exit an Activity." SFAS 146 was effective for us on January 1, 2003. The adoption of
SFAS 146 did not have a significant impact on our financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others." FIN 45 requires that a liability be
recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provision of FIN 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a significant impact on our financial
condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock−Based Compensation −−
Transition and Disclosure, an amendment of FASB Statement No. 123," ("SFAS 148") which provides
alternative methods of transition for an entity that voluntarily changes to the fair value
based method of
19
accounting for stock−based employee compensation. SFAS 148 also amends certain
disclosures under SFAS 123 and Accounting Principles Board Opinion No. 28,
"Interim Financial Reporting," to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock−based employee compensation. SFAS 148 is effective for fiscal years
ending after December 15, 2002. We continue to use the provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") to account for
employee stock options and apply the disclosures required under SFAS 123.
In December 2003, the FASB issued FASB Interpretation No. 46, (revised December 2003),
Consolidation of Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46F replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January
2003. We will be required to apply FIN 46R to variable interests in VIEs created after December
31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will
be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets, liabilities and noncontrolling interests
of the VIE initially would be measured at their carrying amounts with any difference between the
net amount added to the balance sheet and any previously recognized interest being recognized
as the cumulative effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure the assets,
liabilities, and noncontrolling interest of the VIE.
We are evaluating the impact of applying FIN 46R to existing VIEs in which
it has variable interests and has not yet completed this analysis.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," ("SFAS 149") which amends and clarifies accounting and
reporting for certain derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 149 provides greater clarification of the
characteristics of a derivative instrument so that contracts with similar characteristics will
be accounted for consistently. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption
of SFAS 149 did not have a significant impact on our financial condition or results of
operations.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
statement establishes standards for the classification and measurement of
certain financial instruments of both liabilities and equity. The Statement also
includes disclosures for financial instruments within its scope. For us, the
Statement was effective for instruments entered into or modified after May, 31,
2003 and otherwise will be effective as of January 1, 2004, except for mandatory
redeemable financial instruments. For certain redeemable financial instruments,
the Statement will be effective for us on January 1, 2005. The effective date
has been deferred indefinitely for certain other types of mandatory financial
instruments. We currently do not have any financial instruments that are within
the scope of this Statement.
FACTORS AFFECTING FUTURE RESULTS
CLINIC DEVELOPMENT
As of December 31, 2003, we had 242 clinics in operation, 48 of which opened in 2003. Our goal
for 2004 is to open between 45 and 50 additional clinics if we can identify suitable geographic
locations and physical and occupational therapists to manage the clinics. We expect to incur
initial operating losses from the new clinics, which will impact our operating results.
Generally we experience losses during the initial period of a new clinic's operation. Operating
margins for newly opened clinics tend to be lower than more seasoned clinics because of start−up
costs and lower patient visits and revenues. Patient visits and revenues
20
gradually increase in the first year of operation, as patients and referral
sources become aware of the new clinic. Revenues tend to increase significantly
during the two to three years following the first anniversary of a clinic
opening. Based on the historical performance of our new clinics, generally the
clinics opened in 2003 would favorably impact our results of operations
beginning in 2004.
CONVERTIBLE SUBORDINATED DEBT
In May 1994 we issued $3 million of 8% Convertible Subordinated Notes, Series C due June 30,
2004 (the "Series C Notes"). The Series C Convertible Subordinated Note is convertible at the
option of the holder into the number of shares of our common stock determined by dividing the
principal amount of the Notes being converted by $3.33 per share. In June 2002, $667,000 of the
Series C Notes were converted by the note holders into 200,100 shares of common stock. The
remaining principal amount under the Series C Note was $2.3 million at December 31, 2003 and
December 31, 2002. During January 2004, $666,660 of the Series C Notes was converted by the note
holders into 200,000 shares of common stock leaving a remaining balance of $1.7 million. If our
share price is not at or above $3.33 in June 2004, it is likely that the note holders would not
convert and we would have to use cash to repay the remaining Series C Note. See "Notes Payable"
in Note 5 of Item 8.
In 2002, the debt conversion increased our shareholders' equity by the
carrying amount of the debt converted less unamortized deferred financing costs,
thus improving our debt to equity ratio and favorably impacting results of
operations and cash flow due to the interest savings in 2003 and 2002 before
income taxes of approximately $77,000 and $50,000, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not maintain any derivative instruments, interest rate swap arrangements,
hedging contracts, futures contracts or the like. Its only indebtedness as of December 31,
2003, was $2.3 million in Series C Convertible Subordinated Notes, described immediately above
and other notes of $122,000. See Note 5 of Item 8.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ 23
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 2003 and
2002...................................................... 24
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.......................... 25
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2003, 2002 and 2001.............. 26
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.......................... 27
Notes to Consolidated Financial Statements.................. 28
22
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, 2003 and 2002, 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, 2003. 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each
of the years in the three−year period ended December 31, 2003, 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.
KPMG LLP
Houston, Texas
March 4, 2004
23
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
−−−−−−−−−−−−−−−−−−−−−
2003 2002
−−−−−−−−− −−−−−−−−−
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,822 $ 7,610
Patient accounts receivable, less allowance for doubtful
accounts of $3,456 and $4,327, respectively............ 14,135 13,235
Accounts receivable −− other.............................. 266 443
Other current assets...................................... 1,802 1,307
−−−−−−−− −−−−−−−−
Total current assets.............................. 33,025 22,595
Fixed assets:
Furniture and equipment................................... 20,598 17,796
Leasehold improvements.................................... 10,760 9,310
−−−−−−−− −−−−−−−−
31,358 27,106
Less accumulated depreciation and amortization............ 19,550 16,693
−−−−−−−− −−−−−−−−
11,808 10,413
Goodwill, net of amortization of $335....................... 5,685 5,590
Other assets, net of amortization of $432 and $505,
respectively.............................................. 1,955 2,435
−−−−−−−− −−−−−−−−
$ 52,473 $ 41,033
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable −− trade................................. $ 498 $ 624
Accrued expenses.......................................... 2,549 2,188
Estimated third−party payor (Medicare) settlements........ −− 33
Notes payable............................................. 39 4
Convertible subordinated notes payable.................... 2,333 −−
−−−−−−−− −−−−−−−−
Total current liabilities......................... 5,419 2,849
Notes payable −− long−term portion.......................... 83 17
Other long−term liabilities................................. 346 273
Convertible subordinated notes payable...................... −− 2,333
−−−−−−−− −−−−−−−−
Total liabilities................................. 5,848 5,472
Minority interests in subsidiary limited partnerships....... 3,278 3,024
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized, no shares issued and outstanding........... −− −−
Common stock, $.01 par value, 20,000,000 shares
authorized, 12,242,577 and 11,818,711 shares issued at
December 31, 2003 and 2002, respectively............... 122 118
Additional paid−in capital................................ 26,808 23,313
Retained earnings......................................... 28,939 21,608
Treasury stock at cost, 947,100 and 945,300 shares held at
December 31, 2003 and 2002, respectively............... (12,522) (12,502)
−−−−−−−− −−−−−−−−
Total shareholders' equity........................ 43,347 32,537
−−−−−−−− −−−−−−−−
$ 52,473 $ 41,033
======== ========
See notes to consolidated financial statements.
24
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
2003 2002 2001
−−−−−−−−−−− −−−−−−−−−− −−−−−−−−−−
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net patient revenues........................................ $103,225 $92,343 $78,450
Management contract revenues................................ 2,210 2,284 2,311
Other revenues.............................................. 133 112 187
−−−−−−−− −−−−−−− −−−−−−−
Net revenues........................................... 105,568 94,739 80,948
Clinic operating costs:
Salaries and related costs................................ 52,406 44,856 37,521
Rent, clinic supplies and other........................... 21,266 18,006 15,429
Provision for doubtful accounts........................... 932 1,669 1,930
−−−−−−−− −−−−−−− −−−−−−−
74,604 64,531 54,880
Corporate office costs...................................... 13,967 11,334 9,120
−−−−−−−− −−−−−−− −−−−−−−
Operating income............................................ 16,997 18,874 16,948
Interest expense............................................ 189 214 266
Minority interests in subsidiary limited partnerships....... 5,025 4,936 5,179
−−−−−−−− −−−−−−− −−−−−−−
Income before income taxes.................................. 11,783 13,724 11,503
Provision for income taxes.................................. 4,452 5,236 4,432
−−−−−−−− −−−−−−− −−−−−−−
Net income............................................. $ 7,331 $ 8,488 $ 7,071
======== ======= =======
Basic earnings per common share............................. $ 0.66 $ 0.77 $ 0.70
======== ======= =======
Diluted earnings per common share........................... $ 0.61 $ 0.67 $ 0.55
======== ======= =======
See notes to consolidated financial statements.
25
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
−−−−−−−−−−−−−−− PAID−IN RETAINED −−−−−−−−−−−−−−−−− SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
−−−−−− −−−−−− −−−−−−−−−− −−−−−−−− −−−−−− −−−−−−−− −−−−−−−−−−−−−
(IN THOUSANDS)
Balance December 31, 2000............ 8,548 $ 85 $ 3,476 $ 6,049 (15) $ (47) $ 9,563
−−−−−− −−−− −−−−−−− −−−−−−− −−−− −−−−−−−− −−−−−−−−
Proceeds from exercise of stock
options............................ 780 8 2,271 −− −− −− 2,279
Tax benefit from exercise of stock
options............................ −− −− 3,134 −− −− −− 3,134
8% convertible subordinated notes
converted to common stock.......... 1,198 12 4,005 −− −− −− 4,017
Purchase of treasury stock........... −− −− −− −− (135) (1,943) (1,943)
Common stock issued in purchase of
minority interests................. 162 2 2,555 −− −− −− 2,557
Purchase of fractional shares on
three−for−two common stock split... −− −− (12) −− −− −− (12)
Net income........................... −− −− −− 7,071 −− −− 7,071
−−−−−− −−−− −−−−−−− −−−−−−− −−−− −−−−−−−− −−−−−−−−
Balance December 31, 2001............ 10,688 107 15,429 13,120 (150) (1,990) 26,666
−−−−−− −−−− −−−−−−− −−−−−−− −−−− −−−−−−−− −−−−−−−−
Proceeds from exercise of stock
options............................ 931 9 2,997 −− −− −− 3,006
Tax benefit from exercise of stock
options............................ −− −− 4,228 −− −− −− 4,228
8% convertible subordinated notes
converted to common stock.......... 200 2 665 −− −− −− 667
Purchase of treasury stock........... −− −− −− −− (795) (10,512) (10,512)
Other................................ −− −− (6) −− −− −− (6)
Net income........................... −− −− −− 8,488 −− −− 8,488
−−−−−− −−−− −−−−−−− −−−−−−− −−−− −−−−−−−− −−−−−−−−
Balance December 31, 2002............ 11,819 118 23,313 21,608 (945) (12,502) 32,537
−−−−−− −−−− −−−−−−− −−−−−−− −−−− −−−−−−−− −−−−−−−−
Proceeds from exercise of stock
options............................ 424 4 1,458 −− −− −− 1,462
Tax benefit from exercise of stock
options............................ −− −− 2,037 −− −− −− 2,037
Purchase of treasury stock........... −− −− −− −− (2) (20) (20)
Net income........................... −− −− −− 7,331 −− −− 7,331
−−−−−− −−−− −−−−−−− −−−−−−− −−−− −−−−−−−− −−−−−−−−
Balance December 31, 2003............ 12,243 $122 $26,808 $28,939 (947) $(12,522) $ 43,347
====== ==== ======= ======= ==== ======== ========
See notes to consolidated financial statements.
26
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
−−−−−−−−−−−−−−−−−−−−−−−−−−−−
2003 2002 2001
−−−−−−− −−−−−−−− −−−−−−−
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 7,331 $ 8,488 $ 7,071
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 3,591 2,955 2,566
Minority interests in earnings of subsidiary limited
partnerships............................................ 5,025 4,936 5,179
Provision for doubtful accounts........................... 932 1,669 1,930
Tax benefit from exercise of stock options................ 2,037 4,228 3,134
Deferred income taxes..................................... 474 (319) (351)
Other..................................................... 14 −− 3
Changes in operating assets and liabilities:
Increase in patient accounts receivable................... (1,832) (2,135) (3,998)
(Increase) decrease in accounts receivable −− other....... 177 435 (426)
Increase in other assets.................................. (18) (773) (108)
(Decrease) increase in accounts payable and accrued
expenses................................................ (239) (186) 414
Increase in other liabilities............................. 73 306 −−
Decrease in estimated third−party payor (Medicare)
settlements............................................. (33) (80) (242)
−−−−−−− −−−−−−−− −−−−−−−
Net cash provided by operating activities................... 17,532 19,524 15,172
−−−−−−− −−−−−−−− −−−−−−−
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (5,133) (5,565) (3,344)
Purchase of intangibles..................................... (31) (1,071) (53)
Other....................................................... 136 2 21
−−−−−−− −−−−−−−− −−−−−−−
Net cash used in investing activities....................... (5,028) (6,634) (3,376)
−−−−−−− −−−−−−−− −−−−−−−
FINANCING ACTIVITIES
Distributions to minority investors in subsidiary limited
partnerships.............................................. (4,696) (5,161) (4,530)
Payment of notes payable.................................... (38) (701) (1,542)
Repurchase of common stock.................................. (20) (10,512) (1,943)
Proceeds from exercise of stock options..................... 1,462 3,006 2,279
Other....................................................... −− (33) (10)
−−−−−−− −−−−−−−− −−−−−−−
Net cash used in financing activities....................... (3,292) (13,401) (5,746)
−−−−−−− −−−−−−−− −−−−−−−
Net increase (decrease) in cash and cash equivalents........ 9,212 (511) 6,050
Cash and cash equivalents −− beginning of year.............. 7,610 8,121 2,071
−−−−−−− −−−−−−−− −−−−−−−
Cash and cash equivalents −− end of period.................. $16,822 $ 7,610 $ 8,121
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes.............................................. $ 2,785 $ 869 $ 1,957
Interest.................................................. $ 233 $ 168 $ 268
Non−cash transactions during the period:
Conversion of convertible notes payable into common stock... $ −− $ 667 $ 4,200
Note payable purchases of minority interest
Purchase of intangibles/minority interest................. $ 75 $ −− $ −−
Goodwill.................................................. $ 64 $ −− $ 3,622
See notes to consolidated financial statements.
27
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
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, 2003, the Company
owned and operated 242 clinics in 35 states. The clinics provide pre− and 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 managed care programs, commercial
health insurance, Medicare, workers' compensation insurance 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 five such
third−party facilities under management as of December 31, 2003.
The consolidated financial statements include the accounts of U.S. Physical Therapy, Inc. and
its subsidiaries. All significant intercompany transactions and balances have been eliminated.
The Company primarily operates through subsidiary clinic partnerships, in which the Company
generally owns a 1% general partnership interest and a 64% limited partnership interest in the
clinics. The managing therapist of each clinic owns the remaining limited partnership interest
in the majority of the clinics. In some instances, the Company developed satellite clinic
facilities as extensions of existing clinics, with the result that some existing clinic
partnerships operate more than one clinic location. Beginning in 2003, the Company
significantly reduced its development of new clinic partnerships. New clinics opened which are
not satellite clinics are wholly owned by the Company. The clinic directors of such clinics will
be compensated based upon clinic profits. See Note 2.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of three months
or less to be cash equivalents. 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. The Company held approximately $11
million in highly liquid investments at December 31, 2003 and held no highly liquid investments
at December 31, 2002.
LONG−LIVED ASSETS
Fixed assets are stated at cost. Depreciation is computed on the straight−line method over the
estimated useful lives of the related assets. Estimated useful lives for furniture and equipment
range from three to eight years. Leasehold improvements are amortized over the estimated useful
lives of the assets or the related lease terms, whichever is shorter.
IMPAIRMENT OF LONG−LIVED ASSETS AND LONG−LIVED ASSETS TO BE DISPOSED OF
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,
"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
28
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
Transactions," for the disposal of a segment of a business. SFAS 144 was effective for the
Company January 1, 2002. The adoption of SFAS 144 did not have a significant impact on the
Company's financial condition or results of operations.
The Company reviews property and equipment and intangible assets for
impairment when certain events or circumstances indicate that the related
amounts might be impaired. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
GOODWILL
Goodwill represents the excess of costs over the fair value of the acquired business assets. In
July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142").
Provisions of SFAS 142 that were 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. The Company evaluates
goodwill for impairment on an annual basis by comparing the fair value of its reporting segment
units, as defined by SFAS 142, to their carrying values. For the year ended December 31, 2003,
the fair value of the Company's reporting segment units exceeds the recorded carrying value. At
December 31, 2003 and December 31, 2002, the Company had approximately $5.7 million and $5.6
million, respectively, of unamortized goodwill. Amortization expense related to goodwill was
$44,000 for the year ended December 31, 2001. In accordance with SFAS 142, the Company did not
have any amortization expense related to goodwill for the years ended ending December 31, 2003
and 2002.
The following table reconciles previously reported net income as if SFAS
142 were in effect in 2001. Net income excluding goodwill amortization expense
is as follows:
YEAR ENDED DECEMBER 31,
−−−−−−−−−−−−−−−−−−−−−−−−
2003 2002 2001
−−−−−− −−−−−− −−−−−−
Reported net income........................................ $7,331 $8,488 $7,071
Add back: Goodwill amortization net of taxes............. $ −− $ −− $ 27
−−−−−− −−−−−− −−−−−−
Adjusted net income........................................ $7,331 $8,488 $7,098
====== ====== ======
Reported basic earnings per share.......................... $ 0.66 $ 0.77 $ 0.70
Add back: Goodwill amortization net of taxes............. −− −− −−
−−−−−− −−−−−− −−−−−−
Adjusted basic earnings per share.......................... $ 0.66 $ 0.77 $ 0.70
====== ====== ======
Reported diluted earnings per share........................ $ 0.61 $ 0.67 $ 0.55
Add back: Goodwill amortization net of taxes............. −− −− −−
−−−−−− −−−−−− −−−−−−
Adjusted diluted earnings per share........................ $ 0.61 $ 0.67 $ 0.55
====== ====== ======
Prior to the adoption of SFAS 142, goodwill was amortized using the
straight−line method over 20 years.
MINORITY INTERESTS
In the majority of the Company's partnership agreements, the therapist partner begins with a 20%
profit interest in his or her clinic partnership, which increases by 3% points at the end of
each year until his or her interest reaches 35%. Within the balance sheet and statement of
operations the Company records partner therapists' profit interest in the clinic partnerships
as minority interests in subsidiary limited
29
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
partnerships. The Emerging Issues Task Force ("EITF") issued EITF 00−23, "Issues Related to the
Accounting for Stock Compensation under APB No. 25 and FASB Interpretation No. 44" (EITF 00−23),
which provides specific accounting guidance relating to various incentive compensation issues.
The Company reviewed EITF 00−23 with respect to the partnership's structure and the accounting
for minority interest and concluded that for partnerships formed after January 18, 2001, EITF
00−23 requires the Company to expense as compensation rather than as a minority interest in
earnings, the clinic partners' interest in profits. Moreover, EITF 00−23 also requires that the
Company expense as compensation rather than capitalizing as goodwill, the purchase of minority
interest in the partnerships, of clinic partnerships formed after January 18, 2001. At this time
the Company operates 71 wholly owned clinics without any minority interest.
Pursuant to EITF 00−23, for the year ended December 31, 2003 and December
31, 2002, the Company classified $428,000 and $306,000, respectively, of the
minority interest in earnings of subsidiary limited partnerships relating to the
30 partnerships formed after January 18, 2001, as salaries and related costs. As
of December 31, 2003 and December 31, 2002, $346,000 and $276,000, respectively,
in undistributed minority interests related to the 30 partnerships are
classified as other long−term liabilities.
REVENUE RECOGNITION
Revenues are recognized in the period in which services are rendered and
are reported at estimated net realizable amounts.
Net patient revenues are reported at the estimated net realizable amounts from insurance
companies, third−party payors, patients and others for services rendered. The Company has
agreements with third−party payors that provide for payments to the Company at amounts different
from its established rates. The Company determines allowances for doubtful accounts based on the
specific agings and payor classifications at each clinic, and contractual adjustments based on
historical experience and the terms of payor contracts. Net accounts receivable includes only
those amounts the Company estimates to be collectible.
Reimbursement rates for outpatient therapy services provided to Medicare
beneficiaries are established pursuant to a fee schedule published by the
Department of Health and Human Services ("HHS"). Under the Balanced Budget Act
of 1997 the total amount paid by Medicare in any one year for outpatient
physical (including speech−language pathology) or occupational therapy to any
one patient is limited to $1,500 (the "Medicare Limit"), except for services
provided in hospitals. After a three−year moratorium, this Medicare Limit on
therapy services was implemented for services rendered on or after September 1,
2003. The Medicare Limit in any one−year has been adjusted up to $1,590 (the
"Adjusted Medicare Limit") and the full amount was available for the remaining
four months in 2003. Effective December 8, 2003, a moratorium was placed on the
Adjusted Medicare Limit for the remainder of 2003 and for years 2004 and 2005.
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, 2003. Compliance with such laws and regulations can be subject to future
government review and interpretation, as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare program.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between
the financial statement
30
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts
receivable, accounts payable and notes payable −− current portion approximate their fair values
due to the short−term maturity of these financial instruments. The fair values of the
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, 2003 of $15.73, the fair value of the convertible subordinated notes was
$11 million.
USE OF ESTIMATES
In preparing the Company's consolidated financial statements, management makes certain estimates
and assumptions that affect the amounts reported in the consolidated financial statements and
related disclosures. Actual results may differ from these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
STOCK OPTIONS
The Company applies the intrinsic−value−based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its
employee stock−based compensation. Under this method, the compensation expense is generally
recorded on the date of grant only if the current market price of the underlying stock exceeded
the exercise price. FASB Statement No. 123, Accounting for Stock−Based Compensation and FASB
Statement No. 148, Accounting for Stock−Based Compensation −− Transition and Disclosure, an
amendment of FASB Statement No. 123, established accounting and disclosure requirements using
fair−value−based method of accounting for stock−based employee compensation plans. As permitted
by existing accounting standards, the Company has elected to apply the intrinsic−valve−based
method of accounting described above, and has adopted only the disclosure requirements of
Statement 123, as amended. Under APB Opinion No. 25 the Company recognized $52,000 of
compensation cost in net income for the year ended December 31, 2003. No compensation cost
related to stock based compensation has been recognized for the years ended December 31, 2002
and 2001.
For purposes of FASB Statement No. 123 disclosures the fair value of these
options was estimated at the date of grant using a Black−Scholes option pricing
model. The Black−Scholes option valuation model was developed for use in
estimating the fair value of traded options 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
31
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
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 Company's pro forma information follows (in
thousands except for earnings per share information):
2003 2002 2001
−−−−−− −−−−−− −−−−−−
Net income, as reported.................................... $7,331 $8,488 $7,071
Add: Stock−based employee compensation expense
Included in reported net income, net of tax........... 52 −− −−
Deduct: Total stock−based compensation expense determined
under the fair value method, net of taxes............. (978) (831) (508)
−−−−−− −−−−−− −−−−−−
Pro forma net income....................................... $6,405 $7,657 $6,563
====== ====== ======
Earnings per share:
Actual basic earnings per common share................... $ 0.66 $ 0.77 $ 0.70
Actual diluted earnings per common share................. $ 0.61 $ 0.67 $ 0.55
Pro forma basic earnings per common share................ $ 0.58 $ 0.70 $ 0.65
Pro forma diluted earnings per common share.............. $ 0.53 $ 0.60 $ 0.51
The weighted−average fair value per share of stock−based compensation
during the years ended December 31, 2003, 2002 and 2001 follows:
DECEMBER DECEMBER DECEMBER
2003 2002 2001
−−−−−−−− −−−−−−−− −−−−−−−−
1992 Plan.............................................. −− $10.59 $9.07
1999 Plan.............................................. $9.90 $ 8.52 $9.57
Inducements............................................ $9.59 $ 8.66 $7.95
Other Stock−Based Compensation......................... $9.73 −− −−
The following weighted−average assumptions for 2003, 2002 and 2001 were used in estimating the
fair value per share of stock−based compensation and assuming no dividends:
2003 2002 2001
−−−−− −−−− −−−−
Risk−free interest rates.................................... 3.67% 3.83% 5.15%
Expected volatility......................................... 70.48% 49.5% 45.9%
Expected life (in years).................................... 6.4 8.0 8.0
RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143") which
addresses financial accounting and reporting for obligations associated with the retirement of
tangible long−lived assets and the associated asset retirement costs. This statement applies to
all entities that have legal obligations associated with the retirement of long−lived assets
that result from the acquisition, construction, development or normal use of the asset. SFAS 143
was effective for the Company on January 1, 2003. The adoption of SFAS 143 did not have a
significant impact on the Company's financial condition or results of operations.
32
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statements No. 13 and Technical Corrections," ("SFAS 145") which provides
guidance for income statement classification of gains and losses on extinguishments of debt and
accounting for certain lease modifications that have economic effects that are similar to
sale−leaseback transactions. SFAS 145 was effective for the Company on January 1, 2003. The
adoption of SFAS 145 did not have a significant impact on the Company's financial condition or
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities," ("SFAS 146") which addresses significant issues regarding
the recognition, measurement, and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance set forth in EITF Issue No.
94−3, "Liability Recognition of Certain Employee Termination Benefits and Other
Costs to Exit an Activity." SFAS 146 was effective for the Company on January 1,
2003. The adoption of SFAS 146 did not have a significant impact on the
Company's financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others." FIN 45
requires that a liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty liabilities. The
initial recognition and initial measurement provision of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of
FIN 45 are effective for financial statements of interim or annual periods ending after December
15, 2002. The adoption of FIN 45 did not have a significant impact on the Company's financial
condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock−Based
Compensation −− Transition and Disclosure, an amendment of FASB Statement No.
123," ("SFAS 148") which provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock−based employee compensation. SFAS 148 also amends certain disclosures
under SFAS 123 and Accounting Principles Board Opinion No. 28, "Interim
Financial Reporting," to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock−based employee compensation. SFAS 148 is effective for fiscal years ending
after December 15, 2002. The Company continues to use the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") to account
for employee stock options and apply the disclosures required under SFAS 123.
In December 2003, the FASB issued FASB Interpretation No. 46, (revised December 2003),
Consolidation of Variable Interest Entities, which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. FIN 46F replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January
2003. The Company will be required to apply FIN 46R to variable interests in VIEs created after
December 31, 2003. For variable interests in Variable Interest Entities ("VIEs") created before
January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs
that must be consolidated under FIN 46R that were created before January 1, 2004, the assets,
liabilities and non−controlling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance sheet and any
previously recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R
first applies may be used to measure the assets, liabilities, and non−controlling interest of
the VIE.
The Company is evaluating the impact of applying FIN 46R to existing VIEs
in which it has variable interests and has not yet completed this analysis.
33
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," ("SFAS 149") which amends and clarifies accounting and
reporting for certain derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 149 provides greater clarification of the
characteristics of a derivative instrument so that contracts with similar characteristics will
be accounted for consistently. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption
of SFAS 149 did not have a significant impact on the Company's financial condition or results
of operations.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
statement establishes standards for the classification and measurement of
certain financial instruments of both liabilities and equity. The Statement also
includes disclosures for financial instruments within its scope. For the
Company, the Statement was effective for instruments entered into or modified
after May, 31, 2003 and otherwise will be effective as of January 1, 2004,
except for mandatory redeemable financial instruments. For certain redeemable
financial instruments, the Statement will be effective for the Company on
January 1, 2005. The effective date has been deferred indefinitely for certain
other types of mandatory financial instruments. The Company currently does not
have any financial instruments that are within the scope of this Statement.
3. NON−CASH TRANSACTIONS
In June 2002, $667,000 of the Series C Notes were converted by a note holder into 200,100
shares of common stock. See "Notes Payable" in Note 5. During 2001, convertible notes payable
totaling $4.2 million were converted into 1.2 million shares of common stock. Additionally,
during 2001, the Company purchased the 35% minority interest in two limited partnerships for a
total $3.6 million delivered in 162,100 shares of common stock and $1.1 million in notes
payable. These non−cash investing and financing transactions have been excluded from the
consolidated statements of cash flows.
4. ACQUISITION OF MINORITY INTERESTS
On January 31, 2002, the Company purchased a 10% minority interest in a limited partnership that
owns four clinics in Michigan for $447,000. As part of the purchase, we paid the minority
partner $65,000 in undistributed earnings.
On June 1, 2002, the Company purchased a 35% minority interest in a limited
partnership for $220,000. Additional consideration may be paid in the future
based upon clinic performance. The Company paid the minority partner $73,000 in
undistributed earnings. On August 6, 2003, the Company paid additional
consideration of $31,000 based on the clinic's performance. In July 2002 the
Company sold half of the purchased interest to another therapist for $220,000,
payable from future profits of the partnership. The Company discounted the note
receivable by 50% and is recognizing the gain as payments are made.
On June 1, 2002, the Company purchased a 5% minority interest in a limited partnership for
$95,000. The Company also paid the minority partner $8,000 in undistributed earnings.
On August 31, 2002, the Company purchased the 30% minority interest in a
limited partnership for $244,000 cash plus forgiveness of a $75,000 note
receivable from the minority partner. The Company also paid the minority partner
$19,000 in undistributed earnings.
On September 1, 2002, the Company purchased the 35% minority interest in a limited partnership
for $54,000. Also on September 1, 2002, the Company purchased 65% of a speech therapy company
for $26,000.
34
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
On August 1, 2003, the Company purchased the 35% minority interest in a limited partnership for
$64,000 and agreed to pay the minority partner $75,000 in undistributed earnings. The purchase
was made under a note, which is payable in three installments. On September 10, 2003, the
Company paid the first installment of $35,000. The remaining principal amount due under the note
payable was $104,000 at December 31, 2003 to be paid in two annual payments of $34,000 and
$70,000 on August 1, 2004 and August 1, 2005, respectively.
The Company's minority interest purchases all relate to entities in which
the Company is the majority owner and were accounted for as step acquisitions
and accordingly, the results of operations of the acquired minority interest
percentage are included in the accompanying financial statements from the dates
of purchase. In addition, the Company is permitted to make, and has occasionally
made, changes to preliminary purchase price allocation during the first year
after completing the purchase. Goodwill has been recognized for the amount of
the excess of the purchase price paid over the fair market value of the
identified tangible and intangible assets of the minority interest acquired and
accounted for in accordance with SFAS 142.
The changes in the carrying amount of goodwill consisted of the following
(in thousands):
YEAR ENDED
DECEMBER 31,
−−−−−−−−−−−−−−−
2003 2002
−−−−−− −−−−−−
Beginning balance........................................... $5,590 $4,519
Goodwill acquired during the year........................... 95 1,052
Purchase accounting adjustments............................. −− 19
Amortization expense........................................ −− −−
−−−−−− −−−−−−
Ending balance.............................................. $5,685 $5,590
====== ======
5. NOTES PAYABLE
In May 1994, the Company issued $3 million of 8% Convertible Subordinated Notes, Series C due
June 30, 2004 (the "Series C Note"). The Series C Note is convertible at the option of the
holder into shares of the Company common stock determined by dividing the principal amount of
the Notes being converted by $3.33. The Series C Notes bear interest from the date of issuance
at a rate of 8% per annum, payable quarterly. In June 2002, $667,000 of the Series C Notes were
converted by a note holder into 200,100 shares of common stock. The remaining principal amount
under the Series C Note was $2.3 million at December 31, 2003 and December 31, 2002. See
"Subsequent Event" in Note 12.
The Series C Notes are unsecured and subordinated in right of payment to
all other indebtedness for borrowed money incurred by the Company.
35
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
Notes payable as of December 31, 2003 and 2002 consist of the following (in
thousands):
2003 2002
−−−−−− −−−−−−
8% Convertible Subordinated Notes, Series C, due June 30,
2004 with interest payable quarterly...................... $2,333 $2,333
Promissory note payable in two annual installments through
August 1, 2005............................................ 104 −−
Promissory note with an 8% interest rate payable in equal
monthly installments through March 19, 2007 secured by one
of the Company's clinics, with a book value of $78,000 at
December 31, 2003......................................... 18 21
−−−−−− −−−−−−
2,455 2,354
−−−−−− −−−−−−
Less current portion........................................ (2,372) (4)
−−−−−− −−−−−−
$ 83 $2,350
====== ======
Scheduled maturities as of December 31, 2003 are as follows (in thousands):
2004........................................................ $2,372
2005........................................................ 75
2006........................................................ 6
2007........................................................ 2
2008........................................................ −−
−−−−−−
$2,455
======
6. INCOME TAXES
Significant components of deferred tax assets, included in long−term other assets on the balance
sheet at December 31, 2003 and 2002, were as follows (in thousands):
2003 2002
−−−−−− −−−−−−
Deferred tax assets:
Vacation accrual.......................................... $ 70 $ 60
Allowance for doubtful accounts........................... 1,052 958
Depreciation.............................................. 164 742
−−−−−− −−−−−−
Net deferred tax assets..................................... $1,286 $1,760
====== ======
The differences between the federal tax rate and the Company's effective tax rate for the years
ended December 31, 2003, 2002 and 2001 were as follows (in thousands):
2003 2002 2001
−−−−−−−−−−−−−−− −−−−−−−−−−−−−−− −−−−−−−−−−−−−−−
U.S. tax at statutory rate...... $4,023 34.15% $4,698 34.23% $3,911 34.00%
State income taxes, net of
federal benefit............... 386 3.28% 482 3.51% 476 4.13%
Nondeductible expenses.......... 42 0.36% 56 0.41% 45 0.40%
−−−−−− −−−−−− −−−−−− −−−−−− −−−−−− −−−−−−
$4,452 37.79% $5,236 38.15% $4,432 38.53%
====== ====== ====== ====== ====== ======
36
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
Significant components of the provision for income taxes for the years
ended December 31, 2003, 2002 and 2001 were as follows (in thousands):
2003 2002 2001
−−−−−− −−−−−− −−−−−−
Current:
Federal.................................................. $3,217 $4,824 $4,067
State.................................................... 762 731 716
−−−−−− −−−−−− −−−−−−
Total current.............................................. 3,979 5,555 4,783
−−−−−− −−−−−− −−−−−−
Deferred:
Federal.................................................. 644 (319) (351)
State.................................................... (171) −− −−
−−−−−− −−−−−− −−−−−−
Total deferred............................................. 474 (319) (351)
−−−−−− −−−−−− −−−−−−
Total income tax provision................................. $4,452 $5,236 $4,432
====== ====== ======
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") 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. The 1992 Plan expired in 2002 and no new option grants can be
awarded subsequent to this date.
Incentive stock options (those intended to satisfy the requirements of
the Internal Revenue Code) granted under the 1992 Plan were granted at an
exercise price not less than the fair market value of the shares of common
stock on the date of grant.
The Executive Option Plan (the "Executive Plan") permits the Company
to grant to any officer of the Company or its affiliates, options to
purchase up to 255,000 shares of common stock. No further grants of options
will be made under the Executive Plan.
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.
During 2003, 2002 and 2001, the Board of Directors of the Company
granted Inducement options covering 115,000, 10,000 and 30,000 options,
respectively, to six individuals in connection with their offers of
employment or service. During 2003 and 2002, 22,500 and 22,500 options were
forfeited, respectively.
37
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
The 2003 Stock Incentive Plan (the "2003 Plan") permits the Company to
grant stock−based compensation to employees, consultants and outside
directors of the Company up to 900,000 shares of common stock. The 2003
Plan is subject to approval by the shareholders of the Company at the 2004
shareholders meeting.
The Compensation Committee determines the exercise price, vesting
periods, and expiration dates of all stock options. Stock options vest over
one to five years from the date of grant. The expiration dates are
generally ten years from the date of grant. Options are generally subject
to adjustments in the event of stock dividends, splits and similar
corporate transactions.
During 2002 and 2003, the Company erroneously granted options to purchase 308,000 shares of
common stock under the 1992 Plan after the plan expired. Because the Company intends to honor
the original terms of these options, the Company recognized $52,000 of compensation cost in 2003
net income. The Company intends to replace the grants with options to purchase common stock
under the 2003 Plan, which is subject to shareholder approval, or as Inducement options.
A cumulative summary of stock options as of December 31, 2003 follows:
STOCK AVAILABLE
OPTION PLANS AUTHORIZED OUTSTANDING EXERCISED EXERCISABLE FOR GRANT
−−−−−−−−−−−− −−−−−−−−−− −−−−−−−−−−− −−−−−−−−− −−−−−−−−−−− −−−−−−−−−
1992 Plan...................... 3,495,000 870,708 2,184,053 613,823 −−(1)
Executive Plan................. 255,000 90,000 165,000 90,000 −−
1999 Plan...................... 300,000 58,934 34,845 16,676 206,221
Inducements.................... 140,000 125,000 15,000 2,000 −−
−−−−−−−−− −−−−−−−−− −−−−−−−−− −−−−−−− −−−−−−−
Totals......................... 4,190,000 1,144,642 2,398,898 722,499 206,221
========= ========= ========= ======= =======
−−−−−−−−−−−−−−−
(1) The 1992 Plan expired in 2002 and no new option grants can be awarded
subsequent to this date.
38
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
A summary of the status of the Company's stock option plans as of December 31, 2003, 2002 and
2001 and the changes during the years then ended is presented below:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
−−−−−−−−− −−−−−−−−−−−−−−
Outstanding at December 31, 2000............................ 2,981,787 $ 3.35
Granted..................................................... 363,825 15.37
Exercised................................................... (780,142) 3.06
Forfeited................................................... (29,125) 3.81
−−−−−−−−−
Outstanding at December 31, 2001............................ 2,536,345 5.10
Granted..................................................... 171,550 17.54
Exercised................................................... (930,290) 3.42
Forfeited................................................... (78,664) 9.85
−−−−−−−−−
Outstanding at December 31, 2002............................ 1,698,941 6.89
Granted..................................................... 133,175 14.38
Exercised................................................... (423,866) 3.45
Cancelled................................................... (141,500) 17.94
Forfeited................................................... (113,108) 8.99
−−−−−−−−−
Outstanding at December 31, 2003............................ 1,144,642 $ 7.37
=========
The following tables summarize information about the Company's stock options outstanding as of
December 31, 2003, 2002 and 2001, respectively, (contractual life in years):
OUTSTANDING
OPTIONS AS OF WEIGHTED AVERAGE
DECEMBER 31, REMAINING
2003 EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
−−−−−−−−−−−−− −−−−−−−−−−−−−− −−−−−−−−−−−−−−−− −−−−−−−−−−− −−−−−−−−−−−−−−
1992 Plan............ 870,708 $2.81−$16.34 5.4 613,823 $3.00−$16.34
Executive Plan....... 90,000 $4.96−$4.96 .9 90,000 $4.96−$4.96
1999 Plan............ 58,934 $2.81−$16.34 7.6 16,676 $2.81−$16.34
Inducements.......... 125,000 $14.32−$14.75 9.8 2,000 $14.75−$14.75
−−−−−−−−− −−−−−−−−−−−−− −−− −−−−−−− −−−−−−−−−−−−−
1,144,642 $2.81−$16.34 5.7 722,499 $2.81−$16.34
========= ============= === ======= =============
OUTSTANDING
OPTIONS AS OF WEIGHTED AVERAGE
DECEMBER 31, REMAINING
2002 EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
−−−−−−−−−−−−− −−−−−−−−−−−−−− −−−−−−−−−−−−−−−− −−−−−−−−−−− −−−−−−−−−−−−−−
1992 Plan............ 1,490,858 $2.81−$18.04 6.5 758,553 $2.81−$16.34
Executive Plan....... 90,000 $4.96−$4.96 1.9 90,000 $4.96−$4.96
1999 Plan............ 78,083 $2.81−$16.34 7.7 20,425 $2.81−$16.34
Inducements.......... 40,000 $13.58−$14.75 8.4 −− −−
−−−−−−−−− −−−−−−−−−−−−− −−− −−−−−−− −−−−−−−−−−−−−
1,698,941 $2.81−$18.04 6.4 868,978 $2.81−$16.34
========= ============= === ======= =============
39
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
OUTSTANDING
OPTIONS AS OF WEIGHTED AVERAGE
DECEMBER 31, REMAINING
2001 EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
−−−−−−−−−−−−− −−−−−−−−−−−−−− −−−−−−−−−−−−−−−− −−−−−−−−−−− −−−−−−−−−−−−−−
1992 Plan............ 2,162,644 $2.08−$16.34 6.3 1,196,746 $2.08−$16.34
Executive Plan....... 218,250 $4.23−$4.96 1.9 218,250 $4.23−$4.96
1999 Plan............ 95,451 $2.81−$16.34 8.3 12,282 $2.81−$2.81
Inducements.......... 60,000 $2.83−$13.58 8.6 −− −−
−−−−−−−−− −−−−−−−−−−−−− −−− −−−−−−−−− −−−−−−−−−−−−
2,536,345 $2.08−$16.34 6.1 1,427,278 $2.08−$16.34
========= ============= === ========= ============
The following table summarizes information about the Company's stock
options outstanding and range of exercise prices as of December 31, 2003:
OUTSTANDING
OPTIONS AS
OF
RANGE OF DECEMBER 31,
EXERCISE PRICES 2003
−−−−−−−−−−−−−−− −−−−−−−−−−−−
$1.80−$3.61................................................. 560,177
$3.61−$5.41................................................. 204,535
$12.63−$14.43............................................... 117,000
$14.43−$16.24............................................... 228,505
$16.24−$18.04............................................... 34,425
−−−−−−−−−
1,144,642
=========
The Company has reserved 1,935,563 shares for the 1992 Plan, Executive
Plan, 1999 Plan, Inducement Plans and the Series C Notes.
8. PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the shareholders, 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. PURCHASE OF COMMON STOCK
In September 2001, the Board of Directors ("Board") authorized the Company to purchase, in the
open market or in privately negotiated transactions, up to 1,000,000 shares of its common
stock. Shares purchased are held as treasury shares and may be used for such valid corporate
purposes or retired as the Board deems advisable. During the year ending December 31, 2002 and
2001, the Company purchased 795,600 and 135,000 shares, respectively, of its common stock on the
open market for $10.5 million and
40
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
$1.9 million, respectively. During January 2003, we purchased an additional
1,800 shares of common stock on the open market for a total of $20,000.
On February 26, 2003, the Board authorized a new share repurchase program of up to 250,000
additional shares of the Company's outstanding common stock. As there is no expiration for this
Board authorization, additional shares may be purchased from time to time in the open market or
private transactions depending on price, availability and the Company's cash position. As of
December 31, 2003, no shares have been repurchased under the new share repurchase program.
10. 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 has not made any contributions and recognized no contribution expense
for the years ended December 31, 2003, 2002 and 2001.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has entered into operating leases for its executive offices and clinic facilities.
In connection with these agreements, the Company incurred rent expense of $7.6 million, $6.4
million and $5.4 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Several of the leases provide for an annual increase in the rental payment based upon the
Consumer Price Index. The majority of the leases provide for renewal periods ranging from one
to five years. The agreements 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, 2003 are as follows (in thousands):
2004........................................................ $ 7,297
2005........................................................ 6,351
2006........................................................ 4,921
2007........................................................ 3,517
2008........................................................ 1,066
Thereafter.................................................. 88
−−−−−−−
$23,240
=======
EMPLOYMENT AGREEMENTS
At December 31, 2003, the Company had outstanding employment agreements with three of its
executive officers with annual salaries ranging from $250,000 to $325,000, for one term
extending through February 2004 and two terms extending through September 2006. In addition, at
December 31, 2003, the Company had an employment agreement with an employee for $170,000 for a
term extending through September 30, 2004. The Company also had an outstanding consulting
agreement with one of its directors for $50,000 annually for a term extending through November
2007.
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 $3.1 million in 2004 and $575,000 in the
aggregate from 2005 through 2007. In addition, each employment agreement with
the managing physical therapist provides for monthly bonus payments calculated
as a percentage of each clinic's net revenues
41
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
(not in excess of operating profits) or operating profits. The Company recognized salaries and
bonus expense for the managing physical therapists of $17.2 million, $14.8 million and $12.3
million for the years ended December 31, 2003, 2002 and 2001, respectively.
Each employment agreement provides that the Company has the right to
purchase the limited partnership interest in the clinic partnership for the
amount of the partner's 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 which extend through the term of the agreement and
for one to two years thereafter.
12. SUBSEQUENT EVENT
On January 12, 2004, $666,660 of the Series C Notes was converted by the note holder into
200,000 shares of common stock. After the January 2004 conversion, the remaining principal
amount under the Series C Note was $1.7 million.
13. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the years ended December 31, 2003,
2002 and 2001 are as follows (in thousands, except per share data):
2003 2002 2001
−−−−−−− −−−−−−− −−−−−−−
Numerator:
Net income................................................ $ 7,331 $ 8,488 $ 7,071
−−−−−−− −−−−−−− −−−−−−−
Numerator for basic earnings per share.................... 7,331 8,488 7,071
Effect of dilutive securities:
Interest on convertible subordinated notes payable..... 123 140 165
−−−−−−− −−−−−−− −−−−−−−
Numerator for diluted earnings per share−income available
to common shareholders after assumed conversions....... $ 7,454 $ 8,628 $ 7,236
======= ======= =======
Denominator:
Denominator for basic earnings per
share −− weighted−average shares....................... 11,051 10,975 10,109
Effect of dilutive securities:
Stock options.......................................... 476 1,226 2,025
Convertible subordinated notes payable................. 700 734 934
−−−−−−− −−−−−−− −−−−−−−
Dilutive potential common shares.......................... 1,176 1,960 2,959
−−−−−−− −−−−−−− −−−−−−−
Denominator for diluted earnings per share −− adjusted
weighted−average shares and assumed conversions........ 12,227 12,935 13,068
======= ======= =======
Basic earnings per common share............................. $ 0.66 $ 0.77 $ 0.70
======= ======= =======
Diluted earnings per common share........................... $ 0.61 $ 0.67 $ 0.55
======= ======= =======
Options to purchase 267,750 and 344,686 shares for the years ended December 31, 2003 and 2002,
respectively, were excluded from the diluted earnings per share calculations for the respective
periods because the options' exercise prices exceeded the average market price of the common
shares during the periods.
42
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− (CONTINUED)
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2003
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
(IN THOUSANDS, EXCEPT PER SHARE DATA)
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Q1 Q2 Q3 Q4
−−−−−−− −−−−−−− −−−−−−− −−−−−−−
Net patient revenues................................... $24,483 $26,382 $26,224 $26,136
Income before income taxes............................. $ 2,884 $ 3,566 $ 3,055 $ 2,278
Net income............................................. $ 1,787 $ 2,213 $ 1,901 $ 1,430
Earnings per common share:
Basic................................................ $ 0.16 $ 0.20 $ 0.17 $ 0.13
Diluted.............................................. $ 0.15 $ 0.18 $ 0.15 $ 0.12
2002
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
(IN THOUSANDS, EXCEPT PER SHARE DATA)
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Q1 Q2 Q3 Q4
−−−−−−− −−−−−−− −−−−−−− −−−−−−−
Net patient revenues................................... $21,636 $23,449 $23,232 $24,026
Income before income taxes............................. $ 3,353 $ 3,786 $ 3,284 $ 3,301
Net income............................................. $ 2,076 $ 2,336 $ 2,018 $ 2,058
Earnings per common share:
Basic................................................ $ 0.19 $ 0.21 $ 0.18 $ 0.19
Diluted.............................................. $ 0.16 $ 0.18 $ 0.16 $ 0.17
2001
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
(IN THOUSANDS, EXCEPT PER SHARE DATA)
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Q1 Q2 Q3 Q4
−−−−−−− −−−−−−− −−−−−−− −−−−−−−
Net patient revenues................................... $18,930 $19,866 $20,582 $21,570
Income before income taxes............................. $ 2,466 $ 2,900 $ 2,965 $ 3,172
Net income............................................. $ 1,512 $ 1,787 $ 1,825 $ 1,947
Earnings per common share:
Basic................................................ $ 0.15 $ 0.18 $ 0.18 $ 0.19
Diluted.............................................. $ 0.12 $ 0.14 $ 0.14 $ 0.15
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our
disclosure controls and procedures and internal control over financial reporting and concluded
that (i) our disclosure controls and procedures were effective as of December 31, 2003 and (ii)
no change in internal control over financial reporting occurred during the quarter ended
December 31, 2003 that has materially affected, or is reasonably likely to materially affect,
such internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information regarding the Company's Directors, Code of Ethics and compliance with Section
16(a) of the Securities Exchange Act of 1934, you are directed to the sections entitled
"Proposal 1 −− Election of Directors," "Code of Ethics" and "Section 16(a) Beneficial Ownership
Reporting Compliance," respectively, in the Proxy Statement that will be delivered to
stockholders in connection with the Company's Annual Meeting of Stockholders to be held on May
25, 2004. The Company incorporates the information contained in those sections of the Company's
Proxy Statement 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For information required by Item 201(d) of Regulation S−K, see "Market for Common Equity and
Related Stockholder Matters −− Equity Compensation Plan Information" in Item 5. 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.
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Incorporated by reference to "Independent Auditor" in the registrant's
definitive proxy statement relating to its 2004 Annual Meeting of Shareholders.
44
ITEM 15. 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 FINANCIAL STATEMENTS −− DECEMBER 31, 2003
Consolidated Balance Sheets −− December 31, 2003 and 2002
Consolidated Statements of Operations −− years ended December 31, 2003, 2002 and
2001
Consolidated Statements of Shareholders' Equity −− years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Cash Flows −− years ended December 31, 2003, 2002 and
2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS −− DECEMBER 31, 2003
(2) The following consolidated financial statement schedule of U.S. Physical
Therapy, Inc. is included in Item 15(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
EXHIBIT
NO. DESCRIPTION
−−−−−−− −−−−−−−−−−−
3.1 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).
3.2 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).
3.3 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).
10.1 Form of 8% Convertible Subordinated Notes, Series C (filed
as an exhibit to the Company's Form 8−K dated May 5, 1994
and incorporated herein by reference).
10.2 Registration Agreement for Series C Notes (filed as an
exhibit to the Company's Form 8−K dated May 5, 1994 and
incorporated herein by reference).
10.3+ 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).
10.4+ Executive Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S−8 (33−63444) and
incorporated herein by reference).
10.5+ 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).
10.6+ 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).
10.7+ 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).
45
EXHIBIT
NO. DESCRIPTION
−−−−−−− −−−−−−−−−−−
10.8+ 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.)
10.9+ 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).
10.10+ Non−Statutory Stock Option Agreement dated February 26, 2002
(filed as an exhibit to the Company's S−8 dated February 10,
2003 and incorporated herein by reference.)
10.11 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).
10.12+ First Amendment to the Consulting Agreement between the
Company and J. Livingston−Kosberg
10.13+ First Amendment to Second Amended and Restated Employment
Agreement between the Company and Roy W. Spradlin
10.14+ Employment Agreement, dated September 2, 2003, between U.S.
Physical Therapy, Inc. and Lawrance W. McAfee.
10.15+ Employment Agreement, dated September 18, 2003, between U.S.
Physical Therapy, Inc. and Chris Reading.
10.16+ Employment Agreement, dated September 2, 2003, between U.S.
Physical Therapy, Inc. and J Michael Mullin.
21* Subsidiaries of the Registrant
23.1* Consent of KPMG LLP
31.1* Certification
31.2* Certification
31.3* Certification
32.1* Certification of Periodic Report
−−−−−−−−−−−−−−−
* Filed herewith
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8−K
On October 30, 2003, the Company filed a current report on Form 8−K with the Securities and
Exchange Commission related to a press release announcing the Company's earnings for the quarter
and nine months ended September 30, 2003.
46
ITEM 15. (D)
SCHEDULE II −− VALUATION AND QUALIFYING ACCOUNTS
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
−−−−−−−− −−−−−−−−−− −−−−−−−−−−−−−−−−−−−−−−− −−−−−−−−−−− −−−−−−−−−−
ADDITIONS DEDUCTION
−−−−−−−−−−−−−−−−−−−−−−− −−−−−−−−−−−
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS− END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DESCRIBE PERIOD
−−−−−−−−−−− −−−−−−−−−− −−−−−−−−−− −−−−−−−−−− −−−−−−−−−−− −−−−−−−−−−
(AMOUNTS IN THOUSANDS)
Year Ended December 31, 2003:
Reserves and allowances deducted from
asset accounts: Allowance for
uncollectible accounts............. $4,327 $ 932 −− $1,803(1) $3,456
Year Ended December 31, 2002:
Reserves and allowances deducted from
asset accounts: Allowance for
uncollectible accounts............. $3,805 $1,669 −− $1,147(1) $4,327
Year Ended December 31, 2001:
Reserves and allowances deducted from
asset accounts: Allowance for
uncollectible accounts............. $2,780 $1,930 −− $ 905(1) $3,805
−−−−−−−−−−−−−−−
(1) Uncollectible accounts written off, net of recoveries.
47
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
(Registrant)
By: /s/ LAWRANCE W. MCAFEE
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Lawrance W. McAfee
Chief Financial Officer
(duly authorized officer and
principal
financial and accounting officer)
By: /s/ DAVID RICHARDSON
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
David Richardson
Controller
Date: March 12, 2004
48
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 Chairman, President and Chief Executive Officer
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−− (principal executive officer)
Roy W. Spradlin,
By: /s/ JAMES B. HOOVER Director
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
James B. Hoover,
By: /s/ MARLIN W. JOHNSTON Director
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Marlin W. Johnston,
By: /s/ BRUCE D. BROUSSARD Director
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Bruce D. Broussard,
By: /s/ MARK J. BROOKNER Vice Chairman of the Board
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Mark J. Brookner,
By: /s/ ALBERT L. ROSEN Director
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Albert L. Rosen,
By: /s/ DANIEL C. ARNOLD Director
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Daniel C. Arnold,
By: /s/ JERALD PULLINS Director
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Jerald Pullins,
49
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
−−−−−−− −−−−−−−−−−−
3.1 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).
3.2 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).
3.3 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).
10.1 Form of 8% Convertible Subordinated Notes, Series C (filed
as an exhibit to the Company's Form 8−K dated May 5, 1994
and incorporated herein by reference).
10.2 Registration Agreement for Series C Notes (filed as an
exhibit to the Company's Form 8−K dated May 5, 1994 and
incorporated herein by reference).
10.3+ 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).
10.4+ Executive Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S−8 (33−63444) and
incorporated herein by reference).
10.5+ 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).
10.6+ 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).
10.7+ 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).
10.8+ 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.)
10.9+ 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).
10.10+ Non−Statutory Stock Option Agreement dated February 26, 2002
(filed as an exhibit to the Company's S−8 dated February 10,
2003 and incorporated herein by reference.)
10.11 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).
10.12+ First Amendment to the Consulting Agreement between the
Company and J. Livingston−Kosberg
10.13+ First Amendment to Second Amended and Restated Employment
Agreement between the Company and Roy W. Spradlin
10.14+ Employment Agreement, dated September 2, 2003, between U.S.
Physical Therapy, Inc. and Lawrance W. McAfee.
10.15+ Employment Agreement, dated September 18, 2003, between U.S.
Physical Therapy, Inc. and Chris Reading.
10.16+ Employment Agreement, dated September 2, 2003, between U.S.
Physical Therapy, Inc. and J Michael Mullin.
21* Subsidiaries of the Registrant
23.1* Consent of KPMG LLP
31.1* Certification
31.2* Certification
31.3* Certification
32.1* Certification of Periodic Report
−−−−−−−−−−−−−−−
* Filed herewith
+ Management contract or compensatory plan or arrangement.
.
.
.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
−−−−−−−−−−− −−−−−−− −−−−−−−−−−−−−
U.S. PT − Delaware, Inc. Corporation Delaware
U.S. Therapy, Inc. dba The
Facilities Group, Inc. Corporation Texas
National Rehab GP, Inc. Corporation Texas
National Rehab Delaware, Inc. Corporation Delaware
U.S. PT − Michigan, Inc. Corporation Delaware
HH Rehab Associates, Inc. dba
Genesee Valley Physical Therapy
dba Theramax Physical Therapy Corporation Michigan
dba Rebound Physical Therapy Corporation Michigan
Professional Rehab Services, Inc.
dba Northwoods Physical Therapy
dba Thibodeau Physical Therapy
dba Evergreen Physical Therapy Corporation Michigan
U.S. Physical Therapy, Ltd. Limited Partnership Texas
U.S. PT Management, Ltd. Limited Partnership Texas
National Rehab Management
GP, Inc. Corporation Texas
Rehab Partners #1, Inc. Corporation Texas
Rehab Partners #2, Inc. Corporation Texas
Rehab Partners #3, Inc. Corporation Texas
Rehab Partners #4, Inc. Corporation Texas
Rehab Partners #5, Inc. Corporation Texas
Rehab Partners #6, Inc. Corporation Texas
U.S. PT Payroll, Inc. (formerly
Rehab Partners #7, Inc.) Corporation Texas
Rehab Partners Acquisition
#1, Inc. Corporation Texas
U.S. PT Therapy Services, Inc.
(formerly U.S. Surgical
Partners, Inc.) dba Cornerstone
Physical Therapy Corporation Delaware
U.S. Surgical Partners #1, Inc. Corporation Texas
Effingham Ambulatory Surgery
Center, L.P. (formerly U.S.
Surgical Partners of College
Park, Limited Partnership Limited Partnership Texas
U.S. Surgical Partners #2, Inc. Corporation Texas
Midland Surgical Partners, Ltd. Limited Partnership Texas
U.S. PT Turnkey Services, Inc.
(formerly Surgical Management
GP, Inc. Corporation Texas
U.S. Surgical Partners
Management, Ltd. Limited Partnership Texas
Southeastern Hand Rehabilitation,
Inc. dba Reist Hand Therapy
dba Achieve Physical Therapy Corporation Florida
Action Physical Therapy
Clinic, Ltd. Limited Partnership Texas
Cypresswood Physical
Therapy Centre, Ltd. Limited Partnership Texas
Progressive Physical
Therapy Clinic, Ltd. Limited Partnership Texas
Virginia Parc Physical
Therapy, Ltd. dba
McKinney Physical Therapy
Associates Limited Partnership Texas
Dearborn Physical Therapy,
Ltd. dba Advanced
Physical Therapy Limited Partnership Texas
Saline Physical Therapy of
Michigan, Ltd. dba Physical
Therapy in Motion Limited Partnership Texas
41
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
−−−−−−−−−−− −−−−−−− −−−−−−−−−−−−−
R. Clair Physical Therapy,
Limited Partnership Limited Partnership Texas
Roepke Physical Therapy,
Limited Partnership Limited Partnership Texas
Merrill Physical Therapy,
Limited Partnership Limited Partnership Texas
Joan Ostermeier Physical
Therapy, Limited
Partnership dba Sport &
Spine Clinic of Wittenberg Limited Partnership Texas
Crossroads Physical Therapy,
Limited Partnership Limited Partnership Texas
Kelly Lynch Physical Therapy,
Limited Partnership Limited Partnership Texas
U.S. PT Michigan #1, Limited
Partnership Limited Partnership Texas
Spracklen Physical Therapy,
Limited Partnership Limited Partnership Texas
Bosque River Physical Therapy
and Rehabilitation, Limited
Partnership Limited Partnership Texas
Frisco Physical Therapy, Limited
Partnership Limited Partnership Texas
Spinal Therapy Institute,
Limited Partnership Limited Partnership Texas
Sport &Spine Clinic of Fort
Atkinson, Limited Partnership Limited Partnership Texas
Sport &Spine Clinic of
Auburndale, Limited Partnership Limited Partnership Texas
Back in Balance, Limited
Partnership Limited Partnership Texas
Kingwood Physical Therapy, Ltd. Limited Partnership Texas
Enid Therapy Center,
Limited Partnership Limited Partnership Texas
Dynamic Physical Therapy
of Round Rock, Ltd. Limited Partnership Texas
Active Physical Therapy,
Limited Partnership Limited Partnership Texas
Genesis Rehabilitation and
Sports Center − Jackson,
Limited Partnership dba
Genesis Physical Therapy Group Limited Partnership Texas
Cleveland Physical Therapy, Ltd. Limited Partnership Texas
Aquatic and Orthopedic Rehab
Specialists, Limited
Partnership dba Oceanside
Physical Therapy Limited Partnership Texas
Vileno Therapy of Treasure
Coast, Limited Partnership Limited Partnership Texas
Comprehensive Hand &Physical
Therapy, Limited Partnership Limited Partnership Texas
Debra Dent Physical Therapy,
Limited Partnership Limited Partnership Texas
Hands Plus Therapy Center,
Limited Partnership Limited Partnership Texas
South Tulsa Physical Therapy,
Limited Partnership Limited Partnership Texas
Hands On Therapy, Limited
Partnership Limited Partnership Texas
42
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
−−−−−−−−−−− −−−−−−− −−−−−−−−−−−−−
U.S. PT Michigan #2, Limited
Partnership Limited Partnership Texas
First Choice Physical Therapy,
Limited Partnership Limited Partnership Texas
Tupelo Hand Rehabilitation,
Limited Partnership Limited Partnership Texas
The Hale Hand Center,
Limited Partnership Limited Partnership Texas
Sooner Physical Therapy,
Limited Partnership Limited Partnership Texas
Arrow Physical Therapy, Limited
Partnership dba Broken Arrow
Physical Therapy Limited Partnership Texas
Achieve Physical Therapy,
Limited Partnership Limited Partnership Texas
Melbourne Physical Therapy
Specialists, Limited Partnership Limited Partnership Texas
Maine Physical Therapy,
Limited Partnership dba
Maine Physical Therapy Limited Partnership Texas
Brentwood Physical Therapy,
Limited Partnership (clinic
sold 12/31/01) Limited Partnership Texas
Saginaw Valley Sport and Spine,
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 Texas
Brick Hand &Rehabilitative
Services, Limited Partnership Limited Partnership Texas
Heartland Physical Therapy,
Limited Partnership Limited Partnership Texas
Bay View Physical Therapy, Ltd.
dba Pine State Physical Therapy Limited Partnership Texas
Thomas Hand and Rehabilitation
Specialists, Limited
Partnership dba Thomas Physical
&Hand Therapy dba Thomas Hand
Institute Limited Partnership Texas
Hand Health and Rehabilitation,
Limited Partnership Limited Partnership Texas
Flannery Physical Therapy,
Limited Partnership dba
Physical Therapy Plus Limited Partnership Texas
Port City Physical Therapy,
Limited Partnership Limited Partnership Texas
Proactive Physical Therapy,
Limited Partnership Limited Partnership Texas
All Brunswick Physical Therapy,
Limited Partnership Limited Partnership Texas
Mooresville Management,
Limited Partnership Limited Partnership Texas
Beaufort Physical Therapy,
Limited Partnership Limited Partnership Texas
English Creek Hand &Therapy
Center, Limited Partnership Limited Partnership Texas
43
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
−−−−−−−−−−− −−−−−−− −−−−−−−−−−−−−
Brownwood Physical Therapy,
Limited Partnership dba
Pecan Valley Physical Therapy Limited Partnership Texas
Four Corners Physical Therapy,
Limited Partnership Limited Partnership Texas
Wilmington Hand Therapy, Limited
Partnership dba Hand Therapy
of Wilmington Limited Partnership Texas
High Point Physical Therapy,
Limited Partnership Limited Partnership Texas
Yarmouth Physical Therapy,
Limited Partnership Limited Partnership Texas
Quantum Physical Therapy, Limited
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 Limited Partnership Texas
Rice Rehabilitation Associates,
Limited Partnership Limited Partnership Texas
Physical Therapy and Spine
Institute, Limited Partnership Limited Partnership Texas
Forest City Physical Therapy,
Limited Partnership Limited Partnership Texas
Leader Physical Therapy,
Limited Partnership dba
Memphis Physical Therapy Limited Partnership Texas
Coastal Physical Therapy,
Limited Partnership Limited Partnership Texas
Eastgate Physical Therapy,
Limited Partnership dba
Summit Physical Therapy Limited Partnership Texas
Lucasville Therapy Services,
Limited Partnership Limited Partnership Texas
Ankeny Physical &Sports Therapy,
Limited Partnership Limited Partnership Texas
Brem Physical Therapy Associates,
Limited Partnership (closed
effective 05/31/99) Limited Partnership Texas
Penn's Wood Physical Therapy,
Limited Partnership Limited Partnership Texas
Regional Physical Therapy
Center, Limited Partnership Limited Partnership Texas
Wyman Physical Therapy,
Limited Partnership dba
Precision Physical Therapy Limited Partnership Texas
Adams County Physical Therapy,
Limited Partnership Limited Partnership Texas
Coppell Spine &Sports Rehab,
Limited Partnership dba Physical
Therapy of Flower Mound dba
Green Oaks Physical Therapy Limited Partnership Texas
Julie Emond Physical Therapy,
Limited Partnership dba
Maple Valley Physical Therapy Limited Partnership Texas
City of Lakes Physical Therapy,
Limited Partnership Limited Partnership Texas
Radtke Physical Therapy,
Limited Partnership Limited Partnership Texas
Hoeppner Physical Therapy,
Limited Partnership Limited Partnership Texas
44
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
−−−−−−−−−−− −−−−−−− −−−−−−−−−−−−−
Des Moines Physical Therapy,
Limited Partnership dba
Des Moines Physical Therapy Limited Partnership Texas
Shrewsbury Physical Therapy,
Limited Partnership Limited Partnership Texas
Heritage Physical Therapy,
Limited Partnership Limited Partnership Texas
Mansfield Physical Therapy,
Limited Partnership Limited Partnership Texas
Texstar Physical Therapy,
Limited Partnership Limited Partnership Texas
Peninsula Physical Therapy,
Limited Partnership Limited Partnership Texas
Lake Side Physical Therapy,
Limited Partnership dba
Lakeside Physical Therapy Limited Partnership Texas
Flint Physical Therapy,
Limited Partnership Limited Partnership Texas
Pelican State Physical Therapy,
Limited Partnership dba
Audubon Physical Therapy Limited Partnership Texas
Airpark Physical Therapy,
Limited Partnership dba
Philadelphia Physical Therapy Limited Partnership Texas
Capital Hand and Physical
Therapy, Limited Partnership Limited Partnership Texas
Maines &Dean Physical Therapy,
Limited Partnership Limited Partnership Texas
Edge Physical Therapy, Limited
Partnership dba River's Edge
Physical Therapy Limited Partnership Texas
Laurel Physical Therapy,
Limited Partnership dba
South Mississippi Physical Therapy Limited Partnership Texas
Riverwest Physical Therapy,
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
White Mountain Physical Therapy,
Limited Partnership Limited Partnership Texas
Battle Physical Therapy,
Limited Partnership Limited Partnership Texas
Covington Rehabilitation and
Hand Therapy, Limited Partnership
dba South Mississippi Physical
Therapy Limited Partnership Texas
Crawford Physical Therapy,
Limited Partnership Limited Partnership Texas
Mobile Spine and Rehabilitation,
Limited Partnership Limited Partnership Texas
University Physical Therapy,
Limited Partnership Limited Partnership Texas
Oregon Spine &Physical Therapy,
Limited Partnership Limited Partnership Texas
Audubon Physical Therapy,
Limited Partnership Limited Partnership Texas
45
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
−−−−−−−−−−− −−−−−−− −−−−−−−−−−−−−
Bow Physical Therapy &Spine
Center, Limited Partnership Limited Partnership Texas
Caldwell Management, Limited
Partnership Limited Partnership Texas
Southeast Boise Management,
Limited Partnership Limited Partnership Texas
North Shore Sports &Physical
Therapy, Limited Partnership Limited Partnership Texas
Performance and Sports Medicine,
L.P, dba Center for Performance
&Sports Medicine Excellence Limited Partnership Texas
Physical Therapy Connection of
McLean, Limited Partnership Limited Partnership Texas
Royal Physical Therapy,
Limited Partnership Limited Partnership Texas
Sport &Spine Clinic, L.P. Limited Partnership Texas
Yarmouth Physical Therapy,
Limited Partnership Limited Partnership Texas
Sport &Spine Clinic L.P. Limited Partnership Texas
Flannery Physical Therapy,
Limited Partnership, dba
Physical Therapy Plus Limited Partnership Texas
Cupertino Physical Therapy,
Limited Partnership, dba
Peak Physical Therapy Limited Partnership Texas
Town &Country Physical Therapy,
Limited Partnership Limited Partnership Texas
Mountain View Physical Therapy,
Limited Partnership Limited Partnership Texas
Aquatic and Orthopedic Rehab Specialists,
Limited Partnership, dba Oceanside
Physical Therapy Limited Partnership Texas
Ashland Physical Therapy,
Limited Partnership Limited Partnership Texas
Lake Houston Physical Therapy,
Limited Partnership Limited Partnership Texas
R. Clair Physical Therapy,
Limited Partnership, dba R. Clair
Physical Therapy Limited Partnership Limited Partnership Texas
Town &Country Physical Therapy,
Limited Partnership Limited Partnership Texas
South Tulsa Physical Therapy, Limited
Partnership, dba Physical Therapy of Jenks Limited Partnership Texas
Coppell Spine &Sports Rehab, Limited
Partnership dba North Davis/Keller
Physical Therapy Limited Partnership Texas
Green Oaks Physical Therapy, Limited
Partnership dba Green Oaks PT − Cedar Hill Limited Partnership Texas
Green Oaks Physical Therapy, Limited
Partnership dba Green Oaks Physical Therapy Limited Partnership Texas
US PT Therapy Services Inc. dba
Mountain View Physical Therapy of Medford Corporation Texas
Spectrum Physical Therapy, Limited
Partnership Limited Partnership Texas
Peninsula Physical Therapy, Limited
Partnership dba Portland Physical Therapy
Specialists Limited Partnership Texas
Precise Touch Physical Therapy, Limited
Partnership dba Precise Touch Limited Partnership Texas
US PT Therapy Services Inc. dba
Waco Sports Medicine and Rehabilitation Corporation Texas
46
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF TYPE OF INCORPORATION
SUBSIDIARY ENTITY OR FORMATION
−−−−−−−−−−− −−−−−−− −−−−−−−−−−−−−
Lucasville Physical Therapy, Limited
Partnership dba Physical Therapy
of Wheelersburg Limited Partnership Texas
Custom Physical Therapy, Limited
Partnership Limited Partnership Texas
Workwise Therapy Services, Limited
Partnership Limited Partnership Texas
High Plains Physical Therapy,
Limited Partnership Limited Partnership Texas
Evergreen Physical Therapy,
Limited Partnership Limited Partnership Texas
Wise Performance Physical Therapy,
Limited Partnership Limited Partnership Texas
US PT Therapy Services Inc. dba
Advantage Physical Therapy Corporation Texas
US PT Therapy Services Inc. dba
Talent Physical Therapy Corporation Texas
Cross Creek Physical Therapy,
Limited Partnership Limited Partnership Texas
Georgia Orthopedic Physical Therapy,
Limited Partnership Limited Partnership Texas
Sport &Spine Clinic of Nekoosa,
Limited Partnership Limited Partnership Texas
Port Orange Physical Therapy,
Limited Partnership Limited Partnership Texas
US PT Therapy Services Inc. dba
Lake City Hand Therapy Corporation Texas
US PT Therapy Services Inc. dba
Dynamic Hand Therapy Corporation Texas
US PT Therapy Services Inc. dba
Carolina Hand and Wellness Center Corporation Texas
US PT Therapy Services Inc. dba
Therapyworks Corporation Texas
Cape Cod Hand Therapy,
Limited Partnership Limited Partnership Texas
US PT Therapy Services Inc. dba
Tulsa Hand Therapy Corporation Texas
US PT Therapy Services Inc. dba
Missouri City Physical Therapy Corporation Texas
US PT Therapy Services Inc. dba
North Valley Physical and Occupational Therapy Corporation Texas
US PT Therapy Services Inc. dba
Pinnacle Therapy Services Corporation Texas
US PT Therapy Services Inc. dba
Metro Hand Therapy Corporation Texas
US PT Therapy Services Inc. dba
Northern Illinois Therapy Services Corporation Texas
US PT Therapy Services Inc. dba
First Choice Physical Therapy Corporation Texas
47
EXHIBIT 23.1
CONSENT OF KPMG LLP
Board of Directors
U.S. Physical Therapy, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 33−63446,
33−63444, 33−91004, 33−93040, 333−30071, 333−64159, 333−67680, 333−67678, 333−82932 and
333−103057) on Form S−8 of U.S. Physical Therapy, Inc. of our report dated March 4, 2004, with
respect to the consolidated balance sheets of U.S. Physical Therapy, Inc. and subsidiaries as
of December 31, 2003 and 2002, 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, 2003, and the related consolidated financial statement schedule, which report
appears in the December 31, 2003 annual report on Form 10−K of U.S. Physical Therapy, Inc.
KPMG LLP
Houston, Texas
March 11, 2004
48
EXHIBIT 31.1
CERTIFICATION
I, Roy Spradlin, certify that:
1. I have reviewed this annual report on Form 10−K of U.S. Physical Therapy,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a−15(e) and 15d−15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ ROY SPRADLIN
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
ROY SPRADLIN
Chairman, President and Chief
Executive Officer
(principal executive officer)
Date: March 12, 2004
49
EXHIBIT 31.2
CERTIFICATION
I, Lawrance W. McAfee, certify that:
1. I have reviewed this annual report on Form 10−K of U.S. Physical Therapy,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a−15(e) and 15d−15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ LAWRANCE W. MCAFEE
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Lawrance W. McAfee
Chief Financial Officer
(principal financial and accounting officer)
Date: March 12, 2004
50
EXHIBIT 31.3
CERTIFICATION
I, David Richardson, certify that:
1. I have reviewed this annual report on Form 10−K of U.S. Physical Therapy,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a−15(e) and 15d−15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ DAVID RICHARDSON
−−−−−−−−−−−−−−−−−−−−
David Richardson
Controller
Date: March 12, 2004
51
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES−OXLEY ACT OF 2002
In connection with the Annual Report of U.S. Physical Therapy, Inc. (the "registrant") on Form
10−K for the year ending December 31, 2003 as filed with the Securities and Exchange Commission
on the date hereof (the "report"), we, Roy W. Spradlin, Lawrence W. McAfee and David Richardson
, Chief Executive Officer, Chief Financial Officer and Controller, respectively, of the
registrant, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes−Oxley Act of 2002, that to our knowledge:
(1) The report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all material respects, the
financial condition and results of operations of the registrant.
March 12, 2004
/s/ Roy W. Spradlin
−−−−−−−−−−−−−−−−−−−
Roy W. Spradlin
Chief Executive Officer
/s/ Lawrance W. McAfee
−−−−−−−−−−−−−−−−−−−−−−
Lawrance W. McAfee
Chief Financial Officer
/s/ DAVID RICHARDSON
−−−−−−−−−−−−−−−−−−−−
David Richardson
Controller
52
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