UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
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.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 76-0364866
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1300 WEST SAM HOUSTON PARKWAY SOUTH, SUITE 300,
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of November 8, 2006, the number of shares outstanding (issued less treasury
stock) of the registrant's common stock, par value $.01 per share, was:
11,552,110.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005 3
Consolidated Statements of Net Income for the three and nine
months ended September 30, 2006 and 2005 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005 5
Consolidated Statements of Shareholders' Equity for the nine
months ended September 30, 2006 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosure About Market Risk 25
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 6. Exhibits 27
Signatures 28
Certifications 30-32
2
ITEM 1. FINANCIAL STATEMENTS.
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 14,339 $ 12,352
Marketable securities - available for sale ..................... 1,550 2,650
Patient accounts receivable, less allowance for doubtful
accounts of $1,508 and $1,621, respectively ................. 20,702 19,661
Accounts receivable -- other ................................... 415 761
Other current assets ........................................... 1,954 1,428
-------- --------
Total current assets ..................................... 38,960 36,852
Fixed assets:
Furniture and equipment ........................................ 23,912 23,010
Leasehold improvements ......................................... 14,905 14,556
-------- --------
38,817 37,566
Less accumulated depreciation and amortization ................. 25,050 23,825
-------- --------
13,767 13,741
Goodwill .......................................................... 15,444 14,339
Other assets ...................................................... 1,003 1,587
-------- --------
$ 69,174 $ 66,519
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade ...................................... $ 1,149 $ 1,721
Accrued expenses ............................................... 7,685 5,150
Current portion of notes payable ............................... 244 244
-------- --------
Total current liabilities ................................ 9,078 7,115
Notes payable ..................................................... 280 483
Deferred rent ..................................................... 1,103 1,263
Other long-term liabilities ....................................... 1,627 1,159
-------- --------
Total liabilities ........................................ 12,088 10,020
Minority interests in subsidiary limited partnerships ............. 2,872 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,
13,666,847 and 13,645,167 shares issued at September 30, 2006
and December 31, 2005, respectively ......................... 137 136
Additional paid-in capital ..................................... 35,930 35,037
Retained earnings .............................................. 48,600 44,408
Treasury stock at cost, 2,114,737 and 1,809,785 shares held at
September 30, 2006 and December 31, 2005, respectively ...... (30,453) (26,106)
-------- --------
Total shareholders' equity ............................... 54,214 53,475
-------- --------
$ 69,174 $ 66,519
======== ========
See notes to consolidated financial statements.
3
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net patient revenues ................................... $32,865 $32,389 $ 99,937 $92,581
Management contract revenues ........................... 319 502 1,460 1,514
Other revenues ......................................... -- 25 33 50
------- ------- -------- -------
Net revenues ........................................ 33,184 32,916 101,430 94,145
Clinic operating costs:
Salaries and related costs .......................... 17,513 16,699 52,934 47,049
Rent, clinic supplies, contract labor and other ..... 6,953 6,408 20,671 18,498
Provision for doubtful accounts ..................... 592 357 1,564 958
------- ------- -------- -------
25,058 23,464 75,169 66,505
Corporate office costs ................................. 4,136 4,072 13,138 12,269
------- ------- -------- -------
Operating income from continuing operations ............ 3,990 5,380 13,123 15,371
Interest and investment income, net .................... 102 84 269 271
Loss in unconsolidated joint venture ................... -- (18) (31) (18)
Minority interests in subsidiary limited partnerships .. (1,043) (1,180) (3,429) (3,663)
------- ------- -------- -------
(941) (1,114) (3,191) (3,410)
Income before income taxes from continuing
operations .......................................... 3,049 4,266 9,932 11,961
Provision for income taxes ............................. 1,165 1,674 3,806 4,598
------- ------- -------- -------
Net income from continuing operations ............... 1,884 2,592 6,126 7,363
------- ------- -------- -------
Discontinued operations:
Loss from discontinued operations ................... (2,105) (342) (3,056) (308)
Tax benefit from discontinued operations ............ 773 127 1,122 114
------- ------- -------- -------
(1,332) (215) (1,934) (194)
------- ------- -------- -------
Net income ............................................. $ 552 $ 2,377 $ 4,192 $ 7,169
======= ======= ======== =======
Earnings per share:
Basic - income from continuing operations .............. $ 0.16 $ 0.21 $ 0.52 $ 0.62
Basic - loss from discontinued operations .............. (0.11) (0.01) (0.16) (0.02)
------- ------- -------- -------
Total basic earnings per share ...................... $ 0.05 $ 0.20 $ 0.36 $ 0.60
======= ======= ======== =======
Diluted - income from continuing operations ............ $ 0.16 $ 0.21 $ 0.51 $ 0.61
Diluted - loss from discontinued operations ............ (0.11) (0.01) (0.16) (0.02)
------- ------- -------- -------
Total diluted earnings per share .................... $ 0.05 $ 0.20 $ 0.35 $ 0.59
======= ======= ======== =======
Shares used in computation:
Basic earnings per common share ........................ 11,675 11,982 11,750 11,953
======= ======= ======== =======
Diluted earning per common share ....................... 11,801 12,140 11,901 12,104
======= ======= ======== =======
See notes to consolidated financial statements.
4
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2006 2005
------- --------
OPERATING ACTIVITIES
Net income .............................................................. $ 4,192 $ 7,169
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................ 3,374 3,213
Minority interests in earnings of subsidiary limited partnerships .... 3,369 3,663
Provision for doubtful accounts ...................................... 1,649 1,025
Equity-based awards compensation expense ............................. 737 --
Loss on sale or abandonment of assets ................................ 472 23
Tax benefit from exercise of stock options ........................... -- 650
Impairment charge - goodwill ......................................... 192 145
Recognition of deferred rent subsidies ............................... (306) (280)
Deferred income tax .................................................. (71) 76
Other ................................................................ -- 44
Changes in operating assets and liabilities:
Increase in patient accounts receivable .............................. (2,631) (2,734)
(Increase) decrease in accounts receivable -- other .................. 287 (280)
Decrease in other assets ............................................. 103 303
Increase in accounts payable and accrued expenses .................... 1,963 1,939
Increase in other liabilities ........................................ 614 335
------- --------
Net cash provided by operating activities ............................... 13,944 15,291
INVESTING ACTIVITIES
Purchase of fixed assets ................................................ (3,920) (3,006)
Purchase of business .................................................... (54) (5,000)
Acquisitions of minority interests, included in goodwill ................ (1,207) (1,319)
Purchase of marketable securities - available for sale .................. (100) (11,900)
Proceeds on sale of marketable securities - available for sale .......... 1,200 9,500
Proceeds on sale of fixed assets ........................................ 38 201
------- --------
Net cash used in investing activities ................................... (4,043) (11,524)
FINANCING ACTIVITIES
Distributions to minority investors in subsidiary limited partnerships .. (3,521) (4,186)
Repurchase of common stock .............................................. (4,347) (5,106)
Payment of notes payable ................................................ (203) (111)
Excess tax benefit from stock options exercised ......................... 73 --
Proceeds from exercise of stock options ................................. 84 1,208
------- --------
Net cash used in financing activities ................................... (7,914) (8,195)
Net increase (decrease) in cash and cash equivalents .................... 1,987 (4,428)
Cash and cash equivalents - beginning of period ......................... 12,352 19,353
------- --------
Cash and cash equivalents -- end of period .............................. $14,339 $ 14,925
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes ......................................................... $ 3,143 $ 3,756
Interest ............................................................. $ 30 $ 9
Non-cash transactions during the period:
Purchase of business - seller financing portion ...................... $ -- $ 500
See notes to consolidated financial statements.
5
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(unaudited)
COMMON STOCK ADDITIONAL APIC TREASURY STOCK TOTAL
--------------- PAID-IN EQUITY-BASED RETAINED ----------------- SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS SHARES AMOUNT EQUITY
------ ------ ---------- ------------ -------- ------ -------- -------------
Balance December 31, 2005 ..... 13,645 $136 $35,037 $ -- $44,408 (1,810) $(26,106) $53,475
Proceeds from exercise of
stock options .............. 21 1 83 -- -- -- -- 84
Excess tax benefit from
exercise of stock options .. -- -- 73 -- -- -- -- 73
Issuance of restricted stock .. 1 -- 16 (16) -- -- -- --
Amortization of restricted
stock ...................... -- -- -- 16 -- -- -- 16
Equity-based compensation
expense .................... -- -- -- 721 -- -- -- 721
Purchase of treasury stock .... -- -- -- -- -- (305) (4,347) (4,347)
Net income .................... -- -- -- -- 4,192 -- -- 4,192
------ ---- ------- ---- ------- ------ -------- -------
Balance, September 30, 2006 ... 13,667 $137 $35,209 $721 $48,600 (2,115) $(30,453) $54,214
====== ==== ======= ==== ======= ====== ======== =======
See notes to consolidated financial statements.
6
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of U.S. Physical
Therapy, Inc. and its subsidiaries. All significant intercompany transactions
and balances have been eliminated. The Company primarily operates through
subsidiary clinic partnerships, in which the Company generally owns a 1% general
partnership interest and a 64% limited partnership interest. The managing
therapist of each clinic owns the remaining limited partnership interest in the
majority of the clinics (hereinafter referred to as "Clinic Partnership"). To a
lesser extent, the Company operates some clinics, through wholly-owned
subsidiaries, under profit sharing arrangements with therapists (hereinafter
referred to as "Wholly-Owned Facilities").
We continue to seek to attract physical and occupational therapists who have
established relationships with physicians by offering therapists a competitive
salary and a share of the profits of the clinic operated by that therapist. In
addition, we have developed satellite clinic facilities of existing clinics,
with the result that many clinic groups operate more than one clinic location.
Through the third quarter of 2006, we have opened 27 clinics of which 18 were
Clinic Partnerships and 9 were satellites. In 2007, we intend to continue to
focus on developing new clinics and on opening satellite clinics where deemed
appropriate. We also continue to evaluate acquisition opportunities.
During the nine months ended September 30, 2006, we closed 31 unprofitable
clinics of which 28 were closed in the third quarter of 2006. In accordance with
current accounting literature, the results of operations and closure costs for
these clinics are presented in the consolidated statements of income, as
"Discontinued Operations", net of the tax benefit. The closure costs and
operating results of the three clinics closed in the first quarter were deemed
immaterial and therefore not reported as discontinued operations in the first
and second 2006 quarterly reports.
The accompanying unaudited consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in accordance with the
instructions for Form 10-Q. However, the statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. For further
information regarding the Company's accounting policies, please read the audited
financial statements included in the Company's Form 10-K for the year ended
December 31, 2005.
The Company believes, and the Chief Executive Officer and Chief Financial
Officer have certified, that the financial statements included in this report
contain all necessary adjustments (consisting only of normal recurring
adjustments) to present fairly, in all material respects, the Company's
financial position, results of operations and cash flows for the interim periods
presented.
Operating results for the nine months ended September 30, 2006 are not
necessarily indicative of the results the Company expects for the entire year.
Please also review the Risk Factors section included in our Form 10-K for the
year ended December 31, 2005.
SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity or
remaining maturity at the time of purchase of three months or less to be cash
equivalents. Based upon its investment policy, the Company invests its cash
primarily in deposits with major financial institutions, in highly rated
commercial paper, short-term United States treasury obligations, United States
and municipal government agency securities and United States government
sponsored enterprises. The Company held approximately $9.7 million and $5.4
million in highly liquid investments included in cash and cash equivalents at
September 30, 2006 and December 31, 2005, respectively.
The Company maintains its cash and cash equivalents at financial institutions.
The combined account balances at several institutions typically exceed Federal
Deposit Insurance Corporation ("FDIC") insurance coverage and, as a result,
there is a concentration of credit risk related to amounts on deposit in excess
of FDIC insurance coverage. Management believes this risk is not significant.
7
MARKETABLE SECURITIES
Management determines the appropriate classification of its investments at the
time of purchase and reevaluates such determination at each balance sheet date.
As of September 30, 2006 and December 31, 2005, all marketable securities were
classified as available for sale. Available-for-sale securities are carried at
fair value, with unrealized holding gains and losses, net of tax, reported as a
separate component of shareholders' equity. Since the fair value of the
marketable securities - available for sale equals the cost basis for such
securities, there is no effect on comprehensive income for the periods reported.
The Company held approximately $1.5 million and $2.7 million in highly liquid
investments classified as marketable securities as of September 30, 2006 and
December 31, 2005, respectively.
LONG-LIVED ASSETS
Fixed assets are stated at cost. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. Estimated useful
lives for furniture and equipment range from three to eight years. Leasehold
improvements are amortized over the shorter of the related lease term or
estimated useful lives of the assets, which is generally five years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews property and equipment and intangible assets with finite
lives for impairment upon the occurrence of certain events or circumstances
which indicate that the related amounts may be impaired. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
GOODWILL
Goodwill represents the excess of costs over the fair value of the acquired
business assets. Historically, goodwill has been derived from the acquisition of
businesses and the purchase of a portion or all of a partner's equity interest
in a clinic in certain partnerships formed prior to January 18, 2001.
The fair value of goodwill and other intangible assets with indefinite lives are
tested for impairment annually and upon the occurrence of certain events, and
are written down to fair value if considered impaired. The Company evaluates
goodwill for impairment on an annual basis (in its third quarter) by comparing
the fair value of each reporting unit to the carrying value of the reporting
unit including related goodwill. A reporting unit refers to the acquired
interest of a single clinic or group of clinics. Local management typically
continues to manage the acquired clinic or group of clinics on behalf of the
Company. For each clinic or group of clinics, the Company maintains discrete
financial information and both corporate and local management regularly review
the operating results. For each purchase of the equity interest, goodwill, if
deemed appropriate, is assigned to the respective clinic or group of clinics.
The evaluation of goodwill in the third quarter of 2006 did not result in any
goodwill amounts that were deemed permanently impaired. During the nine months
ended September 30, 2006, the Company wrote-off $192,000 in goodwill related to
closed clinics.
MINORITY INTERESTS
In the majority of the Company's partnership agreements, the therapist partner
begins with a 20% profit interest in his or her clinic partnership, which
increases by 3% at the end of each year thereafter up to a maximum of 35%.
Within the balance sheet and statement of net income, the Company has
historically recorded therapist partners' profit interest in the clinic
partnerships as minority interests in subsidiary limited partnerships. The
Emerging Issues Task Force ("EITF") issued EITF 00-23, "Issues Related to the
Accounting for Stock Compensation under APB No. 25 and FASB Interpretation No.
44" ("EITF 00-23"), which provides specific accounting guidance relating to
various incentive compensation issues. For partnerships formed after January 18,
2001, in situations where the therapist limited partner has minimal risk, EITF
00-23 requires the Company to expense as compensation rather than as a minority
interest in earnings, the therapist partners' interest in profits. Moreover,
EITF 00-23 requires that the Company expense as compensation rather than
capitalizing as goodwill, the purchase of minority interests in the partnerships
for clinic partnerships formed after January 18, 2001. For partnerships formed
after January 18, 2001 in situations where the therapist limited partner has
made a substantial investment and has more than inconsequential risk, the
minority interest is reported in the minority interests in subsidiary limited
partnerships line item.
8
The following table summarizes the minority interests in earnings of subsidiary
limited partnerships and related compensation included in salaries and related
costs (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Partnerships formed after January 18, 2001 (1) ..... $ 334 $ 270 $ 926 $ 816
Partnerships formed prior to January 18, 2001 (2) .. 1,043 1,180 3,429 3,663
------ ------ ------ ------
All partnerships ................................... $1,377 $1,450 $4,355 $4,479
====== ====== ====== ======
(1) Expensed as salaries and related costs pursuant to EITF 00-23.
(2) Reported as minority interests in subsidiary limited partnerships in the
statements of net income.
As of September 30, 2006 and December 31, 2005, undistributed minority interests
related to certain partnerships formed after January 18, 2001 in the amount of
$799,000 and $593,000, respectively, were classified as other long-term
liabilities. The undistributed minority interests related to certain
partnerships formed prior to January 18, 2001 are included in the line item in
our balance sheets entitled "minority interest in subsidiary limited
partnerships".
REVENUE RECOGNITION
Revenues are recognized in the period in which services are rendered. Net
patient revenues (patient revenues less estimated contractual adjustments) are
reported at the estimated net realizable amounts from insurance companies,
third-party payors, patients and others for services rendered. The Company has
agreements with third-party payors that provide for payments to the Company at
amounts different from its established rates. The allowance for estimated
contractual adjustments is based on terms of payor contracts and historical
collection and write-off experience.
The Company determines allowances for doubtful accounts based on the specific
agings and payor classifications at each clinic. The provision for doubtful
accounts is included in clinic operating costs in the statement of net income.
Net accounts receivable includes only those amounts the Company estimates to be
collectible.
Since 1999, reimbursement for outpatient therapy services has been made
according to a fee schedule published by the Department of Health and Human
Services. Under the Balanced Budget Act of 1997, the total amount paid by
Medicare in any one year for outpatient physical and/or occupational therapy
(including speech-language pathology) to any one patient is limited to $1,500
(the "Medicare Cap or 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 again placed on the Adjusted Medicare Limit for the remainder of
2003 and for years 2004 and 2005.
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
the Adjusted Medicare Limit was reinstated effective as of January 1, 2006.
Outpatient therapy services rendered to Medicare beneficiaries by the Company's
therapists are subject to the cap, except to the extent these services are
rendered pursuant to certain management and professional services agreements
with inpatient facilities, in which case the caps do not apply. The Medicare
Limit for 2006 is $1,740 subject to an exception policy created by Centers for
Medicare and Medicaid Service, as more fully defined in the February 15, 2006
Medicare Fact Sheet. The exception process allows for automatic and manual
exceptions to the Medicare Cap for medically necessary services. The exception
process specified diagnoses that qualify for an automatic exception to the
therapy caps if the condition or complexity has a direct and significant impact
on the course of therapy being provided and the additional treatment is
medically necessary. The exception process further provides that manual
exceptions may be granted if the condition or complexity does not allow for an
automatic exception, but is believed to require medically necessary services. In
the absence of an exception, patients who are impacted by the cap may choose
themselves to pay for services in excess of the cap; however, it is assumed that
the cap will result in lost revenues to the Company.
9
Laws and regulations governing the Medicare program are complex and subject to
interpretation. The Company believes that it is in compliance in all material
respects with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing that would have a material effect on the Company's financial
statements as of September 30, 2006. 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.
CONTRACTUAL ALLOWANCES
Contractual allowances result from the differences between the rates charged for
services performed and expected reimbursements by both insurance companies and
government sponsored healthcare programs for such services. Medicare regulations
and the various third party payors and managed care contracts are often complex
and may include multiple reimbursement mechanisms payable for the services
provided in our clinics. We estimate contractual allowances based on our
interpretation of the applicable regulations, payor contracts and historical
calculations. Each month the Company estimates its contractual allowance for
each clinic based on payor contracts and the historical collection experience of
the clinic and applies an appropriate contractual allowance reserve percentage
to the gross accounts receivable balances for each payor of the clinic. Based on
our historical experience, calculating the contractual allowance reserve
percentage at the payor level is sufficient to allow us to provide the necessary
detail and accuracy with our collectibility estimates. However, the services
authorized and provided and related reimbursement are subject to interpretation
that could result in payments that differ from our estimates. Payor terms are
periodically revised necessitating continual review and assessment of the
estimates made by management. Our billing system does not capture the exact
change in our contractual allowance reserve estimate from period to period in
order to assess the accuracy of our revenues and hence our contractual allowance
reserves. Management regularly compares its cash collections to corresponding
net revenues measured both in the aggregate and on a clinic-by-clinic basis. In
the aggregate, historically the difference between net revenues and
corresponding cash collections has generally been less than 1% of net revenues.
Additionally, analysis of subsequent period's contractual write-offs on a payor
basis shows a less than 1% difference between the actual aggregate contractual
reserve percentage as compared to the estimated contractual allowance reserve
percentage associated with the same period end balance. As a result, we believe
that a reasonable likely change in the contractual allowance reserve estimate
would not likely be more than 1% at September 30, 2006.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and notes payable approximate
their fair values due to the short-term maturity of these financial instruments.
The carrying amounts for marketable securities - available for sale approximate
the fair value on the respective balance sheet dates.
SEGMENT REPORTING
Operating segments are components of an enterprise for which separate financial
information is available that is evaluated regularly by chief operating decision
makers in deciding how to allocate resources and in assessing performance. The
Company identifies operating segments based on management responsibility and
believes it meets the criteria for aggregating its operating segments into a
single reporting segment.
USE OF ESTIMATES
In preparing the Company's consolidated financial statements, management makes
certain estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related disclosures. Actual results may
differ from these estimates.
10
SELF-INSURANCE PROGRAM
The Company utilizes a self-insurance plan for its employee group health
insurance coverage administered by a third party. Predetermined loss limits have
been arranged with the insurance company to limit the Company's maximum
liability and cash outlay. Accrued expenses include the estimated incurred but
unreported costs to settle unpaid claims and estimated future claims.
RECLASSIFICATIONS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
the Company has reported for all periods presented the operating losses and
closure costs related to the clinics closed in 2006. Therefore, prior period
amounts have been reclassified to conform to the current year presentation. The
closure costs and operating results of the three clinics closed in the first
quarter were deemed immaterial and therefore not reported as discontinued
operations in the first and second 2006 quarterly reports.
In addition, certain reclassifications have been made to prior period amounts to
conform to current period presentation of auction rate securities as marketable
securities rather than cash and cash equivalents in the consolidated balance
sheet as of December 31, 2005. The Consolidated Statement of Cash Flows for the
nine months ended September 30, 2005 reflects the activity in the marketable
securities - available for sale for such period. Since the fair value of the
marketable securities - available for sale equals the cost basis, there is no
effect on current assets, total assets, net income or comprehensive income.
STOCK OPTIONS AND RESTRICTED STOCK
Effective January 1, 2006, the Company adopted Statement No. 123R, Share-Based
Payment (SFAS 123R), which requires companies to measure and recognize
compensation expense for all stock-based payments at fair value. SFAS 123R is
being applied on the modified prospective basis. Prior to the adoption of SFAS
123R, the Company applied the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, to account for its
fixed-plan stock options. Under the intrinsic-value-based method, compensation
expense was recognized only to the extent that the current market price of the
underlying stock on the date of grant exceeded the exercise price. Historically,
the Company has granted stock options with an exercise price equal to the
current market price of the underlying stock, therefore, the Company had not
recognized any compensation expense related to stock-based payments.
Under the modified prospective approach, SFAS 123R applies to new awards and to
awards that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized for the first nine months of 2006 includes compensation for all
stock-based payments granted prior to, but not yet vested on January 1, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS 123, and compensation cost for the stock-based payment granted
subsequent to January 1, 2006, based on the grant-date fair value estimated with
the provisions of SFAS 123R. Prior periods were not restated to reflect the
impact of adopting the new standard.
The impact of adopting SFAS 123R on January 1, 2006 resulted in lowering net
income and net income per diluted share for the three and nine months ended
September 30, 2006 by $170,000, or $0.01 per diluted share, and $440,000, or
$0.04 per diluted share, respectively.
11
The following table illustrates the effect on net income and net income per
share had the Company accounted for stock-based compensation in accordance with
SFAS 123 for the three and nine months ended September 30, 2005 (in thousands,
except per share data):
THREE MONTHS NINE MONTHS
SEPTEMBER 30, SEPTEMBER 30,
2005 2005
------------- -------------
Actual net income .......................................... $2,377 $7,169
Deduct: Total stock based compensation expense determined
under the fair value method, net of taxes ............ 268 633
------ ------
Pro forma net income ....................................... $2,109 $6,536
====== ======
Earnings per share:
Actual basic earnings per common share .................. $ 0.20 $ 0.60
Actual diluted earnings per common share ................ $ 0.20 $ 0.59
Pro forma basic earnings per common share ............... $ 0.18 $ 0.55
Pro forma diluted earnings per common share ............. $ 0.17 $ 0.54
Prior to October 1, 2005, the Company utilized Black-Scholes, a standard option
pricing model, to measure the fair value of stock options granted to employees.
The Black-Scholes model does not provide for the interaction among economic and
behavioral assumptions. While SFAS 123R permits entities to continue to use such
a model, the standard also permits the use of a "lattice" model. For the fourth
quarter of 2005, the Company determined that the Trinomial Lattice Model was the
best available measure of the fair value of employee stock options. The
Trinomial Lattice Model accounts for changing employee behavior as the stock
price changes. The use of a lattice model captures the observed pattern of
increasing rates of exercise as the stock price increases. Also, SFAS 123R
requires that the benefits associated with the tax deductions attributable to
the grant of stock options that are in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating cash flow as
required under previous literature.
The following weighted-average assumptions were used in estimating the fair
value per share of the options granted under the stock option plans and assuming
no dividends for the nine months ended September 30, 2006 and 2005:
2006 2005
---- ----
Risk-free interest rates 4.28% 4.17%
Expected volatility 30.0% 54.2%
Expected life (in years) n/a 5.5
Suboptimal exercise factor 3 n/a
Exit rate post-vesting 12.5% n/a
The Company calculates the expected volatility for stock-based awards using
historical volatility adjusted for periods of excess volatility. The Company
estimates the forfeiture rate for stock-based awards based on historical data.
Currently, the Company estimates the forfeiture rate to be 13%.
Stock option activity is summarized as follows:
Weighted-
Weighted Average Aggregate
Average Remaining Intrinsic
Number of Exercise Contractual Value
Shares Exercise Price Price Term 000's
--------- --------------- -------- ----------- ---------
Outstanding at December 31, 2005 1,142,084 $2.81 - $18.98 $13.39
Granted 2,000 $19.29 19.29
Exercised (20,680) $3.04 - $16.34 4.00
Cancelled (4,032) $12.60 - $18.42 17.87
Forfeited (37,350) $12.60 - $18.98 13.87
---------
Outstanding at September 30, 2006 1,082,022 $2.81 - $19.29 13.54 7.30 Years $--
=========
Exercisable at September 30, 2006 663,762 $2.81 - $19.29 13.10 6.87 Years $--
=========
12
The weighted average grant-date fair value of options granted during the nine
months ended September 30, 2006 and 2005, respectively, was $6.55 and $8.56,
respectively. The total intrinsic value of options exercised during the nine
months ended September 30, 2006 and 2005 was $190,000 and $1.7 million,
respectively.
A summary of the status of the nonvested shares as of September 30, 2006 and the
changes during the nine months ended September 30, 2006, is presented below:
Weighted-Average
Number of Grant-Date
Shares Fair Value
--------- ----------------
Nonvested at January 1, 2006 519,710 $8.43
Granted 2,000 6.55
Vested (66,100) 7.74
Forfeited (37,350) 7.48
-------
Nonvested at September 30, 2006 418,260 8.61
=======
As of September 30, 2006, the future pre-tax expense of nonvested stock options
is $2.5 million to be recognized in the remainder of 2006 through 2010.
As of September 30, 2006, a total of 217,099 shares remained available for grant
under the Company's stock option plans.
In the second quarter of 2006, the Company granted 5,000 shares of restricted
stock to an employee pursuant to its 2003 Stock Incentive Plan for $0.01 per
share. The restricted stock was subject to continued employment by the employee
and vested 1,000 shares on the date of grant and the remaining 4,000 shares were
to vest in equal installments on the following four anniversaries of the date of
grant. During the third quarter, the employee's employment terminated. A
compensation expense for this grant of $16,000 was recognized based on the
estimated fair value of $16.00 per share on the date of grant.
RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which replaces Accounting Principles Board Opinion
No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The adoption of this statement did not have a material
effect on our financial condition or results of operations.
In June 2005, the EITF issued EITF Issue No. 05-6, "Determining the Amortization
Period for Leasehold Improvements Purchased after Lease Inception or Acquired in
a Business Combination." This accounting guidance states that leasehold
improvements that are placed in service significantly after, and not
contemplated at or near, the beginning of the lease term should be amortized
over the shorter of the useful life of the assets or a term that includes
required lease periods and renewals that are deemed to be reasonably assured at
the date the leasehold improvements are purchased. Leasehold improvements
acquired in a business combination should be amortized over the shorter of the
useful life of the assets or a term that includes required lease periods and
renewals that are deemed to be reasonably assured at the date of acquisition.
The Company is required to apply EITF Issue No. 05-6 to leasehold improvements
that are purchased or acquired in reporting periods beginning after June 29,
2005. The adoption of this issue did not have a material impact on our
consolidated statement of net income or consolidated balance sheet in the
reporting period in which adopted or for those periods following adoption.
In October 2005, the FASB issued FASB Staff Position No. 13-1 ("FAS 13-1")
"Accounting for Rental Costs Incurred during a Construction Period". FAS 13-1
requires rental costs associated with ground or building operating leases that
are incurred during a construction period to be recognized as rental expense.
The rental costs must be included in income from operations. FAS 13-1 is
effective for the first reporting period beginning after December 15, 2005. The
adoption of FAS 13-1 did not have a material effect on our consolidated
financial position, results of operations or cash flows.
13
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48") - Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
accounting for derecognition, interest, penalties, accounting in interim
periods, disclosure and classification of matters related to uncertainty in
income taxes, and transitional requirements upon adoption of FIN 48. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Management is
currently evaluating the impact of this statement on the Company. Management
does not believe that the adoption of FIN 48 will have a material impact on the
financial statements of the Company.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
("SFAS 157") which addresses how companies should measure fair value when they
are required to use a fair value measure for recognition or disclosure purposes
under generally accepted accounting principles ("GAAP"). As a result of SFAS 157
there is now a common definition of fair value to be used throughout GAAP. The
FASB believes that the new standard will make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. SFAS 157
is effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating the impact of the statement on the Company. Management does
not believe the adoption of SFAS 157 will have a material impact on its
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements," ("SAB
108"). SAB 108, which becomes effective beginning on January 1, 2007, provides
guidance on the consideration of the effects of prior period misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 requires an entity to evaluate the impact of correcting all
misstatements, including both the carryover and reversing effects of prior year
misstatements, on current year financial statements. If a misstatement is
material to the current year financial statements, the prior year financial
statements should also be corrected, even though such revision was, and
continues to be, immaterial to the prior year financial statements. Correcting
prior year financial statements for immaterial errors would not require
previously filed reports to be amended. Such correction should be made in the
current period filings. Management is currently evaluating the impact of
adopting SAB 108. Management does not believe that the adoption of SAB 108 will
have a material impact on its financial statements.
14
2. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for the Company are as
follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Numerator:
Net income from continuing operations $ 1,884 $ 2,592 $ 6,126 $ 7,363
Net loss from discontinued operations (1,332) (215) (1,934) (194)
---------- ---------- ---------- ----------
Net income $ 552 $ 2,377 $ 4,192 $ 7,169
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per share ---
weighted-average shares 11,675 11,982 11,750 11,953
Effect of dilutive securities:
Stock options 126 158 151 151
---------- ---------- ---------- ----------
Denominator for diluted earnings per share ---
adjusted weighted-average shares and
assumed conversions 11,801 12,140 11,901 12,104
========== ========== ========== ==========
Earnings per share:
Basic - income from continuing operations $ 0.16 $ 0.21 $ 0.52 $ 0.62
Basic - loss from discontinued operations (0.11) (0.01) (0.16) (0.02)
---------- ---------- ---------- ----------
Total basic earnings per share $ 0.05 $ 0.20 $ 0.36 $ 0.60
========== ========== ========== ==========
Diluted - income from continuing operations $ 0.16 $ 0.21 $ 0.51 $ 0.61
Diluted - loss from discontinued operations (0.11) (0.01) (0.16) (0.02)
---------- ---------- ---------- ----------
Total diluted earnings per share $ 0.05 $ 0.20 $ 0.35 $ 0.59
========== ========== ========== ==========
Options to purchase 252,000 and 0 shares for the three months ended September
30, 2006 and September 30, 2005, respectively, and 173,000 and 127,000 shares
for the nine months ended September 30, 2006 and September 30, 2005,
respectively, were excluded from the diluted earnings per share calculations for
the respective periods because the options' exercise prices were greater than
the average market price of the common shares during the periods.
3. PURCHASE OF COMMON STOCK
In September 2001, the Board of Directors ("Board") authorized the Company to
purchase, in the open market or in privately negotiated transactions, up to
1,000,000 shares of its common stock. On February 26, 2003, on December 8, 2004
and on August 23, 2005, the Board authorized share repurchase programs of up to
250,000, 500,000 and 500,000 additional shares, respectively, of the Company's
outstanding common stock. As of September 30, 2006, there were approximately
150,000 shares remaining that could be purchased under these programs. Since
there is no expiration date for these share repurchase programs, additional
shares may be purchased from time to time in the open market or private
transactions depending on price, availability and the Company's cash position.
Shares purchased are held as treasury shares and may be used for such valid
corporate purposes or retired as the Board considers advisable. During the
quarter ended September 30, 2006, the Company purchased 173,734 shares of its
common stock on the open market for $2.3 million. During the nine months ended
September 30, 2006, the Company purchased 304,952 shares of its common stock on
the open market for $4.3 million.
15
4. ACQUISITIONS
ACQUISITION OF BUSINESSES
On May 18, 2005, the Company acquired a majority interest in Hamilton Physical
Therapy, an operator of three physical and occupational therapy clinics located
in central New Jersey ("Hamilton Acquisition"). The Company acquired a 75%
interest with existing partners retaining a 25% interest. The Company paid
$5,425,000, consisting of a three-year note payable in the amount of $500,000
and cash of $4,925,000. In addition, the Company incurred $75,000 of capitalized
acquisition costs. The purchase agreement also provides for possible contingent
consideration of up to $650,000 based on the achievement of a certain designated
level of operating results within a three-year period following the acquisition.
Any contingent payment made will increase goodwill. In July 2006, the Company
paid additional consideration of $90,000 which increased goodwill.
On December 19, 2005, the Company acquired a majority interest in Excel Physical
Therapy, an operator of two physical therapy clinics located near Anchorage,
Alaska ("Excel Acquisition"). The Company acquired a 65% interest with existing
partners retaining a 35% interest. The Company paid $1,600,000, consisting of a
three-year note payable in the amount of $309,710 and cash of $1,290,000. In
addition, the Company incurred $84,000 of capitalized acquisition costs. The
purchase agreement also provides for possible contingent consideration of up to
$325,000 based on the achievement of a certain designated level of operating
results within a three-year period following the acquisition. Any contingent
payment made will increase goodwill.
The acquisitions resulted in approximately $7.0 million of goodwill (inclusive
of the additional consideration paid in July 2006) which is deductible for tax
purposes. Other assets related to the acquisitions included accounts receivable
valued at $214,000, furniture and equipment valued at $235,000 and
non-competition agreements valued at $171,000 which is being amortized over five
years (of which approximately $41,000 had been amortized at September 30, 2006).
The Company also assumed certain employee benefits of approximately $287,000 and
recorded minority interests in subsidiary limited partnerships of approximately
$73,000.
The Company is permitted to make, and has occasionally made, changes to
preliminary purchase price allocations during the first year after completing
the acquisitions.
Unaudited proforma consolidated financial information for these acquisitions has
not been included as the results were not material to current operations.
ACQUISITIONS OF MINORITY INTERESTS
During the second quarter of 2006, the Company purchased the 35% minority
interest in a limited partnership for $298,000 and during the first quarter of
2006, the Company purchased the 35% minority interest in a limited partnership
for $800,000.
During 2005, the Company purchased a 15% minority interest from a limited
partner who owned a 20.5% minority interest in a limited partnership for
$774,000. The limited partner retained a 5.5% minority interest. Also, during
2005, the Company purchased the 35% minority interest in a limited partnership
for $193,000, the 20% minority interest in another limited partnership for
$54,000 and the 35% minority interest in another limited partnership for
$463,000.
On June 1, 2002, the Company purchased the 35% minority interest in a limited
partnership for $220,000. Additional consideration may be paid in the future
based upon clinic performance. Based on the clinic's performance, the Company
paid additional consideration of $31,000, $41,000, $32,360 and $18,000 in August
2003, 2004, 2005 and 2006, respectively. In July 2002, the Company sold half of
the purchased interest to another therapist for $220,000 in a note payable from
future profits of the partnership. The Company discounted the note receivable by
50% and is recognizing gain on the sale as payments are made.
For all minority interest purchases noted above, the Company paid or has agreed
to pay to the minority limited partner any undistributed earnings earned through
an agreed date prior to the purchase date.
The Company's minority interest purchases were accounted for as purchases and
accordingly, the results of operations of the acquired minority interest
percentage are included in the accompanying financial statements from the dates
of purchase. In addition, the Company is permitted to make, and has occasionally
made, changes to preliminary purchase price allocations during the first year
after completing the purchase.
16
The changes in the carrying amount of goodwill consisted of the following (in
thousands):
NINE MONTHS ENDED
SEPTEMBER 30, 2006
-------------------
Beginning balance $ 14,339
Goodwill acquired during the period 1,243
Goodwill written off (192)
Adjustment to purchase price 54
--------
Ending balance $ 15,444
========
In connection with the closure of facilities, the Company wrote-off $192,000 of
goodwill during the nine months ended September 30, 2006, which is included in
the statement of income for such period in the line item - loss from
discontinued operations.
5. CLOSURE COSTS AND DISCONTINUED OPERATIONS
After a thorough review of the Company's clinics, management decided to close 28
unprofitable clinics in the third quarter of 2006. Previously, during the second
quarter of 2006, three clinics were closed. The operating results of these 31
locations have been reported as discontinued operations for all periods
presented as required by SFAS 144. The following are the net revenues and
pre-tax losses reported for these locations (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2006 2005 2006 2005
------- ------ ------- ------
Net revenues $ 580 $1,256 $ 2,748 $4,481
Pre-tax loss $(2,105) $ (342) $(3,056) $ (308)
The pre-tax loss for the quarter and nine months ended September 30, 2006
included $1.7 million and $1.9 million in costs associated with the closure of
these facilities. The $1.7 million in closure costs for the quarter include $1.1
million for lease commitments, $0.4 million for write-off of leasehold
improvements and other assets, $0.1 million for write-off of goodwill and $0.1
million for severance. The $1.9 million in closure costs for the nine months
include $1.2 million for lease commitments, $0.4 million for write-off of
leasehold improvements and other assets, $0.2 million for write-off of goodwill
and $0.1 million for severance.
In addition, during 2005, management closed nine clinics, of which eight were
closed in the fourth quarter of 2005. The operating results of these nine
locations were not material to the operations of the Company and therefore the
operating results of these clinics were not reclassified and reported as
discontinued operations.
The accrual balance, which consisted of lease commitments for the closed clinics
at December 31, 2005, and the accrual balance and activity for the nine months
ended September 30, 2006 are as follows (in thousands):
DEC 31, SEPTEMBER 30,
2005 2006
TYPE OF COST BALANCE ADDITIONS ACTIVITY BALANCE
------------ ------- --------- -------- -------------
Lease commitments $278 $1,243 $(351) $1,170
Leasehold improvements -- 366 (366) --
Goodwill -- 192 (192)
Severance -- 80 (80) --
---- ------ ----- ------
$278 $1,881 $(989) $1,170
==== ====== ===== ======
17
Lease commitments represent the future payments remaining under lease agreements
adjusted for estimated early settlements. At September 30, 2006, $244,000 of the
accrual balance was classified as long-term and is included in the balance sheet
line item - Other Long-Term Liabilities.
The cash flow impact of these 31 clinics is deemed immaterial for the
consolidated statements of cash flows.
6. NOTES PAYABLE
Notes payable as of September 30, 2006 and December 31, 2005 consist of the
following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
Promissory note payable in quarterly principal installments of $41,667
plus accrued interest through May 18, 2008, interest accrues
at 6% per annum $ 292 $ 417
Promissory note payable in quarterly principal installments of $25,809
plus accrued interest through December 19, 2008, interest accrues
at 5.75% per annum 232 310
----- -----
524 727
Less current portion (244) (244)
----- -----
$ 280 $ 483
===== =====
In connection with the Hamilton Acquisition, the Company incurred a note payable
in the amount of $500,000, payable in equal quarterly principal installments of
$41,667 beginning September 1, 2005 plus any accrued and unpaid interest.
Interest accrues at a fixed rate of 6% per annum. All outstanding principal and
any accrued and unpaid interest then outstanding is due and payable on May 18,
2008.
In connection with the Excel Acquisition, the Company incurred a note payable in
the amount of $309,710, payable in equal quarterly principal installments of
$25,809 beginning April 1, 2006 plus any accrued and unpaid interest. Interest
accrues at a fixed rate of 5.75% per annum. All outstanding principal and any
accrued and unpaid interest then outstanding is due and payable on December 19,
2008.
Effective September 30, 2005, the Company entered into an unsecured Credit
Agreement ("Credit Agreement"). The Credit Agreement, which matures on September
30, 2007, allows the Company to borrow funds not to exceed at any one time an
outstanding balance of $5,000,000 ("Commitment"). The outstanding balance bears
interest, at the Company's option, at a rate per annum equal to either the prime
rate, as defined in the agreement, or the adjusted LIBOR rate, as defined in the
agreement, plus three-quarters of one percent. The Company is required to pay a
commitment fee, which is paid quarterly in arrears, of 0.20% per annum on the
daily average difference between the Commitment and the outstanding balance. As
of the date of this report, there are no funds outstanding under this credit
agreement.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
EXECUTIVE SUMMARY
OUR BUSINESS
We operate outpatient physical and occupational therapy clinics that provide
preventive, curative and post-operative care for a variety of orthopedic-related
disorders and sports-related injuries, treatment for neurologically-related
injuries and rehabilitation of injured workers. At September 30, 2006, we
operated 282 outpatient physical and occupational therapy clinics in 40 states.
The average age of our clinics at September 30, 2006 was 5.2 years. We have
developed 271 of the clinics and acquired 11. To date, we have sold six clinics,
closed 74 facilities and consolidated four clinics with other existing clinics.
During the first nine months of 2006, we added 27 new clinics and closed 31
unprofitable clinics, including 28 in the third quarter. Refer to the discussion
of "Discontinued Operations" below.
In addition to our owned clinics, we also manage physical therapy facilities for
third parties, primarily physicians, with four third-party facilities under
management as of September 30, 2006.
SELECTED OPERATING AND FINANCIAL DATA
During the nine months ended September 30, 2006, we closed 31 unprofitable
clinics of which 28 were closed in the third quarter. In accordance with current
accounting literature, the results of operations and closure costs for these 31
clinics are presented as discontinued operations for all periods presented, net
of the tax benefit. The following table and discussion relates to continuing
operations unless otherwise noted. Mature Clinics in the following discussion
relates to clinics opened or acquired before October 1, 2005 and not closed in
2006.
The following table presents selected operating and financial data that we
believe are key indicators of our operating performance.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
2006 2005 2006 2005
-------- -------- ---------- --------
Number of clinics 282 251 282 251
Working days 63 64 191 192
Average visits per day per clinic 19.5 21.1 20.1 20.6
Total patient visits 341,000 335,000 1,031,000 957,000
Net patient revenue per visit $ 96.40 $ 96.76 $ 96.93 $ 96.70
Statements of operations per visit:
Net revenues $ 97.33 $ 98.34 $ 98.38 $ 98.33
Salaries and related costs (51.37) (49.89) (51.34) (49.14)
Rent, clinic supplies, contract labor
and other (20.39) (19.14) (20.05) (19.32)
Provision for doubtful accounts (1.74) (1.07) (1.52) (1.00)
-------- -------- ---------- --------
Contribution from clinics 23.83 28.24 25.47 28.87
Corporate office costs (12.13) (12.17) (12.74) (12.82)
-------- -------- ---------- --------
Operating income from continuing operations $ 11.70 $ 16.07 $ 12.73 $ 16.05
======== ======== ========== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005
- Net revenues increased to $33.2 million for the three months ended
September 30, 2006 ("2006 Third Quarter") from $33.0 million for the
three months ended September 30, 2005 ("2005 Third Quarter") due to a
1.9% increase in patient visits from 335,000 to 341,000 which was
partially offset by a $0.36 decrease from $96.76 to $96.40 in net
patient revenue per visit. The 2006 Third Quarter included 63 working
days versus 64 for the 2005 Third Quarter. The adjusted net revenues
and visits for the 2005 Third Quarter on a 63 working day basis is
$32.4 million and 329,000, respectively. On an adjusted working days
basis, net revenues increased 2.4%.
19
- Net income (inclusive of discontinued operations) was $0.05 per
diluted share for the 2006 Third Quarter as compared to $0.20 for the
2005 Third Quarter. Net income (inclusive of discontinued operations)
for the 2006 Third Quarter was $0.6 million versus $2.4 million for
the same period last year. The 2006 Third Quarter includes a loss from
discontinued operations of $1.3 million, or $0.11 per diluted share
versus $0.2 million, or $0.01 per diluted share for the 2005 Third
Quarter. Total diluted shares were 11.8 million for the 2006 Third
Quarter and 12.1 million for the 2005 Third Quarter.
- During the 2006 Third Quarter, the Company closed 28 clinics incurring
a $1.7 million pre-tax charge. The net operating loss for those
clinics and three closed earlier in the year was $426,000 pre-tax.
NET PATIENT REVENUES
- Net patient revenues increased to $32.9 million for the 2006 Third
Quarter from $32.4 million for the 2005 Third Quarter, an increase of
$0.5 million, or 1.5%, due to a 1.9% increase in patient visits to
341,000 which was offset partially by a $0.36 decrease in net patient
revenues per visit to $96.40 from 96.76. On an adjusted working days
basis (63 working days), net patient revenues for the 2005 Third
Quarter was $31.9 million. On an adjusted working days basis, the 2006
Third Quarter net patient revenues increased 3.1% as compared to the
2005 Third Quarter.
- Total patient visits increased 6,000 or 1.9%, to 341,000 for the 2006
Third Quarter from 335,000 for the 2005 Third Quarter. The growth in
visits was attributable to an increase of approximately 24,000 visits
in clinics opened or acquired between October 1, 2005 and September
30, 2006 (the "New Clinics") offset by a decrease of 18,000 for Mature
Clinics.
- Net patient revenues from New Clinics increased approximately $2.3
million of which $277,000 related to the two clinics acquired in
December 2005. The offsetting decrease of $1.8 million in net patient
revenues was from Mature Clinics. Of the $1.8 million decrease, a $0.4
million increase related to clinics opened or acquired between January
1, 2004 and September 30, 2005 (excluding those clinics closed in
2006) and a $2.2 million decrease related to clinics opened prior to
January 1, 2004 (excluding those clinics closed in 2006).
Net patient revenues are based on established billing rates less allowances and
discounts for patients covered by contractual programs and workers'
compensation. Net patient revenues reflect contractual and other adjustments
relating to patient discounts from certain payors. Payments received under these
programs are based on predetermined rates and are generally less than the
established billing rates of the clinics.
CLINIC OPERATING COSTS
Clinic operating costs as a percent of net revenues were 75.5% for the 2006
Third Quarter and 71.3% for the 2005 Third Quarter.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $17.5 million for the 2006
Third Quarter from $16.7 million for the 2005 Third Quarter, an
increase of $0.8 million, or 4.9%. Of the $0.8 million increase, a
$1.4 million increase was incurred at the New Clinics which was offset
by a decrease of $0.6 million at the Mature Clinics. Salaries and
related costs as a percent of net revenues increased to 52.8% for the
2006 Third Quarter compared to 50.7% for the 2005 Third Quarter.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES, CONTRACT LABOR AND OTHER
Rent, clinic supplies, contract labor and other increased to $7.0
million for the 2006 Third Quarter from $6.4 million for the 2005
Third Quarter, an increase of $0.6 million, or 8.5%. Approximately
$0.8 million was incurred at the New Clinics and a decrease of $0.2
million was acheived at the Mature Clinics. Rent, clinic supplies,
contract labor and other as a percent of net revenues was 21.0% for
the 2006 Third Quarter and 19.5% for the 2005 Third Quarter.
20
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased to $0.6 million for the
2006 Third Quarter from $0.4 million for the 2005 Third Quarter, an
increase of $0.2 million or 65.8%. The provision for doubtful accounts
as a percent of net patient revenues was 1.8% for the 2006 Third
Quarter and 1.1% for the 2005 Third Quarter. Our allowance for bad
debts as a percent of total patient accounts receivable was 6.8% at
September 30, 2006, as compared to 7.6% at December 31, 2005. Our
percentage of gross receivables outstanding 120 days or longer
decreased from 26.7% of total outstanding receivables at December 31,
2005 to 25.9% at September 30, 2006.
CORPORATE OFFICE COSTS
Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, and recruiting fees, were essentially
flat for the two periods at $4.1 million or 12.5% of net revenue. Effective
January 1, 2006, the Company adopted Statement No. 123R, Share-Based Payment
(SFAS 123R), which requires companies to measure and recognize compensation
expense for all stock-based payments at fair value. Prior periods were not
restated to reflect the impact of adopting the new standard. The 2006 Third
Quarter corporate office costs include $273,000 of equity compensation for stock
options. After adjusting for stock-based compensation expense, corporate office
costs would have been 11.6% of net revenue for the 2006 Third Quarter.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships decreased $0.2
million to $1.0 million for the 2006 Third Quarter from $1.2 million for the
2005 Third Quarter. Minority interest as a percentage of operating income before
corporate office costs remained relatively flat between the two periods.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased to $1.2 million for the 2006 Third
Quarter from $1.7 million for the 2005 Third Quarter, a decrease of
approximately $0.5 million, or 30.4% as a result of lower pre-tax income. During
the 2006 Third Quarter, we accrued state and federal income taxes at an
effective tax rate of 38.2% versus 39.2% for the 2005 Third Quarter.
LOSS FROM DISCONTINUED OPERATIONS
During the 2006 Third Quarter, the Company closed 28 clinics and incurred a loss
from discontinued operations of $1.3 million net of tax benefit. The loss
includes a charge of $1.7 million related to clinic closure costs and $0.4
million for operating losses incurred at these 28 clinics and for three other
clinics closed earlier in 2006, net of a tax benefit of $0.8 million. Clinic
closure costs include $1.1 million for lease commitments, $0.4 million for
write-off of leasehold improvements and other assets, $0.1 million for write-off
of goodwill and $0.1 million for severance. The 2005 Third Quarter includes a
loss from discontinued operations of $0.2 million net of tax benefit related to
the operating losses of these 31 clinics.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2005
- Net revenues rose 7.7% to $101.4 million for the nine months ended
September 30, 2006 ("2006 Nine Months") from $94.1 million for the
nine months ended September 30, 2005 ("2005 Nine Months") due to an
7.7% increase in patient visits from 957,000 to 1,031,000 combined
with a $0.23 increase from $96.70 to $96.93 in net patient revenue per
visit. The 2006 Nine Months included 191 working days versus 192 for
the 2005 Nine Months. The adjusted net revenue and visits for the 2005
Nine Months on an 191 working day basis is $93.7 million and 952,000,
respectively. On an adjusted working day basis, net revenues increased
8.3%.
21
- Net income (inclusive of discontinued operations) was $0.35 per
diluted share for the 2006 Nine Months as compared to $0.59 for the
2005 Nine Months. Net income (inclusive of discontinued operations)
for the 2006 Nine Months was $4.2 million versus $7.2 million for the
same period last year. The 2006 Nine Months includes a loss from
discontinued operations of $1.9 million, or $0.16 per diluted share
versus $0.2 million, or $0.02 per diluted share for the 2005 Nine
Months. Total diluted shares were 11.9 million for the 2006 Nine
Months and 12.1 million for the 2005 Nine Months.
- During the 2006 Nine Months, the Company closed 31 clinics incurring a
$1.9 million pre-tax charge. The net operating loss for those clinics
was $1.2 million pre-tax.
NET PATIENT REVENUES
- Net patient revenues increased to $99.9 million for the 2006 Nine
Months from $92.6 million for the 2005 Nine Months, an increase of
$7.3 million, or 7.9%, due to an 7.7% increase in patient visits to
1,031,000 and a $0.23 increase in net patient revenues per visit to
$96.93 from $96.70. On an adjusted working days basis (191 working
days), net patient revenues for the 2005 Nine Months was $92.1
million. On an adjusted working days basis, the 2006 Nine Months net
patient revenues increased 8.5% as compared to the 2005 Nine Months.
- Total patient visits increased 74,000 or 7.7%, to 1,031,000 for the
2006 Nine Months from 957,000 for the 2005 Nine Months. The growth in
visits was attributable to an increase of approximately 54,000 visits
or 5.6% in New Clinics together with an increase of 20,000 visits or
2.1% in Mature Clinics.
- Net patient revenues from New Clinics accounted for approximately
75.0% of the total increase, or approximately $5.5 million, of which
$1.1 million related to the two clinics acquired in December 2005. The
remaining increase of $1.8 million in net patient revenues was from
Mature Clinics. Of this $1.8 million increase, a $4.1 million increase
related to clinics opened between January 1, 2004 and June 30, 2005
(excluding those clinics closed in 2006), a $2.0 million increase
related to three clinics acquired in May 2005 and a $4.3 million
decrease related to clinics opened prior to January 1, 2004 (excluding
those clinics closed in 2006).
CLINIC OPERATING COSTS
Clinic operating costs as a percent of net revenues were 74.1% for the 2006 Nine
Months and 70.6% for the 2005 Nine Months.
CLINIC OPERATING COSTS - SALARIES AND RELATED COSTS
Salaries and related costs increased to $52.9 million for the 2006
Nine Months from $47.0 million for the 2005 Nine Months, an increase
of $5.9 million, or 12.5%. Of the $5.9 million increase, $3.2 million
was incurred at the New Clinics and $2.7 million at the Mature Clinics
due to rising salary costs. Salaries and related costs as a percent of
net revenues increased to 52.2% for the 2006 Nine Months compared to
50.0% for the 2005 Nine Months. Significant demand for physical
therapists coupled with a limited supply of licensed clinicians has
resulted in an increase in salary costs.
CLINIC OPERATING COSTS - RENT, CLINIC SUPPLIES, CONTRACT LABOR AND OTHER
Rent, clinic supplies, contract labor and other increased to $20.7
million for the 2006 Nine Months from $18.5 million for the 2005 Nine
Months, an increase of $2.2 million, or 11.7%. Approximately $2.1
million was incurred at the New Clinics and $0.1 million was incurred
at the Mature Clinics. Rent, clinic supplies, contract labor and other
as a percent of net revenues was 20.4% for the 2006 Nine Months
compared to 19.6% for the 2005 Nine Months.
CLINIC OPERATING COSTS - PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased to $1.6 million for the
2006 Nine Months from $1.0 million for the 2005 Nine Months, an
increase of $0.6 million or 63.3%. The provision for doubtful accounts
as a percent of net patient revenues was 1.6% for the 2006 Nine Months
and 1.0% for the 2005 Nine Months. Our allowance for bad debts as a
percent of total patient accounts receivable was 6.8% at September 30,
2006, as compared to 7.6% at December 31, 2005. Our percentage of
gross receivables outstanding 120 days or longer was reduced from
26.7% of total outstanding receivables at December 31, 2005 to 25.9%
at September 30, 2006.
22
CORPORATE OFFICE COSTS
Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, and recruiting fees, increased to
$13.1 million for the 2006 Nine Months from $12.3 million for the 2005 Nine
Months, an increase of $0.8 million, or 7.1%. Corporate office costs increased
primarily as a result of a non-cash charge of $0.7 million related to
stock-based compensation expense. Effective January 1, 2006, the Company adopted
Statement No. 123R, Share-Based Payment (SFAS 123R), which requires companies to
measure and recognize compensation expense for all stock-based payments at fair
value. Prior periods were not restated to reflect the impact of adopting the new
standard. Corporate office costs as a percent of revenues remained at 13.0% for
the 2006 Nine Months and 2005 Nine Months. After adjusting for stock-based
compensation expense, corporate office costs would have been 12.2% of revenues
for the 2006 Nine Months.
MINORITY INTERESTS IN EARNINGS OF SUBSIDIARY LIMITED PARTNERSHIPS
Minority interests in earnings of subsidiary limited partnerships decreased $0.2
million to $3.4 million for the 2006 Nine Months from $3.6 million for the 2005
Nine Months. Minority interest as a percentage of operating income before
corporate office costs remained relatively consistent between the 2006 Nine
Months and the 2005 Nine Months.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased to $3.8 million for the 2006 Nine
Months from $4.6 million for the 2005 Nine Months, a decrease of approximately
$0.8 million, or 17.2% as a result of lower pre-tax income. During the 2006 Nine
Months, we accrued state and federal income taxes at an effective tax rate of
38.3% versus 38.4% for the 2005 Nine Months.
LOSS FROM DISCONTINUED OPERATIONS
During the 2006 Nine Months, the Company closed 31 clinics and incurred a loss
from discontinued operations of $1.9 million net of tax benefit. The loss
includes a charge of $1.9 million related to clinic closure costs and $1.2
million for operating losses incurred at these clinics, net of a tax benefit of
$1.1 million. Clinic closure costs include $1.2 million for lease commitments,
$0.4 million for write-off of leasehold improvements and other assets, $0.2
million for write-off of goodwill and $0.1 million for severance. The 2005 Nine
Months includes a loss from discontinued operations of $0.2 million net of tax
benefit related to the operating losses of these 31 clinics.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business is generating enough cash flow from operating
activities to allow us to meet our normal short-term and long-term cash
requirements. At September 30, 2006, we had $15.9 million in cash and cash
equivalents and marketable securities - available for sale ("Cash Equivalents
Available") compared to $15.0 million at December 31, 2005. Although the
start-up costs associated with opening new clinics, and our planned capital
expenditures are significant, we believe that our Cash Equivalents Available are
sufficient to fund the working capital needs of our operating subsidiaries,
payment of clinic closure costs accrued, future clinic development and
investments through at least September 2007. Included in cash and cash
equivalents at September 30, 2006 were $4.3 million in a money market fund and
$7.0 million in investments which include short-term high-grade commercial paper
(credit rating of A1/P1 or better), municipal obligations and government
sponsored enterprise investments.
Cash Equivalents Available increased $0.9 million from December 31, 2005 to
September 30, 2006 due primarily to cash provided by operating activities of
$13.9 million, offset by $3.9 million used for the purchase of fixed assets,
$4.3 million used for the repurchase of the Company's common stock, $3.5 million
used for distributions to minority investors in subsidiary limited partnerships
and $1.2 million used for the purchase of minority interests.
At September 30, 2006, we had $0.9 million in accrued expenses related to lease
commitments for closed clinics. This amount will be paid over the next twelve
months.
Effective September 30, 2005, the Company entered into an unsecured Credit
Agreement. The Credit Agreement, which matures on September 30, 2007, allows the
Company to borrow funds not to exceed at any one time an outstanding principal
balance of $5,000,000 ("Commitment"). The outstanding balance bears interest, at
the Company's option, at a rate per annum equal to either the prime rate, as
defined in the agreement, or the adjusted LIBOR rate, as defined in the
agreement, plus three-quarters of one percent. The Company is required to pay a
commitment fee, which is paid quarterly in arrears, of 0.20% per annum on the
daily average difference between the Commitment and the outstanding balance. As
of the date of this report, there were no funds outstanding under the Credit
Agreement.
23
Historically, we have generated sufficient cash from operations to fund our
development activities and cover operational needs. We generally develop new
clinics rather than acquire them, which requires less capital. We plan to
continue developing new clinics and make additional acquisitions in select
markets. We have from time to time purchased the minority interests of limited
partners in our clinic partnerships. We may purchase additional minority
interests in the future. Generally, any acquisition or purchase of minority
interests is expected to be accomplished using a combination of cash, notes or
common stock. We believe that existing funds and the availability of funds under
the Credit Agreement, supplemented by cash flows from existing operations, will
be sufficient to meet our current operating needs, development plans and any
purchases of minority interests through at least September 2007.
In conjunction with the Hamilton Acquisition, we entered into a note payable
with the sellers in the amount of $500,000 payable in equal quarterly principal
installments of $41,667, beginning September 1, 2005, plus any accrued and
unpaid interest. Interest accrues at a fixed rate of 6% per annum. All
outstanding principal and any accrued and unpaid interest then outstanding is
due and payable on the third anniversary of the note, May 18, 2008. The purchase
agreement also provides for possible contingent consideration of up to $650,000
based on the achievement of a certain designated level of operating results
within a three-year period following the acquisition. In addition, we entered
into a 5-year lease for each of the three facilities. In July 2006, we paid
$90,000 additional consideration related to this acquisition upon achievement of
the predefined operating results for the first year and such amount was added to
goodwill.
In conjunction with the Excel Acquisition, we entered into a note payable with
the sellers in the amount of $309,710 payable in equal quarterly principal
installments of $25,809, beginning April 1, 2006, plus any accrued and unpaid
interest. Interest accrues at a fixed rate of 5.75% per annum. All outstanding
principal and any accrued and unpaid interest then outstanding is due and
payable on the third anniversary of the note, December 19, 2008. The purchase
agreement also provides for possible contingent consideration of up to $325,000
based on the achievement of a certain designated level of operating results
within a three-year period following the acquisition. In addition, we entered
into a 5-year lease for one of the facilities and assumed a lease expiring
September 30, 2009 on the other facility.
In September 2001, the Board of Directors ("Board") authorized the Company to
purchase, in the open market or in privately negotiated transactions, up to
1,000,000 shares of its common stock. On February 26, 2003, on December 8, 2004
and on August 23, 2005, the Board authorized share repurchase programs of up to
250,000, 500,000 and 500,000 additional shares, respectively, of the Company's
outstanding common stock. As of September 30, 2006, there were approximately
150,000 shares remaining that could be purchased under these programs. Since
there is no expiration date for these share repurchase programs, additional
shares may be purchased from time to time in the open market or private
transactions depending on price, availability and the Company's cash position.
Shares purchased are held as treasury shares and may be used for such valid
corporate purposes or retired as the Board considers advisable. During the
quarter ended September 30, 2006, the Company purchased 173,734 shares of its
common stock on the open market for $2.3 million. During the nine months ended
September 30, 2006, the Company purchased 304,952 shares of its common stock on
the open market for $4.3 million.
FACTORS AFFECTING FUTURE RESULTS
Clinic Development
As of September 30, 2006, we had 282 clinics in operation, 27 of which were
opened in the first nine months of 2006. We expect to incur initial operating
losses from new clinics opened in 2006. Generally, we experience losses during
the initial period of a new clinic's operation. Operating margins for newly
opened clinics tend to be lower than more seasoned clinics because of start-up
costs and lower patient visits and revenues. Patient visits and revenues
gradually increase in the first year of operation, as patients and referral
sources become aware of the new clinic. Revenues typically continue to increase
during the two years following the first anniversary of a clinic opening. Based
on the historical performance of our newer clinics, generally the clinics opened
in 2006 would favorably impact our results of operations beginning in 2007.
Medicare Reimbursement Changes
In November 2006, The Centers for Medicare and Medicaid Services (CMS) released
the final rule regarding Revisions to Payment Policies Under the Physician Fee
Schedule for calendar year 2007. The rule is projected to result in a 10%
reduction in reimbursement for outpatient physical and occupational therapy
provided to Medicare and Medicaid patients. The rule also provides for a $1,780
therapy reimbursement cap per Medicare or Medicaid patient for 2007 with no
exception process. The fee schedule will be published in the December 1, 2006
Federal Register and will take effect January 1, 2007.
24
Through the first three quarters of 2006, Medicare and Medicaid reimbursement
accounted for 19% of the Company's billed services or approximately $19.0
million of net patient revenue from continuing operations. Using that interim
figure, then on an annualized basis a corresponding 10% reduction to the Company
in Medicare and Medicaid payments could result in a more than $2.5 million
reduction in revenue unless Congress were to change the fee schedule and
exception process or unless the Company were to be successful in offsetting the
Medicare and Medicaid reduction through expansion of its business with other
reimbursement sources.
FORWARD LOOKING STATEMENTS
We make statements in this report that are considered to be forward-looking
statements within the meaning under Section 21E of the Securities Exchange Act
of 1934. These statements contain forward-looking information relating to the
financial condition, results of operations, plans, objectives, future
performance and business of our Company. These statements (often using words
such as "believes", "expects", "intends", "plans", "appear", "should" and
similar words) involve risks and uncertainties that could cause actual results
to differ materially from those we project. Included among such statements are
those relating to opening new clinics, availability of personnel and the
reimbursement environment. The forward-looking statements are based on our
current views and assumptions and actual results could differ materially from
those anticipated in such forward-looking statements as a result of certain
risks, uncertainties, and factors, which include, but are not limited to:
- revenue and earnings expectations;
- general economic, business, and regulatory conditions including
federal and state regulations;
- availability and cost of qualified physical and occupational
therapists;
- salary costs and personnel productivity;
- failure of our clinics to maintain their Medicare certification status
or changes in Medicare guidelines;
- competitive and/or economic conditions in our markets which may
require us to close certain clinics and thereby incur closure costs
and losses including the possible write-off or write-down of goodwill;
- changes in reimbursement rates or payment methods from third party
payors including governmental agencies and deductibles and co-pays
owed by patients;
- maintaining adequate internal controls;
- availability, terms, and use of capital;
- future acquisitions; and
- weather and other seasonal factors.
Many factors are beyond our control.
Given these uncertainties, you should not place undue reliance on our
forward-looking statements. Please see the other sections of this report and our
other periodic reports filed with the Securities and Exchange Commission (the
"SEC") for more information on these factors. Our forward-looking statements
represent our estimates and assumptions only as of the date of this report.
Except as required by law, we are under no obligation to update any
forward-looking statement, regardless of the reason the statement is no longer
accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not maintain any derivative instruments, interest rate swap arrangements,
hedging contracts, futures contracts or the like. We have no material amount of
debt.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
As of the last day of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in ensuring
that information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that
such information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
25
(b) Changes in Internal Control
There have been no changes in our internal control over financial reporting
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS.
The risk factor presented below updates and replaces a risk factor disclosed in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005, and should be considered in addition to the risk factors disclosed in that
Annual Report. There have been no other material changes to the Company's risk
factors as set forth in "Item 1A. Risk Factors," in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2005.
WE DEPEND UPON REIMBURSEMENT BY THIRD-PARTY PAYORS.
Substantially all of our revenues are derived from private and governmental
third-party payors. In 2005, approximately 78% of our revenues were derived from
managed care plans, commercial health insurers, workers' compensation payors,
and other private pay revenue sources and approximately 22% of our revenues were
derived from Medicare and Medicaid. Initiatives undertaken by industry and
government 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. In addition, in certain geographical areas, our clinics must be
approved as providers by key health maintenance organizations and preferred
provider plans. Failure to obtain or maintain these approvals would adversely
affect financial results.
Reimbursement rates for outpatient therapy services provided to Medicare
beneficiaries are established pursuant to a fee schedule published by the
Department of Health and Human Services ("HHS"). Under the Balanced Budget Act
of 1997, the total amount paid by Medicare in any one year for outpatient
physical therapy or occupational therapy to any one patient was initially
limited to $1,500, subject to annual adjustment (the "Medicare Limit"). For
purposes of the Medicare Limit, the aggregate charges for outpatient physical
therapy and speech language pathology incurred by one beneficiary cannot exceed
the Medicare Limit. After a three-year moratorium, the Medicare Limit on therapy
services was initially implemented for services rendered on or after September
1, 2003. The Medicare Limit for fiscal year 2003 was adjusted up to $1,590 (the
"Adjusted Medicare Limit"). Effective December 8, 2003, a second moratorium was
placed on the Adjusted Medicare Limit for the remainder of 2003 and for years
2004 and 2005.
Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
the Adjusted Medicare Limit was reinstated effective as of January 1, 2006.
Outpatient therapy services rendered to Medicare beneficiaries by the Company's
therapists will be subject to the cap, except to the extent these services are
rendered pursuant to certain management and professional services agreements
with inpatient facilities, in which case the caps would not apply. The Medicare
Limit for 2006 is $1,740 subject to an exception policy created by CMS, as more
fully defined in the February 15, 2006 Medicare Fact Sheet. In summary, the
exception process allows for automatic and manual exceptions to the Medicare Cap
for medically necessary services. The exception process specified diagnosis that
qualifies for an automatic exception to the therapy caps, if the condition or
complexity has a direct and significant impact on the course of therapy being
provided and the additional treatment is medically necessary. The exception
process further provides that manual exceptions may be granted if the condition
or complexity does not allow for an automatic exception, but is believed to
require medically necessary services. In the absence of an exemption, patients
who are impacted by the cap may choose to pay out of their own pockets for
services in excess of the cap. The cap has resulted in some lost revenues to the
Company and has had an adverse impact on net income year-to-date in 2006. For a
further description of this and other laws and regulations involving
governmental reimbursements, see "Business - Sources of Revenue
" and "-- Regulation and Healthcare Reform" in Item 1 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
26
In November 2006, The Centers for Medicare and Medicaid Services (CMS) released
the final rule regarding Revisions to Payment Policies Under the Physician Fee
Schedule for calendar year 2007. The rule is projected to result in a 10%
reduction in reimbursement for outpatient physical and occupational therapy
provided to Medicare and Medicaid patients. The rule also provides for a $1,780
therapy reimbursement cap per Medicare or Medicaid patient for 2007 with no
exception process. The fee schedule will be published in the December 1, 2006
Federal Register and will take effect January 1, 2007.
Through the first three quarters of 2006, Medicare and Medicaid reimbursement
accounted for 19% of the Company's billed services or approximately $19.0
million of net patient revenue from continuing operations. Using that interim
figure, then on an annualized basis a corresponding 10% reduction to the Company
in Medicare and Medicaid payments could result in a more than $2.5 million
reduction in revenue unless Congress were to change the fee schedule and
exception process or unless the Company were to be successful in offsetting the
Medicare and Medicaid reduction through expansion of its business with other
reimbursement sources.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding shares of the Company's
common stock repurchased by the Company during the quarter ended September 30,
2006.
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED AS OF SHARES THAT MAY
PART OF PUBLICLY YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS OR UNDER THE PLANS OR
PERIOD SHARES PURCHASED PAID PER SHARE PROGRAMS(1) PROGRAMS(1)
------ ---------------- -------------- ------------------- ------------------
July 1, 2006 through
July 31, 2006 -- $ -- -- 323,697
August 1, 2006 through
August 31, 2006 34,192 14.91 34,192 289,505
September 1, 2006 through
September 30, 2006 139,542 $12.59 139,542 149,963
------- ------ ------- -------
Total 173,734 $13.05 173,734 149,963
======= ====== ======= =======
(1) In September 2001, the Board authorized the Company to purchase, in the
open market or in privately negotiated transactions, up to 1,000,000 shares
of its common stock. On February 26, 2003, on December 8, 2004 and on
August 23, 2005, the Board authorized share repurchase programs of up to
250,000, 500,000 and 500,000 additional shares, respectively, of the
Company's outstanding common stock. As of September 30, 2006, there were
approximately 150,000 shares remaining that could be purchased under these
programs. Since there is no expiration date for these share repurchase
programs, additional shares may be purchased from time to time in the open
market or private transactions depending on price, availability and the
Company's cash position. Shares purchased are held as treasury shares and
may be used for such valid corporate purposes or retired as the Board
considers advisable. All shares of common stock repurchased by the Company
during the quarter ended September 30, 2006 were purchased under these
programs.
ITEM 6. EXHIBITS.
(a) Exibits
EXHIBIT
NO. DESCRIPTION
------- -----------
31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32* Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on our behalf by the
undersigned thereunto duly authorized.
U.S. PHYSICAL THERAPY, INC.
Date: November 8, 2006 By: /s/ LAWRANCE W. MCAFEE
------------------------------------
Lawrance W. McAfee
Chief Financial Officer
(duly authorized officer and
principal financial and accounting
officer)
28
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
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31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32* Certification Pursuant to 18 U.S.C 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith