USPH

Business Context and Reporting Period

Company: U.S. Physical Therapy, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: The Company develops, owns, and operates outpatient physical and occupational therapy clinics. As of September 30, 1999, it operated 107 clinics across 29 states. The Company is also in the formative stages of a new initiative to own and manage surgery centers in partnership with surgeons.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net patient revenues increased 15.2% ($1.67 million) for the quarter and 14% ($4.38 million) for the nine months compared to the prior year periods. Growth was driven by 18 new clinics (accounting for ~50% of quarterly growth) and increased patient visits at existing clinics.
• Profitability: Net income for the quarter rose 161% to $670,000 from $257,000. For the nine months, net income increased 40% to $1.75 million from $1.25 million.
• Cost Structure: Clinic operating costs as a percentage of net patient revenues decreased to 73% for the quarter (from 75%) and 74% for the nine months (from 75%). Salaries and related costs increased 15% for the quarter, largely due to new clinic openings.
• One-Time Items: The prior year period included a $230,000 loss on the closure of a facility in Corpus Christi, Texas, which is not present in the current period.
• Share Repurchase: In May 1999, the Company repurchased 346,000 shares of common stock for $3.41 million, significantly reducing cash balances and shareholders' equity.

Guidance, Outlook, and Risks

• Surgery Center Initiative: The Company is actively pursuing a new line of business to own and manage surgery centers. Costs related to this initiative were $146,000 for the quarter and $149,000 for the nine months. No agreements have been finalized to date.
• Clinic Expansion: Management expects to continue opening new clinics at the current pace. New clinics typically incur initial operating losses before becoming profitable over 3-5 years.
• Medicare Reimbursement: The Company transitioned to the Balanced Budget Act of 1997 fee schedule in 1999, which limits Medicare payments to $1,500 per patient annually for outpatient therapy.
• Year 2000 (Y2K) Risk: The Company estimates a total cost of $114,000 for Y2K compliance, with $92,000 incurred through September 30, 1999. While management believes systems are compliant, reliance on third-party payor systems poses a risk of disruption.
• Liquidity: Cash decreased by $2.71 million during the nine-month period primarily due to the stock repurchase, capital expenditures ($1.55 million), and distributions to minority investors ($1.54 million). Management believes existing funds and operating cash flows are sufficient for current needs.

Investor Verification Checklist

• Stock Repurchase Impact: Verify the effect of the $3.41 million share buyback on future liquidity and capital availability for expansion.
• Surgery Center Viability: Monitor progress on the surgery center initiative, as no agreements have been reached and costs are currently being expensed.
• Medicare Cap Exposure: Assess the impact of the $1,500 annual Medicare cap on high-utilization patients and future revenue per visit.
• Convertible Debt: Review the terms of the $8.05 million in convertible subordinated notes (due 2003-2004) and potential dilution upon conversion.
• Minority Interest Dilution: Note that a significant portion of clinic earnings ($678,000 for the quarter) is attributed to minority interests in subsidiary partnerships, reducing net income available to common shareholders.