NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(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 (the
Company). 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, directly or indirectly, 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).
The Company continues to seek to attract physical and occupational therapists who have established relationships with patients and physicians by offering
therapists a competitive salary and a share of the profits of the clinic operated by that therapist. The Company has developed satellite clinic facilities of existing clinics, with the result that many Clinic Partnerships and Wholly-Owned Facilities
operate more than one clinic location. In addition, the Company has acquired a majority interest in a number of clinics through acquisitions.
During the three months ended March 31, 2013, the Company acquired the following clinic group:
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% Interest
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Number of
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Acquisition
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Date
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Acquired
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Clinics
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February 2013 Acquisition
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Feb 28
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72
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%
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9
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In addition to the February 2013 Acquisition, the Company, through one of its subsidiaries, acquired a physical therapy clinic on
February 1, 2013 (the Tuck-In Acquisition).
As of March 31, 2013, the Company operated 441 clinics in 43 states.
The results of operations of the acquired clinics have been included in the Companys consolidated financial statements since the date
of their respective acquisition.
The Company intends to continue to focus on developing new clinics and on opening satellite clinics where
deemed appropriate. The Company will also continue to evaluate acquisition opportunities.
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. Management believes this report contains all necessary adjustments (consisting only of normal
recurring adjustments) to present fairly, in all material respects, the Companys financial position, results of operations and cash flows for the interim periods presented. For further information regarding the Companys accounting
policies, please read the audited financial statements included in the Companys Form 10-K for the year ended December 31, 2012.
The Company believes, and the Chief Executive Officer, Chief Financial Officer and Corporate Controller have certified, that the financial statements
included in this report present fairly, in all material respects, the Companys financial position, results of operations and cash flows for the interim periods presented.
Operating results for the three months ended March 31, 2013 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, 2012.
7
Clinic Partnerships
For Clinic Partnerships, the earnings and liabilities attributable to the non-controlling interests, typically owned by the managing therapist, directly or indirectly, are recorded within the balance
sheets and income statements as non-controlling interests.
Wholly-Owned Facilities
For Wholly-Owned Facilities with profit sharing arrangements, an appropriate accrual is recorded for the amount of profit sharing due to the profit
sharing therapists. The amount is expensed as compensation and included in clinic operating costs salaries and related costs. The respective liability is included in current liabilities accrued expenses on the balance sheet.
Significant Accounting Policies
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 and for software purchased from three to seven years. Leasehold improvements are amortized over the
shorter of the related lease term or estimated useful lives of the assets, which is generally three to 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 the amount paid and fair value of the non-controlling
interests over the fair value of the acquired business assets, which include certain intangible assets. Historically, goodwill has been derived from acquisitions and, prior to 2009, from the purchase of some or all of a particular local
managements equity interest in an existing clinic. Effective January 1, 2009, if the purchase price of a non-controlling interest by the Company exceeds or is less than the book value at the time of purchase, any excess or shortfall, as
applicable, is recognized as an adjustment to additional paid-in capital.
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 at least an annual basis (in its third
quarter) by comparing the fair value of its reporting units to the carrying value of each reporting unit including related goodwill. The Company operates a one segment business which is made up of various clinics within partnerships. The
partnerships are components of regions and are aggregated to the operating segment level for the purpose of determining our reporting units when performing our annual goodwill impairment test.
An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other
intangible assets, exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using two factors: (i) earnings prior to taxes, depreciation and amortization for the reporting unit
multiplied by a price/earnings ratio used in the industry and (ii) a discounted cash flow analysis. A weight is assigned to each factor and the sum of each weight times the factor is considered the estimated fair value. For 2012, the factors
(i.e., price/earnings ratio, discount rate and residual capitalization rate) were updated to reflect current market conditions. The evaluation in the third quarter of 2012 did not yield any impairment charge.
Non-controlling interests
The Company recognizes non-controlling interests as equity in the consolidated financial statements
separate from the parent entitys equity. The amount of net income attributable to non-controlling interests is included in consolidated net income on the face of the income statement. Changes in a parent entitys ownership interest in a
subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income when a subsidiary is deconsolidated. Such gain
or loss is measured using the fair value of the non-controlling equity investment on the deconsolidation date.
8
When the purchase price of a non-controlling interest by the Company exceeds or is less than the book value
at the time of purchase, any excess or shortfall, as applicable, is recognized as an adjustment to additional paid-in capital. Additionally, operating losses are allocated to non-controlling interests even when such allocation creates a deficit
balance for the non-controlling interest partner.
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 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, which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for doubtful accounts, includes only
those amounts the Company estimates to be collectible.
Medicare Reimbursement
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (MPFS). The MPFS rates are automatically updated annually based on a formula,
called the sustainable growth rate (SGR) formula. The use of the SGR formula has resulted in calculated automatic reductions in rates in every year since 2002; however, for each year through 2013, Centers for Medicare & Medicaid
Services (CMS) or Congress has taken action to prevent the implementation of SGR formula reductions. For 2012, the Temporary Payroll Tax Cut Continuation Act of 2011 (TPTC) delayed application of the SGR for the first two
months of the year and the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRA) included a measure freezing payment rates at their then current level through December 31, 2012. The American Taxpayer Relief Act of 2012
essentially froze the Medicare physician fee schedule rates at 2012 levels through December 31, 2013, averting a scheduled 26.5% cut as a result of the SGR formula that would have taken effect on January 1, 2013. A reduction in the
Medicare physician fee schedule payment rates will occur on January 1, 2014, unless Congress again takes legislative action to prevent the SGR formula reductions from going into effect.
The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years, and requires automatic reductions in federal spending by approximately $1.2
trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. The American Taxpayer Relief Act of 2012 temporarily delayed the automatic, across-the-board sequestration cuts in federal
spending imposed by the Budget Control Act of 2011. Effective April 1, 2013, Medicare reimbursement for services furnished on or after April 1, 2013 has been reduced by 2%.The MCTRA directed CMS to implement a claims-based data collection
program to gather additional data on patient function during the course of therapy in order to better understand patient conditions and outcomes. All practice settings that provide outpatient therapy services would be required to include this
data on the claim form. Beginning on July 1, 2013, therapists will be required to report new codes and modifiers on the claim form that reflect a patients functional limitations and goals at initial evaluation, periodically
throughout care, and at discharge. For claims submitted after July 1, 2013, CMS will reject claims if the required data is not included in the claim.
As a result of the Balanced Budget Act of 1997, the formula for determining the total amount paid by Medicare in any one year for outpatient physical therapy, occupational therapy, and/or
speech-language pathology services provided to any Medicare beneficiary (
i.e.
, the Therapy Cap or Limit) was established. Based on the statutory definitions which constrained how the Therapy Cap would be applied, there
is one Limit for Physical Therapy and Speech Language Pathology Services combined, and one Limit for Occupational Therapy. During 2012, the annual Limit on outpatient therapy services was $1,880 for Physical Therapy and Speech Language Pathology
Services combined and $1,880 for Occupational Therapy Services. Pursuant to the final MPFS rule for 2013, effective January 1, 2013 the annual Limit on outpatient therapy services is $1,900 for Physical Therapy and Speech Language Pathology
Services combined and $1,900 for Occupational Therapy Services. Historically, these Therapy Caps applied to outpatient therapy services provided in all settings, except for services provided in departments of hospitals. However, the American
Taxpayer Relief Act of 2012 extended the annual limits on therapy expenses to services furnished in hospital outpatient department settings from October 1, 2012 through December 31, 2013. Unless Congress enacts legislation to extend the
application of these limits to therapy provided in hospital outpatient settings, the Therapy Cap will no longer apply to such services starting as of January 1, 2014.
9
In the Deficit Reduction Act of 2005, Congress implemented an exceptions process to the annual Limit for
therapy expenses. Under this process, a Medicare enrollee (or person acting on behalf of the Medicare enrollee) is able to request an exception from the Therapy Caps if the provision of therapy services was deemed to be medically
necessary. Therapy Cap exceptions have been available automatically for certain conditions and on a case-by-case basis upon submission of documentation of medical necessity. The MCTRA extended the exceptions process for outpatient Therapy
Caps through December 31, 2012. The American Taxpayer Relief Act of 2012 extended the exceptions process for outpatient Therapy Caps through December 31, 2013. Unless Congress extends the exceptions process, the Therapy Caps will
apply to all outpatient therapy services beginning January 1, 2014, except those services furnished and billed by outpatient hospital departments.
Furthermore, under the MCTRA, starting on October 1, 2012, patients who meet or exceed $3,700 in therapy expenditures during a calendar year are subject to a manual medical review prior to payment.
The $3,700 threshold is applied to the combined physical therapy/speech language pathology cap; a separate $3,700 threshold is applied to the occupational therapy cap. The American Taxpayer Relief Act of 2012 extends through December 31, 2013
the requirement that Medicare perform manual medical review of therapy services beyond the $3,700 threshold and continued the process by which providers may seek pre-approval for services to be performed beyond such dollar threshold. In February
2013, CMS advised providers that the pre-approval process for services beyond the $3,700 cap will no longer be in effect, so that all such services during the calendar year that are over the dollar threshold will be subject to a manual medical
review.
CMS adopted a multiple procedure payment reduction (MPPR) for therapy services in the final update to the MPFS for
calendar year 2011. During 2011, the MPPR applied to all outpatient therapy services paid under Medicare Part B occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays
100% of the practice expense component of the Relative Value Unit (RVU) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy
procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. In 2011 and 2012, the second and subsequent therapy service furnished during the same
day for the same patient was reduced by 20% in office and other non-institutional settings and by 25% in institutional settings. The American Taxpayer Relief Act of 2012 increases the payment reduction to 50%, on subsequent therapy procedures in
either setting, effective April 1, 2013. This reduction in payment for our services provided to Medicare beneficiaries will negatively impact the Companys financial results, estimated to represent an 8% to 10% reduction in overall
reimbursement for services the Company provides to Medicare beneficiaries.
Statutes, regulations, and payment rules governing the delivery of
therapy services to Medicare beneficiaries 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 Companys financial statements as of March 31, 2013. 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.
Physician Services Revenues
Revenues
from physician services are generated by franchise arrangements with third parties, pursuant to which there are multiple deliverables training and ongoing services as well as through the two physician services facilities. Each
component can be purchased separately. Revenue is recognized over the period the respective services are provided. Physician service revenues are included in other revenues in the accompanying Consolidated Statements of Net Income.
Management Contract Revenues
Management contract revenues are derived from contractual arrangements whereby the Company manages a clinic for third party owners. The Company does not
have any ownership interest in these clinics. Typically, revenues are determined based on the number of visits conducted at the clinic and recognized when services are performed. Costs, typically salaries for the Companys employees, are
recorded when incurred. Management contract revenues are included in other revenues in the accompanying Consolidated Statements of Net Income.
10
Contractual Allowances
Contractual allowances result from the differences between the
rates charged for services performed and expected reimbursements for such services by both insurance companies and government sponsored healthcare programs. 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 Company clinics. The Company estimates contractual allowances based on its 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 the Companys historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow it to provide the necessary detail and
accuracy with its collectibility estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from the Companys estimates. Payor terms are
periodically revised necessitating continual review and assessment of the estimates made by management. The Companys billing systems may not capture the exact change in its contractual allowance reserve estimate from period to period in order
to assess the accuracy of its revenues, and hence, its 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,
the difference between net revenues and corresponding cash collections has historically generally reflected a difference within approximately 1% of net revenues. Additionally, analysis of subsequent periods 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, the Company believes
that a change in the contractual allowance reserve estimate would not likely be more than 1% at March 31, 2013.
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 basis 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.
The Company recognizes the financial statement benefit
of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company recognizes accrued interest expense and penalties associated with unrecognized tax benefits as income tax expense. The Company did not have any accrued interest or penalties associated with
any unrecognized tax benefits nor was any interest expense recognized during the three months ended March 31, 2013.
Fair Value 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 amount of the Companys revolving line of credit approximates its fair value. The interest
rate on the revolving line of credit, which is tied to the Eurodollar Rate, is set at various short-term intervals as detailed in the credit agreement.
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.
11
U
se of Estimates
In preparing the Companys consolidated financial statements, management makes certain estimates and
assumptions, especially in relation to, but not limited to, purchase accounting, goodwill impairment, allowance for receivables, tax provision and contractual allowances, that affect the amounts reported in the consolidated financial statements and
related disclosures. Actual results may differ from these estimates.
Self-Insurance Program
The Company utilizes a self-insurance plan for its employee group health insurance coverage
administered by a third party. Predetermined loss limits have been arranged with the insurance company to minimize the Companys maximum liability and cash outlay. Accrued expenses include the estimated incurred but unreported costs to settle
unpaid claims and estimated future claims. Management believes that the current accrued amounts are sufficient to pay claims arising from self-insurance claims incurred through March 31, 2013.
Restricted Stock
Restricted stock issued to employees and directors is subject to certain conditions, including continued
employment or continued service on our B of Directors (the Board), respectively. The transfer restrictions for shares granted to directors lapse in four equal quarterly installments and those to employees lapse in equal installments on
the following four or five annual anniversaries of the date of grant. Compensation expense for grants of restricted stock is recognized based on the fair value per share on the date of grant amortized over the service period. The restricted stock
issued is included in basic and diluted shares for the earnings per share computation.
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):
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Three Months Ended
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March 31,
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2013
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2012
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Numerator:
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Net income attributable to common shareholders
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$
|
3,721
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|
|
$
|
4,478
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|
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Denominator:
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|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted-average shares
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|
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11,955
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|
|
|
11,726
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|
Effect of dilutive securities - Stock options
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|
24
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|
112
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Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions
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11,979
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11,838
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Earnings per common share:
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Basic - net income attributable to common shareholders
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$
|
0.31
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$
|
0.38
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Diluted - net income attributable to common shareholders
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|
$
|
0.31
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|
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$
|
0.38
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|
All options to purchase shares were included in the diluted earnings per share calculation for the three months ended March 31,
2013 and 2012 as the average market prices of the common stock was above the exercise prices. The Companys restricted stock issued is included in basic and diluted shares for the earnings per share computation from the date of grant.
12
3. ACQUISITIONS OF BUSINESSES
The purchase price for 72% interest in the February 2013 Acquisition was $4.3 million in cash and $400,000 in a seller note, that is
payable in two principal installments totaling $200,000 each, plus accrued interest, in February 2015 and 2016. On February 1, 2013, through a subsidiary, the Company acquired a 100% interest in a clinic for $5,000. The purchase prices have
been preliminarily allocated as follows (in thousands):
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Cash paid, net of cash acquired
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$
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4,215
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Seller notes
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|
400
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|
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Total consideration
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$
|
4,615
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Estimated fair value of net tangible assets acquired:
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Total current assets
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634
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Total non-current assets
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230
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Total liabilities
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(125
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)
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Net tangible assets acquired
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739
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Referral relationships
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Non compete
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Goodwill
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|
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5,733
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Fair value of noncontrolling interest
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(1,857
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)
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$
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4,615
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The consideration for each transaction was agreed upon through arms length negotiations. Funding for the cash portion of the
purchase price was derived from proceeds from the Companys revolving credit facility.
The results of operations of these acquisitions
have been included in the Companys consolidated financial statements since acquired.
Because these acquisitions occurred during the
three months ended March 31, 2013, the purchase price plus the fair value of the noncontrolling interest was allocated to the fair value of the assets acquired and liabilities assumed based on the preliminary estimates of the fair values at the
acquisition date, with the amount exceeding the estimated fair values being recorded as goodwill. The Company is in the process of completing its formal valuation analysis to identify and determine the fair value of tangible and intangible assets
acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used at March 31, 2013 based on additional information obtained. Changes in the estimated valuation of the tangible
and intangible assets acquired and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies, where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments to
goodwill.
On May 22, 2012, the Company purchased a 70% interest in a 7 clinic group (May 2012 Acquisition). The purchase
price for the 70% interest in the May 2012 Acquisition was $6,090,000 in cash and $250,000 in seller notes, that are payable in two principal installments totaling $125,000 each, plus any accrued interest, in May 2013 and 2014. The seller notes
accrue interest at 3.25% per annum. For the Company, 70% of the goodwill for the May 2012 Acquisition is tax deductible. During the quarter ended March 31, 2013, the Company determined that the amounts attributable to intangible assets
other than goodwill are as follows: tradenames - $1,300,000; referral relationships - $800,000; and non competition agreement - $240,000. The value assigned to referral relationships and the non competion covenants will be amortized over the related
expected lives which are estimated to be 12 and six years, respectively.
13
In addition to the May 2012 Acquisition, in 2012, the Company, through its subsidiaries, purchased 7
outpatient therapy practices in 7 transactions for aggregate cash consideration of $1,938,000 and, in one transaction, a $100,000 note payable. The purchase prices were allocated $43,000 to current assets, $213,000 to non-current assets, $25,000 to
non competition agreements, $57,000 to referral relationships and $1,883,000 to goodwill.
The purchase prices for the
acquisitions in 2012 have been preliminarily allocated as follows (in thousands):
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Cash paid, net of cash acquired
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$
|
7,929
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Seller notes
|
|
|
350
|
|
|
|
|
|
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Total consideration
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|
$
|
8,279
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|
|
|
|
|
|
Estimated fair value of net tangible assets acquired:
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|
|
|
Total current assets
|
|
$
|
363
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|
Total non-current assets
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|
|
478
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|
Total liabilities
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|
|
(290
|
)
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|
|
|
|
|
Net tangible assets acquired
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|
$
|
551
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|
Tradenames
|
|
|
1,300
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Referral relationships
|
|
|
857
|
|
Non compete
|
|
|
265
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|
Goodwill
|
|
|
8,198
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|
Fair value of noncontrolling interest
|
|
|
(2,892
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)
|
|
|
|
|
|
|
|
$
|
8,279
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|
|
|
|
|
|
The purchase price plus the fair value of the noncontrolling interest for the 2012 acquisitions was allocated to the fair value of the
assets acquired and liabilities assumed based on the preliminary estimates of the fair values at the acquisition date, with the amount exceeding the estimated fair values being recorded as goodwill. The Company is in the process of completing its
formal valuation analysis to identify and determine the fair value of tangible and intangible assets acquired and the liabilities assumed. Thus, the final allocation of the purchase price may differ from the preliminary estimates used at
March 31, 2013 based on additional information obtained. Changes in the estimated valuation of the tangible and intangible assets acquired and the completion by the Company of the identification of any unrecorded pre-acquisition contingencies,
where the liability is probable and the amount can be reasonably estimated, will likely result in adjustments to goodwill.
Unaudited proforma
consolidated financial information for acquisitions occurring in 2013 and 2012 have not been included as the results were not material to current operations.
4. ACQUISITIONS OF NON-CONTROLLING INTERESTS
In four separate transactions during the three months ended March 31, 2013, the Company purchased partnership interests in three
partnerships. The interests in the partnerships purchased ranged from .10% to 35%. The aggregate of the purchase prices paid was $956,000, which included $64,000 of undistributed earnings. The remaining purchase price of $892,000, less future tax
benefits of $350,000, was recognized as an adjustment to additional paid-in capital. For one of the transactions, the non-controlling interest had a $37,000 cumulative loss. This loss less the tax benefit of $14,000 was charged to additional paid-in
capital. During the three months ended March 31, 2013, the Company sold a 1% interest in a partnership for a price of $23,000. This amount was credited to additional paid-in capital.
Included in the above purchases of partnership interests, the Company purchased the remaining 1.3% of the non-controlling interest in STAR Physical Therapy, LP, a subsidiary of the Company
(STAR) held by Mr. Regg Swanson, the Managing Director and a founder of STAR and a member of the Board (Swanson). The purchase price paid for the 1.3% interest was $801,640, which included $55,000 of undistributed
earnings. The purchase price was determined based on the contractual terms in the Reorganization of Securities Purchase Agreement dated as of September 6, 2007 among the Company, STAR, the limited partners of STAR and Swanson as Seller
Representative and in his individual capacity, which was filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC on September 7, 2007. After this transaction, Swanson does not hold any interest in STAR.
14
5. GOODWILL
The changes in the carrying amount of goodwill consisted of the following (in thousands):
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Three Months
|
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Ended
|
|
|
|
March 31,
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|
|
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2013
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Beginning balance
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$
|
100,188
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Goodwill acquired during the period
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|
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5,733
|
|
Goodwill adjustments for purchase price allocation of businesses acquired
|
|
|
(2,340
|
)
|
Goodwill written off - closed clinic
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
103,581
|
|
|
|
|
|
|
6. INTANGIBLE ASSETS, NET
Intangible assets, net as of March 31, 2013 and December 31, 2012 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Tradenames
|
|
$
|
9,273
|
|
|
$
|
7,973
|
|
Referral relationships, net of accumulated amortization of $1,367 and $1,217, respectively
|
|
|
4,151
|
|
|
|
3,501
|
|
Non compete agreements, net of accumulated amortization of $1,954 and $1,848, respectively
|
|
|
806
|
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,230
|
|
|
$
|
12,146
|
|
|
|
|
|
|
|
|
|
|
Tradenames, referral relationships and non compete agreements are related to the businesses acquired. The value assigned to tradenames
has an indefinite life and is tested at least annually for impairment in conjunction with the Companys annual goodwill impairment test. The value assigned to referral relationships is being amortized over their respective estimated useful
lives which range from six to 16 years. Non compete agreements are amortized over the respective term of the agreements which range from five to six years.
15
The following table details the amount of amortization expense recorded for intangible assets for the three
months ended March 31, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Referral relationships
|
|
$
|
150
|
|
|
$
|
78
|
|
Non compete agreements
|
|
|
106
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
|
|
Based on the balance of referral relationships and non compete agreements as of March 31, 2013, the expected amount to be
amortized in 2013 and thereafter by year is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Referral Relationships
|
|
|
Non Compete Agreements
|
|
|
|
Annual
|
|
|
|
|
|
Annual
|
|
Years
|
|
Amount
|
|
|
Years
|
|
|
Amount
|
|
2013
|
|
|
498
|
|
|
|
2013
|
|
|
|
341
|
|
2014
|
|
|
462
|
|
|
|
2014
|
|
|
|
180
|
|
2015
|
|
|
441
|
|
|
|
2015
|
|
|
|
180
|
|
2016
|
|
|
441
|
|
|
|
2016
|
|
|
|
118
|
|
2017
|
|
|
441
|
|
|
|
2017
|
|
|
|
73
|
|
2018
|
|
|
405
|
|
|
|
2018
|
|
|
|
20
|
|
2019
|
|
|
368
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
361
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
336
|
|
|
|
|
|
|
|
|
|
2022
|
|
|
288
|
|
|
|
|
|
|
|
|
|
2023
|
|
|
180
|
|
|
|
|
|
|
|
|
|
2024
|
|
|
80
|
|
|
|
|
|
|
|
|
|
7. NOTES PAYABLE AND REVOLVING CREDIT AGREEMENT
Notes payable as of March 31, 2013 and December 31, 2012 consisted of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Revolving credit agreement average effective interest rate of 3.0% inclusive of unused fee
|
|
$
|
20,400
|
|
|
$
|
17,400
|
|
Promissory note payable in annual installments of $184 plus accrued interest through June 30, 2013, interest accrues at
3.25% per annum
|
|
|
184
|
|
|
|
184
|
|
Promissory note payable in annual installments of $100 plus accrued interest through July 25, 2013, interest accrues at
3.25% per annum
|
|
|
100
|
|
|
|
100
|
|
Promissory note payable in annual installments of $50 plus accrued interest through January 3, 2014, interest accrues at
3.25% per annum
|
|
|
50
|
|
|
|
100
|
|
Promissory notes payable in aggregate annual installments of $125 plus accrued interest through May 22, 2014, interest
accrues at 3.25% per annum
|
|
|
250
|
|
|
|
250
|
|
Promissory notes payable in aggregate annual installments of $200 plus accrued interest through February 28, 2015, interest
accrues at 3.25% per annum
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,384
|
|
|
|
18,034
|
|
Less current portion
|
|
|
(659
|
)
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,725
|
|
|
$
|
17,575
|
|
|
|
|
|
|
|
|
|
|
16
Effective August 27, 2007, the Company entered into a credit agreement with a commitment for a $30.0
million revolving credit facility which was increased to $50.0 million effective June 4, 2008 and increased to $75.0 million effective July 14, 2011 (the Credit Agreement). Effective March 18, 2009, the Credit Agreement
was amended to permit the purchase up to $15,000,000 of the Companys common stock subject to compliance with certain covenants, including the requirement that after giving effect to any stock purchase, the Companys consolidated leverage
ratio (as defined in the Credit Agreement) be less than 1.0 to 1.0 and that any stock repurchased be retired within seven days of purchase. Effective October 13, 2010, the Credit Agreement was amended to extend the maturity date from
August 31, 2011 to August 31, 2015. In addition, the Credit Agreement was amended to adjust the pricing grid which is based on the Companys consolidated leverage ratio with the applicable spread over LIBOR ranging from 1.6% to 2.5%
or the applicable spread over the Base Rate ranging from .1% to 1%. Effective October 24, 2012, the Credit Agreement was amended to permit the Company to purchase, commencing on October 24, 2012 and at all times thereafter, up to
$15,000,000 of its common stock subject to compliance with covenants. On December 3, 2012, the Credit Agreement was amended to allow the Company to pay a special dividend of $0.40 per share. The Credit Agreement is unsecured and has loan
covenants, including requirements that the Company comply with a consolidated fixed charge coverage ratio and consolidated leverage ratio. Proceeds from the Credit Agreement may be used for working capital, acquisitions, purchases of the
Companys common stock, dividend payments to the Companys common stockholders, capital expenditures and other corporate purposes. Fees under the Credit Agreement include an unused commitment fee ranging from .1% to .25% depending on the
Companys consolidated leverage ratio and the amount of funds outstanding under the Credit Agreement. On March 31, 2013, $20.4 million was outstanding on the revolving credit facility resulting in $54.6 million of availability. As of
March 31, 2013, the Company was in compliance with all of the covenants thereunder.
The Company generally enters into various notes
payable as a means of financing a portion of its acquisitions and purchases of non-controlling interests. In conjunction with the February 2013 Acquisition, the Company entered into a seller note, which is payable in two aggregate principal
installments of $200,000 each, plus accrued interest, in February 2014 and 2015. Interest accrues at 3.25% per annum.
Aggregate annual
payments of principal required pursuant to the Credit Agreement and the above notes payable subsequent to March 31, 2013 are as follows (in thousands):
|
|
|
|
|
During the twelve months ended March 31, 2014
|
|
$
|
659
|
|
During the twelve months ended March 31, 2015
|
|
|
325
|
|
During the twelve months ended March 31, 2016
|
|
|
20,400
|
|
|
|
|
|
|
|
|
$
|
21,384
|
|
|
|
|
|
|
8. COMMON STOCK
From September 2001 through December 31, 2008, the Board authorized the Company to purchase, in the open market or in privately
negotiated transactions, up to 2,250,000 shares of the Companys common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of its common stock (March 2009 Authorization). In
connection with the March 2009 Authorization, the Company amended the Credit Agreement to permit share repurchases of up to $15,000,000. The Company is required to retire shares purchased under the March 2009 Authorization.
Under the March 2009 Authorization, the Company has purchased a total of 859,499 shares. Since there is no expiration date for the share repurchase
program, and since, effective October 24, 2012, the Credit Agreement was further amended to permit the Company to purchase, commencing on October 24, 2012 and at all times thereafter, up to $15,000,000 of its common stock subject to
compliance with covenants, there are currently an additional estimated 390,000 shares that may be purchased from time to time in the open market or private transactions depending on price, availability and the Companys cash position. The
Company did not purchase any shares of its common stock during the three months ended March 31, 2013.
17